ZHANG HONG LI AND OTHERS v. DBS BANK (HONG KONG) LTD AND OTHERS

CACV 138/2017 & CACV 139/2017

[2018] HKCA 435

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 138 OF 2017

(ON APPEAL FROM HCCL NO. 2 OF 2011)

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IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 139 OF 2017

(ON APPEAL FROM HCCL NO. 2 OF 2011)

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________________________

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J U D G M E N T

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Hon Cheung JA :

I. Introduction

1.  In this epic saga of greed and great wealth gained and lost, the backdrop is the heady days of the financial bubble in the years leading to the global financial tsunami of 2008 and the period thereafter.  The two leading characters are the 2^nd plaintiff (‘Ji’) and the 7^th defendant (‘Linda Liu’) whose common goal when they were dealing with each other was the pursuit of money.  Ji was an astute and knowledgeable investor whose thirst for high returns and her own perception of market performance blinded her to the high risk involved with such investments. Ji’s company, the 4^th plaintiff (‘Wise Lords’) was at the relevant time the largest customer of the 1^st defendant (‘DBS Bank’).  Linda Liu was Ji’s private banker in DBS Bank and she fed Ji’s greed by peddling to her high risk financial products (which Ji was willing to accept after her own study of the products) and by acceding to Ji’s request for more and more credit facilities so that Ji would continue to indulge in her thirst for wealth. The tragic ending was inevitable when the tsunami unfurled its fury and the bubble burst.

II.  The background

2.1.  The following background of the case is extracted from the detailed and meticulous findings of the trial Judge, Bharwaney J.

1)  The parties

2.2.  The 1^st plaintiff (‘Zhang’) and Ji are husband and wife.  Zhang is a senior banker with well over 20 years of experience in the banking and finance industry, having occupied senior positions at, among other financial institutions, Goldman Sachs (US) and Deutsche Bank.  He did not deal directly with any of the defendants.

2.3.  Ji lives in Beijing with the couple’s two minor sons. She had studied in China and has a Master’s degree in Economics and had experience working in a minerals and metal company.  She had also lived in the United States for three to four years where she worked in the human resource department of a small company.

2.4.  Wise Lords is a BVI company incorporated on 20 February 2004.  Ji subsequently became the company’s first director and sole shareholder.  Wise Lords’ private banking account was opened with DBS Bank on 22 April 2004.  The Account Opening Form was signed by Ji as the sole director.  From April 2004 to early 2005, Ji, as director of Wise Lords, conducted a considerable number of investments through Wise Lords’ account. 

2.5.  The 3^rd plaintiffs (‘Arboit and Sutton’) are the current trustees of the Amsun Trust (‘the Trust’), a Jersey family trust which was set up on 4January 2005. Zhang and Ji are the settlors of the Trust.  The 2^nd defendant (‘DBS Trustee’) was the former trustee of the Trust.  When the Trust was set up Wise Lords became the Private Investment Company (‘PIC’) holding the assets of the Trust.

2.6.  Wise Lords and the Trust were acquired and set up respectively with the assistance of the 1^st defendant (‘DBS Bank’).

2.7.  DBS Bank is the Hong Kong subsidiary of DBS Bank Limited of Singapore.  DBS Bank is and was a licensed bank in Hong Kong and registered and licensed under the Securities and Futures Ordinance (Cap. 571) (‘SFO’) to advise on, deal in and manage securities.  DBS Bank was the parent company of the 2^nd defendant (‘DBS Trustee’), the 3^rd defendant (‘DBS Corporate’) and the 4^th defendant (‘DHJ Management’) and the employer of the 5^th defendant (‘Peter Lee’), the 6^th defendant (‘Edwin Lim’) and Linda Liu.

2.8.  DBS Trustee was a wholly-owned Jersey subsidiary of DBS Bank carrying on business as a professional trustee/trust management company.  DBS Corporate was DBS Bank’s Hong Kong corporate services and corporate nominee subsidiary.  DHJ Management was DBS Bank’s BVI corporate management/corporate services subsidiary.

2.9.  Peter Lee was head of DBS Bank’s Trust and Corporate Services division, executive head of DBS Corporate Services, and supervisor of DHJ Management.  Edwin Lim was the executive head of the Private Banking Division of DBS Bank (‘DBS:PB’) and licensed under the SFO.  Linda Liu was the vice president of and a relationship manager in DBS:PB.  She was also licensed under the SFO.  She was the main point of contact between DBS:PB and Ji and she handled Wise Lords’ account with DBS:PB. 

2.10.  Peter Lee who was a director of DBS Trustee from 21 January 2008 did not exercise management power over DBS Trustee or make any management decisions for DBS Trustee in relation to its trusteeships owing to the intentional offshore setup of the Trust.  Likewise, although Edwin Lim was a director of DBS Trustee between 8 December 2010 and June 2011, the daily operation of DBS Trustee in relation to the Trust was conducted by the directors of DBS Trustee in Jersey.

2.11.   As for DHJ Management, Peter Lee, who was an authorised signatory, did not possess any decision making or management power over DHJ Management.  Edwin Lim, a director of Kingly Management Limited (in turn a director of DHJ Management) between October 2010 and June 2011, was not involved in the daily operation of DHJ Management in relation to Wise Lords.

2)  The setting up of the Trust

2.12.   In 2003/04, one of Zhang and Ji’s friends passed away and the friend’s family experienced some issues with inheritance tax.  The incident caused Zhang and Ji to think about the need to do something about their family assets.

2.13.   Ji was introduced to the Treasury Priority Banking division of DBS Bank in 2004.  She had then been banking with Standard Chartered Bank and had some experience in yen foreign currency trading (‘FX’) and with premium deposits which is a form of currency link note producing enhanced return.

2.14.   The first meeting between Ji and DBS Bank took place on 22 March 2004.  Having considered the documents provided to her and received a general explanation of the different types of trust available, Ji quickly made the decision to use the most common trust structure and to become the investment advisor of the trust to be set up.

2.15.   From April 2004 to January 2005, while the Trust was being set up, Ji and Zhang injected some funds into Wise Lords’ account with DBS:PB and Wise Lords entered into some investment transactions, including a variety of mutual funds and other investment products such as Yield Enhanced Deposits (‘YEDs’) which is another form of currency linked notes producing enhanced return.  The investment of Wise Lords from that point onwards until the relationship with DBS Bank turned sour included large quantity of mutual funds, DEVA Note (a high risk financial product, as detailed in paragraph 2.24 below), YED, large quantity of FX including Australian dollar (‘AUD’), Euros (‘EUR’) and decumulators. 

2.16.   The Trust came into existence with the execution of the Trust Deed dated 4 January 2005.  The administration of the Trust was governed by the terms of the Trust Deed.

2.17.   By an Investment Advisor Agreement dated 4 January 2005, Ji was appointed the investment advisor of Wise Lords. While DBS Trustee did not become aware of the Investment Advisor Agreement until February 2007, it was aware from the outset that an investment advisor would be appointed, and knew that Ji was the designated investment advisor before 23 February 2007.  From the start, Ji asserted her role and status as decision maker in respect of the investments.

2.18.   By an Authorisation Letter dated 5 January 2005 and executed by DHJ Management (signed by Peter Lee as the authorised signatory), Wise Lords authorised Ji to issue investment instructions on its behalf to DBS Bank.

2.19.   The relationship between DBS Trustee, DBS Corporate and Wise Lords was the subject of a Services Agreement dated 13 September 2005, by which DBS Corporate was to perform or appoint one or more persons/companies as nominees (which included DBS Corporate) to perform the services specified in Schedule II of the agreement in relation to Wise Lords. The services specified were the provision of nominee director, provision of registered office and onward transmission of correspondence, record keeping by company secretary and provision of bank signatories.  After Ji transferred the one share in Wise Lords to DBS Trustee for the set up of the Trust, DBS Trustee nominated DHJ Management to act as director of Wise Lords.  After DHJ Management became a subsidiary of DBS Corporate on 17 August 2005, DHJ Management continued to act as DBS Corporate’s nominated director of Wise Lords.

3)  The transactions

(1)  Mutual fund

2.20.   From January 2005 to April 2008, Wise Lords invested principally in mutual funds of shares in Mainland China, with an overall profit of more than HK$132.6 million or USD 17 million.

2.21.   For the extended financial year from 5 January 2005 to 31 March 2006, the unrealised profits in the Trust were USD 5.35 million, which represented a profit percentage of 32.75% of the capital funds in the Trust of USD 16.34 million.  For the financial year ended 31 March 2007, the unrealised profits in the Trust were USD 4.45 million, which represented a profit percentage of 18.3% of the capital funds in the Trust of USD 24.35 million.  For the financial year ended 31 March 2008, the unrealised profits in the Trust were USD 8.53 million, which represented a profit percentage of 26.65% of the capital funds in the Trust of USD 32.02 million.

(2)  Credit facilities

2.22.   Wise Lords applied for and was granted a credit facility of HK$78 million in December 2006.  The application was acknowledged by Ji and Zhang, who signed the relevant Letter of Recommendation dated 13 December 2006.  DBS Trustee and DHJ Management were notified by DBS Corporate on 13 December 2006 and members’ and board resolutions were executed on behalf of Wise Lords on 18 and 21 December 2006.

2.23.   Over the course of time, Ji asked for more and more credit to be extended to Wise Lords.  The facility was increased progressively from USD 10 million on 12 December 2006 to USD 100 million (HK$780 million) on 21 July 2008 :

i)  12 December 2006: Credit Facility granted for USD 10 million (HK$78 million);

ii)  26 January 2007: Temporary increase to USD 12 million (HK$93.6 million);

iii)  28 March 2007: Temporary increase to USD 12.2 million (HK$95.l6 million);

iv)  29 March 2007: Temporary increase to USD 14.1 million (HK$110 million);

v)  14 May 2007: Temporary increase to USD 12.5 million (HK$97.5 million);

vi)  23 May 2007: Credit Facility increased to USD l5 million (HK$117 million);

vii)  4 July 2007: Facility letter (HK$l56 million);

viii)  16 July 2007: Application for temporary increase (HK$195 million);

ix)  26 July 2007: Application for temporary increase (HK$226.2 million);

x)  29 August 2007: Facility letter (HK$250 million);

xi)  31 August 2007: Application for permanent increase (HK$390 million) (The form shows it was resubmitted in December);

xii)  18 January 2008: Facility letter (HK$390 million);

xiii)  29 April 2008: Temporary drawdown of USD 31 million (HK$241.8 million) from DBS Bank’s ‘in transit account’;

xiv)  29 April 2008: Application for Credit Facility to be increased to USD 200 million (HK$1,560 million) declined;

xv)  25 May 2008: Credit Facility increased to USD 58 million (HK$450 million);

xvi)  21 July 2008: Credit Facility increased to USD 100 million (HK$780 million).

(3)  DEVA Notes

2.24.   Wise Lords began to purchase DEVA note in January 2007, another high risk but high return financial product.  Financial experts called by the parties in this case agreed that the purchase of the DEVA note involved the investor taking a market risk in the form of difference between the implied volatility captured by the VIX index : a Volatility Index published by the Chicago Board Options Exchange Market based on the implied volatility of the S&P 500 equity index options and the realised volatility.  A buyer of the DEVA Note adopts the view that the market expectation of future volatility in the S&P index would exceed actual volatility.

(4)  Foreign currencies (‘FX’)

2.25.   In 2008, Wise Lords, at Ji’s initiation, began to invest more heavily in foreign exchange transactions, with particular focus on Australian dollar (‘AUDs’), Euros and YEDs.

2.26.   The increases in the credit facility provided to Wise Lords enabled it to invest in mutual funds to grow from USD 25.87 million on 31 December 2006 to a height of USD 106.37 million on 31 October 2007, being 97.25% of the entire portfolio, before dropping to 91.32% in February 2008 and to 5.28% in May 2008, when the investments switched from mutual funds to AUDs and YEDs.

2.27.   Since mid-2008, Ji preferred to buy and sell FX directly rather than YED which Ji thought produced too little return.  Ji used the ‘carry trade’ strategy of borrowing in USD to buy AUD or EUR to earn higher interest. This was successful when AUD and EUR appreciated against USD.  Substantial losses would occur when these two currencies depreciated against the USD.  At end of July 2008 AUD 66 million was purchased.

2.28.   The credit facility for Wise Lords was increased to HK$780 million on 21 July 2008.  The facility letter dated 21 July 2008 was despatched to Ji for her signature and was signed by Ji sometime later as the original letter had been misdelivered.  The facility letter for the same increase was signed by Wise Lords on 25 August 2008 and, on 26 August 2008, DBS Corporate notified DBS Trustee of the increase, which was approved by DBS Trustee.

2.29.   The increased facility of USD 100 million, which had been made available from 21 July 2008, had already been utilized to the extent of USD 94.5 million by 7 August 2008 and which utilization stayed at or above this level up to the end of August 2008. 

2.30.   As of 18 August 2008, Wise Lords’ portfolio was highly leveraged, the loan of USD 96.37 million as at that date being about 73% of the total portfolio value of USD 131.8 million.  From 24 July to 5 August 2008 USD 116 million was sold to buy AUDs. 

2.31.  Between 24 July and 5 August 2008, Wise Lords purchased USD 96 million worth of AUD.  The AUD deposits rose from AUD 66 million at the end of July 2008 to AUD 122.6 million on 18 August 2008.  This occurred against a backdrop of substantial market nervousness created by the sub‑prime crisis.

2.32.   As at 18 August 2008, Wise Lords’ investment portfolio was as follows :

Item	Amount
Cash	USD160.92
Fixed Deposits (US Dollars)	USD84,980.65
Fixed Deposits (Australian Dollars)	AUD122,586,213.18
Fixed Deposits (Euros)	EUR3,188,861.44
YED in US Dollars, linked to Australian Dollars	USD15,000,000
YED in US Dollars, linked to Euros	USD5,000,000
Total Assets	USD131,800,188.34
Borrowing	USD96,367,192.31
Net Assets	USD35,432,996.04

2.33.   The portfolio had leverage of around 272% (USD 96,367,192.31 divided by USD 35,432,996.04).

2.34.   The portfolio had high currency risk (excluding the effect of the YED):

i)  Australian dollars constituted around 81% of the total investment portfolio and about 302% of net assets.

ii)  Euros constituted 4% of the total investment portfolio and 13% of net assets.

iii)  In effect, foreign currency exposure constituted 85% of the total investment portfolio and 315% of net assets.

iv)  There was a significant mismatch between the currency of asset and liabilities.  Including the YEDs, the portfolio had USD assets of USD 20,085,141.57 (USD 160.92 plus USD 84,980.65 plus USD 15,000,000 plus USD 5,000,000) against USD borrowings of USD 96,367,192.3.  This means there was a USD shortfall of USD 76,282,050.74.

2.35.   In mid July 2008 AUD/USD rose to a then record high of AUD/USD 0.9849.   From 21 July 2008 to 1 August 2008, AUD dropped against the USD from a rate above USD 0.9750 to AUD 1 to below USD 0.93 to AUD 1.

2.36.   From 1 August 2008 to 26 August 2008, AUD dropped against the USD from a rate below USD 0.93 to AUD 1 to a rate below USD 0.85 to AUD 1.

2.37.   The decline in AUD/USD from end-July 2008 to August 2008 has been ascribed to the so-called ‘flight to quality’.  This saw investors seeking safe haven in perceived ‘safer’ currencies, particularly USD coupled with domestic concerns about the Australian economy.

(5)    Decumulators

2.38.   Despite repeated warnings issued to Ji about the AUD situation, Ji was unwilling to unload Wise Lords’ positions at anything less than breakeven point.  Linda Liu then introduced decumulators to Ji as an AUD exit strategy.

2.39.    Wise Lords purchased three decumulators ：

i)  1^st decumulator – purchased on 15 August 2008, approved by DBS Trustee on 18 August 2008.  The amount was AUD 20.8 million with the strike price at USD 0.9650/AUD and knock out price at USD 0.8275/AUD.  It was a one year AUD/USD decumulator issued by DBS Bank.

ii)  2^nd decumulator – purchased on 27 August 2008, approved by DBS Trustee on 28 August 2008.   It was a one year Euro/USD decumulator in the amount of Euro 6,396,000 with strike price at USD 1.568/Euro and knock‑out price at USD 1.419/Euro.

iii)  3^rd decumulator – purchased on 29 August 2008, approved by DBS Trustee on 1 September 2008.  It was a 58‑week AUD/USD decumulator in the amount of AUD 56,260,000 with strike price at USD 0.9520/AUD and knock‑out price at USD 0.8310/AUD.

4)  The fall

2.40.   From 15 August 2008 to 14 November 2008, AUD dropped against the USD from a rate of USD 0.8676 to AUD 1 to USD 0.6627 to AUD 1.  From 15 August 2008 to 14 November 2008, EUR dropped against the USD from a rate EUR 1 to USD 1.4695 to a rate of EUR 1 to USD 1.2731.

2.41.   AUD continued to decline sharply after the two AUD/USD decumulators were executed.  From a rate of 0.8563 on 29 August 2008, it soon fell below the knock‑out rate under the two AUD decumulators (0.8275 and 0.8310 respectively).  As a result, there was only one instalment of USD received under the 1^st decumulator but none under the 3^rd decumulator, which raised the possibility of a margin call on Wise Lords.  To avoid margin calls, Ji had no alternative but to place orders, which she did on 11 September 2008, to sell over AUD 60 million of Wise Lords’ AUD cash holdings at rates ranging from 0.8147 to 0.7970.  By the end of September 2008, AUD deposits of less than AUD 3 million remained in Wise Lords’ account.

2.42.   By September 2008 the global financial storm was at its apex when many financial institutions including Fannie Mae and Freddie Mac, Lehman Brothers and AIG collapsed.

5)  Margin call

2.43.   As the AUD continued to deteriorate in September and October 2008 DBS:PB issued a ‘Top Up’ margin call on 9 October 2008 and a ‘Sell Out’ margin call to Wise Lords on 9 and 13 October 2008 respectively.  Again, Ji had no alternative but, in October 2008, to cause Wise Lords to borrow AUDs and EURs from DBS Bank in order to sell them and use the USD proceeds to reduce the USD loans, thereby converting the USD loan portfolio to an AUD and EUR loan portfolio, and which was repaid by the weekly return of AUDs and EURs from the three decumulators.  Doing so also avoided the currency mismatch.

 2.44.   Eventually by 14 November 2008, the two AUD decumulators were unwound, leaving only the EUR decumulator.

2.45.   In addition to the termination costs of AUD 400,000 and AUD 1.1 million on the AUD/USD decumulators, Wise Lords lost about USD 15 million on the AUD/USD decumulators and also lost about USD 1.2 million on the EUR/USD decumulators as at 14 November 2008 (the unwind date of the AUD/USD decumulators).

6)  Acrimonious accusations

2.46.   From September 2008 onwards, the parties adopted a combative stance, Ji writing many letters of complaints and refusing to terminate the Trust, whilst, on the DBS Bank’s side, refusing Ji’s request to distribute HK$7 million to pay Zhang’s tax unless Ji and Zhang signed the Declarations of Risk Awareness in respect of the sale of the DEVA Note, the three decumulators, the sale of AUD in October 2008, and Awareness letters of the decrease in NAV of the portfolio at end August 2008 and end September 2008.  DBS:PB attempted to refute Ji’s complaints by its letter dated 7 November 2008.  DBS:PB also relayed the response of DBS Trustee to Ji’s complaints by its letter dated 9 December 2008.

2.47.   The dispute escalated when Ji and Zhang engaged solicitors who wrote to DBS Trustee on 11 December 2008 setting out various complaints and claiming USD 50 million as losses caused by breaches of duty by DBS Trustee and DBS:PB.  DBS Trustee responded by letter dated 11 February 2009 to the various complaints and concluded by suggesting that if Ji and Zhang wished to commence legal proceedings then the current trustees would need to resign and a replacement trustee appointed in their stead.

7)  The loss and aftermath

2.48.   In the review for March 2008 to March 2009, a net reduction of 70% in Wise Lords’ NAV (Net Asset Valuation) was recorded.

2.49.   On around 31 January 2011, a Deed of Appointment Retirement and Indemnity was executed between Zhang, Ji, DBS Trustee and the Current Trustees.  In February 2011, the 3^rd plaintiff replaced DBS Trustee as the Trustees of the Trust.

8)  The action and judgment

2.50.   The plaintiffs commenced the present action on 28 February 2011 against the defendants : as against DBS Trustee for dishonest breach of trust, as against DBS Corporate and DHJ Management for dishonest breach of fiduciary duty, as against DBS Bank, Peter Lee, Edwin Lim and Linda Liu for dishonest assistance for the aforesaid breach of trust and fiduciary duty. 

2.51.   After a trial of 24 days Bharwaney J dismissed the plaintiffs’ claim against DBS Bank, DBS Corporate, Peter Lee, Edwin Lim and Linda Liu.  The Judge gave judgment for the plaintiff against DBS Trustee and DHJ Management.   They now appeal against the judgment against them (CACV 138/2017). 

2.52.   The plaintiffs also appeal against the judgment dismissing their claim against the other defendants (CACV 139/2017).

III.  CACV 138/2017

1)  Objects and Duties of Trustee

3.1.   The Judge summarised the objects of the Trust and terms of the Trust Deed and DBS Trustee’s duties.   

(1)  The objects of the Trust

3.2.   The intention of setting up the Trust as reflected in the documents was for the purposes of confidentiality, caring for children, succession planning and avoidance of estate duty and asset protection.  As can be seen from the Letter of Wishes, Zhang and Ji wanted the funds to be available for them and their children and remoter issue.

(2)  The terms of the Trust Deed and the Trustee’s Duties

3.3.   The administration of the Trust was at all material times governed by the terms of the Trust Deed dated 4 January 2005.  The relevant aspects of the structure of the Trust Deed are apparent from its index namely :

i) Clauses 1 and 2 provide a definition of key terms and the declaration of the proper law governing the Trust;

ii) Clauses 3 to 5 declare the trust over the Trust Fund which the trustee(s) is required to hold upon trusts over both the capital and the income ‘… for the benefit of … the Beneficiaries …’ and which require the trustee to administer those trusts;

iii) Clauses 6 and 9 to 11 confer trustee’s powers of appointment, advancement, addition and exclusion;

iv) Clauses 12, 13, 15 to 17, 22 and the First Schedule confer various other specific trustee’s powers;

v) Clause 14 requires the trustee to exercise the trust powers ‘for the benefit of all or any one or more of the Beneficiaries’; and

vi) Clauses 19 and 20 provide for the release of an outgoing trustee from liability, except for any liability in respect of:

a)  any breach of trust arising from fraud, wilful misconduct or gross negligence; or

b)  any action to recover Trust property in the possession of the outgoing trustee; or

c)  any exercise of trustee’s powers not made in good faith.

2)  Jersey law on Trust

3.4.   The governing law of the Trust was Jersey law. The Judge accepted the expert opinion of Professor Matthews on the relevant Jersey trust law.  The other expert was Mr Speck. 

3.5.   The Judge found that it is common ground that the fundamental trust duties in this case comprised the duties of honesty and good faith and the duty not to act in a grossly negligent manner (i.e. a serious or flagrant degree of negligence).  The duties which could not be altered by the express terms of the Trust Deed included :

(1) the unqualified requirement imposed by Article 21(2) of the 1984 Trust (Jersey) Law (‘1984 Law’) that:

‘ Subject to this Law, a trustee shall carry out and administer the trust in accordance with its terms’;

(2) the unqualified obligation imposed by Article 24(2) of the 1984 Law that :

‘ A trustee shall exercise the trustee’s powers only in the interests of the beneficiaries and in accordance with the terms of the trust’;

(3) the unqualified requirements imposed by Article 21(1) of the 1984 Law that :

‘A trustee shall in the execution of his or her duties and in the exercise of his or her powers and discretions –

(a) act –

(i) with due diligence,

(ii) as would a prudent person,

(iii) to the best of the trustee’s ability and skill; and

(b) observe the utmost good faith’; and

(4)  the overriding Article 30(10) prohibition that:

‘ Nothing in the terms of a trust shall relieve, release or exonerate a trustee from liability for breach of trust arising from the trustee’s own fraud, wilful misconduct or gross negligence.’

3.6.   The Judge held :

‘ 119. Clause 19 of the Trust Deed mirrors Article 30(10) [of the 1984 Law] in stating that an outgoing trustee does not have any liability to any beneficiary or replacement trustee except insofar as such liability arises from the outgoing trustee’s fraud, wilful misconduct or gross negligence. The statutory position under Article 30(10) aligns with the English common law position under Armitage v Nurse [1998] Ch 241 referred to by both experts. The “irreducible core” of trust obligations identified in Armitage v Nurse consist of the duties of good faith and honesty, which, of course, prohibit acts of fraud and wilful misconduct.’

3.7.   The Judge accepted the defendants’ submissions that, under Jersey law, there was no duty on the part of trustees in the position of DBS Trustee to pre-approve each investment made by Wise Lords before it was made.  The 1984 Law and the Trust Deed do not contain any provision to such effect and the experts did not suggest the existence of such a duty.   

3.8.   However, the Judge specifically found that the roles assumed by DBS Trustee and DHJ Management were high level supervisory ones and they retained the power to override Ji’s investment decisions or reverse transactions she conducted for Wise Lords.  (emphasis added)

3.9.   The Judge discussed how this high level supervisory role affected DHJ Management and DBS Trustee :

‘ 83. ...... I find that DHJ Management, as director of Wise Lords, was entitled to delegate particular functions, and to trust the competence and integrity of the delegatee to a reasonable extent. I find that that DHJ Management, as director of Wise Lords, was entitled to delegate the exercise of its powers and functions to others and that it was entitled to authorise Ji to execute investment transactions on behalf of Wise Lords. Ji’s power to direct investments was subject to the power of the DBS Trustee and DHJ Management to override Ji’s decisions or reverse the transactions she conducted for Wise Lords. I do not find any conflict between Ji’s authorisation and the fact that approvals for Wise Lords’ investment transactions had to be and were routinely sought from DBS Trustee, through DBS Corporate. DBS Trustee owned the trust asset, which was the shares of Wise Lords. DBS Trustee was obliged to carry out the terms of the Trust and to administer the trust assets for the benefit of the beneficiaries pursuant to the terms of the Trust Deed and subject to the Trusts (Jersey) Law 1984 (“the 1984 Law”). DBS Trustee had to take a high level supervisory role. The structure was deliberately designed to permit a measure of independence and flexibility on the part of Ji advising and executing investments, subject, however, to the Trustee’s overarching supervision, regular monitoring and responsibility to ensure that the value represented by the overall trust fund was subject to appropriate controls, reviews, investment expertise and management.’ (emphasis added)

3.10.   The Judge further elaborated :

‘ 163. DBS Trustee and DHJ Management played a substantial, high-level supervisory role in respect of Wise Lords’ investments. The DBS Trustee was not involved in the day to day management of Wise Lords. The structure permitted a measure of independence and flexibility subject, however, to DBS Trustee’s overarching supervision, regular monitoring and responsibility. As Linda Liu explained to Ji during a telephone conversation on 4 April 2008, “typically speaking, trustee has the right to refuse to accept the investment advisers’ opinions if he thinks that the risk is too high or a loss will be caused to the trustee’s portfolio, or there is a very great risk.” Information provided to DBS Trustee and DHJ Management enabled them to perform their supervisory functions. Matters considered by them were recorded in Minutes. Information related to investment transactions directed by Ji for Wise Lords was passed by DBS:PB personnel to DBS Trustee and DHJ Management through DBS Corporate. The information also enabled DBS Corporate to carry out their book-keeping function in relation to transactions conducted by Wise Lords. DBS Corporate also assisted DBS Trustee and DHJ Management to gather information frequently requested by DBS Trustee and DHJ Management in advance to facilitate their review. Although DBS Trustee and DHJ Management played a substantial, high-level supervisory role in respect of Wise Lords’ investments, it must, however, be noted that DBS Trustee had never reversed any of the 519 transactions that had been entered into by Wise Lords.’

IV.  Liability of DBS Trustee

4.1.   The Judge found against DBS Trustee on the basis that it had breached its high level supervisory role which he regarded as the duty in respect of giving approval for the purchase of AUD, the granting of increased credit facilities and the purchase of the decumulators.

1)  Purchase of AUD

4.2.   The volume of the purchase of AUD from 24 July 2008 to 5 August 2008 is as follows :

FX Transaction
	Client Buy	Client Sell	Inter Rate	Client	Value DD	Transaction Date	Item No. Arboit’s 2nd Schedule
(1)	AUD10,411,244.14	USD10mio	0.96	0.9605	28-Jul-08	24-Jul-08	477
(2)	AUD3,129,890.45	USD3mio	0.958	0.9585	28-Jul-08	24-Jul-08	479
(3)	AUD10,465,724.75	USD10mio	0.955	0.9555	28-Jul-08	25-Jul-08	481
(4)	AUD10,460,251.05	USD10mio	0.9555	0.956	28-Jul-08	25-Jul-08	482
(5)	AUD10,482,180.29	USD10mio	0.9535	0.954	30-Jul-08	28-Jul-08	486
(6)	AUD10,487,676.98	USD10mio	0.953	0.9535	30-Jul-08	28-Jul-08	485
(7)	AUD10,520,778.54	USD10mio	0.95	0.9505	31-Jul-08	29-Jul-08	488
(8)	AUD10,542,962.57	USD10mio	0.948	0.9485	01-Aug-08	30-Jul-08	490
(9)	AUD10,565,240.36	USD10mio	0.946	0.9465	01-Aug-08	30-Jul-08	491
(10)	AUD8,497,079.13	USD8mio	0.941	0.9415	05-Aug-08	04-Aug-08	493
(11)	AUD5,350,454.79	USD5mio	0.934	0.9345	06-Aug-08	04-Aug-08	494
(12)	AUD10,674,955.90	USD10,087,833.33	0.945	YED	05-Aug-08	05-Aug-08	495
(13)	AUD10,651,535.40	USD10,097,655.56	0.948	YED	05-Aug-08	05-Aug-08	496
	AUD122,239,974.35	USD116mio	average cost @0.9490

4.3.   The Judge held at paragraph 407 that apart from the first two purchases of USD 13 million worth of AUD on 24 July 2008, DBS Trustee failed to discharge their high level supervisory duty over the subsequent purchases of USD 83 million worth of AUD from 25 July (mistakenly stated by the Judge to be 24 July) to 5 August 2008.  He held that DBS Trustee ought to have queried and not given approval for the further purchases of USD 83 million worth of AUD. Their failure constituted a breach of their duty to act with due diligence, to act as would a prudent person, to act to the best of his ability and skill, and to act only in the interests of the beneficiaries.  Approving the further purchases of USD 83 million worth of AUD, is not something which a trustee, complying with the duty to act prudently, could reasonably have done.  He held DBS Trustee acted in a negligent manner and that their degree of negligence was a serious or flagrant degree of negligence.

2)  Increase of credit facilities

4.4.   The Judge held :

‘ 408. ...In approving the increased credit facility at the end of August 2008, DBS Trustee failed to discharge their high level supervisory duty over the investments made by Wise Lords. Their failure constituted a breach of their duty to act with due diligence, to act as would a prudent person, to act to the best of his ability and skill, and to act only in the interests of the beneficiaries. Approving the increased credit facility at the end of August 2008 is not something which a trustee, complying with the duty to act prudently, could reasonably have done. I find, for the reasons set out in the afore-mentioned paragraphs of my judgment, that, in approving the increased credit facility at the end of August 2008, DBS Trustee acted in a negligent manner and that their degree of negligence was a serious or flagrant degree of negligence.’

4.5.   Earlier, the Judge found that DBS Trustee was only notified by DBS Corporate on 26 August 2008 of the proposed increase to USD 100 million when the increased facilities had already been utilised up to USD 96.37 million by 18 August 2008. The approval was given by DBS Trustee on 28 August 2008.  On 26 August 2008 DBS Trustee was only aware that USD 27 million was granted.  When they asked DBS Corporate about the need for the increase, the response was :

‘ The increase in the facility to HKD780mio is for standby purpose to provide funds for future investment opportunities, such as investment in FX and Yield Enhanced Deposits.

Hope to have answered you well.’

3)  Decumulators

4.6.   The events leading to DBS Trustee’s approval of the three decumulators are summarised by the Judge as follows :

‘ 370. Linda Liu emailed DBS Corporate on 18 August 2008 seeking approval for the 1^st Decumulator transaction and, on the same day, Sheran Chan sent DBS Trustee an Investment Application form dated 15 August 2008 which was the date of the transaction. DBS Trustee signed the form, signifying that they had considered and approved the application, and returned the Investment Application form by fax on the same day. The Minutes of DBS Trustee resolving to approve the investment was also signed and dated on 18 August 2008. Following upon the trustee’s approval, Wise Lords’ resolution was also signed and dated on 18 August 2008.

 371. On 27 August 2008, Linda Liu emailed DBS Corporate seeking approval for the purchase of the 2^nd Decumulator, which was the EUR Decumulator.  On the same day, Sheran Chan emailed Ben George of DBS Trustee and sent to him the Investment Application form dated 27 August 2008, the date of the transaction, explaining that, as Peter Lee was on leave, they would arrange for him to sign the form when he returned.  On the same day, Frank Mayes emailed Sheran Chan questioning whether the transaction was a sale of an existing investment:

“Can you identify for us as to when this investment being sold, was originally acquired?  We can’t immediately “spot” it.

Or is it a “forward sale”, or some such like?”

372. On 28 August 2008, Sheran Chan replied stating:

“The client is actually buying a decumulator note which sells EUR on hand. The redemption of the note is by weekly instalments to convert the existing EUR holding to USD.”

373. On 29 August 2008, Tim Pearson-Burton of DBS Trustee returned theInvestment Application form for the EUR Decumulator, signed by DBS Trustee, signifying that they had considered and approved the application.  The Minutes of DBS Trustee resolving to approve the investment were also signed and dated on 28 August 2008.  Following upon the trustee’s approval, Wise Lords’ resolution was also signed and dated on 28 August 2008.

374. At 6:58 pm on 29 August 2008, Linda Liu emailed Sheran Chan seeking approval for the 3^rd Decumulator.  Later that evening, Linda Liu emailed Sheran Chan attaching the final termsheet for the 3^rd Decumulator.  Linda Liu also notified Edwin Lim about the transaction.

375. On Monday 1 September 2008, Sheran Chan emailed Tim Pearson-Burton of DBS Trustee and sent an Investment Application for the 3^rd Decumulator for approval dated 29 August 2008, the date of the transaction, stating:

“The client has recommended to buy a decumulator note with the sole purpose of selling out the existing holding of AUD in exchange for USD. Please find attached an investment approval form for your consideration and approval …”.

376. After DBS Trustee had already approved the 1^st Decumulator and the 2^nd Decumulator, on 1 September 2008, in response to her request regarding the 3^rd Decumulator, Tim Pearson-Burton emailed Sheran Chan and, for the first time, sought an explanation of what a decumulator was:-

“The directors would appreciate a brief description of how a decumulator note works and why you would chose to buy one.”

377. On 2 September 2008, Sheran Chan replied:-

“Under a weekly decumulator dual currency note, the specified currency (AUD in this case) is converted to the alternate currency (USD) on each instalment date if no “Knock‑out Event” has occurred.  A Knock‑out Event occurs when the spot USD per AUD rate is, at any time during a monitoring period, lower than or equal to the Knock‑out rate.  The monitoring period and Knock‑out rate are specified in the contract and different among notes.

As mentioned in our email below, the main reason the Settlor recommended to buy a decumulator note is to sell out the existing holding of AUD in exchange for USD.

Hope to have answered you well.’

378. On the same day, Tim Pearson-Burton replied to Sheran Chan and sent her the Investment Application form for the 3^rd Decumulator duly signed by DBS Trustee, signifying that they had considered and approved the application:

“Thanks for your explanation of a decumulator note; please find attached the Investment Application Form for the above mentioned trust.”

379. The Minutes of DBS Trustee resolving to approve the investment was also signed and dated on 1 September 2008. Following upon the trustee’s approval, Wise Lords’ resolution was also signed and dated on 1 September 2008.

380. Mayes gave evidence that a decumulator was an investment product that he was not aware of.’

4.7.   The Judge held DBS Trustee was in breach of their duty.

‘ 381. I find that DBS Trustee did not give proper consideration to investment applications to purchase the decumulators before approving them. DBS Trustee was unable to give proper consideration as they had no knowledge about this investment product and the risks inherent in them. Even when the product was explained to them by Sheran Chan of DBS Corporate, critical information regarding the substantial risk of being locked in for the entire term with a depreciating currency was omitted. I repeat the circumstances prevailing at that time that I have set out in §§304 and §§311-313 above. The likelihood of being able to sell AUD, at the high strike rate that Ji wanted for a substantial period of the term, viewed objectively in the circumstances that prevailed, was slim. Even if Ji was unwilling to sell the AUD at the spot rate, or to sell forward at a better than the spot rate but less than the rate she wanted, it was better for Wise Lords to hold on to its depreciating AUD than to purchase these very risky decumulators. In approving the purchase of 3 Decumulators, DBS Trustee failed to discharge it high level supervisory duty over the investments made by Wise Lords and DHJ Management failed to discharge its duty as director of Wise Lords.’ (emphasis added)

4)  Other matters

4.8.   Other than the above, the Judge dismissed the plaintiffs’ other claims against DBS Trustee based on their approval of the following : Ji as Investment Adviser, mutual funds transaction, DEVA Note, FX and YEDs and the increases in credit facilities to USD 58 million (HK$450 million).

5)  Charges levied to the Trust by DBS Trustee and DBS Corporate

4.9.   The plaintiffs’ case below was that the agreed arrangements were that no additional charges beyond the fixed annual fee would be charged to the Trust and paid by Wise Lords without Ji’s knowledge and approval but from the beginning of 2009, DBS Corporate and DBS Trustee secretly withdrew large sums of money from Wise Lords’ account without disclosing this to Ji and Zhang and that this continued even after the new trustees were formally appointed and DBS Corporate had terminated its Services Agreement with Wise Lords. 

4.10.   The Judge found that DBS Trustee overcharged the Trust to the extent of GBP 13,325 and DBS Corporate overcharged the Trust to the extent of USD 68,825. 

4.11.   He ordered DBS Trustee to repay to the Trust the sums of USD 68,825 and GBP 13,325 (together with interest) being amounts wrongfully paid out from the Trust for charges which were unrelated to the administration of the Trust.

6)  Retention of USD 1 million as indemnity for tax purpose

4.12.   DBS Trustee had retained USD 1 million as indemnity for tax purpose pursuant to Clause 7 of the Deed of Appointment Retirement and Indemnity which provided that to enable the retained funds to be released, written confirmaton had to be provided 

‘ from either the Chinese and Hong Kong revenue authorities or a partner on behalf of a Chinese and or Hong Kong law or accountancy firm of size and standing acceptable to [DBS Trustee] … that there are no fiscal or tax liabilities outstanding of the Settlors and or each or all of the beneficiaries having received distributions from the trust or which will be payable in respect of the [Trust] for the period during which [DBS Trustee] was trustee.’

4.13.   The Judge construed the above clause to mean that written confirmation had to be provided that there were no fiscal or tax liabilities outstanding of the Settlors and/or each of the beneficiaries having received distributions from the trust, and which will be payable for the period during which DBS Trustee was trustee.

4.14.   The Judge accepted the plaintiffs’ case that on 18 November 2011, DBS Trustee was provided with written confirmations that there were no fiscal or tax liabilities outstanding and, therefore, DBS Trustee was obliged to return the retained funds of USD 1 million but wrongly refused to do so.  He found the two declarations issued by CCIF CPA Limited satisfied the requirements of Clause 7 and were sufficient for the release of the retained sum.  He ordered DBS Trustee to repay to the Trust USD 1 million together with interest.

7)  DBS Trustee’s breach caused by DBS Corporate

4.15.   The Judge found that DBS Corporate was the main point of contact of DBS Trustee in Hong Kong and the two companies worked closely together.  DBS Corporate did not have any employees and the work of DBS Corporate was performed by the colleagues of Peter Lee at DBS Bank’s Trust and Corporate Services Department.

4.16.   The Judge held that insofar as DBS Trustee’s breaches of duty were caused or partly caused by the acts and omissions of DBS Corporate, including the failure to inform DBS Trustee in a timely fashion of the offer of increased credit facility and misinforming DBS Trustee about the purpose of increasing the credit facility, DBS Trustee are liable for those acts and omissions of DBS Corporate who was their agent and/or sub-agent (being the agent of DHJ Management).  The Judge did not accept the defendants’ submissions that DBS Corporate was not an agent but merely ‘an administrative conduit’ or that, if DBS Trustee had not been informed by DBS Corporate of the increases in Wise Lords’ credit facilities, then there could be no basis to accuse them of breach of trust by failing to intervene.

4.17.   The Judge further held that the acts and omissions of DBS Corporate amounted either to wilful misconduct on the part of DBS Corporate or that, by such acts and omissions, DBS Corporate acted in a negligent manner and that their degree of negligence was a serious or flagrant degree of negligence.  Even if such acts did not amount to wilful misconduct, nevertheless, the same conduct amounted to DBS Corporate acting in a negligent manner and their degree of negligence was a serious or flagrant degree of negligence.

4.18.   The Judge found that DBS Corporate acted as a bridge of communication but did not possess or exercise any management functions over the trusts or their underlying companies.  The services which DHJ Management and DBS Trustee requested DBS Corporate to provide were administration and operational services as well as secretarial support services which were much more cost effective to be carried out in Hong Kong.  DBS Corporate did not exercise any decision making functions for DBS Trustee.  While some of the tasks required to be performed by DBS Corporate related to more substantive operational matters (such as completing Investment Advisor – Yearly Reviews, sending Investment Application forms to DBS Trustee for approval, sending notifications of activities form, sending applications to DBS Trustee to accept offers to increase credit facilities, keeping DBS Trustee informed regularly of the state of Wise Lords’ portfolio, and posing detailed queries to DBS:PB on proposed investments), they were done to enable and facilitate DBS Trustee to perform its trustee functions.  DBS Corporate did not carry out those functions or exercise any trustee powers itself.  In short, DBS Corporate acted throughout as the agent of DHJ Management and as agent of DBS Trustee.

8)  Exemption of DBS Trustee from liability for DBS Corporate’s wrongs

4.19.   In dealing with the argument that Clause 15 of the Trust Deed exempted DBS Trustee from liability for any wrong committed by DBS Corporate, the Judge held that :

‘ 412. .......Clause 15 must be construed together with Clause 19 of the Trust Deed. Clauses 15 and 19 of the Trust Deed provided :

“15. Delegation of Powers

The Trustees shall have power by deed irrevocable or revocable during the Trust Period to delegate to any person at any time for any period and in any manner (including without prejudice to the generality of the foregoing by power of attorney) and upon any terms whatsoever all or any of the powers or discretions whether dispositive administrative or otherwise imposed on or given to the Trustees by this Settlement or by law or otherwise (including the management and administration of this Settlement) without being liable for any loss to the Trust Fund arising from the acts or defaults of any such person.

…

19. Liability of Outgoing Trustees

If a Trustee ceases to be a Trustee hereof for any reason whatsoever such Trustee (and in the case of a corporate Trustee all of its officers or employees) shall be released from liability to any Beneficiary Trustee or other person interested under this Settlement for any act or omission in relation to the Trust Fund or his duty as a Trustee except:-

(a) any liability in respect of any breach of trust arising from fraud wilful misconduct or gross negligence on the part of such Trustee (and in the case of a corporate Trustee any of its officers or employees);

(b)   …”

I construe these clauses as exempting DBS Trustee from liability from the acts of DBS Corporate except those acts of DBS Corporate which amounted to wilful misconduct or gross negligence on the part of DBS Corporate.  I do so by applying Jersey law as set out in §§118-120 above.’

9)  DBS Trustee’s Counterclaim

4.20.   The Judge dealt with DBS Trustee’s counterclaim as follows :

‘ 414. By its counterclaim, DBS Trustee, relying on Clause 5 of the Deed of Appointment Retirement and Indemnity, sought an indemnity from Arboit and Sutton against the claims made by them. Clause 5 provided :

“The New Trustees for themselves and their respective heirs personal representatives and estates hereby jointly and severally covenant with the Retiring Trustee for itself and for each of the Indemnified Persons as trustee of this covenant for their benefit that the New Trustees will at all times hereafter fully and effectually indemnify and keep indemnified and hold harmless the Indemnified Persons and each of them against Liabilities…”

 415. “Liabilities” was defined in Clause 1(c) of the said Deed as all actions, proceedings, accounts, claims and demands of any kind (and all costs and expenses incurred in connection therewith) which were brought or made or might be brought or made or threatened to be brought or made by any beneficiary under the Trust or any person (whether in existence or not and whether actually or prospectively interested under the Trust Deed) in connection with the trusts of the Trust Deed or in any way relating thereto or to the capital or income of the Trust Fund from time to time whether the same should be enforceable in law or not and whether or not in respect of a period or event falling wholly or partly after or prior to the date thereof.

416. However, the proviso under Clause 5 limited the indemnity in these terms:

“PROVIDED THAT:

(a) there shall be excluded from such indemnity Liabilities of any of the Indemnified Persons in respect of which such Indemnified Person would not have been entitled to reimbursement out of the Trust Fund if the Retiring Trustee had remained trustee of the Settlement on its present terms …; [my emphasis]”

    417. I refer to Clause 19 of the Trust Deed which I have set out in §§403 and 412 above and to my findings as to the liability of DBS Trustee. I find that the proviso under the said Clause 5 applies to the liability that has been established against DBS Trustee, being a liability in respect of which DBS Trustee would not have been entitled to reimbursement out of the trust fund if DBS Trustee had remained trustee.  Accordingly, DBS Trustee cannot claim an indemnity from Arboit and Sutton, or from any other party, against the said liability.’

10)  Relief granted against DBS Trustee

4.21.   The Judge at paragraph 413 held that Arboit and Sutton are entitled to the reliefs claimed against DBS Trustee for equitable restitution to the Trust for breach of trust in order to reconstitute the assets of the Trust so as to place the Trust in the position it would have occupied but for the said breaches; and for payment of the sums wrongly charged to the Trust in the sum of USD 68,825 and GBP 13,325 and of the retained sum of USD 1 million.

4.22.   As to the basis upon which the Court should award equitable compensation, the Judge held that it is not necessary to order an account as the assets in Wise Lords’ portfolio are well documented.  Instead the Judge held that he intended to adopt a robust approach to assess the equitable compensation by, firstly, attempting to determine the value of the assets in Wise Lords’ portfolio on the date of the issue of the Writ in these proceedings on 28 February 2011; and, secondly, by attempting to assess what that value might have been on 28 February 2011 if Wise Lords had not acquired USD 83 million worth of AUD from 24 July to 5 August 2008 and had not purchased the three decumulators but had carried out the other transactions listed in Arboit’s 2^nd Schedule that were unrelated to the purchases of USD 83 million worth of AUD from 24 July to 5 August 2008 and unrelated to the purchases of the three decumulators; and, thirdly, by awarding the difference between the two values to Arboit and Sutton, being the trustees of the Trust, as equitable compensation.  The Judge held that he would need further assistance from the financial experts to enable him to do so and he gave further directions for a further joint report to be obtained from them.

V.  Liability of DHJ Management

1)  Duty of DHJ Management

5.1.   The Judge held DHJ Management as director of Wise Lords owed the duties of a director to Wise Lords.  Even though it was providing directorship services pursuant to the Services Agreement, it was subject to, and had to properly discharge, the duties of a director.  These duties included the duty to Wise Lords to act bona fide in the best interests of the company; and to exercise reasonable care, skill and diligence in the performance of their functions and their management of the company’s affairs.

2)  Breach of duty

5.2.   The Judge held that the directors of DHJ Management and DBS Trustee were, at the material time, the same persons and for the same reasons that he found against DBS Trustee, he found against DHJ Management for breach of its duty as a director in respect of its approval of the following :

(1)  further purchases of USD 83 million worth of AUD from 24 July 2008 to 5 August 2008;

(2)  the increased credit facility at end of April 2008 and

(3)  the purchase of the three decumulators.

5.3.   The Judge held that DHJ Management is liable for those acts and omissions of DBS Corporate who was their agent for the same reasons he had found in respect of DBS Trustee.

3)  Exemption

5.4.   The Judge held that DHJ Management is not entitled to rely on Clause 3(a) of the Services Agreement to exempt it from liability :

‘ 452. The defendants have relied on Clause 3(a) of the Services Agreement as exempting DHJ Management from liability. By reason of my findings above, Clause 3(a), which exempts liability on the part of DHJ Management “except in the case of bad faith or negligence of the Nominees [including DHJ Management]” does not apply to the present case. The defendants also counterclaim for an indemnity in reliance on Clause 3(b) and Clause 7 of the Services Agreement. Clause 7 must be construed together with Clause 3(b) which requires Wise Lords to indemnify DHJ Management except “in the case of gross negligence of the Nominees [including DHJ Management]”. Again, by reason of my findings above that this was a case of gross negligence on the part of DHJ Management and their agent, DBS Corporate, the counterclaim fails and is dismissed.’

4)  Liability for equitable compensation

5.5.   The Judge held that the duty of DHJ Management to act bona fide in the best interests of Wise Lords is a fiduciary obligation, the breach of which entitles Wise Lords to claim the relief of equitable compensation against DHJ Management.

5.6.   The breaches of duty by DHJ Management have directly caused loss of the assets of Wise Lords in that they have directly led to diminution of the value of the assets held in Wise Lords’ portfolio.

5)  Double recovery

5.7.   The Judge held as the Trust owns the entire shareholding of Wise Lords it owns (via its shareholding) the assets of Wise Lords.  He held that the law does not permit double recovery.  If Arboit and Sutton obtain complete satisfaction from DBS Trustee, then Wise Lords cannot seek equitable compensation from DHJ Management and vice versa.  If Arboit and Sutton obtain partial satisfaction from DBS Trustee, then Wise Lords can seek equitable compensation from DHJ Management for the balance and vice versa.

VI. Grounds of Appeal

1)  Duty of trustee

(1)  DBS Trustee and DHJ Management’s case

6.1.   Mr Burns SC (together with Mr Abraham Chan SC and Ms Bonnie Cheng) for DBS Trustee and DHJ Management complained that the Judge had erred when he held that they had failed in their duty of supervision over the investments made by Wise Lords in approving the purchase of AUD, the increase of credit facilities and the purchase of accumulators.  They argued that the Trust is governed by Jersey law, and neither Jersey law expert opined that the terms of the Trust imposed such a duty, or that the general Jersey law of trusts did so.  Consistent with the position agreed by the experts, no such duty was pleaded by the plaintiffs.  Accordingly, the Judge should not have found that such a duty existed and should not have found DBS Trustee liable for breach : Sinoearn International Limited v Hyundai-CCECC Joint Venture (2013) 16 HKCFAR 632 at paragraphs 27-34; Kwok Chin Wing v 21 Holdings Limited and others (2013) 16 HKCFAR 663, at paragraphs 18-27 and Aspial Investment Limited v Mayer Corporation [2014] 5 HKC 259 at paragraphs 20 to 22.  There is in any event no basis in law and no evidential foundation (and none was suggested in the judgment), for finding that such a duty existed.

6.2.   Mr Burns submitted that the fundamental question concerns the duties imposed on and powers given to DBS Trustee in relation to the business of Wise Lords by Ji and her husband in the Trust Deed and/or by the Trusts (Jersey) Law 1984.  There is no scope for imposing any duty on DBS Trustee above and beyond what the Trust Deed and the 1984 Law prescribed.  The clear and determinative answer lies in paragraphs 4 and 5 of the First Schedule to the Trust Deed.  The express purpose and effect of both paragraphs was to disapply any duty, and to remove any power, which DBS Trustee might otherwise have had under the general law in relation to Wise Lords, unless DBS Trustee gained actual knowledge of dishonesty.  Such provisions are commonly called ‘anti‑Bartlett’ provisions, so named because they circumscribe any duty to intervene in relation to the affairs of companies in which the trustee holds shares as considered by Brightman J. in Bartlett v Barclays Bank [1980] Ch. 515 (‘Bartlett’).  They have the dual effect of (1) allowing the company to function without interference from the trustee if that is what the settlor wishes to achieve and (2) relieving the trustee from any such duty and, in some cases depriving it of the power to intervene even if there is no duty.  Such standard clauses differ in their precise terms and must be analysed individually : Lewin on Trusts 19^th Ed. paragraphs 34-059 to 34-062.  An example of the anti‑Bartlett provisions considered to be effective by the Court of Appeal was Highmax Overseas Limited v Chau Kar Hon Quinton [2014] 3 HKLRD 584 which were in less emphatic form than those involved in this case. 

6.3.   Mr Burns submitted that paragraphs 4 and 5 are ‘top of the line’ provisions, both relieving DBS Trustee of any duty to intervene in the affairs of Wise Lords and depriving it of any power to do so except in the extreme case of actual knowledge of dishonesty.  In particular :

(i)   Paragraph 4 contains a detailed and complete code of conduct for DBS Trustee to follow in relation to the business of Wise Lords.  Specifically, paragraph 4(a)(ii) imposed a mandatory requirement (‘shall’) on DBS Trustee to leave the administration management and conduct of the business to the directors and other authorised persons, including Ji as the company’s investment adviser, unless DBS Trustee had actual knowledge of dishonesty. This dishonesty exception encapsulates the ‘residual obligation’ referred to in paragraph 88 of Matthews’ report (see paragraph 6.4 below).

(ii)  The remaining provisions of paragraph 4 are to the same effect, including, by paragraph 4(a)(iii), the obligation to assume that the conduct of the business was being carried on competently, DBS Trustee being under no duty to take any steps to ascertain whether or not those assumptions were correct.  Paragraph 4 culminates in sub-paragraph (d) by expressly providing that the Trustee is not to be liable in any way for any loss to the company or the Trust Fund arising from any act or omission of the directors and other persons (including Ji) even where the act is dishonest, fraudulent, negligent or otherwise.

(iii)  Paragraph 5 mirrors paragraph 4 in disapplying any duty on DBS Trustee to obtain information in relation to Wise Lords, apart from certain statutory information referred to in paragraph 5(c).  Again, DBS Trustee is not to be liable for any loss arising from not obtaining information or not verifying the accuracy of any information it received.

(iv)  It was the Settlors themselves, Ji included, who chose to include such terms in the Trust when they selected a wide discretionary trust containing such extensive anti-Bartlett provisions.  This choice was consistent with the overall arrangements and conduct of the Settlors, Ji in particular, throughout the relevant period.  Neither they nor successor trustees can now complain if they bar a complaint against DBS Trustee, as they undoubtedly do.

(v)  Even absent strong anti-Bartlett provisions such as these, Mr Burns submitted that it is important to remember the limitations of any supposed ‘duty of supervision’ even of an active kind.  In Bartlett itself Brightman J. started from the premises that ‘it does not follow that because a trustee could have prevented a loss it is therefore liable for the loss’ (p. 530H) and the duty ‘does not mean that the trustee is bound to avoid all risk and in effect act as an insurer of the trust fund’. (p. 531F).  An illustration of those principles at work may be found in Appleby Corporate Services (BVI) Limited v Citco Trustees (BVI) Limited BVIHC (Com) 0156 of 2011.  In the present case DBS Trustee had no direct relationship with Ji, who was engaged by Wise Lords.  Even supposing the existence of a ‘high level supervisory duty’ such a duty could not have conferred on DBS Trustee powers in relation to Wise Lords it did not have, given the anti-Bartlett provisions.  In the absence of dishonesty there is nothing DBS Trustee could have done consistently with the terms of the Trust.

6.4.   The Jersey law experts agree that the provisions of the First Schedule are compliant with Jersey law.  The defendants’ expert referred to ‘a residual obligation cast on the trustee’ and observed that ‘[i]f circumstances were to arise where no reasonable trustee could lawfully refrain from exercising those powers, a failure to do so in such a case would amount to a breach of trust’.  The illustration given for such a circumstance is ‘where the trustee was informed by a credible source that the directors of the company were stealing its assets’ (see paragraph 88 and footnote 32 of Matthews’ report).  As mentioned in paragraph 6.3, that view is consistent with the express exception contained in paragraph 4(a)(ii) of the First Schedule which required actual knowledge of dishonesty on the part of DBS Trustee before some intervention even became possible.  No question of dishonesty ever arose.  Thus the expert evidence before the Court could only have justified a conclusion that DBS Trustee was under the ‘residual’ duty set out in paragraph 4(a)(ii) of the First Schedule, in the case of dishonesty but no further.  If by ‘high level supervisory duty’ the Judge meant something different (as must be the case given that he found the Trustee liable although he gave no explanation of the meaning of that expression or what the alleged duty actually entailed) he had no basis on which to reach that conclusion.

6.5.   Further, the alleged duty is wholly inconsistent with an array of other clear express terms of the Trust Deed, particularly paragraph 2 of the First Schedule (speculative investments permitted; trustee under no duty to diversify investments or to preserve or enhance value of trust fund, etc.), paragraph 7 (power to employ agent without being responsible for the agent’s default) and paragraph 8 (power to employ investment adviser with no responsibility for the success or failure of the investment policy pursued).

6.6.   In reaching the conclusion he did as to the nature and scope of DBS Trustee’s duty, the Judge failed to distinguish between activities which were in fact carried out by the Trustee and its legal duty as clearly formulated in the Trust Deed.  The fact that DBS Trustee behaved conscientiously in reviewing what had happened when information was provided to it cannot affect its legal duty.  In describing the Trustee as performing a ‘high level supervisory role’ in respect of Wise Lords’ investments (Judgment paragraph 163) the Judge confused the one with the other.

6.7.   Mr Barlow SC (together with Mr Chan Pat Lun) for the plaintiffs had objected to this argument being raised on the basis that it was common ground in the Court below that DBS Trustee and DHJ Management had assumed this high level supervisory duty.  Although we allowed the argument to be raised, I do not regard it to be a valid one.

(2)  My view

6.8.   To start with, I accept the anti-Bartlett clauses, namely, Clauses 4(d) and 5(d) of the Trust Deed are effective to exclude the obligations to which they refer.  This is the view of Professor Matthews.  However, he also emphasised the existence of a residual obligation on the trustees which these clauses do not exclude.  This is his opinion :

‘ 87. The caselaw obligations of a sole trustee (such as the second Defendant was) of a Jersey law trust with more than one beneficiary (such as the Amsun trust is) include the duty to obtain sufficient information about the affairs of a company in which it is interested as shareholder so as to enable it to make an informed decision whether to take any action for the protection of the trust property. But in Jersey this duty is an aspect of the statutory duty contained in article 21(3) of the 1984 Law, considered above. And in practice such duty is commonly modified or excluded by express provision in the trust instrument, as indeed it was in this case, by clauses 4 and 5 of the First Schedule. Clause 4 released the trustee from any obligation to interfere in the business of such a company, and clause 5 relieved it from any obligation to obtain information regarding such a company.

88. In my opinion, given that the source of this caselaw duty is ultimately the statutory duty in article 21(3), and that duty is expressly made subject to the terms of the trust, these clauses are effective in Jersey law to exclude the obligations to which they refer.  But there is a residual obligation cast on the trustee which these clauses do not exclude.  The trustee as such trustee has in relation to the trust property all the powers of a natural person acting as the beneficial owner of such property.  Although the trustee has no obligation to interfere in the business of the company, and no obligation to obtain information regarding the company, it still has a power to do so, because it is a member of the company. If circumstances were to arise where no reasonable trustee could lawfully refrain from exercising those powers, a failure to do so in such a case would amount to a breach of trust.  It is true that clauses 4(d) and 5(d) purport to exclude liability for losses sustained in certain circumstances, but these clauses are of course subject to the statutory limits on trustee exemption clauses, set out in article 30(10) of the 1984 Law.  This provision in effect renders an exemption clause ineffective to the extent that it purports to relieve a trustee for liability for gross negligence breach of trust, or for anything more serious.’  (emphasis added)

6.9.   The footnote to the sentence ‘If circumstances were to arise where no reasonable trustee could lawfully refrain from exercising those powers......’ states ‘such as where the trustee was informed by a credible source that the directors of the company were stealing its assets’.  In my view actual knowledge of dishonesty is only an example of how this core obligation is engaged.  It does not mean that knowledge of dishonesty is the only situation for the trustee to intervene.

6.10.   The Judge’s use of the phrase ‘high level supervisory duty’ is consistent with the core obligation described by Professor Matthews and found its origin from the way the defendants pleaded their cases, although they did not use the word ‘duty’.  Mr Frank Mayes of the DBS Trustee stated in his witness statement :

‘ 47. This structure was deliberately designed in a way to permit a measure of independence and flexibility on the part of those managing the underlying company (in this case a BVI company), whose share was held by the Trustee as the Trust’s main asset (with further funds settled into the Trust subsequently also injected into the company as shareholder’s loans), subject, however, always to the Trustee’s overarching supervision, regular monitoring and responsibility to ensure the value represented by the overall trust fund was subject to appropriate controls, reviews, investment expertise and management.’ (emphasis added)

6.11.   The phrase was used in the defendants’ opening submission :

‘ 152. As can be seen from the terms of the Trust Deed, the structure and design of the Amsun Trust was such that DBS Trustee was to assume a high‑level, supervisory role in monitoring the overall performance of Wise Lords [i.e. P4].’ (emphasis added)

6.12.   This was further repeated in their closing submission :

(1)  ‘... the role to be assumed by DBS Trustee in the administration of the trust ... was a high level, supervisory one ...’ (paragraph 498);

(2)  ‘[Ji]’s power to direct the investments made by [Wise Lords] was subject to the power of DBS Trustee and [Wise Lords] to override her decisions’ (paragraph 500);

(3)  ‘... DBS Trustee did fulfill its general supervisory and monitoring role at the macro level ...’ (paragraph 501); and

(4)  The true residual core of fundamental trust duties in this case is comprised of the duties of honesty and good faith and the duty not to act in a grossly negligent manner (paragraph 461).

6.13.   How then was this high level supervisory role regarded by the Judge as a high level supervisory duty?  The answer again lies in Professor Matthews’ opinion which I had just cited.  Professor Matthews addressed the consequence of a trustee who had assumed this obligation but chose not to exercise the powers to interfere in the business of the company or to seek information when no reasonable trustee should refrain from so doing.  His conclusion is that the failure to do so amounts to a breach of trust.  Following from this analysis, DBS Trustee’s high level supervisory role is in essence in the nature of a duty irrespective of the labels used such as ‘role’, ‘obligation’ or ‘power’. 

6.14.   What is important is that DBS Trustee itself recognized the purpose of this high level supervision is to ensure that the value of the trust fund is subject to appropriate controls, reviews, investment expertise and management.  The bottom line for the implementation of this high level supervision was for DBS Trustee to approve the investments (although not pre‑approving them) with the power to override Ji’s decisions and reverse the transaction she advised for Wise Lords.  My view is when the Judge held that DBS Trustee had breached this high level supervisory duty which it had accepted, he was precisely addressing the very issue that the defendants had raised in their own case.  This is in line with the expert evidence of Professor Matthews about the ‘core obligation’ of the trustee.  The defendants complained that ‘role’ or ‘obligation’ does not equate to ‘duty’.  In my view this is just a play with words when the defendants themselves chose not to categorise this ‘core obligation’ in their submissions.  The material was fairly and squarely before the Judge.  He had grasped the nettle and properly addressed it.

6.15.   In the course of the arguments before us and no doubt as a result of some tentative views expressed by the Bench, the plaintiffs sought to amend their Respondents’ Notice to plead specifically that DBS Trustee chose not to exercise its trustee’s powers. 

6.16.   The application was opposed.  In the end we refused the application because the issue of power was not an issue before the Judge and, as indicated above, there was material before the Judge for him to come to the view that DBS Trustee had this duty and was in breach of it.

6.17.   Although the discussion so far is on DBS Trustee, the same reasoning applies to DHJ Management who had also assumed the high level supervisory role.

2)  Duty of gross negligence?

6.18.   Related to the complaint that the Judge had erred on the existence of duty, Mr Burns argued that the Judge had wrongly held there was a duty based on gross negligence.  He argued that by finding DBS Trustee was not to act grossly negligently, the Judge failed to recognise that, in the context of the Trust Deed and the 1984 Law, unlike the duties of honesty and good faith, which are ‘irreducible core obligations’ (see Armitage v Nurse [1998] Ch. 241), there is no freestanding obligation ‘not to act grossly negligently’.  The question of whether a trustee has acted grossly negligently becomes relevant if, and only if, a breach of a specific duty imposed by the trust is first established, in which case it will then become necessary (but not otherwise) to consider whether the manner of any such breach involves fraud, wilful misconduct or gross negligence of a kind that prevents or overrides the exemption of the trustee from liability.  This is clear from the language of Clauses 19-20 of the Trust Deed and Article 30(10) of the 1984 Law, and supported by Professor Matthews’ unchallenged evidence that Article 30(10) :

‘ 88. ..... in effect renders an exemption clause ineffective to the extent that it purports to relieve a trustee for liability for gross negligence breach of trust, or anything more serious.’

6.19.   Mr Burns referred to Lewin on Trust 19^th Ed. paragraphs 39-127 to 39-131 on the essential conceptual distinction between the formulation of a trustee’s duty on the one hand and a release from liability for breach of that duty on the other as useful and relevant in the present context.  In holding that DBS Trustee was subject to a freestanding duty to not act grossly negligently, the Judge elided and confused this distinction.  What he should have done was to have ascertained (1) what duties were owed by DBS Trustee, then (2) whether they were breached, and (3) if so whether the breach arose from fraud, wilful misconduct or gross negligence such as to deprive DBS Trustee of the protection afforded by the exoneration provisions in the Trust Deed or other indemnity protection.  Had he done so, the only proper conclusion would have been that DBS Trustee had not breached any duty owed by it under the Trust Deed and the 1984 Law. 

6.20.   I accept that there is no duty ‘not to act grossly negligently’ as such.  I further accept the conceptual distinction between 1) the existence of duty; 2) the breach of the duty; 3) and whether the breach amounts to gross negligence.  But I do not accept that the Judge had confused these distinctions.  He has properly first, identified the duty, namely, the high level supervisory duty, second, identified the breach of the duty when DBS Trustee approved the purchase of AUD, the increase of credit facilities to Wise Lords and the purchase of the decumulators and third, he came to the view this breach amounts to gross negligence.

3)  Other duties?

6.21.   Mr Burns further submitted that the Judge also relied on a ‘duty to act with due diligence, to act as a prudent person, to act to the best of his ability and skill, and to act only in the interests of the beneficiaries’ (judgment paragraphs 406-409). Both experts described these as statutory duties - specifically those contained in Article 21(1)(a) (which provides that a trustee ‘shall in the execution of his or her duties and in the exercise of his or her powers and discretions act (i) with due diligence, (ii) as would a prudent person, (iii) to the best of the trustee’s ability and skill’ and in Article 24(2) (which provides that trustees shall exercise their powers as trustee ‘only in the interests of the beneficiaries’ which the 1984 Law does not allow a trust deed to circumscribe (Speck’s report, paragraphs 3.3, 3.5; Matthews’ report paragraphs 83.6, 83.8; judgment paragraphs 100(d), (f)).

6.22.   Articles 21(1) and 24(2) in effect require a trustee, inter alia, to discharge his primary duties or exercise his primary powers under the trust arrangement (whatever they may be in a particular case), in the manner so prescribed (with due diligence, as a prudent person etc).  While determining the trustee’s approach to discharging such primary duties or powers as he may have in a particular case, the provisions do not by themselves impose any additional, freestanding duties which he does not otherwise have.  Thus, if a trust deed (permissibly) circumscribes particular duties at the primary level, the duty of the trustee is to discharge those circumscribed duties in the manner as prescribed i.e. with due diligence, as a prudent person, etc.  It necessarily follows that no secondary duties as to the manner of discharge can apply beyond the trustee’s primary duties as so circumscribed: there are simply no duties to discharge (in whatever manner) beyond the limits set by the deed.  In addition to being consistent with the balance of the Trust Deed and 1984 Law, the foregoing aligns with the overall investment setup between the parties and the practical context (the commercial realities and prevailing circumstances) addressed below.

6.23.   I do not consider that the Judge had erred in this aspect of the case.  DBS Trustee had to discharge its high level supervision in the manner as prescribed i.e. with due diligence, as a prudent person and to the best of the trustee’s ability and skill.  It is exactly what the Judge had considered in the present case.

4)  No breach of duty

6.24.   Mr Burns submitted that the Judge erred in his findings of breach against DBS Trustee and DHJ Management.  There was a dearth of analysis as to how exactly DBS Trustee could be said to be in breach, and this resulted from the failure to identify the basis and nature of DBS Trustee’s supposed duties by reference to the Trust Deed, and a failure to identify a standard against which to test DBS Trustee’s conduct to establish breach.  When it came to DHJ Management, the findings of breach and gross negligence were said to be ‘for the same reasons’ as those underpinning the findings against DBS Trustee.

6.25.   The defendants further submitted that the Judge erred in finding breach of duty by DBS Trustee and DHJ Management by failing to have proper regard or give sufficient weight to the prevailing circumstances.  It is an erroneous and unfair approach to hold DBS Trustee and DHJ Management to standards which are unreasonable and unrealistic taking into account the practical realities at the material times, as set out below,

(1)  Purpose of trust arrangement and associated structure

6.26.   With reference to the Letter of Wishes and Trust Deed, there was no imperative to engage in low risk investments and Wise Lords was already holding a medium risk level investment portfolio when it was settled into the Trust.  The DBS Trustee was also under no duty to preserve or enhance the trust fund or to diversify investments. 

6.27.     DBS Trustee was aware from the outset that an investment advisor would be appointed by Wise Lords.  Ji became the investment advisor.  She made all the investment decisions and her recommendations were to be final.  In addition, Ji was granted the authority to issue instructions on behalf of Wise Lords to enter into investment transactions under an authorisation letter executed by DHJ Management.  The authorisation letter was found to be valid and effective.

(2)    Role of DBS Trustee and DHJ Management

6.28.   DBS Trustee was not involved in the day to day management of Wise Lords but, instead, played a role in a structure deliberately designed to provide Ji with significant independence and flexibility in advising and executing investments. DHJ Management, on the other hand, provided nominee director services to companies.  While it was found to have had a duty to manage Wise Lords on a day to day basis, it did not provide investment or portfolio management services.  Instead, it authorised Ji to execute investment transactions on behalf of Wise Lords.

6.29.   There is no rule of universal application of the duty ‘to supervise the discharge of delegated functions’.  The extent of the duty, and the question whether it has been discharged, must depend on the facts of each particular case, including the director’s role in the management of the company.  Re Barings plc (No.5) [2000] 1 BCLC 523.

6.30.   The retention of power by DBS Trustee and DHJ Management to override Ji’s investment decision or reverse her transaction was at most a power and not a duty.

(3)  Ji’s investment record and behaviour

6.31.   Ji was an astute and experienced investor, with keen interest and increasing acumen in financial products.  She was the decision maker in respect of the investments.  She was and insisted on being in the driving seat as to investment strategy and selection.  She was a well‑informed, proactive, knowledgeable, meticulous, assertive and aggressive investor.  She was uninterested in low risk/low return investments, was prepared to take risks and ‘gamble a bit’ and did not mind volatility.  There is a history of Ji having a huge appetite for and steering Wise Lords towards a particular type of investments over a period of time (first China mutual funds, then YEDs, then FX for AUD).  She ignored repeated warnings about the risks of over-concentration and refused to diversify Wise Lords’ portfolio or to take a profit.  Wise Lords’ initial investment successes were impressive.  The mutual funds generated an overall profit of more than HK$132.6 million, which could not have been made without the increases in credit facility.  The financial accounts show profit percentages of 32%, 18.3% and 26.6% respectively for the years ended March 2006, 2007 and 2008, figures with which Ji readily expressed satisfaction.

(4)  Accumulation of AUD

6.32.   Ji’s accumulation of AUD was consistent with her bullish strategy and behaviour in buying mutual funds.  The Judge was wrong to focus narrowly upon 25 July to 5 August 2008 as the period when DBS Trustee and DHJ Management (according to him) ought not to have approved Wise Lords’ purchases of AUD because,

i)  it was in reality a continuation of Ji’s earlier strategy of actively purchasing AUD using credit facilities;

ii)  the parties were operating throughout under the same setup, whereby (1) Ji was the settlor, beneficiary, investment advisor, decision-maker and authorised person to give instructions for Wise Lords’ investments; (2) neither DBS Trustee nor DHJ Management was tasked to provide investment or portfolio management services; and (3) the Trust Deed permitted speculative investments and placed no duty on DBS Trustee to preserve or enhance the trust fund or to diversify investments or to intervene in the affairs of Wise Lords;

iii)  under the same setup the investments directed by Ji produced considerable profits for Wise Lords up to at least March 2008.  This track record of success, coupled with Ji’s unique role in the setup, meant that her wishes and views demanded a high level of respect and deference by DBS Trustee and DHJ Management and were not to be overridden and, in the case of DBS Trustee could not be overridden in the absence of actual knowledge on the part of DBS Trustee of any dishonesty (of which there was none);

iv)  Ji refused to countenance suggestions to minimise Wise Lords’ exposure : In June 2008 when AUD was at a record high, Ji was alerted to the risk of a possible USD rebound and a fall of AUD, but declined the suggestion of selling part of the AUD holding and taking profit.  In August 2008, Ji was cautioned about Wise Lords’ AUD position and informed of exit strategies.  Also in August 2008, Ji was warned about the need to issue stop loss order but ‘remained bullish and resisted the idea of closing out Wise Lords’ position’; and

v)  The question whether DBS Trustee and DHJ Management should have queried or intervened in respect of Wise Lords’ purchases of AUD from 25 July to 5 August 2008 must be assessed by reference to what was then known to them, and not with any hindsight bias.  The currency market, as Ji knew, is by nature unpredictable.  The Judge himself aptly observed that, ‘most investors know that it is only a handful of people who have the ability (or luck) to buy at or near the lowest historical price and sell at or near the highest historical price’.  DBS Trustee and DHJ Management, which did not provide investment or portfolio management services, were in no better position than Ji to predict market fluctuations.   Specifically, in July and August 2008, it was not unreasonable to expect some recovery in the value of AUD, given that the exchange rate as between AUD and USD had fluctuated earlier in 2008 and, just prior to Wise Lords’ purchase of AUD in July and August 2008, there was a modest downward adjustment in the value from its peak at 0.9794 on 15 July 2008.  There was, as such, no reason for DBS Trustee or DHJ Management to have predicted that the value of AUD would subsequently plummet as it did in the next two months.  They were not, in any event, obliged to predict the trend of the market and were in no position to do so.  Neither were they subject to any duty to preserve or enhance the value of the trust fund or to diversify investments.  While the increase in AUD holding may have ‘occurred against a backdrop of substantial market nervousness created by the sub-prime crisis’ as the Judge so found between April and July 2008, the subsequent ‘global financial storm’ which only reached its ‘apex’ in September 2008 was unprecedented in scale.

(5)  Persistent demands for credit facilities increases

6.33.   The Judge was wrong to hold that DBS Trustee and DHJ Management ought not to have approved the increased credit facility (from USD 58 million to USD 100 million) at the end of August 2008 because :

i)  the successive increases in credit facility were the result of Ji’s own persistent and aggressive demands.

ii)  there was no compelling reason to refuse her demands by reason of Ji’s role and the investment successes she had achieved for Wise Lords which would not have been possible without the increases in credit facility.

iii)  Ji and Zhang plainly knew of and were prepared to accept the risks associated with the increase of credit limit to USD 100 million when Ji had signed a Letter of Recommendation, and Ji and Zhang a Declaration of Risks Awareness, both dated 11 July 2008 recommending that increase; stating they were fully aware of the risks associated; confirming they would not hold DBS Trustee or DBS Corporate responsible for any loss; and agreeing to indemnify DBS Trustee and DBS Corporate against all claims, demands and proceedings.

iv)  DBS Trustee and DHJ Management were further entitled to assume that Ji and Zhang either had provided or would provide additional collateral as and when required to sustain the loan and avoid a margin call, as they had previously done or represented.

v)   in view of the fact that the Judge found DBS Trustee and DHJ Management were not informed of the increase in the credit facility until August 2008, after it had already been utilised, there was no basis on which any significance or relevance could properly be attached to their subsequent approval of the increase.

vi)  the AUD rate had been fluctuating at the time, but suffered no drastic decline until it ultimately plummeted.  Even as at 25 August 2008, the AUD rate was still 0.868.  Wise Lords’ margin level was objectively still in a healthy state then, considering it was only when the AUD rate dropped to 0.6531 on 10 October 2008 that Ji was told DBS Bank would place a stop loss order if she did not take any action.  So there remained a substantial 33% gap between Wise Lords’ margin level on the date DBS Trustee approved the credit increase on 25 August 2008 and the level that would trigger a compulsory stop loss order.

(6)  Purchase of decumulators

6.34.   The Judge was wrong to find the purchases of the three decumulators made no rational sense and should not have been approved by DBS Trustee and DHJ Management because he failed to give proper regard or sufficient weight to the circumstances (as were found by him) in which they came to be purchased: ‘I accept Linda Liu’s evidence that, despite the worrying AUD situation and the repeated warnings issued to Ji, she was unwilling to unload Wise Lords’ positions at anything less than breakeven point.  Linda Liu then introduced decumulators to Ji as an AUD exit strategy’; ‘I find that the main purpose of the purchase of the decumulators was to enable Wise Lords to sell its AUDs at the rate that Ji wanted’; ‘Ji was not prepared to sell the AUD she had acquired for Wise Lords below cost price and, given the continual depreciation for AUD, these alternative strategies were not acceptable to her’.  The only reasonable conclusion based on such findings is that Ji made a commercial decision to purchase the decumulators (having rejected alternative strategies, as the Judge found) and took their potential upside, i.e. converting AUD to USD at a preferred rate.  Having done so, she must also have accepted their downside of which she was plainly aware, i.e. Wise Lords’ funds being locked up for their terms unless they were unwound at a cost.  It is also important to note that the decumulators were within the accepted risk level of Wise Lords’ portfolio.

6.35.   The Judge was wrong to find DBS Trustee was unable to give proper consideration to the product because it had no knowledge about this product and the risks inherent in them in that this did not amount to a breach of duty as DBS Trustee was, under the prevailing setup, entitled to give deference to Ji’s choices.  In any event, the alleged breach on DBS Trustee’s part was not causative of Wise Lords’ losses.

(7)  Financial crisis unprecedented and unforeseeable

6.36.   The Judge failed to consider the unprecedented nature of the global financial crisis in late 2008; it was unforeseeable to many (indeed most) in and outside of the financial industry, including many financial experts.  While one can be wise after the event and now identify some of the factors that precipitated the crisis and appreciate their implications, those who were then ‘in the eye of financial storm’ were not necessarily able to do so as events unfurled.  The Judge implicitly assumed that DBS Trustee and DHJ Management should have foreseen the decline or further decline in the value of AUD when there was then little or no objective basis for predicting that this would occur.   Likewise, in saying that :

‘ 381. ..... likelihood of being able to sell AUD, at the high strike rate that Ji wanted for a substantial period of the term, viewed objectively in the circumstances that prevailed, was slim. Even if Ji was unwilling to sell the AUD at the spot rate, or to sell forward at a better than the spot rate but less than the rate she wanted, it was better for Wise Lords to hold on to its depreciating AUD than it purchase these very risky decumulators.’

6.37.   The Judge implicitly assumed that DBS Trustee and DHJ Management should have had the foresight to know that holding on to a depreciating currency was (supposedly) the best strategy, and to have been confident enough in it to override Ji’s decisions to purchase the decumulators.  The defendants submitted that even if such a power existed, it did not exist in the absence of actual notice of any dishonesty, of which there was none.

6.38.   The defendant submitted that, for the same reasons, the Judge in any event erred in his findings of gross negligence, which he equated to ‘a serious or flagrant degree of negligence’.  On the Judge’s own terms, this necessarily required carelessness of a degree that was categorically over and above ordinary negligence.  Taking the prevailing circumstances properly into account, the negligence (if any) of DBS Trustee and DHJ Management plainly did not reach the requisite degree of severity nor did the Judge give any, or any adequate, explanation of the basis on which he reached the conclusion he did.

5)  Overview

6.39.   First, I have already addressed the issue of duty and power.  For the defendants to refer to this again in the context of breach of duty does not advance their case further.  I further disagree with the defendants that the Judge had failed to identify the standard against which to test DBS Trustee’s conduct to establish breach.  The standard is that DBS Trustee’s approval of the impugned investments must be conducted with due diligence, as a prudent person and to the best of its ability and skill.  These are the well established standards imposed on a trustee.  Second, I have already referred to the bottom line of DBS Trustee’s high level supervisory duty.  Once this bottom line is recognised, one can see immediately the false premises advanced by the defendants in its submission concerning Ji, such as she being the decision maker, was unlikely to accept any view contrary to her own, she pursued high returns from high risk products unrelentingly, her successful trade records and there was really not much DBS Trustee could have done in a situation like this.  To accede to this line of argument will fundamentally ignore the very core duty that DBS Trustee was prepared and required to perform.

6.40.   Third, whether DBS Trustee had breached this duty is a matter of findings of fact.  As repeatedly said, the appellate Court will interfere with a trial judge’s finding of fact only if it can be shown that such findings are plainly wrong.  The weight to be given to the evidence is a matter for the trial judge.  The Judge in this case received a substantial amount of evidence over a 24 day trial.  He dealt with 70 bundles of 18,719 pages of documents with a number of exhibits being produced at the trial.  Apart from the Joint Report of the Jersey law experts, the Judge received the Joint Report of two financial experts.  He heard evidence from witnesses for the plaintiffs and defendants.  The judgment itself is 375 pages where the Judge had meticulously gone through the transactions and made findings. The threshold imposed on the defendants in a case like this is very high indeed. 

6.41.   I will discuss in the latter part of this judgment that it does not lie in the mouth of a fiduciary who has assumed the special responsibility of trust to say the loss could not reasonably have been foreseen.  The defendants’ submission on the performance of the AUD and the impact of global financial crisis in effect put forward the need for foreseeability which is in fact not a requirement for the breach of trust that this case is concerned with.

6)  AUD and increase of credit facilities

6.42.   I now deal with the specific transactions.  Of the three impugned transactions, the approval for the purchase of AUD and the increase of credit facilities must be considered together and not in isolation.

6.43.   What was the state of the market in July 2008 when Ji commenced the impugned purchase of AUD from 25 July 2008 with the increased credit granted to Wise Lords?  The Judge at paragraph 311 held :

‘ 311. ......Lehman Bros had announced quarterly net losses of US$2.8b on 16 June 2008; the U.S. Treasury had publicly announced rescue plans for Fannie Mae and Freddy Mac on 13 July 2008; the U.S. Federal Reserve banned naked short-selling on 15 July 2008; and just the day before the World’s Central Banks had publicly announced further bank liquidity enhancing measures.’

6.44.   Specifically in respect of the AUD market, the Judge held at paragraph 312 :

‘ 312. ....I accept the opinion of the defendants’ own expert, Malik, who stated:

“3.2.13. … [In mid July 2008] AUDUSD rose to a then record high of AUDUSD 0.9849. From the third week of July 2008, WL switched to becoming long AUD again. Subsequently, the AUDUSD fell causing significant losses to WL.” ’

6.45.   The drop from 21 July 2008 to 1 August 2008 was from a rate above USD 0.975 to AUD 1 to below USD 0.93 to AUD 1.  The Judge held in paragraph 313 that Edwin Lim executive head of DBS:PB stated in his witness statement as the financial crisis continued to worsen throughout 2008, the exchange rate of the AUD to the USD began to decline sharply in around mid-July 2008 and that, ‘at that time, the market was in a state of panic.’

6.46.   The Judge in paragraph 313 further referred to the emails written by England Zai, the Investment Adviser of DBS:PB responsible for FX to Linda Liu from 1‑4 August 2008, expressing her concern about Ji’s position in FX and YED and suggesting exit strategies for the AUD long positions.

6.47.   The defendants’ submission that it was not unreasonable in July and August 2008 to expect some recovery in the value of AUD and that DBS Trustee and DHJ Management were in no better position than Ji to predict market fluctuation must be considered in the light of what the Judge had found to be the situation then.     

6.48.   To gain a full flavour of the background of the increase of credit facilities to USD 100 million in the light of the market condition of AUD and the continuous purchase of the AUD, I set out the relevant parts of the judgment below :

‘ 305. I have already referred to Ji’s email dated 18 July 2008, where she wrote: “… By the way, KEEP WORKING ON INCREASE MY CREDIT LIMIT. I’ll need it very soon. (When AUD and Euro is dropping, I want to buy LARGE AMT. of it.)” Instead of dissuading Ji from further AUD carry trades, Linda Liu arranged for Wise Lords credit facility to be increased from USD58m to a whopping USD100m to fund further purchases of AUD at a time when severe jitters were felt all around the financial world.

 306. The attempt to increase the credit facility to US$100m (HK$780m) had been made on 15 July 2008 when Linda Liu recommended the increase and which was approved by Frederick Ko and Monique Lau of DBS Bank on 17 July 2008.  Linda Liu again greatly exaggerated Ji’s and Zhang’s assets (net worth of US$200m) and annual income (of US$50m) in support of this application.  On 18 July 2008, Linda Liu wrote an email to Edna Chan of DBS Corporate informing her that “[as] per Ms Ji’s request, we have proceeded to apply for her to increase her credit limit … to HKD780mio from our credit department already. After discussion with Credit, they agree to approve this increment as the client will invest to YED and FX only subject to their sufficient collateral.”     

 307. The facility offer letter was issued dated 21 July 2008 and, ignoring the advice of Edna Chan given a year ago, that such a document should be signed by the director of Wise Lords, and not by Ji, the offer letter was dispatched to Ji for her signature and was signed by Ji sometime later as the original letter had been misdelivered.  A Notice to Guarantor of Amendment of Credit Facilities was also signed by Ji.  A Letter of Recommendation dated 11 July 2008 was signed by Ji and a Declaration of Risk Awareness also dated 11 July 2008 was signed Ji and Zhang.  Both letters wrongly stated that the increased facility was sought for “forthcoming investment opportunity especially in [YEDs]”.  By then, Ji had already intimated that she wished to purchase AUD directly.

308. By a Letter of Recommendation dated 11 July 2008 addressed to DBS Trustee and DBS Corporate and signed by Linda Liu and Edwin Lim, the signatories, as Relationship Manager and Managing Director of DBS:PB respectively, and “[as] account manager to the Trust and the Company’s account with [DBS:PB]” recommended that Wise Lords’ credit facility be increased to US$100m for “forthcoming investment opportunity especially in [YEDs]” and that the increase is recommendable “in view of the projected prospect in YED with yield at 5‑10% p.a.”  Edwin Lim was not very forthcoming about the part he played in obtaining the increased facility:

“HIS LORDSHIP: Mr Lim, we already know the historical transactions in this account. The question was actually a very simple one, that the final increase of the loan to $780 million came about with your assistance, and you said you cannot agree with that. Would you agree that you did endorse the application?

A. I did endorse the credit application.

HIS LORDSHIP: So, to that extent, you would agree that you assisted with the application?

A. If speaking from the point of view of provision of a platform, then the answer would be yes.” 

309. Even before the ink was dry, even before the offer was accepted by a director of Wise Lords, and even before approval was given by DBS Trustee, the additional credit facility, which almost doubled the existing facility of US$58m to US$100m, was utilised to purchase AUDs from 24 July to 5 August 2008.  During that period of 13 days, US$96m was sold to buy AUD.  The following chain of emails will cause many eyebrows to be raised, and, certainly, judicial ones:

30 July 2008: Linda Liu to Frederick Ko and others: owing to misdelivery of offer letter and new credit limit of US$100m not updated yet, request temporary excess facility of HK$330m (HK$780m – HK$450m) to enable drawdown of US$18m on 31 July 2008 and US$10m on 1 August 2008.

30 July 2008: Fred Ko to Linda Liu and others: approved subject to signed offer letter within 1 month and no other deviations/exceptions.

31 July 2008: Aimex Kwong to Carmen Keung and others: notice of drawdown of US$18m.

31 July 2008: Maria Chan GCC-Credit Control to Carmen Keung, Aimex Kwong and others: approval pending notice of amendment of facility signed by Ji as guarantor.

31 July 2008:  Linda Liu to Frederick Ko and others: request to defer signed notice of amendment of facility by 1 month.

31 July 2008: Frederick Ko to Linda Liu and others: approved “on the understanding that the said guarantor is the beneficial owner and director of the borrower”.

310. Instead of correcting his error and informing Frederick Ko that the borrower was the PIC of the Trust and that Ji was only the Investment Adviser, Linda Liu wrote an email on 31 July 2008 to Frederick Ko and Edwin Lim as follows:

“It’s remarkable business to our PB when the captioned client [WiseLords] fully utilized her credit facility in USD100 mio for loan draw down to book YED/FX transactions

under current circumstance.

Thanks for your support!” 

311. I reject Linda Liu’s explanation that by “under current circumstance” she meant that shares were not doing well.  I find that she was referring to the events highlighted in §304 above : Lehman Bros had announced quarterly net losses of US$2.8b on 16 June 2008; the U.S. Treasury had publicly announced rescue plans for Fannie Mae and Freddy Mac on 13 July 2008; the U.S. Federal Reserve banned naked short-selling on 15 July 2008; and just the day before the World’s Central Banks had publicly announced further bank liquidity enhancing measures.  In that email, Linda Liu was gloating that even in those troubled financial times they were still enjoying a very “happy hour” moment.

312. I also reject the rather smart sounding so‑called “explanation” given by Linda Liu in the following exchange:

“HIS LORDSHIP: But isn’t it a historical fact also that in times of crisis people tend to flock to US dollars and drop other currencies?

A. Not entirely this case, because the Lehman case had a deleveraging effect. To avoid risk, people can switch to gold and oil and to other foreign currencies as well. Australian dollar is a commodity currency and by itself in nature it is somewhat similar to gold. In the situation at that time, not only Ji was holding a lot of Australian dollars; many other customers were purchasing Australian dollars and long-holding it.” ’

6.49.   After referring to the opinion of Mr Malik and the other matters in paragraph 313 which I have set out, the Judge then held :

‘ 314. Instead of dissuading Ji from further AUD purchases, an additional US$63m of AUD was purchased from 30 July 2008 to 4 August 2008. ....’

6.50.   With this background, the Judge examined the evidence relating to the approval given by DBS Trustee and the Judge came to the view that DBS Trustee was in breach of the high level supervisory duty which it had assumed.  The decision is based on two grounds.  First, in giving approval for the purchase of AUD, DBS Trustee had not made any inquiry why Wise Lords was acquiring so much AUD and how it was paying for them.  Second, in relation to the approval of the credit increase to USD 100 million, when DBS Trustee approved the increase on 28 August 2008, it only had a portfolio statement showing loans of USD 27 million which would have been the position at the end of June 2008.  DBS Trustee was only notified of the increase to USD 100 million (HK$780 million) by DBS Corporate on 26 August 2008.  DBS Corporate did not inform DBS Trustee on 26 August 2008 that the increased credit, which had been made available from 21 July 2008 had already been used to the extent of USD 94.5 million by 7 August 2008 and this remained to be the position up to the end of August 2008.

6.51.   By then the portfolio was highly leveraged.  As of 18 August 2008, the loan of USD 96.37 million constituted about 73% of the total portfolio value of USD 131.8 million.  The content of the notification is also false in that it mentioned the HK$780 million was for standby purpose to provide funds for future investment opportunities when in fact it had already been drawn down and used.  What is even more surprising is that even by end of November 2008 DBS Trustee was still not aware that the USD 100 million credit had been used.  The Judge held that DBS Trustee did not give proper consideration to the increase of credit to USD 100 million and were prevented from doing so by DBS Corporate who omitted critical information from and gave untruthful information to DBS Trustee.  On the basis that DBS Corporate was its agent, DBS Trustee as principal was responsible for the former’s delay in notifying it of the increase and the content of the notification.  I will address the agency argument later.  At this stage I will set out in full the Judge’s finding on the exchange between DBS Corporate and DBS Trustee :

‘ 316. What I find extremely surprising, from my review of the relevant documents, is the absence of any query by DBS Trustee why Wise Lords was acquiring so much AUD and how it was paying for them. In case the documentation produced in court during this period of time was incomplete, I asked the defendants for a summary of the correspondence involving DBS Trustee in 2008. This has been produced in the form of Appendix C of the defendants’ “Note on Queries Raised by the Court” dated 6 November 2014 which confirms that there was no query raised by DBS Trustee why Wise Lords was acquiring so much AUD and how it was paying for them.

317. Although the increased facility had been utilized up to US$96.37m by 18 August 2008, a signed Notification of Activities form was only sent, much later, by DBS Corporate by fax on 26 August 2008 stating that the proposed date of the increased facility was 25 August 2008.  The following email exchange is quite extraordinary (emphasis added):

Email from Sheran Chan to Ben George and others dated 26 August 2008:

“Dear Ben,

The Settlor of the Trust has recommended the Company to accept the renewal of the existing credit facility from HKD450mio to HKD780mio offered by our Bank as per the enclosed letter 25 August 2008. In this regard, we attach the following docs for your attentions:-

i) Notification of Activities signed by DBSCSL; <Please sign and return a copy to us>

*Since Peter is on leave this week, we will arrange his signature on the notification form when he returns and send you a copy for your record.

ii) Facility Letter dated 25 August 2008;

iii) Investment Advisor’s Recommendation;

iv) Declaration of Risk Awareness by the settlors of the Trust; and

v) Director’s Resolution. <Please date, sign and return 2 sets of original to us>

Thank you for your arrangement.

Regards,

Adrienne / Sheran”

Email from Tim Pearson-Burton to Sheran Chan and others dated 26 August 2008:

“Dear Sheran

Please can you explain why having used only half of the existing credit facility the beneficiary wants to increase the facility amount?

Is the investment advisor looking to invest significantly in Yield Enhanced Deposits with the increased facility?

Regards

Tim”

Email from Sheran Chan to Tim Pearson-Burton and others dated 26 August 2008:

“Dear Tim,

As mentioned in the recommendation, the increased facility is especially for investment in Yield Enhanced Deposits, with projected return of 5-10% p.a.

Hope to have answered you well.

Regards,

Adrienne / Sheran”

Email from Tim Pearson-Burton to Sheran Chan and others dated 26 August 2008:

“Dear Sheran

Thanks for your speedy reply.

Having looked through the attachments, USD27 million of the existing facility has been used which is half of the existing facility, can you be more specific as to why the facility needs to be increased by 75% when there is still approx USD30 million left in the existing facility?

Regards

Tim”

Email from Sheran Chan to Tim Pearson-Burton and others dated 27 August 2008:

“Dear Tim,

The increase in the facility to HKD780mio is for standby purpose to provide funds for future investment opportunities, such as investment in FX and Yield Enhanced Deposits.

Hope to have answered you well.

Regards,

Adrienne / Sheran” ’

6.52.   The Judge then came to the finding of breach by DBS Trustee in giving approval for the increase of credit.

‘ 318. The result of this exchange was that the increase of the credit facility was approved. What is extraordinary about the exchange is that DBS Trustee only had a portfolio statement showing loans of US$27m which would have been the position at the end of June 2008. I accept that the extent of the loans obtained by Wise Lords is accurately shown on Appendix 3 of the the (sic) defendants’ “Note on the Queries raised by the Court” dated 6 November 2014. The outstanding loans of US$27m at the end of June 2008 were reduced to US$15m on 1 July 2008, before rising and hovering between US$20m to US$36m in the month of July 2008. Between 30 July 2008 and 7 August 2008, loans to the extent of US$94.5m were drawn by Wise Lords. DBS Corporate did not see fit to inform DBS Trustee on 26 August 2008 that the increased facility, which had been made available from 21 July 2008, had already been utilized to the extent of US$94.5m by 7 August 2008 and which utilization stayed at or above this level up to the end of August 2008. As can be seen from the portfolio statement of 18 August 2008, the portfolio was highly leveraged, the loan of UD$96.37 as that date constituting about 73% of the total portfolio value of US$131.8m. As stated above, from 24 July to 5 August 2008 US$116m was sold to buy AUDs. The statement in the last email quoted above that “the facility [of] HKD780mio is for standby purpose to provide funds for future investment opportunities, such as investment in FX and Yield Enhanced Deposits” was false. The grant of and the drawdown on the increased facility was already a fait accompli. From 1 August 2008 to 26 August 2008, AUD dropped against the USD from a rate below USD0.93 to AUD1 to a rate below USD0.85 to AUD1. It was not only a fait accompli but a fait accompli that was incurring substantial losses. It would appear from the email of Tim Pearson-Burton to Adrienne Lam of DBS Corporate and others dated 28 November 2008 that the drawdown of the US$100m facility was still not known to DBS Trustee as at that date. The email reads:

“I am in the process of reviewing the bank facility entered into in August 2008, please could you advise me whether the facility had been used and if there is any intention to use it in the future?”

DBS Trustee did not give proper consideration to the increase of the credit facility to US$100m and, indeed, were prevented from doing so by DBS Corporate who omitted critical information from and gave untruthful information to DBS Trustee.  I do not accept the evidence of Mayes insofar as he was suggesting otherwise in his witness statement.  I also do not accept the defendants’ submissions in this regard in the defendants’ “Note on Queries Raised by the Court” dated 6 November 2014, including the submission that ‘it was, in the circumstances, not unreasonable at the time to expect some recovery [in AUD] to take place”.  I cannot find in these submissions any support for the decision on the part of DBS Trustee to approve the purchases of AUD100m that took place between 24 July and 5 August 2008.  I have set out the circumstances prevailing at that time in §§304 and 311-313 above.

319. In approving the purchase of over AUD100m from 24 July and 5 August 2008, and in approving the increased credit facility at the end of August 2008, DBS Trustee failed to discharge its high level supervisory duty over the investments made by Wise Lords and DHJ Management failed to discharge its duty as director of Wise Lords.’ 

6.53.   I cannot see how the Judge can be faulted for finding the breach by DBS Trustee in respect of giving approval for the purchase of the AUD and the increase in credit of USD 100 million used for the purpose of the AUD when it did not even have full materials to properly consider these two matters.

6.54.   It is argued that DBS Corporate had duly reported the increase in Wise Lords’ credit facility to DBS Trustee upon becoming aware of it on 25 August 2008 (the date of the formal facility letter from DBS Bank which was counter‑signed on behalf of Wise Lords to confirm Wise Lords’ acceptance thereof).  The Judge in his judgment did not state that he accepted DBS Corporate only become aware of the increased credit on 25 August 2008.  On the contrary the evidence pointed the other way.  As shown by paragraph 306 of his judgment the Judge referred to the email of 18 July 2008 from Linda Liu to Edna Chan of DBS Corporate informing the latter that ‘Credit’ agreed to approve the increase of HK$780 million. 

6.55.   It is further argued that in informing DBS Trustee of the purpose of the increased credit facility, DBS Corporate was doing no more than simply referring to and repeating the contents of the Letter of Recommendation and Declaration of Risk Awareness both dated 11 July 2008 executed by Ji and/or Zhang.

6.56.   The Judge certainly had not stated that he accepted DBS Corporate was merely repeating the contents of the documents.  His conclusion on that matter is the best indication that he rejected such excuse.

6.57.   It is said the Judge made a mistake as to the exact date of the utilisation of the USD 100 million which should be 31 July 2008.  But even assuming the full utilisation occurred on 31 July 2008 and not earlier, the fact remained that by the time of DBS Trustee giving the approval, it was still not aware of the drawing down of the facilities.

6.58.   Mr Barlow SC (together with Mr Chan Pat Lun) for the plaintiffs properly pointed out, while the purchase of AUD simpliciter might have been considered to be reasonable, the defendants adduced no evidence that : (1) the speculative leveraged purchase of USD 83 million of AUD was within an ‘acceptable risk level’; (2) at the time there was any reason to expect the AUD to improve or recover; or (3) there was any reason not to expect the AUD to plummet as it did.

7)  Decumulators

6.59.   A decumulator is a complicated financial product.  The Judge had summarised the operation of this product.

6.60.   The Decumulator Notes structure is a variant on a product known as an Equity Accumulator, which was common in Asia prior to 2007/2008.  The key features of the decumulators are as follows :

   1)  An investment in either the form of a deposit or purchase of a bond, note or security in a nominated currency (say AUD).

   2)  An agreed term, say 1 year.

   3)  The investment may or may not pay any interest.

   4)  At commencement of the transaction, the parties agreed the following :

   i)  A fixed amount of the investment (‘Instalment Amount’) that will mature periodically at regular intervals over the term of the investment (‘Instalment Dates’).

   ii)  An exchange rate between the currency of the deposit and a second currency (say USD) (the ‘Strike Rate’), which is usually set above the market rate at the date the transaction is entered into.

   iii)  A second exchange rate which was lower than the market rate (known as the ‘Knock‑out Rate’).

   5)  On each Instalment Date and at Maturity of the investment, the investment would be redeemed as follows :

   i)  If the AUD/USD exchange rate remained above the Knock‑out Rate, then the investor received an USD amount equivalent to the Instalment Amount converted at the Strike Rate.

   ii)  If the AUD/USD exchange rate was below the Knock Out Rate, then the investor received the Instalment Amount, unconverted in the original currency (AUD).

   6)  A Knock-out event occurred where the exchange rate is lower than or equal to the Knock-out Rate at any time, which may be a period initially between the start date and the first Instalment Date and subsequently between the previous Instalment Date and the next Instalment Date or final maturity.  The exchange rate used is the market rate as determined by the calculation agent in a commercially reasonable manner.

   7)  The investment cannot be redeemed early, that is before the schedule[d] Instalment Dates or before the scheduled final maturity.

6.61.   The actual transaction of the 1^st decumulator entered into by Wise Lords on 15 August 2008 can be used to illustrate the operation of the decumulator :

1)  Wise Lords invested an amount of AUD 20,800,000, purchasing the 1^st decumulator issued by DBS Bank Limited for an agreed term of one year.

2)  The investment does not pay any interest.

3)  At commencement of the transaction, the parties agreed the following :

i)  The investment amortises at the rate of AUD 400,000 (Instalment Amount) each week for 52 weeks (Instalment Date).

ii)  The Strike Rate is set at AUD 1.00 = USD 0.9650 which is above the market spot rate of AUD 1.00 = USD 0.8622. 

iii)  The Knock-out Rate is set at AUD 1.00 = USD 0.8275, below the Spot Rate.

iv)  On each Instalment Date and at Maturity of the investment, the investment would be redeemed as follows :

a)  If the AUD/USD exchange rate remains above AUD 1.00 = USD 0.8275, then the investor received USD 386,000 equivalent to the Instalment Amount (AUD 400,000) converted at the Strike Rate (AUD 1.00 = USD 0.9650).

b)  If the AUD/USD exchange rate is below AUD 1.00 = USD 0.8275, then the investor received AUD 400,000.

6.62.   The Judge held that, with the high risk involved with the product and its inability to serve as a hedge against the investor exposure to AUD, the decumulator entailed the investor assuming currency risk, and in this case, specifically exposure to depreciation of the AUD against the USD.  In return for the opportunity to sell AUD for USD at a higher than market rate, the investor bore the risk of the exchange rate falling below the knock‑out rate.  In this case, the investor also gave up the interest that could be earned on the AUD deposit in order to obtain a higher strike rate.

6.63.   If the decumulator is entered into as a mechanism for liquidating the investor’s exposure to AUD and for realigning the currency mismatch, then the expert opinion was that they were not designed to and could not function as a hedge against the investor’s AUD exposure for the reason that they were conditional: if the AUD declined, the knock‑out event would deactivate the hedge leaving the investor’s AUD holdings exposed to depreciation.  The experts also agreed that the currency risks were asymmetric, ‘that is the investor has limited potential gains and theoretical unlimited losses’.  If the AUD depreciated below the knock‑out rate and continued to depreciate throughout the course of the one year deposit period, the investor would not be able to access the AUD committed to the decumulator : the investor would only receive the weekly instalment payment in AUD of 1/52 of the total AUD deposit, which the investor could convert at current market rate but the balance of the AUD deposit would be locked up and could not be sold.  In effect, the ability to sell AUD was de‑activated when the AUD declined sharply, when protection was most needed.  Instead of being an effective hedge, the instrument exacerbated the currency risks in the portfolio.  Further, the decrease in the value of the decumulator would lower the value of the asset cover for the USD borrowings used to enter into the investments.

6.64.   The investor would only benefit from entering into AUD/USD decumulator where the rate was relatively stable and traded between the Strike Rate and the Knock‑out Rate.  The decumulator was illiquid and the most likely means of terminating the decumulator would be to unwind the transaction with the issuer, which would incur breakage costs.  Indeed, breakage costs of about AUD 400,000 and AUD 1.1 million were paid on the two AUD/USD Decumulator Notes unwound in November 2008.  There was a significant risk that the decumulator would need to be terminated before maturity if the AUD depreciated sharply: given the significant leverage and currency mismatch, the investor would need to realise assets to repay borrowings or meet margin calls.

6.65.   Since the decumulator were fully funded (by the purchase price paid by Wise Lords), they did not expose the investor to any contingent liquidity requirements (i.e. a margin call).  But since the purchase of the decumulator was funded by borrowed USD, that created a possible ‘contingent liquidity’ risk.

6.66.   Ji insisted the strike price of the decumulators should not be lower than the spot price that she had bought the AUD at and also insisted on a lower knock‑out price.  The Judge found that Ji caused Wise Lords to purchase these decumulators because she wanted to sell Wise Lords’ substantial holdings of AUD at the rate that she wanted and she was willing to take a substantial risk to do so.  But as the Judge found, the likelihood of achieving that purpose, viewed objectively in the circumstances that prevailed, was slim.  By peddling these very risky decumulators, very risky because of the high strike rate Ji wanted and the lengthy lock out period, Linda Liu and Kenneth Cheung of DBS:PB put Wise Lords in a worse position than it would have been had it simply continued to hold the AUD deposits in the depreciating currency.

6.67.   Again in my view the Judge cannot be faulted for finding DBS Trustee was in breach of its duty by giving approval for the purchase of a product when it knew nothing about the product and when it had not fully appraised itself of the information regarding the substantial risk of this product.

6.68.   It is of note that Ji and Zhang had not even signed any Investment Advisor’s Recommendation or the Declaration of Risk Awareness for the decumulators.  In any event, as Mr Barlow for the plaintiffs pointed out, these documents were transaction specific in nature.

6.69.   The statements by Brightman J in Bartlett which were referred to by Mr Burns, namely, ‘It does not follow that because of a trustee could have prevented a loss it is therefore liable for the loss’ and ‘That does not mean that the trustee is bound to avoid all risk and in effect act as an insurer of the trust fund’ are said in the context of the discussion that a trustee who is honest and reasonably competent is not to be held responsible for a mere error of judgment.  Brightman J at page 532 discussed what the trustee in that case should do as a prudent man of business.  The discussion was on the basis that the Court will not first take into account that the trustee in that case was in fact a specialist trustee :

‘ ...The prudent man of business will act in such manner as is necessary to safeguard his investment. He will do this in two ways. If facts come to his knowledge which tell him that the company’s affairs are not being conducted as they should be, or which put him on inquiry, he will take appropriate action. Appropriate action will no doubt consist in the first instance of inquiry of and consultation with the directors, and in the last but most unlikely resort, the convening of a general meeting to replace one or more directors. What the prudent man of business will not do is to content himself with the receipt of such information on the affairs of the company as a shareholder ordinarily receives at annual general meetings. Since he has the power to do so, he will go further and see that he has sufficient information to enable him to make a responsible decision from time to time either to let matters proceed as they are proceeding, or to intervene if he is dissatisfied. ....’ (emphasis added)

6.70.   I think Brightman J’s view is apposite to this case.  Notwithstanding the presence of anti-Bartlett provisions, the high level supervision assumed by DBS Trustee clearly required it not simply to content itself with the receipt of information concerning the purchase of AUD, the increase of credit and the purchase of decumulators.  As a prudent trustee it ought to have gone one step further and made the inquiries which I have already addressed earlier before giving approval for the impugned transactions.

8)  No gross negligence?

6.71.   Once DBS Trustee had been found in breach, it follows, like night following day, that the degree of breach was a serious and flagrant one.  The nature of the breach speaks for itself.  It had failed to perform the very task that it had assumed namely, high level supervision in order to assure that the trust asset is subject to appropriate control.  The breach was not accidental but carried with it a serious and flagrant degree of negligence because the tasks to be performed by DBS Trustee clearly involved more than rubberstamping the transactions.  It is a matter of common sense that, to properly discharge the task, DBS Trustee must have at least kept itself informed of the prevailing financial conditions.  Although the intensity of the global financial crisis was unprecedented, it did not occur overnight and as the Judge had pointed out, the storm had been brewing since March 2007.  In the circumstances, DBS Trustee plainly must exercise more caution before giving approval for the impugned transactions.

9)  Causation

6.72.   Mr Burns argued that even if the defendants were in breach, the Judge had omitted to consider causation which is an essential ingredient of the causes of action against DBS Trustee and DHJ Management.  The reality is that they could not have prevented Ji from being appointed as the investment manager of Wise Lords.  At best its supposed duty of supervision could only have entailed an attempt to influence Wise Lords to bring Ji’s appointment to an end at some specified point.  Only loss directly attributable to a failure to do so could be said to have been caused by a breach of duty on the part of DBS Trustee. 

6.73.   Mr Burns submitted that given Ji was the dominant decision-maker in respect of all investments, her conduct (supported by Zhang) was the effective, proximate cause of Wise Lords’ investment losses.  The defendants submitted that focusing on the impugned transactions, the reality in view of Ji’s ravenous investment appetite and readiness to take risks was that, had there been any resistance to Ji’s insistence or attempt to prevent Wise Lords acquiring any or as much AUD as it did from 25 July to 5 August 2008, it is likely that Ji would have either appointed other trustees in place of DBS Trustee or terminated the trust in order to get her own way, or alternatively, to have demanded the accumulation of other foreign currencies, (other than USD, to which she consistently maintained an aversion), or would have engaged in other investments.  What would not have happened was Ji putting a halt to her investment spree.  As to the increase of credit facility in July 2008, the Judge found that it was not causative of any loss :

‘ 431. .....Wise Lords did not suffer any loss or damage from the grant of the credit facilities or the increased credit facilities: they were suffered from the substantial purchase AUDs from 24 July 2008 to 5 August 2008 and the purchase of the 3 decumulators.’

6.74.   While the latter part of this statement is incorrect for the reasons set out above, the earlier part is a positive finding that is irreconcilable with the attribution of liability to DBS Trustee or DHJ Management as regards the increase of credit facility.  Further, in respect of the Judge’s finding that DBS Trustee and DHJ Management were not informed of the increase in the credit facility until August 2008, after it had already been utilised, their approval or otherwise of the increase could not have caused any loss.

6.75.   In my view, first, it is pure speculation to discuss what Ji would or would not have done if DBS Trustee had not given its approval for the three impugned transactions. Second, I have already held that the purchase of AUD cannot be considered in isolation, it must be viewed together with the increased credit of USD 100 million which fuelled the purchase.  Third, the discussion on causation must focus on the nature of the breach.  The present breach is the first category of breach discussed by the Court of Final Appeal in Libertarian Investments Ltd v Hall (2013) 16 HKCFAR 681 which approved the view of Tipping J in BNZ v NZ Guardian Trust Co Ltd [1999] 1 NZLR 664, namely, breach leading to damage or loss of the trust property.  The principles on causation in respect of this first category is addressed by Ribeiro PJ in Libertarian as follows :

‘ 78. ….., in cases within Tipping J’s first category, involving loss caused by the fiduciary to trust property, strict rules on causation apply. These are rules borrowed from those developed in relation to traditional trusts, requiring the trustee to restore to the trust fund what he has caused it to lose as a result of his breach of trust. In Target Holdings Ltd v Redferns, Lord Browne-Wilkinson explained the traditional rule as follows:

 In such a case the basic rule is that a trustee in breach of trust must restore or pay to the trust estate either the assets which have been lost to the estate by reason of the breach or compensation for such loss. ... If specific restitution of the trust property is not possible, then the liability of the trustee is to pay sufficient compensation to the trust estate to put it back to what it would have been had the breach not been committed ... Even if the immediate cause of the loss is the dishonesty or failure of a third party, the trustee is liable to make good that loss to the trust estate if, but for the breach, such loss would not have occurred ... Thus the common law rules of remoteness of damage and causation do not apply.

  79. Tipping J held that a breach of fiduciary duty in his first category is to be equated with such a breach of trust and treated with equal strictness.  Causation is established on a “but for” basis without the constraints of the common law causation rules on remoteness and foreseeability:

In the first kind of case the allegation is that a breach of duty by a trustee has directly caused loss of or damage to the trust property. The relief sought by the beneficiary is usually in such circumstances of a restitutionary kind. The trustee is asked to restore the trust estate, either in specie or by value. The policy of the law in these circumstances is generally to hold the trustee responsible if, but for the breach, the loss or damage would not have occurred. This approach is designed to encourage trustees to observe to the full their duties in relation to the trust property by imposing upon them a stringent concept of causation. Questions of foreseeability and remoteness do not come into such an assessment.

 80.As McLachlin J in Canson Enterprises explained, this approach is tied to the responsibility assumed by the fiduciary to act in the interests of another:

The requirement that the loss must result from the breach of the relevant equitable duty does not negate the fact that ‘causality’ in the legal sense as limited by foreseeability at the time of breach does not apply in equity.  ... Thus while the loss must flow from the breach of fiduciary duty, it need not be reasonably foreseeable at the time of the breach .... The considerations applicable in this respect to breach of fiduciary duty are more analogous to deceit than negligence in breach of contract.  Just as ‘it does not lie in the mouth of the fraudulent person to say that [the losses] could not reasonably have been foreseen’ (Doyle v Olby (Ironmongers) Ltd, [1969] 2 QB 158, [1969] 2 All ER 119 at 222 (CA)), so it does not lie in the mouth of a fiduciary who has assumed the special responsibility of trust to say the loss could not reasonably have been foreseen. This is sound policy. ... In the case of a breach of fiduciary duty, as in deceit, we do not have to look to the consequences to judge the reasonableness of the actions. A breach of fiduciary duty is a wrong in itself, regardless of whether a loss can be foreseen. Moreover, the high duty assumed and the difficulty of detecting such breaches make it fair and practical to adopt a measure of compensation calculated to ensure that fiduciaries are kept ‘up to their duty.’  (emphasis added)

6.76.   These principles were referred to by the Judge in his previous decision in Akai Holdings Ltd.  (In Compulsory Liquidation) v. Everwin Dynasty Ltd. & Ors (No. 2) [2016] 3 HKC 307.  He relied upon Akai Holdings Ltd in his judgment.  In my view it is wrong to say that the Judge had not considered causation because at paragraph 424, he held :

‘ 424. ...These principles apply to the present claim. It is not in dispute that DBS Trustee was under a fiduciary duty to the Trust. I am satisfied that the breaches of duty by DBS Trustee, that I have found to have been established, have directly caused loss of the assets of the Trust in that they have directly led to diminution of the value of the assets held in Wise Lords’ portfolio. Our case also falls into the first category identified by Ribeiro PJ above, being a case where the breaches of duty by DBS Trustee have led directly to losses being suffered by Wise Lords’ portfolio, i.e. a case where “there are breaches leading directly to damage to or loss of the trust property”.’

6.77.   The bottom line is, as Ribeiro PJ observed :

‘ 93. Where the plaintiff provides evidence of loss flowing from the relevant breach of duty, the onus lies on a defaulting fiduciary to disprove the apparent causal connection between the breach of duty and the loss (or particular aspects of the loss) apparently flowing therefrom.’ (emphasis added)

6.78.   I repeat my earlier observation on foreseeability.  In my view the defendants had not been able to disprove the apparent causal connection between the breach of duty and the loss apparently flowing therefrom.

10)   Position of DHJ Management

6.79.   Mr Burns referred to New Zealand Netherlands Society ‘Oranje’ Inc v Kuys [1973] 1 WLR 1126, at 1129-1130; Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41, 97 (applied by the Court of Final Appeal in Active Profit Ltd v Nissho Iwai (2006) 9 HKCFAR 653 at paragraph 42) and Kelly v Cooper [1993] AC 205 at 215 which emphasised the critical importance of context in determining the extent and application of any alleged fiduciary or trust duties.

6.80.   In my view, the principles in these cases are well established and recognized.  However, the fiduciary duty imposed on DHJ Management does not arise simply because of its position as a director of Wise Lords, it arises because, similar to DBS Trustee, it had assumed the high level supervisory role in approving the investments of Wise Lords.  The assumption of this role is the basis upon which it owes the fiduciary duty towards Wise Lords.

11)  Position of DBS Corporate

6.81.   The plaintiffs had framed a discrete cause of action against DBS Corporate for breach of fiduciary duty.  The claim was dismissed by the Judge.

6.82.   Separately the Judge found DBS Corporate was the agent of DBS Trustee and DHJ Management.  Mr Burns attacked this finding on a number of grounds :

(1)  The plaintiffs had not pleaded DBS Corporate was an agent of these two defendants.  As a result the defendants were deprived of any opportunity to respond to this issue (including evidence on Jersey law).

(2)  There was no evidence on the nature of this agency.  The available evidence militated against the finding.  There is nothing in the Management Agreement dated 17 October 2001 (as varied by the Agreement dated 30 August 2005) or Delegation Agreement dated 17 October 2001 to suggest that DBS Corporate was an agent for these two defendants, or to impose any duty on DBS Corporate as regards reporting investment activity to DBS Trustee or DHJ Management or any duty (of whatever nature) to Wise Lords.  The Services Agreement dated 13 September 2005 provides that DBS Corporate would perform or appoint nominees to perform for Wise Lords the services specified in Schedule II, none of which relates to the reporting of investment activity.

(3)  The finding is inconsistent with the Judge’s earlier finding that DBS Corporate ‘acted as a bridge of communications but did not possess or exercise any management functions over the trusts or their underlying companies’, provided ‘administrative and operational services as well as secretarial support services’ and at no time did [it] exercise any decision-making functions for DBS Trustee.

(4)  The Judge erred in finding that DBS Corporate wilfully misconducted itself and was grossly negligent in relation to its communications with DBS Trustee on 26 and 27 August 2008 as regards the increase of the credit facility to USD 100 million was unjustified, without any or any proper foundation, and unfair.  DBS Corporate had duly reported the increase in Wise Lords’ credit facility to DBS Trustee upon becoming aware of it on 25 August 2008 (the date of the formal facility letter from DBS Bank which was counter-signed for and on behalf of Wise Lords to confirm Wise Lords’ acceptance thereof). A fair consideration of the chain of relevant correspondence shows that in informing DBS Trustee of the purpose of the increased credit facility, DBS Corporate was doing no more than simply referring to and repeating the contents of the Letter of Recommendation and Declaration of Risk Awareness both dated 11 July 2008 executed by Ji and/or Zhang.

(5)  Even if DBS Corporate is an agent of DBS Trustee it should be exempted from liability under paragraph 7 of the First Schedule to the Trust Deed.

6.83.   In my view this is not a valid challenge.  The plaintiffs had pleaded in paragraph 35B of their re‑amended counterclaim that DBS Trustee had delegated its contractual and trusteeship duties to DHJ Management.  The latter in turn delegated those duties to DBS Corporate.  DBS Trustee permitted DBS Corporate to be supervised and controlled by Peter Lee.  Paragraph 104(5) further pleaded DBS Trustee breached its duty by failing to manage the company or to cause its agents to manage the company in an honest and/or competent and/or businesslike manner.  The defendants joined issue on these pleas in their amended defence and counterclaim (paragraphs 105D, 309).  In the plaintiffs’ amended reply, there was an express plea in paragraph 32(6) in respect of, amongst other things, DBS Trustee ‘and its agents such as DBS Services and DHJ Management’.

6.84.   In my view, the plaintiff had sufficiently pleaded that DBS Corporate was an agent of DBS Trustee and DHJ Management.  What is more important is that the defendants themselves recognised the issue of agency before the Judge.  Mr Mayes of DBS Trustee acknowledged DBS Corporate as its agent.  Further paragraph 10 of the Defendants’ Note on queries raised by the Court reads :

‘ 11. It is also plain from the foregoing that, in conveying the information in question to DBS Trustee, DBS Corporate cannot properly be described as DBS Trustee’s “agent”. DBS Corporate was simply fulfilling its role as an administrative conduit.’ (emphasis added)

6.85.   The issue of DBS Corporate being an agent was squarely before the Judge.  The argument that the defendants were deprived of the chance to adduce evidence including Jersey law is in my view an afterthought.  Further I do not regard there is any inconsistency between the Judge’s finding of agency and his earlier finding that DBS Corporate ‘acted as a bridge of communication’.  This description does not detract from the finding that DBS Corporate was the agent and the principals are responsible for the acts of the agent.

6.86.   Yuen JA has in her judgment dealt with the issues of exclusionary/indemnity provisions, reflective loss and equitable compensation.  I agree with her judgment.

VII.  Conclusion

7.   Accordingly the appeal in CACV 138/2017 is dismissed.

VIII.  Costs

8.   There will be a costs nisi that the 2^nd and 4^th defendants will pay the plaintiffs the costs of the appeal in CACV 138/2017 together with certificate for two counsel.

CACV 139/2017

9.   I agree with the judgment of Kwan JA in CACV 139/2017 and the orders she proposes to make. 

Hon Yuen JA :

10.   I agree with the judgment of Cheung JA that on the facts of this case, the anti-Bartlett provisions did not have the effect of exempting DBS Trustee from liability.  It is clear, and I think Mr Burns acknowledges, that the provisions did not have the legal effect of making the trustees liability-free rubber-stampers of Ji’s investment recommendations.  He accepts that they had a “high level supervisory role”. Unfortunately in the course of performing that role, they failed to discharge the residual obligation that Professor Matthews accepted they owed to the trust 1. 

11.1.   Although Ji was Wise Lords’ investment advisor, the trustees must have been aware that the beneficiaries of the discretionary trust included minor children.  And the contemporaneous documentary evidence shows that the trustees were well aware that Ji’s style of investment was unsuitable for a discretionary trust, the purposes of which included asset protection and family wealth succession. 

11.2.   Well before the events of 2008, some personnel of the trustees had expressed their concern about “the lack of diversity and sizeable investments in what may be risky investments, within the underlying portfolio” 2. 

11.3.   As long ago as 30 March 2007, nearly 1½ years before the headlong plunge into AUD employing increased credit facilities, and the use of decumulator notes as an “exit strategy”, David Muir of New World Trustees (Jersey) Ltd, DBS Trustee’s agent, had in an email to DBS Corporate 3:

“ [made] our general point ... that a discretionary trust is not the usual medium to hold investments with heavy exposure to specific investments or specific market place, especially ones in which the trustees themselves have little specific knowledge or expertise in” 4. (Emphasis added).

That last remark is particularly apposite to the purchase of the decumulator notes.  The trustees approved the 1^st and 2^nd decumulator notes on 18 August 2008 and 29 August 2008, yet it was only on 1 September 2008 5 when they asked how these notes worked:

“The directors would appreciate a brief description of how a decumulator note works and why you would choose to buy one”.

11.4.   Further in April 2007, Peter Lee had said in an email to Mr Muir:

“Actually we have raised exactly the same questions to the RM [Linda Liu] and warned her that a trust should not concentrate on just a few investments and that it will be very hard for the trustee to continuously approve extra loans.

Several actions we could do/have done:

a. we have escalated this to the PB Head in Hong Kong of the fact that the decisions/accession to the investment advisor was made without formally allowing time for consideration by us;

b. with the trustee’s authorisation (if so we need to be authorised) to inform the RM and the Bank’s credit department to stop approving temporary loans to Wise Lords;

c. with the trustee’s authorisation (if so we need to be authorised) to inform the RM that for any additional new investment, each investment in a specific fund may not exceed say X [per cent] of the total trust portfolio; ...”. (Emphasis added).

11.5.   The misgivings expressed as early as March 2007 and the suggestions in April 2007 (which were apparently not taken up) demonstrated the trustees’ awareness that the investments that Mr Muir had warned against in his email were unsuitable for the Trust.  Yet they continued to approve them when they could (and should) have called a halt.  It may well be that Ji was a strong-minded individual to whom the staff of PB deferred, but the trustees’ obligation was to the Trust, and unfortunately, despite their earlier concerns, they allowed themselves to lose sight of it. 

12.1.   I shall now deal with the issue of exclusionary/indemnity provisions. 

12.2.   In Ground (21) of the Grounds of Appeal, DBS Trustee contends that if it is liable in respect of the impugned transactions, then it is entitled to an indemnity from Ji pursuant to letters of recommendation signed by her, and from Ji and Zhang pursuant to declarations of risk awareness signed by them.

12.3.   In Ground (22), DBS Trustee contends that it is entitled to an indemnity from the Current Trustees pursuant to clause 5 of the Deed of Appointment Retirement and Indemnity (“DARI”).

12.4.   In Ground (23), DHJ Management contends that the judge should have held that it should be exempt from liability pursuant to clause 3(a) of the Services Agreement, and in any event it is entitled to an indemnity pursuant to clauses 3(b) and 7 of that Agreement.

13.   I shall deal first with Ground (21).  In the Amended Counterclaim 6, DBS Trustee pleaded that Ji had agreed “by each of the letters of recommendation” she signed, as investment advisor of Wise Lords, to indemnify DBS Trustee against all actions etc which might arise from Wise Lords’ investing “in the investment therein referred to”. 

14.1.   It is clear from the above pleading that DBS Trustee’s case is based on (1) an agreement of (2) a specific indemnity contained in each letter recommending the specific investment referred to in that particular letter. 

14.2.   The same applies to DBS Trustee’s counterclaim against Ji and Zhang based on the declarations of risk awareness signed by them 7.

15.1.   Mr Barlow’s reply to this ground was that the judge did not need to deal with this issue because in fact, there were no letters of recommendation or declarations of risk awareness relating to the impugned transactions 8.

15.2.   The only documents in this regard relied upon by DBS Trustee were a letter of recommendation signed by Ji dated 11 July 2008, and a declaration of risk awareness signed by her and Zhang of the same date.  However these documents did not recommend the purchase of AUD 9, and so (on the pleaded case of DBS Trustee) the indemnity in the letter was not engaged. 

16.  I agree with that submission.  We have not been referred to any letters of recommendation or declarations of risk awareness with respect to the purchase of the decumulators.

17.1.   In any event and more importantly in my view, it was pleaded in the Reply 10 that there was no consideration for the alleged agreement(s) of indemnity.  Although the defendants filed a rejoinder 11, no answer to the lack of consideration point was pleaded 12.

17.2.   Mr Burns argued before this court that the indemnities were given in consideration for DBS Trustee’s approval of Wise Lords’ investments 13. 

17.3.   With respect, I do not agree with that argument.  Quite apart from the fact that this had not been pleaded 14, there was nothing in the documents themselves which indicated that that was the consideration for DBS Trustee’s approval of the subject investment.  Nor have we been referred to any evidence from DBS Trustee to that effect.  Rather, it was the trustees’ case that the purpose of obtaining letters of recommendation and declarations of risk awareness was as follows: (a) the letters of recommendation provided “information” to the trustees, and served as “reminders” to Ji of issues like risk factors and diversity 15; and (b) the declarations of risk awareness were obtained “to keep track of their risk profile such that the Trustees could have an all round picture of the interested parties when exercising its discretion under the Trust” 16.  It was not asserted that another purpose of those documents was so that the trustees could obtain indemnities as consideration for their grant of approval for the impugned transactions.   

18.  I shall now deal with Ground (22).  DBS Trustee says that the judge should have upheld its counterclaim 17 that the Current Trustees should indemnify it pursuant to Clause 5 of the DARI 18, the material parts of which provide:

“The New Trustees [the Current Trustees] ... hereby jointly and severally covenant with the Retiring Trustee [DBS Trustee] ... that the New Trustees will at all times hereafter fully and effectually indemnify and keep indemnified and hold harmless the Indemnified Persons 19 against Liabilities 20 PROVIDED THAT:

(a) there shall be excluded from such indemnity Liabilities of any of the Indemnified Persons in respect of which such Indemnified Person would not have been entitled to reimbursement out of the Trust Fund if the Retiring Trustee had remained trustee of the Settlement on its present terms ...”.

19.1.   The judge held 21:

“ I refer to Clause 19 of the Trust Deed ... and to my findings as to the liability of DBS Trustee. I find that the proviso under the said Clause 5 applies to the liability that has been established against DBS Trustee, being a liability in respect of which DBS Trustee would not have been entitled to reimbursement out of the Trust Fund if DBS Trustee had remained trustee. ... ”

19.2.   Clause 19 of the Trust Deed releases outgoing trustees from liability, except (amongst other things):

“ any liability in respect of any breach of trust arising from fraud wilful misconduct or gross negligence on the part of such Trustee ...”.

20.   DBS Trustee having been found liable for such breach of trust, it is clear in my view that the effect of the proviso to Clause 19 is to make that liability remain with it personally, notwithstanding the cessation of its trusteeship.  Being a personal liability, the trustee could not have satisfied it by resorting to the Trust Fund.   That being the case, it must follow on a purposive interpretation of proviso (a) of Clause 5 of DARI that DBS Trustee is precluded from shifting its personal liability to the Current Trustees.

21.  Further, the indemnity sought by DBS Trustee would have the effect of relieving it from liability for breach of trust arising from the trustee’s gross negligence, which would be tantamount to a backdoor way of getting around Article 30(10) of the Trust (Jersey) Law 1984 22.

22.  I come now to Ground (23), in which DHJ Management contends that the judge should have held that it is exempt from liability pursuant to clause 3(a) of the Services Agreement, and in any event it is entitled to an indemnity pursuant to clauses 3(b) and 7 of that Agreement.

23.1.   The Services Agreement was made on 13 September 2005 between DBS Corporate, Wise Lords and DBS Trustee (which was referred to as the “Principal”).  Essentially, DBS Trustee appointed DBS Corporate (or its nominees including DHJ Management) to provide corporate services (“the Services” set out in Schedule II) in respect of Wise Lords.  DHJ Management was not a party to the Services Agreement and I do not think that Mr Burns’ argument based on a “Himalaya” clause is valid for want of the second and third conditions stated in Scruttons Ltd v Midland Silicones Ltd 23.  Be that as it may, I shall assume for the purpose of this discussion that DHJ Management was brought into the Agreement. 

23.2.   Clause 3(a) of the Services Agreement provides:

“ None of the Nominees [including DHJ Management] shall be liable to the Principal [DBS Trustee] and/or the Company [Wise Lords] ... for anything done or omitted to be done by the Nominees in connection with the Services except in the case of bad faith or negligence of the Nominees”.

23.3.   Clause 3(b) provides:

“ Except when caused solely by actions (including inaction) of the Nominees done in bad faith or in the case of gross negligence of the Nominees , the Principal [DBS Trustee] and/or the Company [Wise Lords] will indemnify and keep indemnified each of the Nominees ... against all ... liabilities for which any of them may become liable or which may arise or occur and against all actions, claims, demands and proceedings which may be taken or made against them directly or indirectly in connection with the Services or by reason of anything done or omitted to be done in relation to the Services”.

23.4.   Clause 7 provides:

“The Principal [DBS Trustee] and the Company [Wise Lords] will indemnify … each Nominee ... on demand, against all ... liabilities for which any of them [the Nominees] may become liable or which may arise or occur and against all actions, claims, demands and proceedings which may be taken or made against any of them directly or indirectly in connection with the Services or by reason of anything done or omitted to be done in relation to the Services”.

24.  As I understand it, although the Services Agreement contemplated only routine corporate services, Mr Burns was not suggesting that what DHJ Management did in relation to the impugned transactions was outside the scope of those services.  He referred the court to his clients’ evidence that DHJ Management “continued to monitor the general performance of Ji and the investments she instructed DBS Bank to execute on behalf of Wise Lords” 24.  Mr Burns also agreed that DHJ Management as director of Wise Lords had the power to reverse Ji’s recommendation.  It follows that it is Mr Burns’ case that what DHJ Management did was within the scope of the services it provided under the Services Agreement.  As such, he argued that the exemption and/or indemnity pursuant to the above provisions applied. 

25.  The judge found that “DHJ Management failed to discharge their duties as a director of Wise Lords to act in the best interests of the company and to exercise reasonable care, skill and diligence in the performance of their [DJH Management’s] functions and their management of the company’s affairs”.  For the same reasons set out in §§407-409 of the Judgment, he held that the degree of negligence was serious or flagrant.  Clauses 3(a) and 3 (b) did not therefore apply.  The judge construed clause 7 together with clause 3(b). 

26.1.   With respect, I think that must be right.  If clause 7 was intended to provide a blanket indemnity, covering even liabilities caused by DHJ Management’s gross negligence, it would be inconsistent with clause 3(b).  This inconsistency has not been explained by Mr Burns whose clients were the makers of this document.

26.2.   Further, the three tests laid down in R v Canada SS Co Ltd 25 apply to indemnity clauses as well as exemption clauses.  One of the tests is that even if the words used are wide enough to cover negligence on the part of the party seeking to be indemnified, the court must consider whether liability for the loss mentioned in the clause may arise on some ground other than negligence, which ground is not so fanciful or remote that the parties cannot be supposed to have intended the indemnity to apply to it 26.  Here it cannot be said that there are no such grounds.  In the course of performing corporate services, there may be many areas in which DHJ Management (not being negligent) would be entitled to an indemnity from Wide Lords (eg a penalty imposed on DHJ Management by authorities for non-compliance with deadlines for filing returns, which non-compliance was caused by Wise Lords’ delay in providing particulars to DHJ Management).     

26.3.   As for Mr Barlow’s further points based on the Unconscionable Contracts Ordinance Cap. 458 or the Control of Exemption Clauses Ordinance Cap.71, I do not think this court should deal with them as the trial judge had not made findings of fact (eg whether Wise Lords was dealing as a consumer 27, or the reasonableness of the contractual terms 28) which are necessary to enable this court to consider the applicability of these ordinances.

27.  I shall now deal with Ground (17).  DBS Trustee contends that the judge was wrong in allowing the Current Trustees’ claim against it for equitable compensation, when the loss was merely reflective of the loss suffered by Wise Lords only.

28.  However this was not pleaded at all, nor argued below.  The Jersey trust law experts did not discuss this issue, and as Wise Lords is incorporated in the BVI, expert evidence on BVI corporate law 29 would also have been required.  Even under English trust law, the application of the reflective loss principle in relation to trusts is unclear on the authorities 30, and is fact-specific 31.  For all the above reasons, it is clear that this court should not permit this point to be argued for the first time on appeal. 

29.  I shall now deal with Grounds (18) and (20) which deal with the judge’s approach to the assessment of equitable compensation. 

30.  Before discussing the argument, it is worthwhile recapping the basic rule of equitable compensation, as summarized by the editors of Lewin on Trusts 32:

“ It was confirmed by the House of Lords in Target Holdings v Redferns 33, that the basic rule on the personal liability of a trustee is that he must restore or pay to the trust estate either the assets which have been lost to the estate by reason of the breach of trust ..., or compensation for such loss. The form of relief is couched in terms appropriate to require the defaulting trustee to restore the missing assets to the trust estate. If specific restitution of the trust property is not possible, the trustee must pay sufficient compensation to put the estate back to what it would have been had the breach not been committed”. (Emphasis added).

31.1.   As to valuation of the loss, the following passages are relevant 34:

“The compensation is valued as the amount required to restore the trust estate to its value as if the breach had not taken place. ... It has been said that the remedy ‘will be fashioned according to exigencies of the particular case so as to do what is practically just as between the parties’. The fiduciary must not be ‘robbed’, nor must the beneficiary be unjustly enriched. This may explain the adoption of different bases of loss in different circumstances, ensuring that the award of equitable compensation operate fairly between the defaulting trustee and the beneficiaries. ...”. (Emphasis added).

31.2.   The loss is assessed as at the time of the trial, using the benefit of hindsight 35.  

32.  The Current Trustees had claimed against DBS Trustee “... equitable restitution to the Trust for the breaches ... in order to reconstitute the assets of the Trust so as to place the Trust in the position that it would have occupied but for [DBS Trustee’s] breaches of its trustee’s duties” 36.  This approach was correctly not challenged in the Amended Defence. 

33.  In his Judgment, the judge first set out the principles regarding equitable compensation at great length.  He was well aware that the compensation is intended to be restorative. Doing the best he could in the circumstances, he decided “to adopt a robust approach to assess the equitable compensation by, first, attempting to determine the value of the assets in Wise Lords’ portfolio on the date of the issue of the Writ in these proceedings on 28 February 2011; and secondly, by attempting to assess what that value might have been on 11 February 2011 37 if Wise Lords had not acquired US$83m worth of AUD from 24 July to 5 August 2008 and had not purchased the 3 Decumulators but had carried out the other transactions listed in Arboit’s 2^nd Schedule that were unrelated to the purchases of the 3 Decumulators; and thirdly, by awarding the difference between the 2 values to [the Current Trustees], being the trustees of the Trust, as equitable compensation” 38. The judge then gave directions for a further joint report from the parties’ financial experts to assist him in this exercise.

34.  Mr Burns’ challenge to the judge’s approach is on the basis that the judge did not require an assumption to be made that the credit facilities were not increased 39.  He submits that

(1)  if there were no increase, it was likely that Ji would have terminated the banking relationship with DBS:PB and the trust relationship with DBS Trustee, and after that she would have conducted the same investments elsewhere;

(2)  if there were such increase, it was likely that Ji would have utilised it for other investments which, in the market situation at the time, would have led to losses anyway.

35.1.   With respect, I do not agree with that submission.  In relation to (1), supposing Ji terminated the trust relationship with DBS Trustee then, these proceedings would not have come into being.

35.2.   In relation to (2), it has been held by the Court of Final Appeal that the burden is on a defaulting trustee to disprove the apparent causal connection between the breach of duty and the loss apparently flowing therefrom 40.  It would appear that Ji was not cross-examined on the scenarios above, and in light of the burden on the trustees, in my view it cannot be assumed that if DBS Trustee had disapproved the AUD purchase and the 3 Decumulators (eg on the grounds its staff had internally discussed earlier, that these were not suitable investments for a discretionary trust the purposes of which included asset protection and family wealth succession for minor beneficiaries), that Ji would not have paused to consider their rationale for disapproval.

36.  Finally I also agree with the judgment of Kwan JA.

Hon Kwan JA :

37.  For ease of reference, I will adopt the same nomenclature as in the judgment of Bharwaney J (“the Judgment”).

38.  I have had the benefit of reading in draft the judgments of Cheung JA and Yuen JA in respect of the appeal brought by the 2^nd and 4^th defendants (DBS Trustee and DHJ Management) in CACV 138/2017, with which I agree.  My judgment deals with the appeal brought by the 3^rd and 4^th plaintiffs (current trustees of the Trust and Wise Lords) in CACV 139/2017.

The notice of appeal

39.  The notice of appeal in CACV 139/2017 sought to challenge:

(1) the judge’s holding that the breaches of trust of DBS Trustee and breaches of fiduciary duty of DHJ Management he found in approving (a) the purchase of US$83 million worth of AUD from 24 July 2008 to 5 August 2008 [41], (b) the increase of Wise Lords’ credit facility from US$58 million to US$100 million at the end of August 2008 [42], and (c) the purchase of 3 decumulators in August 2008 [43] (collectively “the 2008 Transactions”), were not dishonest [44] (“the No Dishonesty Finding”);

(2) the judge’s refusal to allow §44 of the Re‑amended Statement of Claim (“RASOC”) to be amended on Day 21 of the trial by adding the word “knowing” so that the proposed amendment of the relevant part would read: “… either the DBS Fiduciaries [45], with the knowing assistance of DBS Bank, acting through Peter Lee, and/or Edwin Lim and/or Linda Liu, caused [Wise Lords] recklessly to enter into the below-described transactions …” [46]; and

(3) the judge’s holding that DBS Bank, DBS Corporate, Peter Lee, Edwin Lim and Linda Liu were not liable for knowing assistance in the breach of trust and breach of fiduciary duty for which the judge found DBS Trustee and DHJ Management respectively liable in respect of the 2008 Transactions [47] (“the No Accessory Liability Finding”).

40.  The notice of appeal sought the following orders:

(1)  those parts of the Judgment relating to the No Dishonesty Finding and the No Accessory Liability Finding be set aside;

(2)  the plaintiffs be permitted to amend §44 of RASOC in the manner as sought; and

(3)  in respect of the 2008 Transactions, judgment be entered (a) against DBS Trustee for dishonest breach of trust; (b) against DHJ Management for dishonest breach of fiduciary duty; (c) against DBS Bank, DBS Corporate, Peter Lee, Edwin Lim and Linda Liu for knowing assistance in the dishonest breach of trust and dishonest breach of fiduciary duty.

41.  It is Mr Barlow’s contention that apart from his challenge to the judge’s finding that the authorisation letter dated 5 January 2005 was not back‑dated in 2010 [48], all the other grounds of appeal “almost entirely concern pure questions of law”, as it is his complaint that the judge did not correctly identify the legal and equitable principles applicable to the relationships between the plaintiffs and the defendants and hence failed to apply those principles to his findings of fact.  If the judge had correctly identified and applied the relevant principles, on the facts he found as shown in Appendices A to C of the notice of appeal and the “Summary of Facts” prepared by the plaintiffs, he should have found for the plaintiffs on dishonest breach of trust, dishonest breach of fiduciary duty and knowing assistance in respect of those breaches.

42.  I do not agree with the above characterisation of this appeal.  In substance, this appeal is against findings of fact.  The case argued on appeal for the plaintiffs is the primary case advanced by them in the court below, which was rejected by the judge, who found in their favour only in respect of the 2008 Transactions and only on the basis of gross negligence of DBS Trustee and DHJ Management, and insofar as the breaches of DBS Trustee and DHJ Management were caused or partly caused by the acts and omissions of DBS Corporate, such acts and omissions amounted to either wilful misconduct or gross negligence of DBS Corporate [49]. The judge’s findings are the fall‑back positions of the plaintiffs taken below. He frowned upon the plaintiffs’ litigation as “carpet bombing”, in that they had been “raising multiple and serious allegations, some spurious, against every individual and entity involved with the Trust”, resulting in “this complex, costly and prolonged litigation” [50].

43.  What the plaintiffs sought to do in this appeal was to trawl through the findings of fact and contend once again that they support the primary case not just the fall‑back positions.  The arguments for the primary case were advanced in full before the judge.  As the Court of Appeal has emphasised in the past, in an appeal against findings of fact, it is unhelpful if the appellant just repeats submissions already advanced and considered by the primary judge at the trial.  The appellant should identify palpable errors in the judgment which warrant intervention on appeal. The assertion that the judge’s finding is against the weight of the evidence or that the judge should have reached another conclusion because of submissions advanced below are not errors within that category (China Gold Finance Ltd v CIL Holdings Ltd, CACV 11/2015, 27 November 2015, §16).

The primary case of the plaintiffs advanced below and rejected

44.  The primary case of the plaintiffs was stated in the opening submission [51] and repeated substantially in the closing submission at trial [52].  In contending in this appeal that the findings of fact “require” the conclusions advocated [53], the plaintiffs are re-asserting their primary case.

45.  To deal with this argument persistently advanced by the plaintiffs, it is convenient to first set out their primary case, and for completeness their fall‑back positions, taken from their opening submission at trial:

“10. The Plaintiffs’ Primary case

10.1 … their primary case is as follows:-

(a) In 2004, DBS [Bank] dishonestly breached its duties to P1/P2 [54] when it disingenuously advised them to have their assets managed through trust/company structures which would be set up for them by DBS [Bank], by misrepresenting to P2 (for P1/P2) that, through DBS Trustee and Wise Lords, their family’s assets would be managed by independent, reliable and experienced trust and investment management professionals with the expertise to safeguard and augment them, whereas, from the outset, DBS [Bank] knew and intended that: the DBS Trustee arrangement was a mirage; the DBS group director/management companies were an unnecessary but expensive disguise; and the asset-holding company (Wise Lords) was to be controlled by DBS:PB sales personnel capable of manipulating the investing of its assets with DBS:PB in whatever future investments would be likely best to serve the interests of DBS [Bank].

(b) In 2005-2008, DBS [Bank]’s control over the entire process led to:-

(i) throughout 2005-2008, each of the DBS Fiduciaries, with the encouragement and knowing assistance of DBS [Bank], D5, D6 and D7 [55], dishonestly misadministered the Trust/Wise Lords so as to exploit the actual conflicts of interest, which DBS [Bank] had built into the Annex A [56] structures, to prefer the interests of the DBS group at the expense of the interests of the Trust’s Beneficiaries;

(ii) that process of exploitation included: setting up the sham appointment of P2 as Wise Lords’ “Investment Adviser”; the sham Services Agreement; the sham LOR/DORA [57] – all designed to displace liability for the likely recriminations when the course of Hazardous Investments inevitably resulted in the loss of the Trust’s investments;

(iii) in 2008, DBS [Bank] allowed D7 to take the process too far, by permitting her (without authority from the DBS Fiduciaries) to ratchet up the Margin Investing to absurd levels in order to fund ludicrously hazardous, ultra high‑risk unauthorised investments, without prior reference to the DBS Fiduciaries;

(iv) once they became aware of them, the DBS Fiduciaries dishonestly purported retrospectively to ratify those investments any way;

(v) DBS [Bank], the DBS Fiduciaries, D5, D6 and D7 then all tried unlawfully to obtain retrospectively documentary “ratification” from P2 and to get the Settlors to close down the Trust – in an attempt to cover up their dishonest breaches of duty; and

(vi) from 2009-2011, the DBS Fiduciaries have committed multiple breaches of duty in attempts to cover up or otherwise protect them from the consequences of their dishonest breaches of duty and without authority removed Trust funds to which they were not entitled.

(c) Thus, in 2005-2008, DBS Trustee exercised their trustee’s powers of investment in bad faith for the benefit of the DBS group at the expense of the Trust/Beneficiaries and (to the extent that they participated) DBS Corporate Services and [DHJ] Management exercised their powers over the Account in like manner. Throughout, none of the DBS Fiduciaries ever relied upon any “investment advice” from P2 (who they knew to be incapable of providing any investment advice that an honest trustee fiduciary could conscientiously adopt in the best interests of the Trust/Beneficiaries. The entire investment process was run by DBS [Bank]’s D7 with assistance from D5 and D6 – all of whom had a personal financial interest in the process. None of the wrongdoers has taken responsibility for their misconduct or assisted the present trustees in seeking redress for the foregoing.

10.2 If the Plaintiffs are unable to sustain that primary case, then, in their case against the corporate Defendants, they shall be relying upon the clear evidence that those Defendants’ breaches of duty were intentional and consciously committed.

10.3 The Plaintiffs’ fall‑back case, against the corporate Defendants, is that, at the very least, the Defendants breaches of duty were grossly negligent and below the standards of skill and care which they owed to the Plaintiffs.”

The arguments on the No Dishonesty Finding

46.  The main arguments advanced to attack the No Dishonesty Finding in respect of the breach of trust of DBS Trustee and the breach of fiduciary duty of DHJ Management in relation to the 2008 Transactions are as follows:

(1)  The judge failed to adopt and apply the well‑established standard of dishonesty in Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378 at 398E to H and 390C to H; Barlow Clowes International Ltd (in liquidation) v Eurotrust International Ltd [2006] 1 WLR 1476 at §10; and Ivey v Genting Casinos UK Ltd (Trading as Crockfords Club) [2017] UKSC 67 at §74, namely, that although a dishonest state of mind is a subjective mental state, the standard by which the law determines whether it is dishonest is objective.  There is no requirement that the defendant must appreciate that what he has done is, by the standards of ordinary decent people, dishonest.  So where a trustee consciously participates in “known actual conflict of interest within a course of dealing beneficial to himself or to a related party, which no reasonable trustee would have considered to be in the best interests of the beneficiaries”, then the trustee is acting dishonestly (Armitage v Nurse [1998] Ch 241 at 251D to F; Walker v Stones [2001] QB 902 at 941A to G).

(2)  The judge failed to address the evidence of the experts on Jersey law (who were not cross-examined) on the prohibition of Jersey law against self-dealing by trustees in that they are prohibited directly or indirectly from causing or permitting themselves or any other person to profit directly or indirectly from the trusteeship.  The judge also failed to address the plaintiffs’ case in respect of the “systemically conflicted trust structures” constructed by DBS Bank.

(3)  The appointment of Ji as the investment advisor to Wise Lords was a sham appointment designed as an attempt by DBS Bank, Peter Lee, Edwin Lim and Linda Liu to displace potential liability for their future conduct of Wise Lords’ affairs.  Equity looks beneath the surface, so the judge should have been concerned with the substance of the trustees’ conduct rather than the mere form (Jones v Lipman [1962] 1 WLR 832 at 836; Tito v Waddell (No 2) [1977] Ch 106 at 240).  Further this appointment was unlawful under the Securities and Futures Ordinance, Cap 571 (“SFO”) or a breach by DBS Bank, Edwin Lim and Linda Liu of the Securities and Futures Commission’s Code of Conduct.

(4)  There was no meaningful assessment of the credibility of the trial witnesses.  Despite the plaintiffs’ challenge of the credibility of the defendants’ witnesses and the detailed submissions they made on this subject, the judge side‑stepped the issues concerning the witnesses’ credibility and instead “carved out” exceptions where he disbelieved or did not accept particular aspects of their evidence.

The arguments on the No Accessory Liability Finding

47.  The plaintiffs again complained that the judge had not tested dishonesty on an objective standard.  Reliance was also placed on these propositions:

(1)  Accessory liability for knowing assistance is not limited to those who assist in the original breach of trust or fiduciary duty but “extends to everyone who consciously assists in the continuing diversion of the money” (Twinsectra Ltd v Yardley [2002] 2 AC 164 at §107).

(2)  The requirement of dishonest assistance relates not to any loss or damage which may be suffered but to the breach of trust or fiduciary duty.  The relevant inquiry is what loss or damage resulted from the breach of trust or fiduciary duty which has been dishonestly assisted.  It is inappropriate to become involved in attempts to assess the precise causative significance of the dishonest assistance in respect of either the breach of trust or fiduciary duty or the resulting loss (Grupo Torras SA v Al-Sabah [2001] CLC 221 at §119).

(3)  An accessory possesses the requisite dishonest state of mind if he knows that the transaction involved an application of trust assets to the detriment of the beneficiaries.  “Nor does an honest person in such a case deliberately close his eyes and ears, or deliberately not ask questions, lest he learn something he would rather not know, and then proceed regardless” (Royal Brunei Airlines v Tan at 389F to G).  It is sufficient if the accessory knew or should have known that “the person he is assisting is not entitled to do what he is doing” (Underhill and Hayton: Law Relating to Trusts and Trustees (19^th ed), §98.67).

(4)  In determining whether an accessory was acting dishonestly, the court will look at all the circumstances known to the accessory at the time he acted.  The court will also have regard to the personal attributes of the accessory, such as his experience and intelligence, and the reason why he acted as he did (Royal Brunei Airlines v Tan at 391B to C).

48.  Further complaint was made that the judge did not directly address the subject of vicarious liability of DBS Bank for the dishonest acts of its employees within its private banking section and trust section, namely, Peter Lee, Edwin Lim and Linda Liu, and its agent DBS Corporate, despite extensive submissions made by the plaintiffs in the closing at trial.  An employer will be vicariously liable for the acts of its employees and other agents, whose knowledge will be imputed to him, applying the “close connection” test (whether the employee’s wrongdoing was so closely connected with his employment that it would be fair and just to hold his employer vicariously liable) (Lister v Hesley Hall Ltd [2002] 1 AC 215; Ming An Insurance Co (HK) Ltd v Ritz-Carlton Ltd (2002) 5 HKCFAR 569 at §§17 to 19 and 23; Dubai Aluminium Co Ltd v Salaam [2003] 2 AC 366 at §§124 and 129; Various Claimants v Catholic Child Welfare Society [2013] 2 AC 1 at §35).  Similarly, a principal who creates an agency in which there is a risk of misconduct by the agent or sub‑agent must expect to bear responsibility where that risk eventuates and loss is thereby caused by the agent to a third party (Nathan v Dollars & Sense Ltd [2008] 2 NZLR 557 at §§39 to 48).

49.  There is also a pleading point regarding the judge’s refusal to allow the amendment in §44 of RASOC.

50.  I will deal with the arguments on the No Dishonesty Finding and the No Accessory Liability Finding under the main topics as identified above.

The standard of dishonesty

51.  There is no dispute on the standard of dishonesty to be applied, as explained in the cases mentioned earlier.  The question is whether the judge has applied this standard in making the No Dishonesty Finding and in finding that DBS Bank, DBS Corporate, Peter Lee, Edwin Lim and Linda Liu did not act dishonestly in the No Accessory Liability Finding.

52.  Mr Barlow submitted that the Judgment betrays the confusion of the judge in respect of the relevant and applicable principles on the standard of what constitutes dishonest conduct.  I do not think that is the case on a proper reading of the Judgment.  I note that the opening submissions of the plaintiffs [58] set out extensively the relevant passages on the standard of dishonesty in Royal Brunei Airlines v Tan at 389E to H and 390C to H and their closing submissions [59] again dwelt on dishonest breaches of trust at some length citing additional cases including Armitage v Nurse and Walker v Stones.  The fact that the judge did not mention these cases in his lengthy judgment does not mean he was not aware of or was confused as to the standard of dishonesty.  In finding that the plaintiffs have failed to establish the element of dishonesty as against the accessory defendants [60], the judge cited Lewin on Trusts (19^th ed) §40‑35, which contained a long quotation on the test of dishonesty in Royal Brunei Airlines v Tan at 389B to F.

53.  The judge was clearly mindful of the allegations of dishonesty against various defendants made by the plaintiffs as that was their primary case.  He had reviewed the evidence and found that Peter Lee, Edwin Lim and Linda Liu did not act dishonestly.  Whilst he did not make express findings about the allegations of dishonesty concerning DBS Trustee or DHJ Management for breach of trust and breach of fiduciary duty in respect of the 2008 Transactions, it is implicit in concluding that the conduct of these defendants amounted to no more than gross negligence that he must have rejected any allegation of dishonesty against them.  There is no sufficient reason to differ from the judge’s findings.

54.  As stated by Lord Hutton in Twinsectra Ltd v Yardley at §43: “It is only in exceptional circumstances that an appellate court should reverse a finding by a trial judge on a question of fact (and particularly on the state of mind of a party) when the judge has had the advantage of seeing the party give evidence in the witness box.”  And these statements of Lord Jenkins in Akerhielm v De Mare [1959] AC 789 at 806 are of the same effect:

“Their Lordships can hardly imagine a case in which the credibility of a witness could be more vital than a case like the present where the claim is based on deceit, and the witness in question is one of the defendants charged with deceit. Their Lordships would add that they accept, and would apply in the present case, the principle that where a defendant has been acquitted of fraud in a court of first instance the decision in his favour should not be displaced on appeal except on the clearest grounds.”

The prohibition against self-dealing

55.  The contention here is that DBS Trustee’s breaches of trust were dishonest as it had consciously and deliberately breached the prohibition against self‑dealing and/or had otherwise undertaken duties as trustee for the benefit of its owners/controllers without any genuine belief that this was in the best interests of the beneficiaries. This is premised on the contention in the plaintiffs’ primary case advanced below that the “systemically-conflicted trust structures” that DBS Bank and Peter Lee constructed for the beneficiaries was a mirage and an unnecessary but expensive disguise, for DBS Bank personnel to manipulate the investing of trust assets in a manner that would best serve the interests of DBS Bank and its employees.

56.  This appeal seeks to set aside those parts of the judgment relating to the No Dishonesty Finding and the No Accessory Liability Finding and both findings were in respect of the 2008 Transactions. The alleged contravention of the prohibition against self‑dealing owing to the “systemically-conflicted trust structures” has no direct or apparent relevance to the 2008 Transactions.

57.  Besides, this allegation was thoroughly canvassed in the court below.  The judge dismissed the claim against DBS Bank, DBS:PB, Peter Lee and/or Linda Liu for alleged breach of duty in respect of the structure adopted for the Trust [61].  He has made a number of findings concerning the setting up of the Trust.

58.  At the first meeting between Ji and DBS Bank on 22 March 2004, after receiving a general explanation of the different types of trust available, Ji quickly made the decision to use “their most common trust structure” and to become the investment advisor of the trust to be set up [62].  The judge noted the “common arrangement” for family trusts that settlors act as investment advisors [63].  Ji was made the sole shareholder and director of Wise Lords, which was to be used as the private investment company of the Trust.  She signed the Investment Advisor Agreement on 4 January 2005, by which she was appointed the investment advisor of Wise Lords [64]. The judge rejected the allegation that the appointment of Ji was a sham or disingenuous [65].

59.  As found by the judge [66], the relationship between DBS Trustee, DBS Corporate and Wise Lords was the subject of a Services Agreement dated 13 September 2005, by which DBS Corporate was to perform or appoint one or more persons/companies as nominees (which include DBS Corporate) to perform the services specified in Schedule II of the agreement in relation to Wise Lords.  The services specified were the provision of nominee director, provision of registered office and onward transmission of correspondence, record keeping by company secretary and provision of bank signatories.  After Ji transferred the one share in Wise Lords to DBS Trustee for the setting up of the Trust, DBS Trustee nominated DHJ Management to act as director of Wise Lords.  The judge rejected “outright” the contention that the Services Agreement made between DBS Corporate, Wise Lords and DBS Trustee was “a sham purported contract” [67].  The allegation of false and/or forged and/or disingenuous documents was also dismissed [68].

60.  Of the many allegations made by the plaintiffs, they succeeded only in respect of the 2008 Transactions and only on their fall‑back position.  The judge rejected the claims concerning the churning of investments, the “No Call Representation”, the Margin Investing, the redemption restrictions misrepresentation, the DEVA Note, the foreign exchange transactions including the YED products [69].

61.  The allegation of DBS Trustee having consciously and deliberately breached the prohibition against self‑dealing and/or having otherwise undertaken duties as trustee for the benefit of its owners/controllers without any genuine belief this was in the best interests of the beneficiaries is just not borne out by the facts found and the holdings made in the Judgment.  The alleged dishonest breach of trust premised on the aforesaid allegation does not get off ground.

62.  In light of the factual findings, it is understandable that the judge did not find it necessary to address the elaborate submissions of Mr Barlow in closing [70] regarding the prohibition against self‑dealing based on the statutory provisions in Jersey and the provisions in the Trust Deed.  He repeated those submissions on appeal.  For the same reason, I find it unnecessary to address those submissions.  I will nevertheless deal with the submissions on both sides for completeness.

63.  Mr Burns referred this court to clauses 11 to 13 of the 1^st Schedule to the Trust Deed [71], Article 21(4) of the Trusts (Jersey) Law 1984 (“the 1984 Law”) [72], which prohibits profit from trusteeship, and §84.2 of the Mathews Report [73].  The defendants’ Jersey law expert Professor Matthews mentioned in §84.2 of his report (which was unchallenged) that Article 21(4) of the 1984 Law “is derogated from by clauses 11 to 13 of [the 1^st Schedule to the Trust Deed], permitting a trustee to exercise a power whilst having a personal interest in its exercise, permitting a trustee to transact with the trustees of other trusts even though the trustee is one of those trustees, and permitting the trustee in some circumstances to contract with itself in a matter in which it is personally interested”.  In §85, Professor Matthews opined that the articles of the 1984 Law referred to in §84 are provisions which by their express terms may be modified or negatived by the terms of the Trust Deed, and the terms identified in the Trust Deed were “effective to modify or derogate from those statutory duties accordingly” [74].  In light of the legal position, Mr Burns submitted that the complaint of self‑dealing is wholly misconceived in any event.

64.  Mr Barlow relied on clause 7(b) of the Trust Deed [75] which provides as follows:

“7. Overriding Exceptions

Notwithstanding anything herein contained in this Settlement:-

…

(b) no part of the capital or income of the Trust Fund shall be paid or lent to or settled on or applied for the benefit either directly or indirectly of any Excluded Person in any circumstances whatsoever.”

65.  “Excluded Persons” is defined in clause 1 to mean, inter alia, “all and any persons specified in the fourth schedule [76]”.  “Trust Fund” is defined to mean “(1) the property specified in the second schedule [77]; (2) all property hereafter paid or transferred by any person to or so as to be under the control of and (in either case) accepted by the Trustees as additions to the Trust Fund; (3) the property from time to time representing the said property and additions including any income received therefrom and any income accumulated pursuant to the provisions hereof”.

66.  Mr Barlow argued that clause 7(b) overrides “anything herein contained in [the Trust Deed]”, including the 1^st Schedule to the Trust Deed, so clause 11 of the 1^st Schedule should be read subject to clause 7(b) and the contents of clause 11 are therefore irrelevant.

67.  I am more inclined to agree with Mr Burns’ submissions.  I do not think clause 7(b) would assist the plaintiffs.  There is no question of the “capital or income of the Trust Fund” having been applied for the benefit of anyone.  Wise Lords was the underlying private investment company of the Trust.  For the setting up of the Trust, the one share in Wise Lords was transferred by Ji to DBS Trustee.  The trust asset which DBS Trustee owned was the shareholding of Wise Lords [78]. The “Trust Fund” in clause 7(b) was the shareholding of Wise Lords, not the assets which were held by Wise Lords.  This is borne out by the accounts of Wise Lords and the Trust.  The accounts of Wise Lords for the period to 31 March 2006 showed total assets of US$21,697,772.26, financed by paid up capital of US$1, shareholder’s loan of US$16,346,871.62 and retained earnings of US$5,350,899.64.  The accounts of the Trust for the same period showed total assets of US$16,346,881.62, made up of inter alia accounts receivable from Wise Lords of US$16,346,871.62.

The appointment of Ji as investment advisor

68.  The contention here is that the judge failed to conclude, to the knowledge of all the defendants, that Ji was unqualified and incapable of undertaking the role of investment advisor to Wise Lords and as the appointment was self‑evidently not in the interests of the beneficiaries, it was undertaken in bad faith and constituted a dishonest breach of trust by DBS Trustee and dishonest breach of fiduciary duty by DHJ Management, in which each of DBS Bank, Peter Lee and Linda Liu was complicit.

69.  As with the complaint relating to self‑dealing, the allegation concerning Ji’s appointment as investment advisor has no relevance to this appeal which seeks to set aside two findings in respect of the 2008 Transactions.

70.  Ji’s appointment as the investment advisor of Wise Lords was thoroughly canvassed at the trial and the judge devoted Section E of the Judgment to consider the topic.  As mentioned earlier, the judge rejected the allegation that the appointment of Ji was a sham or disingenuous.  It was Ji who decided to become the investment advisor, long before the Trust was set up [79].  Although approval was given for her to act as Wise Lords’ investment advisor without any real scrutiny of her qualifications [80], DBS Trustee was aware of her experience in operating Wise Lords’ account from 22 April 2004 to 5 January 2005 and she quickly became an “astute and experienced investor” [81].  Throughout the relationship between Wise Lords and DBS:PB, Ji was the decision maker and was in the driving seat as regards investment strategy and selection [82].  There is no factual basis to support the contention that her appointment was evidently not in the interests of the beneficiaries or was in bad faith, and constituted a dishonest breach of trust and dishonest breach of fiduciary duty.

71.  As for the contention that her appointment was unlawful as being contrary to the provisions of the SFO and the Code of Conduct of the SFC, this is not raised in the notice of appeal.  In any event, there is no substance in the plaintiffs’ submission that the judge’s analysis was “woefully inadequate”.  The judge has set out the relevant provisions in the SFO and given cogent reasons why there was no contravention of the statute [83].

The breaches of fiduciary duty

72.  The plaintiffs contended that the breaches of fiduciaries duty of DHJ Management were dishonest in that these breaches were consciously and deliberately undertaken, with knowledge that they were contrary to the best interests of Wise Lords, within a scheme involving DHJ Management in stark conflicts of interest.

73.  For the reasons I have given earlier, there is no justification to overturn the No Dishonesty Finding of the breaches of fiduciary duty in relation to the 2008 Transactions.  I have dealt with the arguments on the allegation of conflicted structures set up by DBS Bank.

The assessment of witnesses’ credibility

74.  Mr Barlow referred this court to his closing submissions at trial in which he sought to demonstrate how Linda Liu’s evidence was untruthful, inconsistent and inherently unreliable, how Edwin Lim was complicit in Linda Liu’s generation of false and/or misleading loan and other documentation and how he conceded his assistance provided the “platform” with which to increase Wise Lords’ credit facility to US$100 million [84], and how Peter Lee’s evidence could not be relied upon and was materially different from Frank Mayes of the Jersey personnel who had assisted DBS Trustee.  He contended that the Judgment had “carved out” exceptions where the judge did not accept particular aspects of the evidence of these witnesses and had fallen into the kind of error mentioned in Tradepower (Holdings) Ltd v Tradepower (Hong Kong) Ltd (2009) 12 HKCFAR 417 at §24, in which the trial judge was criticised for stating that he should accept the evidence of the witnesses concerned “unless any particular aspect of their evidence is shown to be wrong by undisputed contemporaneous documents or other incontrovertible evidence”.  In regarding this approach as unsatisfactory, Ribeiro PJ had this to say:

“Inconsistencies between the testimony of a witness and other items of evidence have to be evaluated as part of the overall process of assessing credibility. It is not satisfactory first to form the view that the witness is generally credible and then to carve out exceptions in areas where inconsistencies with other evidence are found. Such an approach casts doubt on the initial assessment of credibility.”

75.  On a fair reading of the Judgment, the judge had not committed the error described above in his evaluation of the credibility of the witnesses.  He had approached the evidence with an open mind and evaluated carefully the witnesses’ evidence at each stage of the events as narrated in the Judgment.  The fact that he did not deal with all the plaintiffs’ submissions does not mean he has side-stepped material issues. There is no substance in the criticism that he did not make a meaningful assessment of witnesses’ credibility.

Accessory liability

76.  Mr Barlow contended that although the Judgment mostly identified the core elements for accessory liability, the judge was confused as to the principles governing the accessory’s knowledge of the breach and the accessory’s complicity in the dishonest breach of trust or fiduciary duty and had misapplied the relevant principles.  The judge was wrong in holding that the accessory defendants did not provide assistance in the primary breaches of trust or fiduciary duty and that dishonesty had not been established against them.  The assistance was said to consist of the following acts:

(1)  throughout 2005 to 2008, the accessory defendants exploited the “conflicted trust structures” to prefer the interests of DBS Bank and its employees at the expense of the interests of the beneficiaries;

(2)  in 2008, DBS Bank allowed Linda Liu, without authority from the DBS Fiduciaries and without prior reference to the DBS Fiduciaries, “to ratchet up the Margin Investing to absurd levels in order to fund ludicrously hazardous, ultra high‑risk unauthorised investments”; and

(3)  once the DBS Fiduciaries became aware of the investments, they dishonestly purported to ratify them.  DBS Bank and the DBS Fiduciaries, acting through Peter Lee, Edwin Lim and Linda Liu, all tried unlawfully to obtain retrospective documentary ratification from Ji and to get the Settlors, Zhang and Ji, to close down the Trust, in an attempt to cover up their breaches of duty.

77.  This argument was advanced before the judge in the opening and closing submissions of the plaintiffs.  They asserted that the findings in the Judgment require the conclusion that the case of accessory liability was established, invoking the legal principles as they had done in the court below.

78.  The judge noted that Linda Liu did not occupy any positions within DBS Trustee, DBS Corporate or DHJ Management and held that she did not have any substantive involvement in the matters of the Trust.  And although the judge faulted her conduct as relationship manager of DBS:PB, he found she did not act dishonestly [85].

79.  The plaintiffs argued all these holdings are erroneous.  The judge had elevated “form over substance” in concluding that Linda Liu did not occupy any positions within the entities mentioned.  The finding that she did not have any substantive involvement in the matters of the Trust was contradicted by the findings in Appendices A, B and C of the notice of appeal.  The judge had understated the gravity of his findings concerning her misconduct.  And his finding that she did not act dishonestly is “devoid of reasoning” or factual basis. It is unclear if he had adopted an objective or subjective test.

80.  As for Edwin Lim, the judge noted he only became a director of DHJ Management on 1 October 2010 and a director of DBS Trustee on 8 December 2010 and no evidence had been adduced to show that he had any participation in matters concerning the Trust [86].

81.  The plaintiffs challenged the holdings repeating their submission that the judge had elevated “form over substance” regarding Edwin Lim’s role and activities, that Edwin Lim was Linda Liu’s supervisor, and the finding that he did not have any substantive involvement in the matters of the Trust was contradicted by the findings in Appendix A of the notice of appeal.

82.  In respect of Peter Lee, the judge noted that he was appointed a director of DBS Corporate on 25 September 2007 and a director of DBS Trustee on 21 January 2008, that he was one of the authorised signatories of DHJ Management to sign certain documents to facilitate daily operations.  The judge found that Peter Lee did not possess any decision making or management power over DHJ Management and at all material times, he was concerned solely with the provision of corporate services as an intermediary between DBS Trustee and DBS Bank and DBS:PB.  The judge further found he did not engage in any dishonest assistance to any breach of trust and the allegations of forgery made against him in respect of the authorisation letter dated 5 January 2005 have not been established [87].

83.  The plaintiffs argued that the above findings are wrong.  They repeated the contention that the judge had elevated “form over substance” regarding Peter Lee’s involvement and had failed to take into account the facts shown in Appendix B to the notice of appeal, and the control of Peter Lee over DHJ Management, DBS Corporate and Wise Lords.  The judge had overlooked that DBS Bank, DBS:PB and DBS Bank’s Trust Section are the same entity.  His conclusion that Peter Lee did not engage in any dishonest assistance to any breach of trust contradicted his findings on the primary liability of DBS Trustee and DHJ Management in that having excused the Jersey personnel of DBS Trustee of wrongdoing, the judge effectively characterised each of DBS Trustee and DHJ Management as “riderless horses”, who committed breaches of duty without any human actors being involved.  Further, this conclusion contradicted the findings in Appendices A, B and C of the notice of appeal.  As for the holding that the allegations of forgery against Peter Lee in respect of the authorisation letter dated 5 January 2005 have not been established, this was said to be contrary to the “overwhelming weight” of the trial evidence and common sense, and wholly inconsistent with the findings in the Appendices to the notice of appeal.

84.  I have dealt with the arguments on the standard of dishonesty.  There is no basis to suggest that the judge had failed to adopt and apply the established standard and the principles relating to the requisite dishonest state of mind for an accessory.  There is nothing to fault the judge’s finding that none of the individual defendants had acted dishonestly [88] and that is fatal to the challenge mounted against the No Accessory Liability Finding.

85.  Further, the relevant question here concerns the personal involvement (if any) of Linda Liu, Edwin Lim and Peter Lee in matters concerning the Trust in relation to the 2008 Transactions. Matters that happened prior to 2008 mentioned in Appendices A, B and C of the notice of appeal cannot be of a nature sufficient to amount to any act of assistance of the breach of trust or fiduciary duty in respect of the 2008 Transactions.  Even if it is inappropriate to assess the “precise causative significance” of the dishonest assistance in respect of the breach of trust or fiduciary duty or the resulting loss (Grupo Torras SA v Al-Sabah at §119), it is still necessary to establish a sufficiently close link between the alleged assistance and loss for there to be a finding of accessory liability (Brinks Ltd v Abu-Saleh [1996] CLC 133).

86.  There is no evidence and no factual basis for asserting that Peter Lee had any personal involvement in matters concerning the Trust in relation to the 2008 Transactions.  The fact that he had no personal involvement in matters concerning the Trust in relation to the 2008 Transactions does not mean DBS Trustee and DHJ Management had committed breaches of duty without any human actors.

87.  Edwin Lim endorsed Wise Lords’ application for the increase in its credit facility from US$58 million to US$100 million and co‑signed a letter of recommendation with Linda Liu in relation to that increase [89].  He did so in his capacity as managing director of DBS:PB and the supervisor of Linda Liu who was a relationship manager in DBS:PB.  There is no evidence Edwin Lim had any material involvement in the purchase of AUD or the decumulators.

88.  Although the judge has faulted the conduct of Linda Liu, that was in relation to her conduct as a relationship manager of DBS:PB [90].  There is no contradiction between that finding and the finding that Linda Liu did not have any substantive involvement in the matters of the Trust [91].

89.  All acts of Edwin Lim and Linda Liu were done pursuant to the banking relationship between DBS Bank and DBS:PB with Wise Lords, which was the customer of DBS Bank.  Wise Lords’ relationship with DBS Bank and DBS:PB (and individual bank officers) was one defined and governed by contract [92] and a fiduciary relationship did not exist between DBS Bank, DBS:PB and Wise Lords [93]. The judge found that DBS Bank, DBS:PB, Linda Liu, Peter Lee and Edwin Lim did not owe any statutory or common law duties of care to Zhang and Ji, nor did DBS Bank and DBS:PB owe any contractual or statutory duties to the Trust [94].  All claims relating to acts done pursuant to the banking contract were dismissed and there is no appeal from the dismissal.

90.  As Mason J has stated in Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 97:

“That contractual and fiduciary relationships may co-exist between the same parties has never been doubted. Indeed, the existence of a basic contractual relationship has in many situations provided a foundation for the erection of a fiduciary relationship. In these situations it is the contractual foundation which is all important because it is the contract that regulates the basic rights and liabilities of the parties. The fiduciary relationship, if it is to exist at all, must accommodate itself to the terms of the contract so that it is consistent with, and conforms to, them. The fiduciary relationship cannot be superimposed upon the contract in such a way as to alter the operation which the contract was intended to have according to its true construction.”

91.  The acts of Edwin Lim and Linda Liu done pursuant to the banking relationship and governed exclusively by contract between Wise Lords and DBS Bank are not capable of amounting to dishonest assistance in any breach of trust or fiduciary duty.

92.  There is no basis to interfere with the No Accessory Liability Finding.

Liability of DBS Bank

93.  The plaintiffs submitted that on the basis of the findings in Appendices A, B and C of the notice of appeal, and applying the legal principles they relied on as mentioned earlier, this would require findings they have established (1) DBS Bank’s liability for its own participation (through DBS Corporate, Peter Lee, Edwin Lim and Linda Liu) in the accessory defendants’ dishonest knowing assistance in the primary breaches of duty; and (2) DBS Bank’s vicarious liability for the misconduct of its employees (Peter Lee, Edwin Lim and Linda Liu) and agent (DBS Corporate). Further, the judge has found DBS Trustee liable in failing to discharge its high level supervisory role in approving the increased credit facilities up to the end of August 2008 and then inconsistently found that Wise Lords did not suffer loss as a result of the increased credit facilities but as a result of the substantial purchase of AUD from 24 July to 5 August 2008 and the purchase of the 3 decumulators [95].  It was argued that the judge should have found that those losses would not have been possible and would not have been suffered without the increased credit facilities wrongfully allowed by DBS Bank on the basis of Linda Liu’s gross exaggerations of Ji’s and Zhang’s assets in support of the increased credit applications.

94.  Having rejected the plaintiffs’ arguments to challenge the No Accessory Liability Finding, it is not necessary to deal with their argument that DBS Bank is liable for its own participation (through DBS Corporate, Peter Lee, Edwin Lim and Linda Liu) in the accessory defendants’ dishonest knowing assistance in the primary breaches of duty.

95.  As for vicarious liability, this likewise cannot get off ground.  Insofar as this is founded on the accessory liability of the employees or agents, there is no basis to interfere with the finding that the claims of knowing assistance have not been established.

96.  I see nothing to fault the judge’s reasoning that Wise Lords did not suffer any loss or damage from the grant of increased credit facilities by DBS Bank.

The pleading point

97.  It is not strictly necessary to deal with the pleading point regarding the judge’s refusal to allow an amendment in §44 of RASOC, as there is no basis to overturn the No Accessory Liability Finding.  I will deal with this nevertheless as this was extensively argued.

98.  On Day 12 of the trial, after the plaintiffs had closed their case on Day 8, the defendants disclosed 11 lever arch files of DBS Trustee’s books and records for the Trust.  This prompted an application by the plaintiffs to re‑amend their pleading.  The judge allowed most of the proposed amendments save for adding the word “knowing” to line 3 of §44 of the draft RASOC so the relevant part would read: “… either the DBS Fiduciaries, with the knowing assistance of DBS Bank, acting through Peter Lee, and/or Edwin Lim and/or Linda Liu, caused [Wise Lords] recklessly to enter into the below-described transactions …”.  He stood over the application to amend that part of the pleading until after the delivery of the closing submissions and the delivery of the Judgment.  He eventually disallowed the amendment on the basis that the claim for knowing assistance (even if it had originally been made) has not been established to his satisfaction [96].

99.  It is unnecessary to go into the rival contentions whether the proposed amendment to §44 of the draft RASOC arose from any improper withholding from discovery of any key documents by the defendants.

100.  Mr Barlow submitted that the claim of dishonest knowing assistance had been made out and that the amendment should have been permitted to enable the court to adjudicate on the true issues.

101.  Mr Burns submitted there is no properly pleaded case in dishonest assistance, and counsel’s opening submission at trial cannot take the place of pleadings.  No facts are pleaded as to any relevant acts of assistance and no or no clear or sufficient particulars of alleged dishonesty are given (Bullen & Leake & Jacob’s Precedents of Pleadings (17^th ed), vol 2, §§62‑12 and 62-14; Ultraframe (UK) Ltd v Fielding & Ors [2005] EWHC 1638 (Ch) at §1761; Haifa International Finance Co Ltd v Concord Strategic Investments Ltd [2009] 4 HKLRD 29 at §16).  Those defects in the plaintiffs’ pleading would not have been cured by the proposed insertion of the word “knowing” in §44 of the draft RASOC.

102.  I am inclined to agree with Mr Burns that the pleading of dishonest assistance left much to be desired.

103.  Mr Burns further submitted that the Court of Appeal has no jurisdiction to entertain any appeal from the refusal of the judge to allow the proposed amendment as this is an interlocutory order and no leave to appeal from that decision has been applied for or granted, citing section 14AA(1) of the High Court Ordinance, Cap 4.  Mr Barlow submitted no leave to appeal is required as the judge’s ruling on the pleading point was made in the Judgment in respect of which the plaintiffs have a right of appeal and they have exercised that right by lodging this appeal.

104.  I think Mr Barlow is correct. The relevant passage in §20/8/15 of Hong Kong Civil Procedure 2018, vol 1, reads as follows:

“If leave [to amend pleading] is refused at the trial, it is a final order, and the judgment should not mention the refusal. If judgment is given against any party asking for leave to amend, an appeal against the judgment includes an appeal against the order refusing leave to amend, and no separate appeal from such order is necessary (Laird v Briggs (1881) 16 Ch D 663).”

105.  This is because the refusal of leave to amend in that situation is “simply part of the trial” (Laird v Briggs at 664, per Jessel MR).

106.  There is jurisdiction to entertain the appeal from the judge’s refusal to allow the proposed amendment but I find no basis to interfere with his exercise of discretion to refuse the amendment which is useless in the circumstances.

The authorisation letter dated 5 January 2005

107.  Mr Barlow repeated his submissions at trial in support of the allegation that the authorisation letter dated 5 January 2005 was a forgery in that it was back‑dated and signed by Peter Lee only after this action had been commenced.  He contended the judge’s rejection of forgery was contrary to the “overwhelming weight” of the trial evidence and common sense and wholly inconsistent with the judge’s findings concerning Peter Lee.

108.  This is admittedly an appeal against a finding of fact and may be dealt with shortly.

109.  Quite apart from the consideration this challenge has little relevance to the 2008 Transactions, the judge had analysed the evidence thoroughly and considered all the plaintiffs’ arguments [97].  He decided to accept the evidence of Frank Mayes and much of the evidence of Peter Lee and considered it “fanciful” that Peter Lee or his staff would have created and backdated the cover letter dated 6 January 2005 in 2010 by using old letterhead.  There is no basis at all to overturn his finding.

Conclusion and costs

110.  There is no merit in any of the contentions to challenge the No Dishonesty Finding and the No Accessory Liability Finding.  The appeal in CACV 139/2017 must be dismissed.

111.  There being no reason to depart from the rule that costs should follow the event, I would make an order nisi that the 3^rd and 4^th plaintiffs are to pay the costs of the 1^st to 7^th defendants in CACV 139/2017, with a certificate for three counsel.