Bringing the Trustee Act 1956 into the 21st Century
Singapore modernised its Trusts Act in 2006 and Hong Kong has recently announced the changes that it is making to its Trusts laws. Both Singapore and Hong Kong are leading financial centres and the changes that are enacted there might well serve as models that the Law Commission could recommend for New Zealand.
This is a short note about some of the changes that have been made in Hong Kong by the Trust Law (Amendment) Bill 2013.
The Perpetuities Rule
This will be abolished: “The rule against perpetuities … and the rule against excessive accumulations have no effect …”. “A Trust … may continue in existence for an unlimited period unless the terms of the Trust provide to the contrary.”
Payment for Professional Trustees
The rule that trustees are not entitled to be paid for their services unless the terms of the Trust Deed allow it is to be changed. A trustee who acts in “a professional capacity” (a defined term) “is to be treated as being entitled under the instrument creating the trust to receive payment for services provided even if the services are capable of being provided by a lay trustee …”.
A statutory duty of care
Professional trustees “are to comply with a statutory duty of care”: “[a] trustee must exercise the care and skill that is reasonable in the circumstances, having regard to … any special knowledge or experience that the trustee has or holds out as having” and “that is reasonably expected of a person acting in the course of that kind of business or profession”.
If the statutory duty of care applies to a trustee then the “duty has effect in place of any common law rules and equitable principles regarding the duty of standard of care… .”
Although this will make life harder for many professional trustees (they may need to increase their PI cover) it is an obvious reform that should be enacted here.
Trustee’s expenses
If a person is to be persuaded to act as a professional trustee of a Trust, it is fundamental that the person should not only be entitled to be paid his/her reasonable fees but should also be paid his/her expenses. In this way, the new law entitles “a trustee … who has properly incurred expenses when acting on behalf of the Trust” to “be reimbursed … for those expenses …”.
Exclusion clauses – farewell to unaccountability
It is common for deeds of Trust to provide that trustees will not be liable for anything they do, or fail to do, except fraud or other grievous default. The Privy Council recently upheld this regime (albeit by a majority) in the Spread Trustee case: [2011] UKPC 13. To her credit, Justice French rejected the applicability of such a clause in Spencer v Spencer HC, Wellington CIV-2011-485-857, 19 October 2011.
The new law in Hong Kong provides that: “The terms of a Trust must not relieve, release or exonerate a trustee from liability for a breach of Trust arising from the trustee’s own fraud, wilful misconduct or gross negligence” or “grant the trustee any indemnity against the Trust property for the liability.” And any term of the Trust that contradicts this is “invalid”.
We should have this law. People who hold themselves out as being competent professional trustees ought not to be able to charge fees based on their supposed competence and then hide behind exclusion clauses when they fail in the performance of their duties.
The legitimacy of reserved powers
Most settlors of inter vivos Trusts wish to retain control over the Trusts that they establish and it is common for tax havens to stipulate a set of powers that settlors can retain without invalidating a Trust.
In Hong Kong, it is being stipulated that “a Trust is not invalid” only because “the settlor” reserves “any or all powers of investment or asset management functions under the Trust.” Any trustee who “acts in accordance with the exercise of the power or function [of the settlor] is not in breach of the Trust.” This, too, is a sensible change. Many settlors will have firm views about how they wish the assets of the Trust to be managed and they should be free to stipulate the investments and assets that they think appropriate.
Avoiding the Courts
The Bill provides a court-free mechanism for beneficiaries to retire and appoint trustees.
We, too, need more of these innovations.
The lesson for NZ
There will be many “professional trustees” who will consider these changes to be retrograde. (For “retrograde” read “contrary to their financial interests”.) But that is not a reason why we shouldn’t follow this example. Singapore and Hong Kong are trying to take the financial business from New York, London and Frankfurt and if they regard these changes as being necessary to make the laws of their countries internationally acceptable, we should give the changes serious consideration.