Trusts Act 2019: Trustee Default Duties and Shields

With the new Trusts Act 2019 now in force, the spotlight is on trustee accountability.  When setting up or becoming involved in a trust, trustee liability and protection of trustees are important considerations.  Should trustees be exposed for decisions made by a trust owned entity, or should they be shielded?

The Trusts Act 2019 imposes default duties on trustees, therefore clauses to exempt trustees from specific duties will become more important.

A Shield: Anti-Bartlett Clause

Anti-Bartlett clauses come from the UK case of Bartlett v Barclays Bank (Nos 1 and 2) [1980] 1 Ch 515.  Common in offshore jurisdictions such as the Virgin Islands, anti-Bartlett clauses shield trustees from liability for decisions they would otherwise be responsible for.  The clauses expressly exclude particular trustee duties/responsibilities, for example, financial market awareness, prudent investment and supervision of trust owned assets.  They have an added benefit: allowing settlors and beneficiaries (and sometimes settlors who are also beneficiaries) to get involved in the business of the trust or trust owned entities, with the trustee(s) sitting back free from liability.  They do not exclude trustee core liability (dishonesty, wilful misconduct and gross negligence), but they reduce the scope of other duties.  The clauses are popular in trust deeds that manage entities running high risk ventures, such as overseas investments and currency trading.

Relevance for New Zealand

Sections 28-39 of the Trusts Act 2019 impose default duties on trustees, unless specifically excluded from or modified within the trust deed.  The default duties may further reinforce the need for anti-Bartlett clauses if that is what a settlor wants.  The default duties are:

• A general duty of care;
• Investing prudently;
• A prohibition on trustees acting in their own interests;
• A duty to consider the exercise of trustees’ powers;
• Banning trustees from actions that fetter a trustee’s discretion;
• Acting unanimously;
• Not to profit from the trusteeship or benefit from the exercise of trustee discretions.

Although anti-Bartlett clauses can in theory exclude all of the above, sections 40-41 prohibit a trust deed excluding trustee liability for dishonesty, wilful misconduct or gross negligence.

Case Study

A 2020 Hong Kong Court of Final Appeal (“HKCFA”) case illustrates the usefulness of anti-Bartlett clauses to trustees.

Background

In Zhang Hong Li and Ors v DBS Bank Hong Kong (Limited) and Ors [2019] HKCFA 45, a Hong Kong couple settled a trust under Jersey law (an island in the British Channel which is a self-governing British Crown dependency within the common law).  The trustee, DBS Trustee, held the only shares in the trust property, Wise Lords, an investment company set up with DBS Bank to make high risk investments, particularly in foreign currency.  One of the settlors, Madam Ji, an investment advisor to Wise Lords, directed the investments.

In July and August 2008, Wise Lords increased its credit facilities with DBS Bank to USD $100 million, three times its net assets and purchased USD $83 million worth of Australian currency (“AUD”).  The 2008 GFC struck, sending the AUD crashing down against the USD.  Wise Lords suffered significant losses, approximately USD $16.2 million on investments and incurring a termination fee of AUD $1.5 million.  It appears the trustees were very “hands off”, simply rubberstamping the transactions.

Madam Ji and her husband sued DBS Trustee for gross negligent breach of trust and for gross negligent breach of duty by the directors of Wise Laws for approving the transactions.

At the trial and on appeal both Courts found that the trustees breached a “high-level residual duty” by not supervising the transactions.  The HKCFA analysed the anti-Bartlett clause in the trust deed which instructed the trustees to:

• Leave the administration, management and conduct of the business and affairs of such company to the directors and other officers;
• Assume at all times that the administration management and conduct of the business and affairs of such company are being carried on competently, honestly, diligently and in the best interests of the trustees;
• Ignore any duty to take any steps at all to ascertain whether or not the assumptions above are correct.

Result

Although the case settled prior to the judgment being delivered, the HKCFA still gave its decision as this case will be very important for trusts and anti-Bartlett clauses worldwide.  Reversing the decisions of the lower Courts, the HKCFA unanimously found:

• The trustees had no “high level residual duty” to supervise the company's activities, given that the anti-Bartlett clause relieved them from any duty to interfere with or supervise the company's conduct, unless they became aware of actual dishonesty;
• The existence of such a duty was inconsistent with the anti-Bartlett clause. Such a duty would require DBS Trustee to query and disapprove the transactions, thus interfering with Wise Lords’ business contrary to the terms of the trust deed;
• There was no actual knowledge of dishonesty that required the DBS Trustee to interfere;
• The “rubberstamp” approvals did not constitute gross negligence. While the transactions were speculative and risky, the trust deed specifically allowed the taking of such risks.  The trustees were protected by liability exemption clauses for any acts and omissions short of gross negligence;
• The corporate director of the investment company did not have any supervisory duty in respect of the investment decisions and was not in breach of its fiduciary duties.

If the trust had been settled in New Zealand after 31 January 2021 without the anti-Bartlett clause, the default general duty of care and the duty to invest prudently would have rendered the trustees liable.  It is prudent for trustees of new trusts to identify their protections and potential exposure.

If you would like further information, please contact Daniel Shore on 07 958 7477.