Jurisdiction - Hong Kong
Hong Kong – How Should Trustees React To Foreign Divorce Proceedings?

25 February, 2015


Legal News & Analysis – Asia Pacific – Hong Kong – Banking & Finance


In the matter of the Representation of HSBC Trustee International Limited [2011] JRC 167 and [2014] JRC 254A




The case concerned a divorcing couple.  The Husband was a successful businessman in Hong Kong operating his business through a large group of companies. A conventional discretionary trust governed by the law of Jersey was established in 1995 (the “Trust“). The Trust’s sole asset was a holding of 84.63% of the shares in the Bermuda holding company (the “Company”) which in turn owned 100% of a number of companies which formed the corporate group assembled by the Husband over many years. Approximately 70% of the underlying assets of the holding company and its subsidiaries were held in Hong Kong or the People’s Republic of China.


The Trustee was a BVI company with a branch in Jersey, and had delegated the administration of the Trust to a trust company which carried out the administration from Hong Kong. The Husband was the protector of the Trust and retained the power to appoint and remove trustees. The beneficiaries of the Trust were the Husband, his Wife, their surviving daughter and any other living descendants of the Husband (of which there were none at the date of the hearing).


The marriage between the Husband and the Wife broke down and divorce proceedings were commenced in 2009, resulting in the High Court of Hong Kong granting a decree absolute in 2010. The High Court of Hong Kong made an order joining the Trustee as a party to the divorce proceedings. The Wife sought orders from the Hong Kong Courts to the effect that the whole of the assets of the Trust should be regarded as being part of the matrimonial estate available for distribution between the Husband and the Wife, or alternatively, that the Hong Kong Court should attribute all of the Trust assets to the Husband as a financial resource of the Husband.


Submission To Foreign Divorce Proceedings


The first issue which arose for the Trustee was whether it should submit to the jurisdiction of the foreign (i.e. Hong Kong) court. The Trustee considered that it should submit to the jurisdiction of the Hong Kong courts and applied to the Royal Court of Jersey for directions in this regard.


The Royal Court recognised that the Wife was not seeking an order by which the terms of the Trust would be altered or varied. On the contrary, the division and distribution of the Trust assets that she was seeking was within the powers already contained in the Trust deed. The Husband and Wife were both beneficiaries of the Trust and therefore the Trustee could, in accordance with the terms of the Trust, give effect to such order as requested by the Wife without contravening or varying the terms of the Trust. The problem of what may happen if a foreign court purported to make an unauthorised alteration to the trust deed (for example, as occurred in Re IMK Family Trust [2008] JLR 250) did not therefore arise.


In Re H Trust [2006] JLR 280, the Royal Court held that in most circumstances it is unlikely to be in the interests of a Jersey trust for the trustee to submit to the jurisdiction of an overseas court which is hearing divorce proceedings. The Royal Court said that “it is more likely to be in the interests of a Jersey trust and the beneficiaries thereunder to preserve the freedom of action of both the trustee and this court [i.e. the Jersey court] to act as appropriate following and taking full account of the decision of the overseas court”. However, the Royal Court recognised that in some cases, it may be in the interests of the trustee to appear before a foreign court to put forward its point of view.  This included circumstances where, by reason of the location of the trust assets, the foreign court would be able to enforce its order without regard to the trustee or the Royal Court.


The Royal Court ruled that submission to the jurisdiction of the Hong Kong courts was reasonable for the following reasons:


(a) The appearance of the Trustee would ensure that it was able to put forward arguments and produce evidence such that the interests of the other beneficiaries of the Trust were fully considered;


(b) The Royal Court acknowledged that 70% of the Trust’s underlying assets were held in Hong Kong or the PRC, so even if the Trustee chose not to take part the Hong Kong court would still have the power to enforce any order it made varying the Trust;


(c) The Trust was administered in Hong Kong and therefore the key individuals could be ordered to give information; and


(d) The risk of the Trustee being put in position of conflict between its duty to obey an order of the Hong Kong court and its duty to adhere to the trust deed was minimal given that the Wife was seeking an order that was within the powers in the trust deed.


The Orders Made By The Hong Kong Courts


Following a first instance decision and two subsequent appeals, the Court of Final Appeal of Hong Kong (the “CFA“) held that:


(a) The entire trust fund should be regarded as a financial resource available to the Husband, hence part of the matrimonial estate of the couple; and


(b) The Wife was entitled to 50% of the combined matrimonial assets of the parties, including the assets of the Trust.


This resulted in a total award to the Wife of approximately HKD 832.5m (of which approximately HKD 770.5m was to come from the Trust). The Husband had already paid HKD 380m to the Wife. These payments had been funded by way of loans made by the Trustee to the Husband and these loans were in turn funded by way of dividends paid by the Company to the Trust. The Company subsequently declared a dividend in an amount sufficient to enable the Husband to pay the remaining sum due to the Wife pursuant to the order of the CFA, and following the payment of that dividend, the Husband requested that the Trustee make a distribution to him accordingly.


The Distribution


The Husband requested the Trustee make a distribution to him to allow him to meet the amount of the award made by the CFA and then to exercise its power under the trust deed to exclude the Wife as a beneficiary of the Trust.


The Trustee was inclined to accede to the Husband’s requests and, in addition, to treat the loans of HKD 380m as distributions. The Trustee applied to the Royal Court of Jersey for its approval of the following:


(a) The making of a distribution out of the Trust to the Husband for the purpose of enabling him to satisfy the order made by the CFA;


(b) To treat the loans made to the Husband as distributions, with the net effect that the whole of the ancillary relief award made by the CFA in favour of the Wife will have been funded by way of distributions out of the Trust; and


(c) Thereafter, to exercise its power under the trust deed to exclude the Wife as a beneficiary.


Decision OfTthe Royal Court




The Court’s role in approving the Trustee’s decision was set out in Re S Settlement [2001] JLR N 37. The Court must satisfy itself that the Trustee’s decision has been made in good faith, that the decision is one at which a reasonable Trustee properly instructed could have arrived, and that the decision has not been vitiated by any actual or potential conflict of interest. No issue arose in relation to the Trustee acting in good faith and that its decision was not vitiated by conflict of interest. The Court confined itself to whether the decisions of the Trustee were decisions at which a reasonable Trustee could properly have arrived.


The Court had no difficulty in finding the first two decisions to be entirely reasonable; the Husband owed the sum to the Wife; the payment was in the interests of the Husband in order to enable him to pay his debt; it was in the interests of the Wife to enable her to receive the amount which the CFA had ordered. The Royal Court had regard to the interests of the couple’s daughter (i.e. the other living beneficiary), and found that the proposed distribution could be regarded as being in her interests also, in that the litigation between her parents would be brought to an end. The Royal Court also thought it reasonable for the Trustee to conclude that the daughter would ultimately benefit from her mother’s estate. It was also noted that, although the sum payable amounted to half the trust fund, the remaining assets of the Trust were equally substantial.


Applying the Re S Settlement principles, the Royal Court found the Trustee’s decision to make a distribution to the Husband, to enable him to meet his obligations to the Wife, to be entirely reasonable.


Removal Of The Wife As A Beneficiary


The Wife opposed her removal as a beneficiary of the Trust, for the following reasons:


(a) The proposed distribution of HKD 770.5m should be regarded as being made to the Husband for his benefit, and not for her benefit at all;


(b) The figures used by the Hong Kong Courts in arriving at the figure of approximately HKD 770.5m as representing 50% of the Trust assets were historical, and therefore potentially under-representative of the current value of the underlying group of companies making up the assets of the Trust; and


(c) The Wife still had an important role to play in supervising and holding the Trustee to account (in particular on behalf of her daughter) even if she did not expect to receive any further benefit from the Trust herself.


As to the first point, the Royal Court declined to ignore the background to the distribution. The decision of the CFA was that the Wife should receive half of the value of the Trust assets, and the procedure proposed to be adopted was a way of giving effect to that decision. It was quite clear that the distribution, although initially paid to the Husband, was ultimately for the benefit of Wife.


As to the second argument, the Royal Court declined to second guess the basis of the Hong Kong Court’s calculations, and did not find the Trustee’s decision to refuse to provide further information to the Wife about the performance of the Trust assets since the date of the decision of the CFA to be unreasonable in the circumstances. It was the intention of the Trustee to exclude the Wife, the Court saw no justification for the Wife seeking up to date information with a view (in the event of it transpiring that the assets had increased) to seeking a further payment or to arguing that she should not be excluded because she might receive a further payment. She has received what the CFA considered fair in circumstances.


As to the third argument, the Royal Court found that the Trustee was a professional trust company and it saw no reason to think it would not act properly and impartially as a Trustee towards the daughter following the Wife’s removal from the class of beneficiaries. The presence of the Wife as a beneficiary was not necessary to protect the interests of the daughter.


Finally, in considering whether the decision of the Trustee to exclude the Wife was on balance a reasonable one, the Royal Court took the following factors into account:


(a) The Wife would, in effect, receive half of the Trust fund, giving her a total payment of HKD 832.5m from the divorce. She was aged 75 and would have ample financial resources to last her for the rest of her life, there was no need for her to remain as a beneficiary of the Trust on financial grounds;


(b) The money was to be paid to her as part of a divorce order intended to achieve a clean break. It was entirely reasonable for the Trustee to take into account that, following a divorce, relations between former spouses may be difficult and the continued presence as a beneficiary of a spouse who has received a capital sum as a clean break is likely to make it more difficult for everyone to put the divorce proceedings behind them and to move forward with their lives.


The Royal Court observed that the power to exclude was an “unusual” power, and that where a trustee was considering its exercise it should “consider the position very carefully”. Having said that, the circumstances of this case were, the Royal Court said, “perhaps a classic example of where it may well be appropriate to exclude a beneficiary”.


In all the circumstances, the Royal Court had “no hesitation in approving the decision of the Trustee to exclude the wife as a beneficiary as being an entirely reasonable decision” and concluded that the remaining assets of the Trust should be held exclusively for the remaining beneficiaries of the Trust.




These two Jersey judgments provide very useful guidance to the approach which should be taken by trustees (1) in circumstances where assets held in a Jersey law governed trust are considered to be marital property in foreign matrimonial proceedings; and (2) in relation to a proposed exercise of the power to exclude a former spouse as a beneficiary under a trust.


The Royal Court appeared to have accepted that the position taken by the Trustee at trial and on appeal was a neutral one, albeit that the Trustee had resisted the Wife’s contention that the whole of the Trust should be seen as a matrimonial asset available for distribution, or that the Hong Kong Court should attribute all the Trust assets to the Husband as a resource.


The Royal Court had specifically authorised the Trustee to participate in the Hong Kong divorce proceedings so that all the arguments in favour of the beneficiaries of the Trust (other than the Husband and Wife) could be put forward to safeguard the interests of those beneficiaries. It was therefore consistent with that duty that the Trustee put forward arguments which emphasised the interests of the daughter as the other principal beneficiary, which therefore suggested that not all of the Trust assets should be regarded as a resource available to the Husband.


The Royal Court stated that it would expect that, in many cases where a trustee does intervene in divorce proceedings in order to protect the interests of the other beneficiaries of a trust, the trustee’s arguments will in practice be more supportive of whichever spouse is seeking to argue that the trust assets are not a resource available to one or other of the spouses. Such an approach would not suggest that a trustee is behaving in an incorrect or unduly partisan manner; on the contrary it would suggest that such a trustee is doing precisely what it should do, namely highlighting the interests of the beneficiaries other than the spouses.


herbert smith Freehills


For further information, please contact:


Gareth Thomas, Partner, Herbert Smith Freehills

[email protected]


Richard Norridge, Herbert Smith Freehills

[email protected]


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