The revamped trust law in Hong Kong and its impact on ORSO schemes

To modernize the trust law regime in Hong Kong, the Trustee Ordinance (Cap.29) and the Perpetuities and Accumulations Ordinance (Cap. 257) have been amended with effect from 1 December 2013. In this article, we would like to discuss the implications of these amendments on the trustees of an occupational retirement scheme ("ORSO Scheme").

Duty of trustees

The amended Trustee Ordinance introduces a statutory duty in relation to certain functions a trustee carries out, including investment, delegation, appointing nominees and custodians, taking out insurance and powers in relation to accepting property and valuations and audit, etc. Where the statutory duty applies, the trustee must exercise the care and skill that is reasonable in the circumstances, having regard to (i) any special knowledge or experience that the trustee has or holds out as having; and (ii) if the trustee is acting in that capacity in the course of a business or profession, any special knowledge or experience that is reasonably expected of a person in the course of that kind of business or profession. Therefore, the statutory duty may apply to non-professional and professional trustees. The statutory duty will exist (if it applies) alongside the other fundamental duties of trustees at common law, such as their duty to act in the best interest of beneficiaries.

As regards an ORSO Scheme whose trust instrument is silent on the standard of care of trustees, the new statutory duty will apply. However, for trust instruments that have already set out a duty and standard of care of trustees, the amended Trustee Ordinance provides that the statutory duty will not apply "if it appears from the trust instrument or an enactment that the duty is not meant to apply". In addition, persons creating the ORSO Scheme (which was created before 1 December 2013) may also consider executing a deed with a provision to the effect that the statutory duty does not apply.

Exemption of trustees' liabilities

At common law, a trustee can exclude his liabilities except for fraud. The amended Trustee Ordinance tightens control on exemption clauses in relation to professional trustees who are remunerated for their services. These trustees can no longer exclude or indemnify against their liabilities for fraud, wilful misconduct and gross negligence. However, in relation to trusts created before 1 December 2013, this new rule will only come into effect in December 2014.

In practice, this amendment may have no significant impact on trustees of ORSO Schemes. Firstly, it has no application on individual trustees of ORSO Schemes who do not qualify as professional trustees. Secondly, the Occupational Retirement Schemes Ordinance (Cap. 426) provides that trust assets cannot be used to indemnify an ORSO Scheme's trustee against any fraud, misfeasance or breach of trust. Breach of trust has a broad coverage including acts of gross negligence. As such, the position of ORSO Schemes' trustees may not be affected by the amendment in practice.

Powers of trustees

When the trust instrument is silent on trustees' powers, the Trustee Ordinance steps in and provides trustees with default powers. The amended Trustee Ordinance has enhanced the existing and introduced new default powers. However, the new or extended powers conferred on trustees are (i) in addition to the powers conferred by the trust instrument, (ii) are subject to the terms of the trust instrument and (iii) would only apply if there is no contrary intention in the trust instrument.

• Power to insure: Trustees may derive their power to insure trust property from the trust instrument or the Trustee Ordinance. Pursuant to the amended Trustee Ordinance, trustees who exercise the statutory power to insure may now insure trust property against loss and damage due to any event, not just through fire and typhoon as was the case under the old regime.
• Power to appoint agents, custodians and nominees:Pursuant to the amended Trustee Ordinance, a trustee may appoint (i) agents to perform most of their functions including the investment of trust assets; (ii) nominees in relation to any of the trust assets; (iii) custodians for the safe custody of trust assets or title documents. Upon appointment of the agent, nominee or custodian, the trustee should keep the arrangement under review, and if necessary, exercise his power of intervention (by giving directions and revoking the appointment) unless such application is inconsistent with the terms of the trust instrument.
• Power to invest: In the absence of a contrary provision in the trust instrument, a trustee shall make investment decisions in accordance with the range of authorized investments in Schedule 2 to the Trustee Ordinance. This position has not changed. However, the choices of companies that trustees can invest in are widened by the relaxations of the conditions regarding investment in shares. Trustees exercising the default investment powers pursuant to the Trustee Ordinance can now invest in companies with a market capitalization of at least HK$5 billion and a track record of having paid cash or in-kind dividends over the preceding 3 years (instead of HK$10 billion and 5 years of cash-only dividends which was the previous position).

Despite the foregoing, as the trust instruments of most ORSO Schemes would already have their own provisions concerning the above powers, the amendments above may not have a significant practical impact on ORSO Schemes' trustees.

Settlors' involvement in the trusts

At present, if the settlor of a trust reserves excessive powers to himself, the trust may be invalidated on the ground of the lack of certainty of intention to create a trust. Pursuant to the amended Trustee Ordinance, the settlor of an ORSO Scheme (i.e. an employer) may now reserve any or all powers of investment or asset management functions in a trust deed without running the risk of invalidating the trust. In practice, such powers of investment and asset management vest in the trustees and so this amendment may have little practical impact on ORSO Schemes.

Trustees' remuneration

Prior to the amendments, it is not possible for trustees to be paid unless the trust instrument contains an express provision to that effect. The amended Trustee Ordinance introduces a new statutory charging clause whereby trustees acting in a professional capacity may now receive reasonable remuneration in the absence of a contrary intention in the trust instrument. However, as the trust instruments of most ORSO Schemes would have already provided for trustees' entitlement to remuneration, this amendment should not affect trustees of most ORSO Schemes.

Beneficiaries' right to remove trustees

At present, beneficiaries of ORSO Schemes (i.e. members of pension schemes or their beneficiaries) may only remove a trustee without going to the court if (i) the trust instrument grants the beneficiaries a power to remove trustees or (ii) all the beneficiaries (being of full age and capacity and absolutely entitled to the trust property) consent to terminate the trust and re-settle the trust property. The amended Trustee Ordinance introduces an additional court-free process whereby the sole beneficiary or all the beneficiaries may remove a trustee without terminating the trust. This process is applicable if (i) the trust instrument has not provided for a contrary intention; (ii) the trust instrument has not nominated anyone for the purpose of appointing trustees; and (iii) if all the beneficiaries are of full age and capacity and are absolutely entitled to the trust property. This amendment will apply to a trust created before 1 December 2013 unless a deed is executed by the settlor with a provision to the effect that this amendment does not apply. Nevertheless, as most ORSO Schemes would have provided for the power to appoint trustees in the trust deed, it appears that this new process may have no relevance to ORSO Schemes.

Perpetuity period

The rule against perpetuity which requires trusts in Hong Kong to run no more than 80 years is now abolished in the amended Perpetuities and Accumulations Ordinance. However, this abolition only applies to trusts created on or after 1 December 2013. In other words, only a trust created on or after 1 December 2013 may last for an unlimited period and so it does not apply to an ORSO Scheme established before that date.