The two Hong Kong Court of Final Appeal (CFA) cases outlined below are landmark decisions on the standard of care of a lay trustee and on the test of unconscionability in knowing receipt, respectively.
Man v Man
Trustees owe a duty of care to prudently administer the trust under the common law. That common- law duty of care has been written into statute in the UK through the introduction of a statutory duty of care into the Trustee Act 2000. Hong Kong’s Trustee Ordinance (Cap 29) mirrored the UK Trustee Act 1925 and it is now very outdated. In 2009, the HKSAR government proposed to reform Hong Kong’s trust legislation, and one aspect of that is to introduce a statutory duty of care. Until the Legislative Council passes the bill that reforms the Trustee Ordinance (Cap 29), a trustee’s duty of care is still the common-law duty of care.
Man v Man [2006] 4 HKLRD 484, (2009) 9 HKCFAR 674 raised an interesting question: whether a common standard of care should be applicable to a layman trustee (who usually acts for free and is unskilled) and to a paid professional or a corporate trustee (who usually acts for a fee and professes to have special skills).ManMan concerned registered managers of a village clan in the New Territories. Registered managers are a creation of the New Territories Ordinance (Cap 97) (not the Trustee Ordinance (Cap 29)) and New Territories lands are registered under their names. They are the legal representatives with full power to dispose of village land.
In this case, the registered managers of a village clan had sold land to a company for HKD342.6 million, and the company resold it 17 days later for HKD446 million, making a profit of HKD103.4 million. A member of the village clan claimed that the registered managers had been negligent in selling the land at an undervalue.
After finding that the registered managers are trustees within the meaning of the Trustee Ordinance (Cap 29), and that they owed a duty of care to prudently administer the trust property that was the land sold, the question arose as to whether their lack of skill and knowledge was excusable because they were ‘only villagers’ (i.e. traditional folk in a traditional setting who were not accustomed to the dealings of a modern society, and therefore their conduct should be judged in this context). In other words, should a lower standard of care apply to lay trustees? The matter went to the Hong Kong Court of Appeal, where Cheung JA said: ‘… in my view their duties must be judged in the context of the duties imposed by law on a trustee notwithstanding the traditional setting of this case. The requirement of appointing managers to represent the [village] and the supervision by the Government under Section 15 of the New Territories Ordinance reinforced the argument that the well-recognised duties of a trustee must be imposed on the managers. Their duty could not be any less.’1 Another justice, Yuen JA, held that they should have sought professional advice and professional valuation and that their failure to do so was a breach of duty. Although the Court of Appeal decision was overturned on appeal to the CFA on other grounds, these dicta on the standard of care were not disturbed. This shows that there are not two different standards of care applicable to lay and professional trustees.
Akai Holdings Ltd (in liq) v Kasikornbank PCL
A third-party accessory to a trustee in breach is also liable to account. The landmark decision on third-party accessory liability is Barnes v Addy (1874) 9 Ch App 244, which has three limbs:
- Intermeddling with the trust – by actually participating in the fraudlimbulent conduct of the trustee, akin to a partner or sidekick of the trustee. This limb is now obsolete.
- Knowing receipt – beneficial receipt (by the third-party accessory) of the plaintiff’s property disposed of by the fiduciary in breach and that the third party has notice of such breach.
- Dishonest (or knowing) assistance – a third party has the requisite knowledge (of breach) and acts in a way contrary to normally acceptable standards of honest conduct.
With respect to the second limb, an accessory in receiving trust property is liable if they have actual or constructive knowledge of the breach. An accessory is held to have constructive notice of the trust if they abstain from making proper enquiries that would have led to them discovering the breach.2 Constructive notice is fixed on a person for matters they would have discovered if they had made the enquiries they ought reasonably to have made. Lindley LJ pointed out in Bailey v Barnes [1894] 1 Ch 25 that the word ‘ought’ does not import a duty or obligation, for a purchaser need make no enquiry. The expression ‘ought reasonably’ must mean ‘ought as a matter of prudence, having regard to what is usually done by men of business under similar circumstances’.3 Constructive notice is as good as any other notice.4 In the absence of fraud, a trustee that has acted for more than one trust or estate shall not be fixed by any notice in relation to any particular trust or estate if that notice was received merely because of that trustee acting or having acted for another trust or estate.5
The legal test for knowledge is whether it is unconscionable for the recipient to retain the benefit of the receipt – Bank of Credit and Commerce International (Overseas) Ltd (in liq) v Akindele [2000] 4 All ER 221. Unconscionability can involve dishonesty, but if the circumstance of receipt is irrational or the transaction cannot be explained by any plausible or logical reason, that fulfils the unconscionability test.
The test in Bank of Credit and Commerce International (Overseas) Ltd (in liq) v Akindele was applied in Akai Holdings Ltd (in liq) v Kasikornbank PCL [2011] 1 HKC 357, (2010) 13 HKCFAR 479. In this case, the bank was hit hard by the Asian financial crisis and many of its loans had become non-performing, including a loan to Singer. The bank had frequent dealings with Ting, a tycoon who owned and controlled several substantial companies, including Singer and a Hong Kong listed company, Akai. Singer was on default of repayment to the bank and, during discussions between the bank and Ting, it was resolved that the loan to Singer was to be redeemed by Akai so that the borrower would be switched from Singer to Akai – Akai became the borrower. The bank approved this switching transaction within six months of the discussion with Ting because the bank wanted to reduce its exposure risk. Upon receiving that approval, Ting gave the bank ‘Minutes of an Executive Committee’ meeting of Akai signed by him. The minutes were a false document, dishonestly prepared by Ting. No meeting of Akai’s Executive Committee had been held. Ting also, purportedly acting on behalf of Akai, executed various documents encumbering Akai in favour of the bank. Later, Ting, again purportedly acting for Akai, borrowed USD30 million from the bank, authorised it to be used to pay off the liability of Singer, and lodged certificates in respect of the 56 million shares (the pledged shares) in Akai Electric with the bank, as security for the loan.
Akai failed to pay the USD30 million with interest. On the day of default, the Akai shares were worth USD32 million. However, it was not until five months later that the bank enforced its security over the shares by selling them in the market. In doing so, the bank realised USD20 million, and proved in the winding-up of Akai for the shortfall of over USD13 million. Liquidators of Akai brought proceedings against the bank. Ting was obviously in breach of his fiduciary duty to Akai by intentionally and dishonestly committing Akai to the switch transaction for the benefit of Singer, but the question was whether the bank was acting unconscionably and guilty of knowing receipt. The CFA found that the resolution proffered by Ting did not fully describe the switch transaction in detail, despite the fact that the amount was so substantial, and did not record any conflicts of interest. Also, the bank’s normal practice was to obtain a board resolution and to get legal advice, and it was quite irrational for the bank to have proceeded with the switch transaction, with all its remarkable and questionable features, simply on the basis of Ting’s say-so. Since the bank was then in a dire financial situation and it was an enormous amount representing nearly twice the bank’s annual profit, it could be inferred that the bank was enticed to depart from normal standard practice, and such irrationality was sufficient to render the bank guilty of knowing receipt and unconscionable action.
- 1Man v Man [2005] 1 HKC 535, para 10.
- 2Justice v Wynne (1860) 121 Ch R 289 at pp310–311 (CA) per Ball J.
- 3Bailey v Barnes at p35. See also Eagle Trust plc v SBC Securities Ltd [1992] 4 All ER 488, [1993] 1 WLR 484 and Sun Sek Haw v Au So Kum [1999] 3 HKC 92 at p102 per Rogers JA.
- 4Cookson v Lee (1853) 23 LJ Ch 473 at 478 per Lord Cranworth LC.
- 5Trustee Ordinance (Cap 29), s30.