A Tale Of Greed And Great Wealth Gained And Lost1

Wills, Trusts & Probate

March 2020

In October 2019 I had the great pleasure and privilege of appearing2 in

the Hong Kong Court of Final Appeal on behalf of the successful
Appellants in the anxiously-awaited appeal in Zhang Hong Li and
others v DBS Bank (Hong Kong) Limited and others. The case had
become widely known in the private wealth and banking worlds over
the past couple of years, primarily because it highlighted the potential
exposure of trustees to liability for breach of trust where investments
made by a company the shares of which are held in trust suffer a
disastrous decline. The unanimous judgment of the CFA delivered on 22
November 2019 ([2019] HKCFA 45) came as a considerable relief to
many, particularly trustees and their advisers. It is (so far as is known)
the only final appellate level decision in the common law world in
relation to the operation of so-called “anti-Bartlett” provisions.

Such was the general importance of the points at issue that the CFA
decided to deliver its judgment even though the parties had resolved
their differences after the hearing. Although that rendered the decision
unnecessary as between the parties, it nevertheless represents a
highly authoritative expression of view on the part of five distinguished
judges of the highest standing and on that basis is bound to be
influential throughout the common law world.

What went wrong?

DBS Trustee was appointed as the trustee of a family discretionary
trust, the Amsun Trust, settled by a mainland Chinese couple, Zhang
and Ji, in January 2005. Madam Ji was already a customer of DBS
Bank’s private banking arm and proved to be an astute as well as
aggressive investor, initially in mutual funds but later more
sophisticated investment products and foreign currency transactions.
In due course she became the Bank’s largest individual private banking
client on the back of substantial loans from the Bank, ultimately
running to more than US$100 million.
DBS Bank had previously arranged the creation of a BVI private
investment company, Wise Lords Ltd., as an investment vehicle for
Madam Ji who was initially its director and shareholder. When the sole
share in Wise Lords was subsequently settled into trust, DBS Bank’s
affiliate DHJ Management was appointed its sole director. The Bank
provided its standard form discretionary trust which was governed by
Jersey law. Madam Ji, as well as being co-settlor of the trust and one of
its discretionary beneficiaries (with her husband and their minor
children), was appointed investment advisor to Wise Lords with
authority to direct its investments.

In July and August 2008, while the global financial crisis was unfolding,
three particular transactions were undertaken by Wise Lords that
proved to be of particular significance in the litigation; (1) an increase
of Wise Lords’ borrowing facility by US$100 million which was used to
fund (2) a very substantial investment in Australian dollars (AUD), later
sought to be unwound by (3) significant purchases of “decumulators”
offered by DBS Bank when Madam Ji was unwilling to reduce exposure
to AUD holdings.

The AUD fell sharply against the US dollar and Wise Lords suffered very
significant losses. Both DBS Trustee and DHJ Management (amongst
many others and in particular individual members of DBS Bank’s staff)
were sued by the Settlors and replacement trustees to recover those
losses. The Judge at first instance castigated what he described as
“carpet bombing” litigation on the part of the Plaintiffs in proceeding
against multiple defendants on multiple grounds. He rejected all the
claims with the notable exceptions of those which alleged breach of
duty on the part of DBS Trustee and DHJ Management. Which takes us
to the provisions of the Trust itself.

The anti-Bartlett provisions

For those readers unfamiliar with the expression, “anti-Bartlett”
clauses are so named because they seek to counter the duties of
trustees in relation to companies in which they hold shares which were
held to arise on the facts of the English case of Bartlett v Barclays
Trust Co. Ltd [1980] 1 Ch. 515. Such clauses are very common in trusts
created as private family wealth holding and management structures to
such an extent that they appear in practically every precedent used by
trust service providers and their advisors. However, they come in all
shapes and sizes and often detailed consideration of them is an
afterthought when things have already gone wrong.
The particular variant of the anti-Bartlett clause included in the Amsun
Trust deed is one in frequent use around the world. It was explicit in
instructing DBS Trustee not to interfere in the affairs of the company.
In particular it imposed a mandatory requirement on DBS Trustee to
leave the administration management and conduct of the business of
Wise Lords to the directors and other authorised persons, including
Madam Ji as the company’s investment adviser, unless DBS Trustee
had actual knowledge of dishonesty.
As the CFA observed:
“…the trustees are being consistently told to keep their noses out of
the company’s business and to leave those having conduct of the same
free to manage it without interference.”
Despite those apparently clear terms, both the Judge at first instance
and the Court of Appeal found DBS Trustee liable for breach of what
was described as a “high level supervisory duty” which required a
trustee to intervene in certain circumstances even where there was no
notice of dishonesty. DHJ Management was similarly found liable. But
how could that be, in the face of the anti-Bartlett provisions?
The “high level supervisory duty”
The courts below identified two possible sources for such a duty. One
was DBS Trustee’s own evidence describing itself as having a “ high
level supervisory role” arising out of its having “approved” or “noted”
the investments made by Wise Lords after they had been made. The
second was the report of one of the two Jersey law experts which
suggested that there are circumstances in which a trustee might have
a “residual” duty to interfere with the management of the company
despite the existence of an otherwise valid anti-Bartlett provision, for
example where it was informed by an apparently credible source that
dishonesty was involved in the company’s management. But both
Jersey law experts agreed that the anti-Bartlett clause was effective
according to its terms and that already included the exception for
knowledge of dishonesty. Is there a difference? Did it mean that there
are circumstances other than dishonesty in which a trustee must get
involved or did it mean only that the clause was properly drafted so as
to recognise that a trustee could not ignore dishonesty?
The CFA judgment

The CFA unanimously rejected the view that some unspecified high
level supervisory duty exists which trumped the anti-Bartlett clause. In
this case the clause disapplied any duty of supervision and positively
prevented the Trustee from interfering in the company’s affairs. Nor did
the role which in practice was discharged by DBS Trustee give rise to a
duty. The clause means what it says. The Court also felt able to read
the Jersey law advice consistently with the particular provision in the
Trust so the expert’s “residual duty” referred only to knowledge of
dishonesty. In consequence DBS Trustee was not liable for breach of
trust nor, in the particular circumstances, was DHJ Management liable
for breach of duty as the director of Wise Lords.

Implications

Before the judgment of the CFA clarified the position, there had been
widespread anxiety that commonly-used clauses of this kind could not
be safely relied on to circumscribe the duties and powers of trustees.
That was not merely a worry for trustees and their advisers but also for
those settlors whose aim was to create a proper trust but also to
reserve the ability either to run the underlying company themselves or
to appoint their chosen management to run it without interference.
That is the basis on which “reserved powers” trusts operate and in
such cases the trust legislation of most international financial centres
expressly relieves the trustees from breach of trust where that is done.
The trust in question in this case was not a reserved powers trust,
rather a conventional discretionary trust, but the thinking is much the
same where settlors want to include an anti-Bartlett clause. It would be
wrong to think of them as simply attempts by trustees to get off the
hook or as pure exoneration clauses. Their rationale is to enable a
separation of functions between the trustees, discharging their usual
dispositive and administrative powers at trust level, and those involved
in the commercial management of the company. As always, clear
drafting is everything. Not every anti-Bartlett clause is as specific and
clear as the one under examination in this case.
A word about equitable compensation

One other significant and valuable aspect of the judgment is the Court’s
analysis of the correct approach to equitable compensation in such a
case as this. The courts below had treated the case as one calling for,
in effect, reconstitution of the trust fund on the basis that the disputed
transactions had not occurred. Was this the correct approach?

In his influential judgment in Bank of New Zealand v New Zealand

Guardian Trust Co Ltd [1999] 1 NZLR 664 at p.687 Tipping J had
distinguished three types of breach of trust: breaches leading directly
to damage to or loss of the trust property (category 1), breaches
involving an element of infidelity or disloyalty which engage the
conscience of the fiduciary (category 2) and breaches involving a lack
of appropriate skill or care (category 3). We argued on behalf of the
Trustee that, if there had been any breach in this case, it fell into
category 3 case. The significance of that is, as previously explained by
the CFA in Libertarian Investments Limited v Hall [2013] 16 HKCFAR
681, the rules of causation apply with varying degrees of strictness
depending on the category. In category 1 cases a strict “but for”
causation test is applied and common law rules of remoteness and
foreseeability do not apply – it is a substitutive claim for restoration of
the trust property either in specie or by value. In category 3 cases,
however, the common law rules of causation, foreseeability and
remoteness apply and it would be for the complainant to plead and
prove his case on that basis. The claim is reparative rather than
substitutive. For further elucidation of these interesting issues the
reader is referred to Ribeiro PJ’s paper Equitable Compensation for
Breach of Fiduciary Duty delivered at the Asia-Pacific Judicial
Colloquium in Singapore in May 2019.

The CFA was satisfied that, had a breach been established, the case
would indeed have fallen into category 3, being one in which the trust
property itself (the share in Wise Lords) remained intact - the essence
of what was complained of was a lack of care and skill in maintaining
or enhancing its value.
1 The opening words of the judgment of the Court of Appeal
2 With Ashley Burns SC and Bonnie Cheng both of Temple Chambers,
Hong Kong, instructed by Mayer Brown, Hong Kong.