Out with the old
The revision of the Hong Kong Trustee Ordinance sees it sailing into the modern world, says Philip Munro
Hong Kong has remained an important centre for private wealth management following its return to Chinese sovereignty. Its position under the People’s Republic of China’s ‘one country two systems’ rule has preserved its favourable tax regime and its separate legal system is derived from English law.
However, its trust law remains, contained largely in the Trustee Ordinance enacted in 1934 and mostly modelled on the English Trustee Act 1925. This law has been increasingly seen as outmoded and, consequently, it has not been commonly used for trusts settled in, or administered from, the jurisdiction.
The process for modernising the trust law began in earnest in 2008, when Hong Kong Financial Services and the Treasury Bureau announced it would effect some revision of Hong Kong’s trust law. It was keen to promote using local trust law in a bid to further develop the jurisdiction’s position as a global asset management centre.
After a two-stage consultation process, draft legislation was put ?before Hong Kong’s Legislative Council, which passed the Trust Law (Amendment) Bill 2013 on 17 July 2013, amending both the Trustee Ordinance and the Perpetuities and Accumulations Ordinance.
The amendments effected by the new bill make a number of fundamental revisions to the trust law. Perhaps the most notable change is the abolition of the rule against remoteness of vesting, which will, from 1 December 2013, allow for the creation of perpetual trusts governed by Hong Kong law. This amendment will, in itself, increase the attraction of Hong Kong as a governing law for higher value trusts, or where settlors have dynastic intentions, the fixed trust period in Hong Kong presently being 80 years.
It should be noted that the transitional provision in relation to this amendment makes the change prospective and relevant only for new dispositions: it does not apply to wills executed before 1 December 2013 and, where an instrument is made in the exercise of a power of appointment, this change will only apply if the instrument creating the power of appointment takes effect on or after 1 December 2013.
Not only will Hong Kong come to have an updated trust law by abolishing the rules against perpetuities, and the rule against the excessive accumulation of income otherwise than for charitable trusts, but it will be modern in providing expressly for the recognition of settlor reserved powers.
The Trust Law (Amendment) ?Bill introduces provisions that expressly confirm the inclusion of such provisions in the trust deed will not invalidate the trust. The provision is confined to reservations to the settlor, but relates ?to asset management, as well as investment, functions.
In practice, settlor reserved power model trusts are very popular in Asia, where many families are activist investors and, no doubt, many Hong Kong trusts will be drafted to take advantage of this statutory recognition of reserved powers.
Another feature included in the revised Trustee Ordinance is an express disapplication of forced heirship rules. The provision states that a lifetime disposition of moveable property to such a trust will be considered valid for Hong Kong purposes if the transferor had capacity to make such a transfer under Hong Kong law, the law of the transferor’s domicile or nationality, or the proper law of the transfer.
This provision not only overrides aspects of private international law generally, but expressly provides that no law relating to inheritance or succession of a foreign jurisdiction will affect the validity of the transfer of any movable property to be held on trust if the person transferring the movable property had the capacity to do so in accordance with the Trustee Ordinance.
There are a number of jurisdictions in Asia that have Sharia law and other forced heirship regimes, and this provision will make Hong Kong notably attractive to settlors with connections to them.
Many amendments to the ordinance are designed to enhance the default powers conferred on trustees where trust instruments do not contain express powers. Trustees can now appoint agents, other than a beneficiary, to perform most of their trustee functions. For example, trustees will be able to delegate investment management to suitable fund managers, thus enabling the trust portfolio to be managed on a discretionary basis.
Before 17 July 2013, section 25 of the Trustee Ordinance said an agent’s power over property situated in Hong Kong was limited to exercising administrative functions and less than the powers available for property outside of the region.
This has now been addressed with a single set of rules based on Singapore and English law, meaning trustees (other than charity trustees) are now able to appoint agents to carry out any of their functions except distribution; the decision of whether a payment should be made out of income or capital; the appointment of a new trustee and delegation by the agents themselves (that is sub-delegation), or the appointment by the agent of nominees or custodians.
For charity trustees, agents are limited to the generation of income to advance the charity’s objects, but not carrying out those objects. Delegation of such powers, however, will be subject to safeguards, in particular an obligation to keep the performance of the agents, nominees and custodians under review. Trustees may also not appoint agents on terms that permit them to sub-delegate, act even if a conflict of interest may arise, or restrict the liability of agents or their delegates, unless it is reasonably necessary to do so.
As long as trustees discharge their statutory duty of care in appointment and reviewing agents, nominees, and custodians, they will not be liable for any of their acts or defaults.
The default powers to insure trust property have been extended to any risk of loss or damage, not just loss through fire and typhoon. Premiums can now be paid out of trust property in line with UK and Singapore law, and not just trust income.
It had not been possible for trustees of Hong Kong trusts to be paid, unless there was an express provision in ?the trust deed to that effect, or an order of the court. Professional trustees may now receive reasonable remuneration in the absence of an express provision in the trust deed.
For charitable trusts, a trustee acting in a professional capacity other than a trust corporation must not be the sole trustee and is entitled to remuneration only to the extent to which a majority of the other trustees have agreed that the trustee should be paid. This means that in setting by a charitable trust by deed or by will, more than one trustee will need to be appointed if the intention is to delegate the administration to a professional trustee for remuneration.
Bringing Hong Kong into line with other jurisdictions, such as England and Wales, and Singapore, the amended legislation imposes a statutory duty of care on trustees: they must exercise such care and skill as is reasonable in the circumstance. This duty is, however, subject to the terms of the trust instrument and can (as in England) be excluded, lessened or otherwise modified.
The new statutory duty of care applies regardless of whether the trust was created before or after the enactment, the new legislation, although it does not affect the legality or validity of anything the trustee may have done before that date. Moreover, the trust instrument can exclude, lessen or otherwise modify the duty required
Another change that applies to existing trusts relates to exculpation provisions. At common law, a trust instrument can exempt a trustee from liability for all breaches of trust except for fraud or wilful default. The Hong Kong amendments provide a degree of protection for beneficiaries.
A trust instrument can no longer exempt a trustee from liability for wilful misconduct and gross negligence, as ?well as fraud. This applies to trusts ?created before or after new ordinance commenced. These provisions will, however, be limited to professional trustees and will commence in phases to allow trustees time to resign or to otherwise try to remedy issues, if this is required.
With these changes, Hong Kong relaunches itself as a jurisdiction of choice for implementing trust structures in Asia and in the Chinese language. It will not only be in an improved position to offer trusts to Asian families, but should be able to attract more international trust business from settlors outside Asia.
Philip Munro is a partner at Withers in SingaporeTags: