Unlike most aspects of trusts, anti-Bartlett clauses are a relatively recent development. They were developed following the 1980 English law case of Bartlett v Barclays Bank Trust Co Ltd. Broadly speaking, the case determined that where a trust holds a controlling block of shares in a company the trustees have certain duties, including to take action when the company’s affairs are not being conducted properly.
Most trustees do not want to be that involved in an underlying company. In addition, often trustees do not have the requisite specialist knowledge or expertise to prudently manage and be closely involved in such investment, trading or operating companies and associated businesses.
In response, anti-Bartlett clauses were developed. The clauses are drafted with a view to excluding the duty of a trustee to supervise or interfere in the affairs of companies in which the trust holds shares, and in turn give protection from liability for losses incurred in transactions by such companies unless the trustee is aware of actual dishonesty.
A recent case questioned the effectiveness of such clauses
Between 2017 and November 2019 the efficacy of these clauses was questioned by the Hong Kong courts in the case of Zhang Hong Li v DBS Bank (Hong Kong) Ltd.
The case involved a Jersey trust with an underlying British Virgin Islands company. The trust deed was complex and bespoke; it included anti-Bartlett clauses, authorisation for speculative investments, no duty to diversify, etc.
The trustee of the trust was DBS Trustee HK (Jersey) Ltd, with other entities within the DBS family fulfilling the roles of company director, bank to the structure, etc. The trust was settled by Ji Zhengrong (JZ) and her husband. JZ was the company’s investment adviser and was granted authority to give investment instructions on the company’s behalf.
What follows is a light touch review of the court decisions in the case and what it might mean for trustees.
What went wrong?
Between 2005 and 2008, JZ executed a large number of trades in mutual funds; the investments were profitable. In October 2007, the return on these investments was diminishing; JZ turned to foreign exchange transactions. By October 2008, 85 per cent of the portfolio was currency related, 81 per cent being exposure to the Australian dollar. At the same time, JZ had increased the company’s credit facility tenfold; resulting in borrowings of US$96.4m as against net assets of US$35.4m.
The financial crisis of 2008 arrived, resulting in heavy losses for the company and in turn the trust.
Shortly thereafter, JZ and her husband raised complaints claiming the losses were caused by breaches of duty by the trustee and the bank; this despite the fact, that at various points in time the bank had advised JZ to diversify but JZ was unwilling to accept this advice.
The court at first instance (whose decision was upheld by the court of appeal) was of the view that the anti-Bartlett clauses were effective but the trustees (i) still had a high-level residuary duty to supervise the trust, and (ii) were empowered to override JZ’s decisions and reverse transactions.
Had these decisions stood this would have caused many a professional trustee a headache or two.
Fortunately, when the case arrived at the Court of Final Appeal in November 2019, the five judges (one of which was Lord Neuberger, former President of the Supreme Court of the United Kingdom) unanimously overturned the earlier decisions. The Court was of the view that:
- the anti-Bartlett clauses restricted the powers of the trustee to interfere in the conduct or management of the company’s investment business;
- a high-level supervisory role would be inconsistent with an anti-Bartlett clause;
- approval of relevant transactions did not constitute a breach of duty; and
- there was no knowledge of dishonesty that required the trustee to interfere, and therefore no duty arose which could have been breached.
The outcome of the case, which is likely to carry weight in most common law jurisdictions, is to be welcomed. It provides some clarity on trustees’ duties.
That said, every case turns on its facts and there is no denying the case of Zhang involved a rather particular and extreme set of facts. Trustees should not be complacent. The importance of a well drafted trust deed should never be overlooked.