Trustees' Duties and Liabilities Under Hong Kong Trust Law: A Comprehensive Guide

Introduction

A trustee occupies one of the most demanding roles in the law. By accepting appointment as a trustee, an individual or corporation takes on a complex set of duties owed to the trust's beneficiaries, backed by the full force of equity. A trustee who breaches these duties may be personally liable to restore the trust fund and compensate beneficiaries for any loss.

In Hong Kong, the law of trusts is primarily based on English equity, as received into Hong Kong law through the doctrine of common law reception. The Trustee Ordinance (Cap. 29) supplements the common law and equity by codifying certain trustee powers and duties and providing procedural mechanisms for the administration of trusts. This guide provides a comprehensive overview of the duties and liabilities of trustees under Hong Kong trust law.

The Trustee's Core Duties

The Duty of Loyalty

The most fundamental duty of a trustee is the duty of loyalty — to act in the interests of the beneficiaries and not in the trustee's own interest or the interests of third parties. The duty of loyalty encompasses a range of more specific obligations, including:

• The no-conflict rule: A trustee must not allow their personal interests or the interests of third parties to conflict with the interests of the beneficiaries. Where a conflict arises, the trustee must put the interests of the beneficiaries first
• The no-profit rule: A trustee must not profit from the trust or from their position as trustee without the informed consent of the beneficiaries (or the sanction of the court)
• The self-dealing rule: A trustee must not purchase trust property or enter into any transaction in which they are on both sides (i.e., acting both as trustee and as the counterparty)

Breaches of the duty of loyalty are treated with particular severity by the courts. Even if the trustee acted honestly and in good faith, a breach of the duty of loyalty will generally result in liability to account for any profit made or to restore the trust fund.

The Duty of Care

A trustee must exercise the care and skill of an ordinary prudent person managing their own affairs. Professional trustees — such as banks and trust companies — are held to a higher standard: they must exercise the degree of care and skill that is reasonable given any special knowledge or experience they have or hold themselves out as having. This higher standard reflects the fact that professional trustees are remunerated for their services and are engaged on the strength of their professional expertise.

The Trustee Ordinance codifies a standard of care for trustees exercising specific statutory powers (such as the power of investment), requiring trustees to exercise such care and skill as is reasonable in the circumstances.

The Duty to Act Personally and Not to Delegate

The general rule is that a trustee must act personally and cannot delegate their duties to another person without authority. However, the Trustee Ordinance permits trustees to delegate certain functions and provides a framework for the appointment of agents, nominees, and custodians. When a trustee properly delegates a function, they must take reasonable care in selecting the delegate, providing proper instructions, and reviewing the delegate's performance.

The Duty to Act Unanimously

Where there are multiple trustees, they must act unanimously on all trustee decisions (unless the trust deed or statute permits majority decisions). A decision taken by some trustees without the knowledge or concurrence of co-trustees may not be binding on the trust. This duty makes it important for co-trustees to maintain effective communication and to ensure that all trustees are involved in material decisions.

The Duty to Distribute to the Correct Beneficiaries

A trustee must ensure that trust income and capital are distributed to the correct beneficiaries in accordance with the terms of the trust. A trustee who distributes trust property to the wrong person, or to a person not entitled, may be personally liable to the true beneficiaries for the loss suffered. Trustees can protect themselves by obtaining appropriate receipts and releases from beneficiaries and, where there is doubt as to entitlement, by applying to the court for directions.

The Duty to Keep Accounts and to Render Accounts to Beneficiaries

A trustee must keep full and accurate accounts of the trust property and transactions, and must be prepared to render accounts to beneficiaries on request. Beneficiaries have the right to see the trust accounts and to inspect trust documents (including the trust deed, although the position on disclosure of certain confidential letters of wishes can be more nuanced).

The Duty of Impartiality

Where there are different classes of beneficiaries with competing interests — most commonly, life tenants (who are entitled to income) and remaindermen (who are entitled to capital) — the trustee must act impartially between them. The trustee must not favour one class over the other when making investment decisions or other decisions that affect the balance between income and capital.

The Trustee's Investment Duties

One of the most important and potentially complex areas of trustee duty is the duty to invest. Under the Trustee Ordinance, trustees are given a general power of investment, subject to the standard of care described above. Key investment duties include:

• Diversification: Trustees should diversify trust investments to reduce the risk of loss from the failure of any single investment, unless the circumstances make it inappropriate to do so
• Suitability: Trustees must ensure that each investment is suitable for the trust, taking into account factors such as the investment objectives of the trust, the needs of the beneficiaries, and the nature and duration of the trust
• Review: Trustees must review trust investments from time to time and consider whether they remain appropriate
• Obtaining advice: Before exercising the power of investment, trustees must (subject to limited exceptions) obtain and consider proper investment advice

Trustees who invest imprudently or speculatively without authority may be liable to restore any loss to the trust fund.

Breach of Trust and Personal Liability

A trustee who fails to perform their duties, or who acts in a way that is inconsistent with the trust, commits a breach of trust. The consequences of a breach of trust depend on the nature and extent of the breach:

• Accounting for profits: Where a trustee has made an unauthorised profit from the trust, they must account to the trust for that profit
• Restoration of the trust fund: Where a trustee has caused loss to the trust fund through a breach, they must restore the fund to the position it would have been in had the breach not occurred
• Equitable compensation: In some cases, beneficiaries may be entitled to equitable compensation for loss caused by a breach of trust, including loss of opportunity

A trustee who commits a breach may seek relief from personal liability in certain circumstances, including where the court finds that they acted honestly and reasonably and ought fairly to be excused (under section 58 of the Trustee Ordinance).

Trustee Exemption Clauses

Trust deeds often contain trustee exemption clauses that seek to limit or exclude the trustee's liability for breach of trust. Hong Kong law permits such clauses to exclude liability for negligence (but not fraud or dishonesty). However, courts have shown a willingness to construe such clauses narrowly, and professional trustees cannot rely on overly broad exclusion clauses to escape liability for serious failures.

Practical Guidance for Trustees

To minimise the risk of breach, trustees should:

• Read the trust deed carefully and understand the terms of the trust before accepting appointment
• Keep proper minutes and records of all trustee decisions
• Seek independent legal and financial advice when dealing with complex matters
• Maintain open communication with co-trustees and ensure all trustees are involved in material decisions
• Be alert to potential conflicts of interest and address them proactively
• Obtain the informed consent of adult beneficiaries before departing from the strict terms of the trust in ways that affect them
• Apply to the court for guidance when there is genuine uncertainty about the proper course of action

How Alan Wong LLP Can Help

Alan Wong LLP advises trustees, trust protectors, beneficiaries, and settlors on all aspects of Hong Kong trust law. Our services include:

• Advising trustees on their duties, powers, and liabilities under a specific trust
• Reviewing and drafting trustee exemption clauses and trust deeds
• Advising on trustee decision-making processes and governance
• Acting in trust disputes, including claims for breach of trust and applications to remove or replace trustees
• Advising beneficiaries on their rights to information and their entitlements under a trust

Conclusion

Trusteeship is a position of great responsibility. The duties owed by trustees under Hong Kong trust law are extensive and demanding, and a failure to meet those duties can result in serious personal liability. Whether you are considering accepting an appointment as trustee, are already acting as trustee, or are a beneficiary concerned about the conduct of a trustee, understanding the legal framework is the essential first step to protecting your interests.

This article is for general information purposes only and does not constitute legal advice. For advice on specific trust matters, please contact Alan Wong LLP.