“This epic saga of greed and great wealth gained and lost”
The above is the opening line of one of the judgments in what is widely known as the DBS Bank or Amsun Trust case. Arising out of events preceding and during The Great Recession and involving litigation that started as long ago as February 2011, the last word on the saga has been pronounced very recently (22 November 2019) by the Hong Kong Court of Final Appeal (CFA). Its decision reported as Zhang Hong Li and others v DBS Bank (Hong Kong) Limited and others  HKCFA 45, is a landmark not only in the area of trustee duties but also the principles applicable to awarding compensation where such duties are breached.
The headline point of the CFA’s decision, which is the one on which we will focus, is that there was no breach of trust on the part of a trustee where an “anti-Bartlett” clause expressly excluded trustee responsibility for intervention in the affairs of an underlying private investment company, except in the event that the trustee obtained actual knowledge of dishonesty on the part of those engaged in the management of the company. Anti-Bartlett clauses are so named because they seek to counter the trustee duty of supervision which was held to arise on the facts of Bartlett v Barclays Trust Co. Ltd  1 Ch. 515. Such clauses are very common in trusts created as private family wealth holding and management structures. In our experience, they appear in practically every precedent used by trust service providers and their external 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 Background Facts
What went wrong in the present case can be briefly summarised as follows.
DBS Trustee was the trustee of a family discretionary trust, the Amsun Trust, settled by a Chinese couple, Zhang and Ji, in January 2005. Madam Ji was already a customer of DBS Bank’s private banking arm and had 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. It should be noted that she did so on the back of substantial loans from the Bank, ultimately running to more than US$100 million.
DBS Bank initially arranged the creation of a BVI private investment company, the eponymous Wise Lords Ltd., as the vehicle for the investment of the funds it lent. DBS Bank’s affiliate DHJ Management was appointed the sole director of Wise Lords. When in 2004 Madam Ji and her husband decided that they wanted a trust for Chinese succession planning and inheritance tax purposes, the Bank provided that as well in the form of what was described as its standard discretionary trust which was governed by Jersey law. DBS Trustee held the only share of Wise Lords as the sole trust asset. 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.
We will refer below to the specific terms of the anti-Bartlett provisions included in the Amsun Trust. In what became a central focus of consideration in the proceedings, DBS Trustee described itself in evidence as having performed a “high level supervisory role” in relation to the investments made by Wise Lords at Madam Ji’s direction. In July and August 2008, while the global financial crisis was taking hold, part of that “role” involved DBS Trustee giving ex post facto approval for certain transactions entered into by Wise Lords. There were three transactions 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 but he judged that the loss in question fell on DBS Trustee and DHJ Management as we explain below.
The Anti-Bartlett Provisions
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 the 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.
The “High Level Supervisory Duty”
The first instance Judge and Court of Appeal identified two possible sources for such a duty. One was DBS Trustee’s own evidence describing its “high level supervisory role”. 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 it 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
Both the Judge and the Court of Appeal (unanimously) considered that a high-level supervisory duty existed. At first instance, the Judge equated the role played by DBS Trustee with a duty of an unspecified kind to involve itself in the affairs of Wise Lords in respect of the transactions. The Court of Appeal preferred to find the supposed duty in the explanation of the Jersey law expert, considering that his reference to dishonesty was merely as an example of circumstances which might require involvement on the part of the Trustee. However, the CFA unanimously rejected the view that some unspecified high-level supervisory duty existed. In this case the anti-Bartlett clause disapplied any duty of supervision and positively prevented the Trustee from interfering in the company’s affairs. The clause means what it says. 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.
A Great Relief
Before the judgment of the CFA there had been widespread anxiety across the trust world 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 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, so it is well worth reviewing your trust before trouble arises rather than waiting until disaster strikes.
Shan Warnock-Smith QC is a barrister who provides advisory and litigation services to professional clients in the wealth structuring field. From her bases in London and Cayman, Shan has an international practice, which takes her around the globe to advise and litigate.
Andrew De La Rosa
Andrew De La Rosa has a recognised expertise in cases involving the application of equitable principles and remedies in international disputes, in particular where fiduciary relationships in trust, succession, partnership, corporate governance and investment management spheres are involved. He practices from Cayman and London and has a long-term connection with the Arabian Gulf jurisdictions.