Hong Kong has said that trustees are protected by anti-Bartlett clauses, in a decision bound to reverberate through the private wealth and trusts world.
Hong Kong Court of Final Appeal (CFA) established that so-called anti-Bartlett clauses in the trust deed of a Jersey family trust exempted the trustees from any liability for losses incurred in transactions by the trust's underlying investment company, in what was know as the Zhang and Ji v DBS Trustee case.
The Court of Final Appeal reversed the Court of Appeal's findings and ruled that the anti-Bartlett clause contained in the trust deed effectively excluded any "high level supervisory duty" with any purported residual obligation on the part of the trustee in relation to the losses caused by risky investment decisions made on behalf of the trust's underlying investment company.
This is an important decision (and rare high level decision on this issue) which may reassure private wealth and trusts practitioners of the strength and scope of anti-Bartlett clauses"
The Court of Final Appeal similarly found that the corporate director of the investment company also had no such high level supervisory duty and was not in breach its fiduciary duties.
"This is an important decision (and rare high level decision on this issue) which may reassure private wealth and trusts practitioners of the strength and scope of anti-Bartlett clauses," international law firm Herbert Smith Freehills said.
The events took place during the 2008 financial crisis. The trust, Amsun, was settled by Ji Zhengrong, an expert in financial investment, and her husband Zhang Hong Li. They created an offshore company, Wise Lords, owned by the trust to make high-return investments during the bubble before the 2008 crash. Many were high-risk foreign exchange deals, and by August 2008, Wise Lords' portfolio contained 85% in foreign currency exposure, most of it in Australian dollars. Its borrowings of $96.4m were nearly three times its net assets.
When the crash came, Wise Lords suffered significant losses. Ji and Zhang, in their capacity as beneficiaries, together with the successor trustees and the company itself, sued the trustee, DBS Trustee HK, and the corporate director of the company for breach of trust or duty. Their claims succeeded at trial, the Court of First Instance finding that DBS Trustee HK had been in "serious and flagrant breach" of its duties and had breached its "high level of supervisory duty" when allowing Wise Lord to buy the high-risk products. The Hong Kong Court of Appeal agreed.
Reversing the decisions of Hong Kong's Court of Appeal and lower courts, the CFA unanimously found that the trustees had no 'high level residual duty' to supervise the company's activities, given that the anti-Bartlett provisions relieved them from any duty to interfere with or supervise the company's conduct, unless they became aware of actual dishonesty.
The case was heard in the Hong Kong courts and the governing law of the trust was Jersey law. The principles will therefore likely be applicable in most of the major common law trust jurisdictions.