Hong Kong Trusts as an Alternative to VISTA Trusts

Family trusts commonly hold controlling interests in companies which may engage in business activities. These activities may entail varying degrees of risk. Some trustees may not wish to assume duties to supervise these business activities and some settlors may not wish trustees to interfere in these business activities.

Prudent Man Rule

In Bartlett v. Barclays Trust, the English courts laid down the principle that the trustee of such a trust has a duty act in respect of the controlling interest in the same manner as a prudent man of business. In this regard, the court stated:

The bank, as trustee, was bound to act in relation to the shares and to the controlling position which they conferred, in the same manner as a prudent man of business. The prudent man of business will act in such manner as is necessary to safeguard his investment. He will do this in two ways. If facts come to his knowledge which tell him that the company’s affairs are not being conducted as they should be, or which put him on inquiry, he will take appropriate action. Appropriate action will no doubt consist in the first instance of inquiry of and consultation with the directors, and in the last but most unlikely resort, the convening of a general meeting to replace one or more of the directors. What the prudent man of business will not do is to content himself with the receipt of such information on the affairs of the company as a shareholder ordinarily receives at annual general meetings. Since he has the power to do so, he will go further and see that he has sufficient information to enable him to make a responsible decision from time to time either to let matters proceed as they are proceeding or to intervene if he is dissatisfied.

The court then went on to discuss how the trustee may have acted, citing by way of example:

• the appointment of a nominee to the board of directors of the company to supervise the affairs of the company and to report back to the trustee;
• the receipt of copies of the agenda and minutes of board meetings; and
• the receipt of monthly management accounts.

The court rejected the argument that the trustee could discharge its duty to supervise by relying upon the expertise of the board of directors of the company. In this regard, the court emphasized that the trustee had a duty not to monitor every move of the directors but to make it reasonably probable, so far as circumstances permit, the trustee will receive an adequate flow of information in time to enable the trustee to use its controlling interest should this be necessary for the protection of the trust assets.

VISTA Trust

The BVI VISTA trust structure is specifically designed to override the prudent man rule. In a VISTA trust, the trust holds shares in one or more BVI companies and the trustee is not required, nor indeed generally permitted, to actively manage these companies. The result is that the trustee of a VISTA trust has limited fiduciary duties to supervise the management of the underlying BVI companies.

However, in a VISTA trust, the trustee must be a BVI licensed trust corporation or a BVI private trust company and the trustee cannot be a director of any of the underlying BVI companies.

Zhang Hong v. DBS

In Zhang Hong v. DBS, a husband and wife set up a family trust. The trust held a single asset, namely a company (“Investment Co.”) which maintained an account with a bank through which it conducted investment trading activities. Investment Co. appointed the wife as its investment adviser to exercise investment discretion on its behalf and the letter of wishes for the trust provided that the trustee was to consult with the wife in all matters.

In the event, Investment Co. undertook a series of investments which resulted in millions of dollars of losses. The husband and wife in turn sued the trustee on the basis that the trustee had breached its duty to supervise the investment activities of Investment Co.

The terms of the trust deed specifically provided that the trustee could make speculative investments, the trustee had no duty to diversify investments and the trustee had no duty to see that the value of the trust assets were preserved or enhanced.

The trust deed then went to provide, amongst other things, that the trustee had no duty to exercise its rights of control over Investment Co. It stated:

[the trustee has] no duty to exercise any control [it] may have over or to interfere in or become involved in the administration management or conduct of the business or affairs of any company in which this Settlement is or may be interested whether or not this Settlement holds the whole or a substantial portion of the shares carrying the control of the company and without prejudice to the generality of the foregoing [the trustee] shall not be under any duty to exercise any voting powers or rights of representation or intervention conferred on [it] by any shares in respect of such company…

The trust deed then provided that the trustee could leave the management of Investment Co. to its directors without a duty on its part to supervise them, stating:

the [trustee] shall leave the administration management and conduct of the business and affairs of such company to the directors officers and other persons authorised to take part in the administration management or conduct thereof and the [trustee] shall not be under any duty to supervise such directors officers or other persons so long as the [trustee does] not have any actual knowledge of any dishonesty relating to such business and affairs on the part of any of them; and

the [trustee] shall assume at all times that the administration management and conduct of the business and affairs of such company are being carried on competently honestly diligently and in the best interests of the [trustee] in [its] capacity as [shareholder] or howsoever they are interested therein until such time as they shall have actual knowledge to the contrary and so that the [trustee] shall not be under any duty at any time to take any steps at all to ascertain whether or not the assumptions contained in this sub-clause are correct.

Finally, the trust deed provided that the trustee had no duty to seek or verify information about the activities of Investment Co., stating:

The [trustee] shall not be under any duty to obtain or to seek to obtain in any way whatsoever any information regarding the administration management or conduct of the business or affairs of any company in which this Settlement is or may be interested (although this Settlement holds the whole or a majority of the shares carrying the control of the company) from the persons involved in the administration management or conduct or from the shareholders or other persons interested therein or any other matter relating to such company

The [trustee] shall assume that such information as is supplied to them by any person relating to such company is accurate and truthful unless the [trustee has] actual knowledge to the contrary and the [trustee] shall not be under any duty at any time to take any steps at all to ascertain whether or not the information is accurate and truthful.

On the basis of the express provisions of the trust deed, known as “anti-Bartlett clauses”, the Court of Final Appeal held that the trustee had no “high level supervisory duty”. As a result, the trustee was not liable for the losses suffered by the trust.

The court went on to hold that the trustee did not in fact exercise supervisory oversight over Investment Co but that even if the trustee had in fact done so, liability would not follow as the trustee had only a power rather than duty to exercise such oversight and a deficient exercise of a power does not amount to a breach of a duty. The anti-Bartlett clauses made it clear that there was no duty but only a power.

Though the trust in question was governed by Jersey law rather than Hong Kong law, the finding by Hong Kong's highest court that there was no breach of trust suggests that the position would be the same even if the trust were governed by Hong Kong law and even bearing in mind the Trustee Ordinance provisions which forbid a trustee from excluding liability for breach of trust arising from gross negligence. Thus, as a result of the Court of Final Appeal's decision in Zhang Hong, it seems that there is no need in Hong Kong to use a VISTA trust to preclude the trustee from the prudent man rule and to provide the flexibility for the settlor to take an active role in companies held by the trust free from the oversight of the trustee.