Modernising a Trust Law that many in Hong Kong have lost faith in
The law of trusts - involving properties held for the benefit of others - is at last being updated
On December 1, the city's law of trusts will undergo major changes. A trust is created when someone transfers property to another, subject to the obligation to hold that property for the benefit of others. The person creating the trust is called the settlor, the one looking after the property is the trustee and those who will benefit from the property are called the beneficiaries of the trust.
Trustees are bound by strict duties to look after the trust property, and are granted powers by the settlor to do so.
The Trustee Ordinance, which governs trustees' default powers, was implemented in 1930 and was largely in line with English legislation of the period.
For many years, those involved in Hong Kong's trust industry have called for aspects of the law to be modernised in line with developments in other commercial jurisdictions, in order to make the city a more attractive place to create trusts.
Traditionally, trustees' actions have been judged by reference to the standard of care a reasonable man of business would use when looking after his own affairs. This standard has been raised for professionals and those charging for their trustee services, but has still been criticised as too low.
The new changes will mean that trustees are to be judged by a reasonable standard to be expected in the circumstances, based upon any special knowledge or experience they may have or that they profess to have. So, if they are acting in the course of a business or profession, they will be judged having regard to any special knowledge or experience that is reasonably expected of a person acting in the course of that kind of business or profession.
Trustees will be able to delegate more of their powers to agents in certain circumstances, but the actions of those agents will be subject to more stringent review.
A consistent criticism of trustees' default powers has been the restriction on their ability to insure trust properties, except against loss or damage by fire or typhoon. This will change, with new general powers to insure by default.
Professional trustees have long insisted on including clauses in the instruments that create trusts that try to exclude or minimise their potential liability for any loss to the trust. For any trust created after December 1, such clauses will be ineffective.
Unusually, the changes will also make any such clauses in pre-existing trusts invalid. But this retrospective action will take effect only from December 1, 2014, allowing trustees time to resign from trusts if they do not wish to lose their shield.
These changes, and the removal of some outdated rules restricting the length of time that trusts may continue, should make the city a more attractive jurisdiction for settlors, both resident and non-resident.
Steven Gallagher is professional consultant and assistant dean (undergraduate student affairs) of the Faculty of Law, Chinese University