Breach of Trust. Hong Kong’s Court of Appeal Judgment Illustrates Failure in Discharging a Trustee’s High Level, Supervisory Duties over Trust Assets.

The recent Hong Kong appellate judgment in Zhang Hong Li and another v DBS (Hong Kong) Ltd and others, CACV 138/2017, in which a bank’s wealthy customers sought to recover losses suffered from investments made with or through the bank, deserves mention in this well-developed area of law.

The Court of Appeal, dismissing the customers’ cross-appeal, affirmed the first instance judgment and upheld findings of breach of trust by the bank trustee and breach of fiduciary duties by the bank-provided corporate director.

This judgment shows how professional trustees can face exposure for losses to trust assets arising from financial investments conducted by and on the advice of settlors qua investment advisors. The pivotal cause of action is not classically mis-selling, but breach of trust – alleged failure in discharging the trustee’s high level, supervisory duties over trust assets.


In 2005, Zhang Hong Li (Zhang) and his wife Ji Zhengrong (Ji) set up a family trust with the help of the defendant bank (the Bank). It was for succession planning and estate duty purposes. The trust structure is typical in the private banking world. Zhang and Ji were the settlors. Investments were to be held by a BVI company, Wise Lords. Shares of Wise Lords are the trust asset.

Wise Lords’ sole shareholder was Nautilus Trustees Asia Ltd, the bank’s trustee entity incorporated in Jersey (Bank Trustee). Wise Lords’ sole director was DHJ Management (DHJ), a bank entity incorporated in BVI. As is typical in the trust industry, another bank entity in Hong Kong provided administration, operational and secretarial support services, in Hong Kong, to Bank Trustee in Jersey.  That entity was found to be the Bank Trustee’s agent.

Wise Lords maintained a private banking account with the Bank in Hong Kong, through which investments were carried out. Wise Lords was served by one key relationship manager at the Bank (RM).

Zhang, Ji, Wise Lords and new trustees of the trust (replacing the Bank Trustee given the litigation) were the plaintiffs.  The defendants included the Bank, Bank Trustee, DHJ, and another defendant Bank’s employees and entities. The Bank and the relevant Bank entities played three roles: (a) banker of Wise Lords; (b) trustee of the trust; and (c) director of Wise Lords.

Ji was appointed as investment advisor to Wise Lords and was authorised by Wise Lords to (a) execute investment transactions, (b) operate Wise Lords bank accounts, and (c) negotiate and draw on overdraft facilities. 


Between 2005 and 2008, Ji executed over 500 investment transactions for Wise Lords’ account. The bulk, some 340, comprised trades in mutual funds.  Overall, these trades had generated handsome profits. The judge in the Court of First Instance found that by May 2008, Ji had become disenchanted with mutual funds, thinking that the U.S. market was going into a deep recession, which would affect the global economy, in turn affecting mutual funds. She redeemed most of Wise Lords mutual fund holdings, and switched her focus to investing heavily in foreign currencies, particularly Australian dollars (AUD) and euro (EUR), currency-linked notes, and, ultimately, currency decumulators, with increasing leverage.

Between 2006 and 2008, Wise Lords’ overdraft facility was gradually increased from $10 million to $100 million. The judge found that Ji had strongly and repeatedly pressed the Bank to increase the credit line, and that the RM had helped support the last few applications for increases by exaggerating to the Bank, Zhang’s and Ji’s assets and income.

By August 2008, Wise Lords’ portfolio comprised over A$122 million deposits (purchased in 11 tranches on just six trading days in July and August 2008), currency-linked notes for $20 million (linked to AUD and EUR) and some EUR deposits, against a $96 million overdraft.  The portfolio had grown substantially in a short time against leverage.

Contrast the portfolio at that date with the position three months before: Wise Lords did not hold any AUD deposits, just $4.7 million deposits and some $52 million worth of currency-linked notes, against loans of $19 million.

It was in July and August 2008 when Ji made substantial purchases of AUD that AUD began its decline against U.S. dollars.  The purchases incurred losses given the currency mismatch (against U.S. dollars borrowing) and leverage.  The judge found that despite the worrying AUD situation and repeated warnings from the Bank, Ji remained bullish and resisted unloading Wise Lords’ long positions at anything less than break-even point.  What Ji did instead was to execute “decumulators” for A$76 million and 6 million euro.

It is noteworthy that the judge also found that Ji was sufficiently informed of the operation and risk features of the decumulators by the RM and the Bank’s product specialist. However, the judge found that Ji was not impressed by these suggestions, and that she wanted to be able to sell Wise Lords substantial holdings of AUD only at the rate she wished and was willing to take substantial risks to do so.


In the Court of First Instance, all claims against the Bank and its staff, including the RM as banker, were dismissed.  The judge found that no statutory or common law duties were owed or assumed by the Bank to Zhang, Ji or the trust. There was no banker-customer contract between the bank and them.

The RM was found to have exaggerated to the Bank Ji’s and Zhang’s assets to support increasing credit facilities to Wise Lords. However, according to the judge, that was a wrong to the Bank, not to any of the plaintiffs. In any case, no loss was caused to the plaintiffs because of the increased facilities. The judge found that Wise Lords suffered losses not from the grant of increased facilities, but from substantial purchase of AUDs in July and August 2008 and the purchase of currency decumulators, although the purchases were partly funded by overdrafts.

But for the trust structure, the judgment would have ended here. Yet issues about the trust intervened.


The judge in the Court of First Instance found that Ji’s power to make investments was subject to the Bank Trustee and DHJ’s power to:

  1. override Ji’s decisions; or
  2. reverse transactions she conducted for Wise Lords.

This power was never exercised to reverse any of the over 500 investment transactions made. In practice, approvals to transactions and credit facilities were sought from and given by DHJ and the Bank Trustee after the event.

The judge found that the Bank Trustee did not query why, in July and August 2008, Wise Lords was acquiring so much AUD and how it was paying for them. Regarding the decumulators, the Bank Trustee was found to have sought an explanation of what a decumulator was after approving two. It went on to approve the third when critical information about a decumulator’s risks of a possible one-year lock-up was not given in internal approval applications addressed to the Bank Trustee.

In the circumstances, the judge found that (a) the Bank Trustee failed to discharge its supervisory duty owed to the trust (represented in the action by the new trustees), and (b) DHJ failed to discharge its fiduciary duty owed to Wise Lords, in approving, after the event:

  1. nine out of 11 purchases of AUD (worth $83 million out of $96 million) made by Wise Lords in July and August 2008;
  2. the increased credit facility (from $58 million to $100 million) obtained by Wise Lords in July 2008; and
  3. the three decumulators.


The Court of Appeal affirmed all aspects of the first instance judgment, and does not add materially to it. It dismissed the appeal by the Bank, particularly against the finding of breach of trust by the trustee and breach of fiduciary duties by the corporate director. It also dismissed the customer’s cross-appeal, particularly against the findings that the bank owed no advisory duty to the customer and incurred no accessory liability for any knowing or dishonest assistance.


Regarding the Court of Appeal’s judgment, we have the following observations.

  • “Anti-Bartlett” provisions. These are provisions, common in the professional trust industry, designed to circumscribe the trustee’s duty to intervene in the affairs of companies in which the trustee holds shares. The trust document in question contains these provisions. The Court of Appeal, however, held that, as a matter of Jersey law—the governing law of the trust (after considering Jersey law expert opinions), anti-Bartlett provisions notwithstanding, the trustee has a residual high level supervisory role or obligation.  The Court of Appeal affirmed the first instance Judge’s finding that the trustee breached this high-level supervisory duty when the trustee approved, and did not override or reverse, the purchases of the investments in question. This amounted to gross negligence, for which liability cannot be relieved by any exemption clauses under Jersey law.
  • Indemnity claim against investment advisor. The customer was appointed investment advisor to Wise Lords. The trustee pleaded that for the investments in question the investment had signed “letters of recommendation” addressed to Wise Lords. Those letters were said to contain indemnity provisions. Accordingly, the trustee argued that the investment advisor should indemnify the trustee against the claim for losses to the investments.
  • The Court of Appeal rejected this argument, finding that there was no consideration for the alleged indemnity. Importantly, the purported letters containing the indemnity provisions did not provide that the indemnity was given in consideration for the trustee’s approval of the investments in question. 

Going forward, professional trustees may want to consider:

  1. augmenting “anti-Bartlett” provisions in trust instruments by disclaiming liability for withholding approval for investments recommended by the investment advisor; and
  2. providing expressly the consideration for which any indemnity is given by customers/investment advisors.

Partner, Allen & Overy (Hong Kong)

Fai Hung is a partner in the litigation and dispute resolution department of the Hong Kong office. His caseload gravitates towards Greater China, with an emphasis on banking and finance disputes and finance related regulatory investigations. He has extensive experience in handling complex financial and commercial disputes, including debt recovery actions, disputes relating to mis-selling of financial products and commercial fraud, shareholders' disputes and insolvency-related disputes.

Partner, Allen & Overy

Matt Bower is a partner in Allen & Overy's litigation and dispute resolution team in Hong Kong. Matt advises financial institutions and corporates in connection with internal and regulatory investigations as well as litigation before the High Courts in Hong Kong and England and Wales.  
Matt has substantial experience of advising clients on the conduct of regulatory investigations across Asia-Pacific, having advised on some of the most high profile benchmark investigations in the region concerning financial services conduct and competition issues and a number of investigations regarding the assessment of client suitability for financial products.

Partner, Allen & Overy (Hong Kong)

Simon Clarke is a partner of the Hong Kong office of Allen & Overy. Clarke has been conducting litigation and managing legal teams in multi-jurisdictional actions based out of Hong Kong for over 20 years. His practice focuses on special situations – complex disputes and investigations of significant financial or reputational risk. His emphasis is on clients in banking and financial services and the securities markets.