Introduction

In certain banking arrangements in which investments are made in relation to a trust, a fiduciary relationship may arise when the bank or its affiliates act as a corporate trustee of a trust or a director of a company customer.  A party may be regarded as a fiduciary if it owes an obligation to act solely in the best interests of another party, of whom its assets are taken care of by the fiduciary.

The Court of Appeal (the “CA”) in Zhang Hong Li v DBS Bank (Hong Kong) Ltd CACV 138&139/2017 recently upheld the trial judge’s findings on a breach of fiduciary duties owed by DBS bank entities to its investor customers through a trust arrangement.  Among the various issues dealt with in the judgment, two main areas are discussed below. Firstly, the bank entities expressly assumed a supervisory role that gave rise to fiduciary duties. Secondly, there were special “relieving provisions” in the trust arrangement that the bank entities sought to rely on, arguing its duties had been limited by them.

Background

The case involved a Jersey family trust (the “Trust”) set up with the assistance of DBS Bank in 2005.  The settlors of the Trust were a senior banker and his wife.

The wife, described as an astute and knowledgeable investor, heavily invested through her company, Wise Lords (“WL”), which held the assets of the Trust.  DBS Trustee, a Jersey subsidiary of DBS Bank, was appointed as a professional trustee of the Trust, while DHJ Management, a BVI subsidiary of DBS Bank, was nominated by DBS Trustee to act as a director of WL.  The wife was appointed as WL’s investment advisor and was the decision maker in respect of the investments of WL.

The high-risk investments in foreign currencies and decumulators made through WL were initially rewarded with substantial return, but only until the global financial crisis hit its climax in around September 2008.  WL suffered a drastic net reduction of 70% in its Net Asset Valuation from March 2008 to March 2009.

The Appeals

In an attempt to recover the investment loss, actions were commenced for dishonest breach of trust against DBS Trustee, for dishonest breach of fiduciary duty against DHJ Management, and for dishonest assistance for such breaches against DBS Bank, DBS Corporate and some employees of DBS Bank.  After a 24-day trial, the claims against DBS Bank, DBS Corporate and the individual DBS employees were dismissed. But judgment was given for the Plaintiffs against DBS Trustee and DHJ Management.  DBS Trustee and DHJ Management appealed for the judgment against them while two of the Plaintiffs also appeal against the judgment dismissing their claims against the other defendants.

The CA found no liability in the individual DBS employees, DBS Bank and DBS Corporate and hence dismissed the appeal by two of the Plaintiffs. However, the CA also dismissed the appeal by DBS Trustee and DHJ Management in respect of the finding of their breach of trust and fiduciary duty.

The successful claims against
the professional trustee and the director

High-level supervisory role

The CA confirmed that both DBS Trustee and DHJ Management were found to have failed to discharge a substantial “high-level supervisory role” in monitoring WL’s investments.

In particular, as a trustee, DBS Trustee admitted in “[playing] a role in a structure deliberately designed to provide [the investors] with significant independence and flexibility in advising and executing investments”. Such an arrangement that allowed the experienced investors to execute their own investment decisions, however, did not exclude the core obligations of the trustee.

The crux of the Court’s findings was a “high-level supervisory role” assumed by DBS Trustee in monitoring the overall investment profile. This role was coupled with a power to override the investment advisor (the wife)’s decisions to ensure the value of the Trust was subject to “appropriate controls, reviews, investment expertise and management”. 

On the part of DHJ Management, similar to that of DBS Trustee, heightened duty arose from its assumption of the high-level supervisory role, which in fact required the director to go “one step further” to actively make inquiries in reviewing WL’s investments.

The effect of anti-Bartlett provisions on limiting trustee’s duties

It was submitted by the DBS Trustee that certain provisions in the trust deed relieved DBS Trustee of any duty to intervene in the affairs of WL.  These clauses known as “anti-Bartlett provisions”, as derived from Bartlett v Barclays Bank [1980] Ch. 515 intend to (1) allow the company to function without interference from the trustee and (2) relieve the trustee from any such duty or power to intervene, except in extreme case of actual knowledge of dishonesty.

While the CA accepted that the anti-Bartlett provisions in question were effective under Jersey law, DBS Trustee were subject to a “residual obligation” that could not be excluded by these provisions. This residual obligation to exercise its power to obtain information of the company remains with the trustee under certain circumstances where “no reasonable trustee could lawfully refrain from exercising those powers”, which include but are not limited to where a trustee has actual knowledge of dishonesty. DBS Trustee and DHJ Management were found to have failed to discharge their residual obligations over WL’s purchases of high-risk investment products and credit facilities increases, resulting in a breach of duty regardless of the effective anti-Bartlett provisions in the trust deed.

Conclusion

As it was a case involving the operation of a trust, the Court’s findings were case-sensitive and largely based on the peculiar facts in this case.  The CA acknowledged that the wife in this case, being the decision-maker of WL’s transactions, was clearly a risk-taker and had her eyes set on high-risk/high return products.  Whilst market fluctuations are inevitable, this ruling nevertheless illustrates the importance of both the bank and its customers knowing their respective roles and responsibilities in the allocation of investment risks. Particular attention should be given when adopting anti-Bartlett provisions in trust arrangements, which may not be effective in sparing the trustees from their core obligations.