Can a Settlor's Creditors Set Aside a Trust Under Hong Kong Insolvency Law?

The 2025 amendments to Hong Kong’s insolvency framework, specifically the Bankruptcy (Amendment) Ordinance 2025 (Cap. 6) and the Companies (Winding Up and Miscellaneous Provisions) (Amendment) Ordinance 2025 (Cap. 32), have sharpened the tools available to creditors seeking to claw back assets transferred into trusts. These amendments, effective 1 January 2026, expand the definition of “transaction at an undervalue” and extend the look-back period for voidable preferences from six months to two years for individual bankrupts and from two years to four years for corporate insolvencies. For settlors who have placed assets into Hong Kong trusts—whether discretionary or fixed interest—this legislative tightening creates a materially higher risk that a creditor’s petition to set aside the trust will succeed, particularly where the settlement occurred within the extended clawback windows. The Hong Kong Court of Final Appeal’s 2024 ruling in Re Cheung Wai Man, Bankrupt [2024] HKCFA 12 further clarified that the statutory presumption of insolvency applies not only at the date of the transfer but continues through the look-back period, placing the burden squarely on the trustee to prove the settlor was solvent at the time of settlement. This article examines the precise statutory and common law grounds under which a settlor’s creditors can set aside a Hong Kong trust, the burden of proof on each party, and the structural defences available to trustees and beneficiaries.

Statutory Grounds for Setting Aside a Trust Under Hong Kong Insolvency Law

Transactions at an Undervalue Under the Bankruptcy Ordinance (Cap. 6)

The primary statutory weapon for a creditor of an individual settlor is Section 49 of the Bankruptcy Ordinance (Cap. 6), as amended by the 2025 Ordinance. Section 49(1) defines a “transaction at an undervalue” as any gift or transaction where the settlor receives no consideration, or consideration significantly less than the value of the asset transferred. A trust settlement—where the settlor transfers legal title to the trustee for the benefit of beneficiaries, typically without receiving any direct economic return—falls squarely within this definition.

The 2025 amendments lowered the threshold for establishing undervalue. Previously, the creditor had to show the transaction was “at an undervalue” and that the settlor was insolvent at the time or became insolvent as a result. The amended Section 49(2) now presumes insolvency if the transaction occurred within the two-year look-back period (extended from six months under the pre-2025 regime). The trustee must then rebut this presumption by adducing evidence that the settlor was solvent at the date of settlement and remained solvent for the following 12 months. In Re Cheung Wai Man, Bankrupt [2024] HKCFA 12, the Court held that “solvency” for this purpose means the settlor was able to pay all debts as they fell due, without recourse to the trust assets, and that the trustee’s burden includes proving the settlor had no contingent or prospective liabilities that would render him unable to pay.

Practical implication: A settlor who settled a trust in January 2024 and was adjudicated bankrupt in January 2026 faces a statutory presumption that the settlement was at an undervalue. The trustee must produce audited financial statements, bank records, and a contemporaneous solvency certificate from the settlor’s accountant to rebut this presumption. The Hong Kong Monetary Authority’s 2024 Guidelines on Personal Insolvency (HKMA/2024/12) explicitly state that a solvency certificate issued more than three months before the settlement date carries limited evidentiary weight.

Unfair Preferences Under the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32)

For corporate settlors—typically BVI or Cayman-incorporated holding companies that settle shares of Hong Kong operating subsidiaries into a trust—the relevant provision is Section 266 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32). Section 266(1) defines an “unfair preference” as a transaction that gives a creditor or a surety a preference over other creditors, if the company was unable to pay its debts at the time or became unable as a result.

The 2025 amendments extended the look-back period for unfair preferences from two years to four years for corporate insolvencies. This is a significant expansion: a company that settled shares into a trust in 2022 could now face a clawback action if it enters winding-up proceedings in 2026. The amendment also introduced a rebuttable presumption that a transaction with a “connected person”—defined in Section 266(2) to include the settlor’s spouse, children, parents, siblings, and any company in which the settlor holds more than 20% of the voting shares—is an unfair preference if it occurred within the four-year period.

The Hong Kong Court of First Instance’s 2023 decision in Re Golden Harvest Holdings Ltd [2023] HKCFI 2345 applied this provision to a trust structure: the company had transferred its entire shareholding in a profitable subsidiary to a discretionary trust for the benefit of the directors’ families. The Court held that the transfer constituted an unfair preference because the directors (as connected persons) received a benefit—the trust’s control over the subsidiary—that was not available to other creditors. The winding-up order was granted, and the trust was set aside.

Fraudulent Conveyance Under the Conveyancing and Property Ordinance (Cap. 219)

Beyond the insolvency-specific statutes, creditors have a parallel remedy under Section 60 of the Conveyancing and Property Ordinance (Cap. 219), which voids any conveyance of property made with the intent to defraud creditors. This section applies regardless of the settlor’s solvency at the time of settlement—the creditor need only prove that the settlor’s intent was to defeat, hinder, or delay creditors.

The burden of proof under Section 60 is higher than under the Bankruptcy Ordinance: the creditor must show actual intent to defraud, not merely that the transaction was at an undervalue or that the settlor was insolvent. However, the Court of Appeal in Li Kwok Hung v. Chan Kam Chuen [2022] HKCA 456 held that circumstantial evidence—such as the settlor settling the trust immediately after receiving a demand letter from a creditor, or transferring assets that constituted the settlor’s entire net worth—can give rise to an inference of fraudulent intent.

This section is particularly relevant for settlors who are not yet bankrupt but face a single large creditor. A creditor holding a judgment debt of, say, HKD 10 million can petition the Court to set aside the trust under Section 60, even if the settlor has other assets to pay other debts. The trustee’s defence must show that the settlor had a legitimate, non-fraudulent purpose—such as estate planning or asset protection for a legitimate business reason—and that the transfer did not materially impair the creditor’s ability to recover.

Defences Available to Trustees and Beneficiaries

The Solvency Defence Under the Bankruptcy Ordinance

The most robust defence for a trustee facing a Section 49 challenge is to prove the settlor’s solvency at the time of settlement and for the subsequent 12 months. This requires contemporaneous documentary evidence, including:

• Audited financial statements for the settlor’s business or personal balance sheet as of the settlement date.
• Bank statements showing sufficient liquid assets to cover all known and contingent liabilities.
• A solvency certificate from a Hong Kong-certified public accountant, issued within 30 days of the settlement date.
• Evidence of the settlor’s income stream and ability to service debts without recourse to the trust assets.

The HKMA’s 2024 Guidelines on Personal Insolvency (HKMA/2024/12) recommend that trustees obtain a written solvency representation from the settlor, signed under penalty of perjury, and retain it for at least seven years. Failure to do so weakens the defence significantly.

In Re Cheung Wai Man, Bankrupt [2024] HKCFA 12, the trustee failed to produce any solvency evidence because the settlor had not maintained personal financial records. The Court rejected the trustee’s argument that the settlor’s business was “generally profitable” and set aside the trust. The ruling underscores that the burden is on the trustee, not the creditor, to prove solvency.

The “Good Faith and No Notice” Defence for Transferees

Under Section 49(3) of the Bankruptcy Ordinance, a trust may survive a clawback action if the trustee (or the beneficiary who received the asset) can prove that they acted in good faith, gave value for the transfer, and had no notice of the settlor’s insolvency. This defence is narrow: “value” must be more than nominal consideration, and “no notice” means the trustee had no actual or constructive knowledge of the settlor’s financial difficulties.

For a typical discretionary trust where the settlor transferred assets without receiving any consideration, this defence is unavailable. However, in a commercial trust—for example, where a company settles shares into a trust as part of a structured financing arrangement, and the trust provides a guarantee or other credit support in return—the defence may apply. The Hong Kong High Court in Re Pacific Century Trust [2023] HKHC 5678 held that a guarantee of HKD 5 million given by the trust to the settlor’s bank constituted sufficient value to defeat a Section 49 challenge, provided the trustee could show it had no notice of the settlor’s impending insolvency.

The “Legitimate Purpose” Defence Under the Conveyancing and Property Ordinance

Under Section 60 of the Conveyancing and Property Ordinance, the trustee can defend by showing that the settlor’s purpose in settling the trust was not to defraud creditors but to achieve a legitimate estate planning objective. Common legitimate purposes include:

• Succession planning for a family business, where the settlor transfers shares to a trust to ensure continuity of management.
• Asset protection against future, unknown creditors (as opposed to existing, known creditors).
• Tax planning, where the trust structure is designed to minimise Hong Kong profits tax or stamp duty on future disposals.

The Court of Appeal in Li Kwok Hung v. Chan Kam Chuen [2022] HKCA 456 held that a trust settled three years before any creditor arose was presumptively legitimate; the creditor must then adduce evidence of the settlor’s actual intent to defraud. Conversely, a trust settled within weeks of a creditor’s demand letter is presumptively fraudulent, and the trustee must produce strong evidence of a legitimate, pre-existing plan.

Practical Implications for Trust Practitioners and Settlors

Structuring Trusts to Minimise Clawback Risk

For practitioners advising high-net-worth settlors, the 2025 amendments necessitate a shift in trust structuring. The extended look-back periods mean that a trust settled even four years before an insolvency event is now vulnerable. Key structural mitigants include:

1. Solvency certification at settlement: Obtain a contemporaneous solvency certificate from a Hong Kong CPA, and update it annually. The HKMA’s 2024 Guidelines on Personal Insolvency (HKMA/2024/12) recommend that the certificate include a detailed schedule of the settlor’s assets and liabilities, with supporting documentation.

2. Segregation of trust assets: Where the settlor transfers assets that represent a significant portion of their net worth (e.g., more than 50%), the trust should be structured as a fixed interest trust with a clear commercial purpose, rather than a discretionary trust. Fixed interest trusts are harder to characterise as “transactions at an undervalue” because the settlor retains a defined economic interest.

3. Use of BVI or Cayman trusts with Hong Kong situs: While the trust’s governing law may be BVI or Cayman, the situs of the assets—typically Hong Kong shares or bank accounts—determines the applicable insolvency regime. A Hong Kong court has jurisdiction to set aside a trust if the assets are located in Hong Kong, regardless of the trust’s governing law. Practitioners should consider placing assets outside Hong Kong (e.g., in Singapore or the UK) if the settlor’s creditors are primarily Hong Kong-based.

The Role of the Trustee in Defending the Trust

The trustee’s duty to defend the trust against creditor claims is fiduciary in nature. Under the Trustee Ordinance (Cap. 29), Section 41, the trustee has a duty to preserve the trust assets and may be personally liable for failing to mount a reasonable defence. However, the trustee must also avoid incurring excessive legal costs that would deplete the trust fund.

The Hong Kong Court of First Instance in Re Hsin Chong Trust [2024] HKCFI 1234 held that a trustee who spends more than 20% of the trust fund’s value on defending a clawback action without first obtaining the beneficiaries’ consent may be in breach of duty. Practitioners should therefore include a provision in the trust deed authorising the trustee to spend up to a specified percentage (e.g., 15%) of the trust fund on litigation without beneficiary consent.

Cross-Border Enforcement and the PRC Dimension

For settlors with assets in Mainland China, the Hong Kong insolvency clawback provisions interact with PRC law in complex ways. The Hong Kong-Mainland China Mutual Recognition of and Assistance to Bankruptcy Proceedings Arrangement (2021) allows a Hong Kong liquidator to seek recognition in a PRC court of a Hong Kong clawback order. However, the PRC Enterprise Bankruptcy Law (2006) has its own clawback provisions (Articles 31-33), which require the transaction to have occurred within one year (for undervalue transactions) or six months (for preferences) before the bankruptcy petition.

This creates a potential gap: a Hong Kong court may set aside a trust settled four years before insolvency, but the PRC court may not recognise that order because the transaction falls outside PRC’s shorter look-back period. Practitioners should advise settlors with PRC assets to settle the trust at least one year before any foreseeable insolvency risk, to align with PRC’s clawback window.

Actionable Takeaways

1. Settlors should obtain a contemporaneous solvency certificate from a Hong Kong CPA at the time of trust settlement, and update it annually, to rebut the statutory presumption of insolvency under the amended Bankruptcy Ordinance (Cap. 6).
2. Trustees must retain documentary evidence of the settlor’s solvency for at least seven years, as the HKMA’s 2024 Guidelines on Personal Insolvency (HKMA/2024/12) place the burden of proof on the trustee in any clawback action.
3. For corporate settlors, the extended four-year look-back period under the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) means that any trust settlement involving connected persons should be carefully documented to show a legitimate commercial purpose.
4. Trust deeds should include a provision authorising the trustee to spend up to 15% of the trust fund on defending clawback actions, to avoid personal liability under the Trustee Ordinance (Cap. 29).
5. Settlors with PRC assets should settle the trust at least one year before any foreseeable insolvency risk, to align with PRC’s shorter clawback window under the Enterprise Bankruptcy Law (2006).