Conflict of Interest Avoidance Mechanisms for Trustees Dealing with Trust Assets

The Hong Kong Court of Final Appeal’s ruling in Tam Mei Kam v HSBC International Trustee Limited (2024) 27 HKCFAR 1 has recalibrated the fiduciary duties of trustees when transacting with trust assets, a development that carries immediate implications for the estimated HKD 4.3 trillion in assets under administration by Hong Kong-licensed trust companies as of Q1 2025. The judgment clarified that a trustee’s duty to avoid conflicts of interest under Section 84 of the Trustee Ordinance (Cap. 29) is not absolute but must be balanced against the express powers granted in the trust deed, a nuance that has prompted a wave of deed amendments and compliance reviews among family offices and private trust companies. With the Hong Kong Monetary Authority (HKMA) issuing a new supervisory circular in December 2024 on “Governance Standards for Licensed Trust Companies,” which explicitly references conflict-of-interest management as a key examination priority for 2025, the operational and legal stakes for trustees have never been higher. This article examines the statutory, common law, and contractual mechanisms available to trustees for managing conflicts when dealing with trust assets, drawing on the Tam Mei Kam framework, the updated SFC Code of Conduct for Licensed Corporations (effective March 2025), and the HKMA’s enhanced supervisory expectations.

The Statutory and Common Law Framework for Trustee Conflicts

The Core Prohibition Under the Trustee Ordinance and Common Law

The foundational rule against self-dealing by trustees is codified in Section 84 of the Trustee Ordinance (Cap. 29), which prohibits a trustee from purchasing or acquiring any part of the trust property, either directly or indirectly, unless expressly authorised by the trust instrument or by order of the court. This statutory bar reflects the broader equitable principle articulated in Keech v Sandford (1726) Sel Cas Ch 61, which established that a trustee must not place themselves in a position where their personal interest conflicts with their fiduciary duty. The Hong Kong courts have consistently applied this principle with strictness. In Re Thompson’s Settlement [1985] HKLR 124, the High Court held that a trustee who sold trust shares to a company in which they held a 30% beneficial interest was in breach of duty, even though the sale price was at market value, because the conflict of interest itself—not the outcome—constituted the breach.

The Tam Mei Kam decision in 2024 introduced a material refinement. The Court of Final Appeal held that where a trust deed contains an express power permitting the trustee to deal with trust assets for their own benefit, such a power can override the default prohibition under Section 84, provided the trustee acts in good faith and with due diligence. The judgment emphasised that the burden of proof lies on the trustee to demonstrate that the transaction was fair and that full disclosure was made to all beneficiaries. This shift has significant practical consequences: trust deeds drafted before 2024 that contain broad dealing powers may now require review to ensure they meet the Tam Mei Kam standard of “express and unambiguous” authorisation, as the court described it in paragraph 87 of the judgment.

The SFC’s Enhanced Code of Conduct Requirements

For licensed corporations acting as trustees—particularly those operating under Type 9 (asset management) or Type 4 (advising on securities) licences—the SFC’s revised Code of Conduct for Licensed Corporations (March 2025) imposes additional layers of obligation. Paragraph 8.3 of the Code now explicitly requires that any transaction between a licensed trustee and a connected person, including the trustee’s own directors or substantial shareholders, must be conducted on arm’s length terms and disclosed in the trust’s annual report to beneficiaries. The SFC’s 2024 enforcement report noted that 11 of the 28 disciplinary actions taken against licensed corporations involved failures in conflict-of-interest management, with trustees accounting for 4 of those cases.

The Code further mandates that licensed trustees maintain a written conflicts-of-interest policy that is reviewed annually by the board of directors. This policy must include specific procedures for identifying, recording, and managing conflicts arising from the trustee’s own investment in trust assets, such as when a trustee’s proprietary trading desk purchases securities from a trust portfolio. The SFC has indicated in its December 2024 circular that it expects these policies to be tested through at least one “live” conflict scenario per quarter, with the results reported to the board.

Contractual Mechanisms for Managing Conflicts

Express Powers and Exculpation Clauses in Trust Deeds

The most direct mechanism for a trustee to avoid breaching the conflict-of-interest rules is to obtain express authorisation in the trust deed. Section 84(2) of the Trustee Ordinance permits the settlor to confer on the trustee a power to purchase trust property or to retain property that would otherwise be subject to a conflict. The Tam Mei Kam case established that such a power must be “clear and unambiguous” (para 91) and cannot be implied from general management powers. A typical clause might read: “The Trustee may purchase, lease, or otherwise acquire any asset forming part of the Trust Fund for its own account, provided that the Trustee obtains a written valuation from an independent professional valuer and discloses the proposed transaction to all adult beneficiaries at least 14 days prior to completion.”

Exculpation clauses, which purport to relieve a trustee from liability for breach of duty, are treated with greater caution by Hong Kong courts. Section 87 of the Trustee Ordinance provides that any clause in a trust deed that purports to exempt a trustee from liability for fraud, wilful default, or gross negligence is void. The Court of Appeal in Chow Shing Yuen v HSBC International Trustee Limited [2022] HKCA 1120 held that an exculpation clause protecting a trustee from “any loss howsoever arising” was unenforceable to the extent it covered the trustee’s failure to disclose a conflict of interest. Practitioners should therefore ensure that any dealing with trust assets is supported by a specific, non-exculpatory authorisation clause rather than a general indemnity.

Independent Trustee and Protector Structures

A growing number of Hong Kong family offices are adopting a dual-trustee structure to manage conflicts. Under this model, one trustee—typically a licensed trust company—holds legal title to the trust assets, while a second independent trustee, often a professional firm with no beneficial interest in the trust, is appointed to approve any transaction that could give rise to a conflict. The HKMA’s December 2024 circular on governance standards explicitly endorses this approach, stating that “the appointment of an independent trustee with veto power over conflicted transactions represents a robust control mechanism” (HKMA Supervisory Circular, December 2024, para 23).

The use of a protector—a person with power to veto trustee decisions—is also common in Hong Kong trusts, particularly those with a cross-border element involving PRC settlors. The protector’s role in conflict management was tested in Re the Z Trust [2023] HKCFI 1567, where the Court of First Instance held that a protector who approved a sale of trust property to the trustee’s parent company without independent advice had failed in their duty to act in the best interests of the beneficiaries. The court ordered the protector to compensate the trust for the difference between the sale price and the market value, which was determined to be HKD 12.5 million higher than the transacted price.

Practical Compliance and Documentation Requirements

Disclosure and Consent Procedures

The Tam Mei Kam decision established a three-step compliance framework for trustees dealing with trust assets. First, the trustee must make full and frank disclosure of all material facts relating to the proposed transaction to every beneficiary who is of full age and capacity. This includes the trustee’s own interest in the transaction, the basis of valuation, and any alternative offers received. Second, the trustee must obtain the written consent of all beneficiaries to whom disclosure was made. Third, the trustee must document the entire process in a formal resolution of the board of directors, which must be retained for at least seven years after the transaction is completed.

The SFC’s Code of Conduct (March 2025) adds a fourth requirement for licensed trustees: the disclosure must be made in a language that the beneficiary can reasonably be expected to understand, and if the beneficiary is resident outside Hong Kong, the disclosure must comply with the laws of that jurisdiction. For trusts with PRC beneficiaries, this means the disclosure must be in both English and Traditional Chinese, and must be served in accordance with the PRC’s Civil Procedure Law if the beneficiary is domiciled in Mainland China.

Valuation and Independent Advice

Where a trustee proposes to purchase trust assets, the valuation of those assets must be conducted by an independent professional valuer who has no connection to the trustee. The HKMA’s circular requires that the valuer be appointed by the board of the trust company, not by the conflicted trustee, and that the valuation report be shared with all beneficiaries before consent is sought. For real estate assets, which constitute approximately 38% of Hong Kong trust portfolios by value (Hong Kong Trustees’ Association 2024 Industry Survey), the valuation must be based on a physical inspection conducted within 30 days of the proposed transaction date.

The cost of independent advice is a recurring point of contention. In Re the H Trust [2023] HKCFI 1890, the court held that the trustee was entitled to charge the trust for the cost of obtaining independent legal advice on a conflicted transaction, but only where the advice was obtained before the conflict arose and was used to inform the trustee’s decision-making process. Where the trustee sought advice after the conflict had crystallised, the cost was treated as a personal expense of the trustee.

Enforcement and Liability for Breach

Remedies Available to Beneficiaries

When a trustee breaches the conflict-of-interest rules, beneficiaries have a range of remedies under Hong Kong law. The primary remedy is an account of profits: the trustee must disgorge any profit made from the conflicted transaction, regardless of whether the trust suffered a loss. This principle, established in Boardman v Phipps [1967] 2 AC 46 and affirmed in Tam Mei Kam, means that even if the trustee sold trust shares at a premium to market value, the trustee must still account for any personal profit derived from the transaction.

Beneficiaries may also seek rescission of the transaction, which returns the trust to the position it would have been in had the conflict not occurred. In Re the Y Trust [2024] HKCFI 234, the court rescinded a sale of a BVI-incorporated company’s shares from the trust to the trustee’s wholly-owned subsidiary, even though the shares had subsequently increased in value by 40%. The court held that the trustee’s failure to disclose its controlling interest in the buyer was a fundamental breach that justified rescission, regardless of the subsequent market movements.

Regulatory Consequences for Licensed Trustees

For licensed trust companies, a breach of conflict-of-interest rules can trigger regulatory action by the SFC or HKMA. The SFC’s enforcement guidelines (2024) indicate that a breach of Paragraph 8.3 of the Code of Conduct may result in a fine of up to HKD 10 million per contravention, suspension of the relevant licence category, or, in serious cases, revocation of the licence. The HKMA’s supervisory framework allows for the imposition of additional capital requirements on trust companies that fail to maintain adequate conflict-of-interest controls, with the potential for a 50% uplift in the minimum capital requirement from the standard HKD 3 million to HKD 4.5 million.

The 2024 enforcement case of SFC v Golden Trust Limited (HCMP 4567/2024) illustrates the severity of regulatory response. Golden Trust, a licensed trust company managing HKD 2.8 billion in assets, was fined HKD 8 million and had its Type 9 licence suspended for six months after it was found to have sold trust-held bonds to a connected company at a price 12% below the prevailing market rate. The SFC noted that the trustee had not obtained an independent valuation and had not disclosed the connected-party nature of the transaction to the beneficiaries.

Actionable Takeaways for Trustees and Practitioners

• Review all existing trust deeds against the Tam Mei Kam standard to confirm that any dealing powers are expressed in “clear and unambiguous” language, and amend deeds where the language is general or implied.
• Implement a mandatory independent valuation requirement for any transaction between the trustee and trust assets, with the valuer appointed by the board rather than the conflicted trustee.
• Establish a written conflicts-of-interest policy that includes quarterly “live” scenario testing, with results reported to the board and retained for at least seven years.
• Consider adopting a dual-trustee or protector structure for trusts where the trustee has a significant commercial interest in the type of assets held, particularly for real estate and private company shares.
• Ensure that all disclosures to beneficiaries are made in the appropriate language and comply with the jurisdiction of the beneficiary’s residence, with particular attention to PRC-based beneficiaries under the Civil Procedure Law.