August 2013 Trust Law (Amendment) Ordinance 2013 A Summary for Bond Trustees. Introduction More than four years in the making, much anticipated reforms to modernise Hong Kong trust law were finally implemented when the Trust Law (Amendment) Ordinance 2013 (the Amendment Ordinance ) was passed by the Legislative Council on 17 July 2013. The Amendment Ordinance largely reflects the changes anticipated at the consultation stage 1. The Amendment Ordinance will come into operation on 1 December 2013 except that statutory controls on trustees exemption clauses will take effect, in relation to pre-existing trusts, on 1 December 2014. This alert discusses the actions that professional trustees acting in capital markets transactions should consider taking in light of the upcoming changes to trust regulation. Statutory Duty of Care for Trustees A statutory duty of care will be imposed on trustees carrying out certain functions such as exercise of the power of investment, appointment of agents, nominees and custodians, and review of arrangements with such parties. The formulation of the statutory duty of care largely follows the language proposed at the consultation stage which requires a trustee to exercise the care and skill that is reasonable in the circumstances, having regard to any special knowledge or experience that the trustee has or holds itself out as having (a subjective standard) as well as, in the case of a professional trustee, any special knowledge or experience that is reasonably expected of a professional trustee (an objective standard). The statutory duty will replace the common law and equitable rules regarding the duty and standard of care owed by a trustee to beneficiaries of the trust. Contents Introduction... 1 Statutory Duty of Care for Trustees... 1 Statutory Controls on Trustees Exemption Clauses... 2 Powers to Appoint Agents, Nominees and Custodians 2 Remuneration and Reimbursement of Expenses... 3 Beneficiaries Right to Remove/Appoint a Trustee 4 Authorized Investments... 4 Action to be taken... 4 The statutory duty of care applies to existing and newly created trusts, but it may be excluded by the trust instrument. Whilst it may be impracticable for existing trust deeds to be amended to expressly exclude the statutory duty, trustees should review the terms of existing trust deeds to check whether they 1 For further details on the consultation conclusions reached on the trust law reform proposals, please see our client alert issued in November 2012 on the Consultation on Detailed Legislative Proposals on Trust Law Reform Consultation Conclusions (the Consultation Conclusions ) published by the Financial Services and the Treasury Bureau. Trust Law (Amendment) Ordinance 2013 A Summary for Bond Trustees 1
will be sufficient to displace the statutory duty of care. In relation to newly created trusts, we expect that professional trustees may wish to expressly exclude the statutory duty of care in the trust deed. As a corollary to the introduction of the statutory duty of care, a number of legislative amendments were made to require a trustee to discharge the statutory duty of care in taking certain actions before the corresponding statutory exemption from liability resulting from such actions could be relied upon. An example would be where a trustee has discharged the statutory duty of care in exercising or renouncing subscription rights offered to the trustee, the trustee will not be responsible for any loss occasioned by such action. Trustees should consider whether they wish to rely on the amended statutory provisions (which will require the statutory duty of care to be discharged) or ensure that the express provisions in the trust deed (as discussed later in this alert, exemption clauses are themselves subject to new statutory controls) are sufficiently wide to provide such protections. Statutory Controls on Trustees Exemption Clauses As anticipated during consultations, statutory controls will be introduced on exemption clauses used by a remunerated professional trustee. A trustee exemption clause will be invalid to the extent that it seeks to relieve a trustee from liability for a breach of trust arising from the trustee s own fraud, wilful misconduct or gross negligence 2 or grant the trustee any indemnity against trust property for such liability. These statutory controls apply to new trusts created on or after 1 December 2013, and to pre-existing trusts with effect from 1 December 2014. New to the Amendment Ordinance is the exemption of an approved trustee of a registered scheme under the Mandatory Provident Fund Schemes Ordinance (Cap.485) (the MPFSO ) from these statutory controls 3. Trustees should review their exemption clauses to bring them in line with the statutory controls. Powers to Appoint Agents, Nominees and Custodians The Amendment Ordinance provides for statutory powers to appoint agents, nominees and custodians and imposes restrictions on the persons who may act as such appointees and the terms of their appointment. These restrictions do not apply if the appointees are not appointed under the statutory powers of appointment. Therefore, trustees should ensure that trust instruments contain express powers for the appointment of agents, nominees and custodians. The Amendment Ordinance also introduces new requirements to review the arrangements under which agents, nominees and custodians act and requires the trustee to discharge the statutory duty of care before the statutory exemption from liability for appointees (or their delegates ) acts or omissions could be relied upon. Although these requirements apply regardless of whether the appointees were appointed under statutory powers 2 3 As anticipated in the Consultation Conclusions, liability for gross negligence (instead of reckless act which was the initial proposal) cannot be excluded under trustees exemption clauses. Presumably, this is because s. 26 MPFSO already imposes statutory controls on trustees exemption clauses contained in the governing rules of a registered scheme. Trust Law (Amendment) Ordinance 2013 A Summary for Bond Trustees 2
of appointment or express powers under the trust instrument, as these requirements can be excluded, trustees should generally be able to continue to rely on express provisions in their trust instruments relating to the arrangement for supervision of their appointees and provisions exempting trustees from liability for the acts or omissions of their appointees (subject to the statutory controls on trustees exemption clauses discussed above). Whilst the existing requirement that a trustee must deposit bearer securities with a bank has been slightly modified so as to require a trustee to appoint a custodian for bearer securities, the Amendment Ordinance provides that this requirement does not apply if the trust instrument permits a trustee to retain or invest in bearer securities without appointing a custodian. Following the practice in the United Kingdom (where the Trustee Act 2000 contains a similar provision), we expect trustees to include an express provision in the trust instrument that the trustee is not obliged to appoint a custodian of securities payable to bearer. Section 8(4) of the Trustee Ordinance, which absolves a trustee from responsibility for loss incurred by reason of depositing bearer securities with a bank and allows the trustee to pay any fees relating to the custodial arrangement out of the income of the property, will be repealed when the Amendment Ordinance comes into effect on 1 December 2013. In respect of liability for custodians acts or omissions, this will need to be covered either under the statutory exemption from appointees liability upon discharging the trustee s statutory duty of care, or an express exemption clause. As for fees and expenses relating to the custodial arrangement, this will need to be covered either under the statutory charging provision or, as discussed later in this alert, preferably by an express charging provision in the trust deed. Section 32 of the Trustee Ordinance, which limits a trustee s liability in respect of third party acts and losses incurred other than through the trustee s wilful default and allows a trustee to pay trust expenses out of trust property, will be repealed with effect on 1 December 2013. Again, trustees will need to rely on other statutory exemption and charging provisions (as described above) and/or express provisions in the trust deed for such protection. Remuneration and Reimbursement of Expenses As trust deeds generally contain express provisions on remuneration of trustees, the default provisions on remuneration of trustees in the Amendment Ordinance should be of limited practical significance. The Amendment Ordinance provides a statutory entitlement to trustees to pay properly incurred trust expenses out of trust funds. It also allows trustees to pay reasonable remuneration to its agents, nominees and custodians and their properly incurred expenses out of trust funds. To avoid any uncertainty as to whether the statutory entitlement applies (and in particular whether remuneration is reasonable in the circumstances), trustees should continue to rely on express provisions in the trust instrument on remuneration and reimbursement of expenses of a trustee and its appointees. Trust Law (Amendment) Ordinance 2013 A Summary for Bond Trustees 3
Beneficiaries Right to Remove/Appoint a Trustee Powers given to beneficiaries to direct the retirement or appointment of a trustee in the Amendment Ordinance do not apply if the trust instrument expresses a contrary intention. We expect professional trustees acting in the context of bond transactions to continue to provide expressly for the appointment and removal of trustees and displace the operation of the statutory provisions. Authorized Investments As anticipated in the Consultation Conclusions, the scope of authorized investments in shares when a trustee exercises the default investment powers in the Trustee Ordinance has been expanded by lowering the issuer market capitalisation requirement from HK$10 billion to HK$5 billion and by relaxing the current five-year cash dividend requirement to a cash or noncash dividend requirement in respect of three of the previous five years. Interestingly, new to the Amendment Ordinance is the exclusion of structured products from the scope of authorized investments. These changes are however of limited practical significance as trust instruments used in bond transactions usually expressly provide for the scope of authorized investments. Action to be taken Now that the Amendment Ordinance has become law, and given the imminence of its effective date, trustees will be well advised to review their trust documentation and consider making the necessary changes. Trust Law (Amendment) Ordinance 2013 A Summary for Bond Trustees 4
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