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Hong Kong Modernisation of Trust Law Long Overdue

Hong Kong Modernisation of Trust Law Long Overdue

Hong Kong Modernisation of Trust Law Long Overdue

Friday, 20 December 2013 14:35

Alfred Ip, Partner
Scherzade Burden, Foreign Qualified Lawyer

The New Trustee Ordinance (the “Ordinance”) came into effect on 1st December 2013. A summary of major changes are as follows:-

1. Statutory Duty Of Care
With the new s3A of the Ordinance, the Trustee who holds out as having any special knowledge or experience or is acting in the course of his business or profession would be reasonably expected to have such special knowledge or experience.

For professional Trustees, they are now expected to exercise their care and skill with their special knowledge or experience.

2. Restriction on Exoneration Clause

The new s41W of the Ordinance restricts a professional trustee from exonerating himself from liability for a breach of trust arising from his own fraud, wilful misconduct or gross negligence, or allowing himself to be indemnified under those circumstances. Any clause in the trust to such effect will be construed as invalid.

3. Settlor’s Reserved Powers to Invest
s41X allows the settlor to reserve the power of investment or asset management under the trust. A Trustee who acts in accordance with the exercise of the power or function is not in breach of the trust.

In the past such reserved power may invalidate the trust as the settlor may be regarded as having full control over the assets under the trust. At the same time, losing control over the trust assets is one of the main deterrents for a lot of high net worth individuals to set up a trust.

4. Forced Heirship Provisions
s41Y of the Ordinance provides that forced heirship rules, which are commonly found in continental European countries such as France, Italy and Germany, to name a few, and China, have no effect on trust created in Hong Kong. In other words, people from those countries or other countries with forced heirship rules can inject assets into a trust set up in Hong Kong without worrying about the same being attacked after they passed away.

5. No rule against Perpetuities
The accumulation period of 80 years has been abolished, which means theoretically a trust can carry on forever until it is terminated.

6. Simplified Procedure to Remove Trustee
New s40A allows beneficiaries to give a written direction to a trustee directing the trustee to retire the trust, and such trustee must make a deed to that effect upon certain criteria as set out in ss(3) being complied with. New s40B applies when the trustee becomes mentally incapacitated.

7. Trustee’s Powers of Delegation
The new Part IVA authorises the delegation of ‘delegable functions’ to certain persons, bringing Hong Kong laws into a comparably similar position with the UK and Singapore.

Trustees are now empowered to appoint agents, with certain restrictions on the number of agents and delegable functions. The terms of such appointments must not contravene s41E(3), which includes sub-delegation, restriction on liability and conflicts of interest.

When trustees delegate asset management functions, the trustee is required to provide a written investment policy statement. Trustees can only appoint professional nominees and custodians for asset management functions. Trustees are expected to review the performance of the agent, nominee or custodian regularly. If this requirement is not met then the Trustee fails to satisfy the statutory duty of care and therefore cannot be exempt from liability.


Conclusion
Hong Kong's trust law is based mainly on the common law. It is complemented by the Trustee Ordinance and the Perpetuities and Accumulations Ordinance. Those Ordinances, which were enacted in 1934 and 1970 respectively, have not been substantially reviewed or modified since that time. It was therefore high time that Hong Kong Trust law was reviewed and any antequated provisions changed.

The major changes have been outlined above.

The Trust (Amendment) Ordinance 2013 is the product of four long years’ work between Hong Kong Trustees’ Association (HKTA), the Society of Trusts and Estates Practitioners (STEP) and the Financial Services and Treasury Bureau.

The primary aim of the new Trust law is to boost the competitiveness of the Hong Kong trust services industry and make it a stronger competitor against jurisdictions such as Singapore. The government hopes that by bringing the law largely into line with Singapore and the UK that settlors, particularly those from civil law jurisdictions, will be more attracted to set up trusts in Hong Kong. In time the government hopes that if this does indeed happen then it will increase Hong Kong’s stature as a strong international asset management centre.

Aside from the politico-economic reasons for the government modernising Hong Kong Trust law, it will also afford greater protection to beneficiaries since there is now stronger statutory control upon Trustees who previously were able to limit their liability through various clauses in the Trust Deed. The new law severely limits Trustees from limiting their liability in the Deed.

Trusts Practitioners will be relieved that the law has finally been enacted. Many consider it to have been a long time coming. It will now be interesting to see if in the years to come, the government’s hopes for Hong Kong to become the asset management centre of choice for settlors are realised.