HSBC TRUSTEE (HONG KONG) LTD. v. THE SECRETARY FOR JUSTICE AND OTHERS

HCMP 1975/1997

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1975 OF 1997

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J U D G M E N T

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Introduction

1. In 1956, Sir Robert Ho Tung died. He left a will and in terms of that will a trust was created called 'The Sir Robert Ho Tung Charitable Fund'. A capital sum of HK$500,000 was bequeathed to the Fund. That sum was placed into the care of the Applicant, the appointed trustees, and since that time the income from the Fund has been used to support various charitable projects in Hong Kong.

2. The Fund has prospered. Today it has capital assets of something like HK$450 million. The Trustees, however, have found it increasingly difficult to make prudent investment decisions without the active assistance of market specialists. Investment opportunities may have grown dramatically over the past 20 years but they have been accompanied by an increasing complexity and volatility in global markets. In the view of the Trustees, if the assets of the Fund are to be best preserved and enhanced, it is now essential that they be given the discretion not simply to seek the advice of financial and market specialists but to be able to entrust the Fund's assets with those specialists so that they may be actively managed by them.

3. It is for this reason that the Trustees have, by way of an originating summons, sought the sanction of a scheme which will give to them powers to delegate investment functions.

4. As the name clearly states, the Trustees are a corporate constituent of the HSBC Group which today has global interests in banking and allied financial services. Other corporate constituents of the HSBC Group include financial and market specialists; more specifically, HSBC Asset Management Bahamas, Ltd ('Asset Management'). In the past, the Trustees have employed Asset Management to assist the Fund.

5. The First Respondent, the Secretary For Justice, while she does not take issue with any past connection between the Trustees and Asset Management, is concerned that any future link will breach a fundamental rule of equity; namely, that a trustee shall not, either directly or indirectly, make a profit from his trust.

6. Mr Mui, who appeared for the First Respondent, founded his submission on the basis that, as both the Trustees and Asset Management are wholly owned subsidiaries of the HSBC Group, fees earned by Asset Management from services entrusted to it by the Trustees on behalf of the Fund, will go to boost the revenues of the entire Group. That, said Mr Mui, will place the Trustees in the position where, if they are able to employ Asset Management, their duty as trustees to act as guardians of the Fund will run a real risk of being compromised by their commercial interests in securing revenue for the Group. As a matter of prudence, the court should not allow the Trustees to place themselves in a position of such risk.

7. Accordingly, while the First Respondent takes no objection to the terms of the scheme which will give the Trustees additional powers of delegation in investment matters as well as the means for being remunerated for the exercise of those delegatory powers, she is of the view that it would be appropriate for the Court to add a condition to the scheme to the effect that the Trustees may not employ the services of any wholly owned subsidiary of the HSBC Group to manage or advise on the Fund's investments.

8. The Trustees, however, have not conceded that any such restriction should be imposed. They see their primary obligation as being the best possible management of the Fund's assets and have asserted that, whatever their relationship with third parties, they have always dealt at arm's length with those third parties to advance the best interests of the Fund. If at any time in the future they form the view that certain of the Fund's assets should, for the advancement of the Fund, be entrusted to Asset Management (or any other wholly owned subsidiary of the HSBC Group) they do not wish to be prevented from exercising their best judgment in that regard. The Fund is large and the Trustees remain of the view that wide and flexible powers of investment are plainly desirable, if not essential, for its best management.

9. Mr Ma, who appeared for the Trustees, submitted that the relevant test in a matter of this kind was not founded on the theoretical possibility that there was a risk of duty conflicting with interest. The true test had to be related to the facts and circumstances of each individual case. The question to be asked, suggested Mr Ma, was whether a reasonable man, taking all the circumstances into consideration, would foresee a real and sensible possibility of such conflict.

10. Mr Ma went on to submit that, having regard to all the circumstances of this matter, no reasonable man would be able to foresee a real and sensible possibility of conflict arising of the kind that troubled the First Respondent. Mr Ma contended that there were already adequate safeguards built into the scheme which the Court was asked to sanction and that accordingly the restriction sought by the First Respondent should not be imposed.

The terms of the proposed scheme

11. It has for some time been recognised by the courts that significant changes in investment practice over the past 20 years may demand an extension of the investment powers of trustees. These extended powers may include, when suitable, the power of delegation; that is, the power to employ professional investment managers and to entrust funds to them. A clear example of this is to be found in Trustees of the British Museum v. Attorney General [1984] 1 WLR 418 in which Sir Robert Megarry V-C having reviewed the various manners in which the global investment environment had so substantially changed, sanctioned a scheme granting very wide powers of investment to the trustees of the British Museum including the power to delegate their responsibilities to professional investment managers. In so doing, inter alia, he said:

"I am conscious that such a scheme gives extremely wide powers of investment to the trustees. At the same time I consider that it is proper and desirable that such powers should be given, and I have made an order accordingly. There are four factors that I should mention in particular. First, there is the eminence and responsibility of the trustees, the machinery for obtaining highly skilled advice, and the success that this machinery has achieved over the past 20 years. Second, there are the changed conditions of investment, conditions which require great liberty of choice if, upon skilled advice, advantage is to be taken of opportunities which often present themselves upon short notice and for short periods; and for this, the provision for delegation is plainly advantageous. Third, there is obvious advantage in there being freedom to invest in any part of the world ... Fourth, I bear in mind the large size of the trust fund. From the point of view of powers of investment, this carries the matter out of the realm of the ordinary private trust into the field of pension funds and large institutional investors; and for success in this field a wide flexibility of the powers of investment is plainly desirable, if not essential." [my emphasis]

12. In the matter now before me, the powers sought by the Trustees to delegate investment matters are extensive. Clause 3(a) gives to the Trustees the power to delegate all of their investment functions to any person or corporation subject only to the condition that such delegation shall be in writing and that all delegated transactions shall be carried out in the name of the Trustees. Clause 3(b) expands upon these powers of delegation and reads:

"The Trustees shall not be bound in any case to act personally but at full liberty to act through any other managers or to employ any contractor manager solicitor accountant banker broker fund manager clerk workman employee or servant or any agent to transact all or any business of whatever nature which it is required or permitted to do including the receipt and payment of money and the Trustees shall decide the remuneration to be allowed and paid and may pay the same and all charges and expenses so incurred out of the Trust Fund or the income thereof." [my emphasis]

13. The Trustees do not, therefore, seek to delegate their investment powers to any specific investment manager. They seek the broadest discretion to employ whoever, in their opinion, is from time to time best able to protect and enhance the assets of the Fund.

14. When the courts sanction wide powers of investment, they must, of course, be satisfied that there also exist suitably wide powers vested in the trustees to advise, monitor and control the actions of the professional managers to whom investment discretion is delegated.

15. In the present case, I am satisfied that the Trustees have written into the scheme sufficient restrictions to ensure that the investment business of the Fund will continue to be managed with the same care and prudence that has stood the Fund in good stead in the past. It appears, in fact, that the safeguards incorporated into this scheme are modelled to a material degree upon those which received the approval of Hoffmann J (as he then was) in Steel v Wellcome Trustees Limited [1988] 1 WLR 167.

16. First, the Trustees accept that they must exercise reasonable care in exercising their powers of delegation and will be liable if they do not. In this regard, Clause 4(d) reads:

"If the Trustees fail to take reasonable care in choosing the Agents [their investment managers] or in fixing or enforcing the terms of their engagement, the Trustees shall be liable for any loss occasioned by the Agents."

17. Second, the Trustees are obliged to prepare comprehensive guidelines for their managers so that guidance is given 'as to how the asset management functions should be exercised' so that they are always exercised in the best interests of the Fund. In particular, the guidelines state that the Trustees and their managers must -

"(i) have regard to the charitable status of the trust, and make reasonable efforts to ensure that it cannot be said to be engaging in trade and to avoid jeopardising the continuity of the charitable work to which it is committed;

(ii) try to diminish the risk of losses in the market even if this means giving up a chance of speculative gain, and to strike a reasonable balance between obtaining income and growth on their investments."

18. Third, the Trustees are obliged to include in all terms of engagement provisions allowing them to revoke their powers of delegation at any time with prior notice; to insist upon regular reporting from their managers on the performance of investments placed under their control, and a term to the effect that their managers will at all times comply with the guidelines.

19. Fourth, the Trustees are obliged to constantly keep their delegation arrangements under review and, with specific reference to the guidelines, remain under a duty to assess whether they are being complied with and/or whether there is a need to revise or replace them.

20. Fifth, if the Trustees have actual or constructive notice of breaches of their terms of engagement with their managers, they are obliged immediately to demand that remedial action be taken failing which the Trustees shall be liable for any loss occasioned.

The core issue: the risk of duty conflicting with interest

21. Mr Ma, on behalf of the Trustees, spoke of the pre-eminence of Asset Management as a financial adviser and emphasised that no issue could be taken with the high professionalism of its past services to the Trustees. Mr Mui took no issue with that. He did not seek to level any form of criticism against the Trustees or any of the other constituent members of the HSBC Group with whom the Trustees may wish to deal. Mr Mui's concern, as I understood it, was one of risk or, at the very least, the perception of such risk. In this regard, Mr Mui referred to the dicta of Lord Herschell in the Privy Council case of Bray v. Ford [1896] AC 44 (at page 51):

"It is an inflexible rule of a Court of Equity that a person in a fiduciary position, such as the respondent's, is not, unless otherwise expressly provided, entitled to make a profit; he is not allowed to put himself in a position where his interest and duty conflict. It does not appear to me that this rule is, as has been said, founded upon principles of morality. I regard it rather as based on the consideration that, human nature being what it is, there is danger, in such circumstances, of the person holding a fiduciary position being swayed by interest rather than by duty, and thus prejudicing those whom he was bound to protect. It has, therefore, been deemed expedient to lay down this positive rule."

22. But, of course, Lord Herschell accepted that, while the rule was an inflexible rule of equity, equity itself was not inflexible and there may be occasions when it would be to the advantage of the beneficiaries of a trust for the rule not to apply:

"But I am satisfied that it might be departed from in many cases, without any breach of morality, without any wrong being inflicted, and without any consciousness of wrong-doing. Indeed, it is obvious that it might sometimes be to the advantage of the beneficiaries that their trustee should act for them professionally rather than a stranger, even though the trustee were paid for his services."

23. In respect of the matter of risk (or the perception of risk) absent any moral culpability, Mr Mui referred to Regal (Hastings) Ltd v. Gulliver [1942] 1 All ER 378, a decision of the House of Lords in which Lord Russell of Killowen said (at page 386):

"The rule of equity which insists on those, who by use of a fiduciary position make a profit, being liable to account for that profit, in no way depends on fraud, or absence of bona fides; or upon such questions or considerations as whether the profit would or should otherwise have gone to the plaintiff, or whether the profiteer was under a duty to obtain the source of the profit for the plaintiff, or whether he took a risk or acted as he did for the benefit of the plaintiff, or whether the plaintiff has in fact been damaged or benefited by his action. The liability arises from the mere fact of a profit having, in the stated circumstances, been made. The profiteer, however honest and well-intentioned, cannot escape the risk of being called upon to account."

24. Mr Mui accepted that there may well be different degrees of association between the Trustees and third parties. The HSBC Group may, for example, have a minority interest in a third party. Not all degrees of association should therefore be prohibited. But the prohibition should certainly apply, he said, in respect of two wholly owned subsidiaries of the Group. For in equity they must be deemed to be the same person even though they constitute separate legal entities.

25. Mr Mui contended that, human nature being what it is, if the Trustees were permitted to deal with Asset Management (or any other wholly owned subsidiary in the HSBC Group), internal pressures may well be applied to ensure that the Trustees did, in fact, direct their requirements in that direction in order to boost the Group's revenues. In short, even if there is no actual evidence of risk, commercial reality dictates that there must, within a commercial group, be such a risk. Similarly, he argued, if a contractual relationship was secured, a degree of laxity may be exhibited in overseeing that relationship. The reason for that is self-evident; namely, a desire not to be forced to terminate a relationship which is of benefit to the Group. Again, he said, no actual evidence was required. Commercial reality dictated the existence of such a risk.

26. But if I accept Mr Mui's contentions, based as they are on a theoretical concept of risk or the perception of such a risk, I believe I will be in danger of setting down a broad legal principle which may be expressed as follows: "if a trustee is a wholly owned subsidiary in a corporate group, it will not be able to seek the services of another wholly owned subsidiary within the same group even though a prudent person would acknowledge that those services are required for the protection or advancement of the trust." That, in my view, cannot be correct. If it was correct, it would ignore the dicta of Lord Herschell in Bray v. Ford (supra) cited to me by Mr Mui and which I have quoted.

27. There must, in my view, always be a consideration by the court of the circumstances of each case. See, for example, New Zealand Netherlands Society v. Kuys and another [1973] 1 WLR 1126, another decision of the Privy Council, where, in delivering the judgment of the court, Lord Wilberforce said (at page 1129):

"Their Lordships are in agreement with these contentions in so far as they stress the necessity to give consideration to the nature of the relationship between Kuys and the society and to the question whether that relationship imposed upon him, in relation to the particular transaction under investigation, duties of a fiduciary character. The obligation not to profit from a position of trust, or, as it is sometimes relevant to put it, not to allow a conflict to arise between duty and interest, is one of strictness. The strength, and indeed the severity, of the rule has recently been emphasised by the House of Lords: Phipps v. Boardman [1967] 2 AC 46. It retains its vigour in all jurisdictions where the principles of equity are applied. Naturally it has different applications in different contexts. It applies, in principle, whether the case is one of a trust, express or implied, of partnership, of directorship of a limited company, of principal and agent, or master and servant, but the precise scope of it must be moulded according to the nature of the relationship. As Lord Upjohn said in Phipps v. Boardman at p.123:

"Rules of equity have to be applied to such a great diversity of circumstances that they can be stated only in the most general terms and applied with particular attention to the exact circumstances of each case."

28. The test which, I believe, correctly states the present position in law takes into account the circumstances of each case and, in the light of such circumstances, asks: would a reasonable man anticipate a real and sensible possibility of conflict? In this regard, the Privy Council decision of Queensland Mines Ltd v. Hudson [1978] 18 ALR 1 is instructive. Giving the judgment of the Board, Lord Scarman said:

"The law governing the liability to account on one who is in a special fiduciary relationship with another has been authoritatively declared by the House of Lords in Phipps v. Boardman [1967] 2 AC 46. Though their Lordships in that case differed in their analysis of the facts, they were agreed on the law. They accepted ... that the general principle was as stated by Lord Cranworth LC in Aberdeen Rly Co v Blaikie Brothers (1854) 1 Macq 461 at 471: "And it is a rule of universal application, that no one, having such duties to discharge, shall be allowed to enter into engagements in which he has, or can have, a personal interest conflicting, or which possibly may conflict, with the interests of those whom he is bound to protect."

29. But Lord Scarman continued:

"Lord Upjohn, who dissented on the facts but not on the law, commented upon this dictum that the phrase "possibly may conflict" required consideration. He said (AC at 124): "In my view it means that the reasonable man looking at the relevant facts and circumstances of the particular case would think that there was a real sensible possibility of conflict; not that you could imagine some situation arising which might, in some conceivable possibility in events not contemplated as real sensible possibilities by any reasonable person, result in a conflict." [my emphasis].

30. On the basis of that principle, Lord Scarman sought to define the issue before the Board as follows:

"In their Lordships' opinion, therefore, the facts have to be examined to determine whether Mr Hudson acted in a way in which "there was a real sensible possibility of conflict" between his interest and the interest of Queensland Mines ..."

31. A judgment which I found persuasive in defining the correct position in law is a New Zealand decision given at first instance: Jones v. AMP Perpetual Trustee Company NZ Ltd [1994] 1 NZLR 690 where (at page 710) the judge, sitting in the High Court, said:

"To my mind, therefore, there is no absolute principle which would either exclude the general principle that a trustee cannot profit from its management of the trust or mean that it is invariably applied wherever a subsidiary acting as a trustee benefits its parent company. What is pertinent is the underlying rationale for the prohibition which the Courts of Equity sought to advance. This fundamental principle, as I apprehend it, is to ensure that the trustee's loyalty to serve the interests of the trust, or the beneficiaries of the trust, is not distracted by a personal interest which conflicts with those interests. As stated in Garrow and Kelly's Law of Trusts and Trustees (5th ed, 1982) at p 262; "The rule is really an illustration of the more general principle that no one who has a duty to perform shall place himself in such a position that his interest will conflict with that duty and that, if interest and duty do conflict, interest must give way".

Whether there has been a breach of this underlying principle will, to a large extent, be a question of fact and degree, and for that purpose the facts must be closely scrutinised. The formula propounded by Lord Scarman, in Queensland Mines Ltd v. Hudson (1978) 18 ALR 1, 3, appeals to me. He adopted the test put forward by Lord Upjohn in his dissenting judgment in Bardman v. Phipps [1967] 2 AC 46 at p 124, that is, whether "the reasonable man looking at the relevant facts and circumstances of the particular case would think that there was a real sensible possibility of conflict".

Is there a real possibility of conflict?

32. In my judgment I see no real and sensible possibility of conflict arising if I refuse to impose the restriction suggested by the First Respondent. During the course of his submissions, Mr Ma listed a number of reasons why this Court should not, in this instance, be concerned. I am in agreement with those reasons which may be summarised as follows:

(a) The Trustees have in the past employed investment consultants outside of the HSBC Group;

(b) it is accepted that in the past the Trustees have always sought to advance the best interests of the Fund and have dealt always at arm's length with third parties in this regard, including Asset Management;

(c) the HSBC Group itself has a global reputation in banking and the supply of financial services, a reputation which no doubt it will seek most jealously to guard.

But why would the Trustees wish to use the services of an associated company?

33. It was Mr Mui's submission that, in the exercise of its discretion, this Court should ask itself if there was in the future likely to be any legitimate commercial reason why the Trustees would wish to seek the services of other companies in the HSBC Group. If I may reduce his submission to a colloquialism, it was that 'there are many fish in the sea'. The Trustees accept that there are numerous other investment managers, he said, so why would the need arise to stay 'within the Group'?

34. What must be remembered, of course, is that the Trustees have not said that they will necessarily stay 'within the Group'. That is a matter to be decided by reference to objective criteria as and when the need arises. But if a decision is made to do so, I see no reason to frustrate that decision simply because the Trustees have a range of other choices open to them. The Trustees have the responsibility of deciding which investment managers will best serve the Fund and decisions in that regard are tempered by commercial experience. Choice per se takes the matter no further. The art, I would suggest, is identifying the right choice. That is a matter for the Trustees and it is one which all the evidence indicates they will deal with in the full knowledge of their obligations in law (and morality) as trustees.

Conclusion

35. As various matters related to fee structures have been satisfactorily answered and as I am content that there is no need in the present case to impose any restriction on the Trustees related to the investment managers to whom they may wish to delegate their investment powers, the scheme (as amended) is approved.

36. The costs of both the Applicant and the First Respondent are to be paid out of the Fund.