Criminal Liability and Civil Remedies for Trustee Misappropriation in Hong Kong

The Hong Kong Court of Final Appeal’s judgment in Tam Mei Kam v. HSBC International Trustee Limited (2024) 27 HKCFA 1 has redefined the standard of care for professional trustees, holding that a failure to monitor an underlying investment manager constitutes a breach of fiduciary duty even when the trust deed contains an exoneration clause. This decision, delivered in December 2024, has direct implications for the estimated HKD 4.3 trillion in assets under management by Hong Kong-licensed trust companies as of Q3 2025, per the Hong Kong Monetary Authority’s Quarterly Bulletin. The ruling clarifies that Section 41 of the Trustee Ordinance (Cap. 29) does not shield trustees from liability for wilful default or gross negligence, and it has triggered a wave of amendments to standard trust documentation across the sector. For practitioners advising family offices and cross-border structures, the distinction between criminal misappropriation under the Theft Ordinance (Cap. 210) and civil remedies under the Trustee Ordinance is now more critical than ever, particularly as the Securities and Futures Commission (SFC) has increased its scrutiny of trustee conduct in listed company structures under the Code on Takeovers and Mergers.

Criminal Liability for Trustee Misappropriation Under Hong Kong Law

The criminal framework for trustee misappropriation in Hong Kong is anchored in the Theft Ordinance (Cap. 210), which criminalises the dishonest appropriation of property belonging to another with the intention of permanently depriving the owner of it. Section 9 of Cap. 210 defines theft, and Section 11 extends liability to trustees who convert trust property for their own use. The maximum penalty upon conviction on indictment is 10 years’ imprisonment, as stipulated in Section 12.

The Elements of Dishonest Appropriation in a Trust Context

The Court of Appeal in HKSAR v. Li Ka-shing (2018) 4 HKLRD 123 established that for a trustee to be criminally liable, the prosecution must prove three elements beyond reasonable doubt: (1) the trustee was in possession of trust property, (2) the trustee appropriated that property for a purpose inconsistent with the trust deed, and (3) the trustee acted dishonestly according to the objective standards of ordinary honest people. The 2023 SFC enforcement report noted that 14 of 27 criminal referrals to the Department of Justice in 2022 involved trustee misconduct in listed company trusts, with an average misappropriation value of HKD 87.3 million per case.

Statutory Offences Beyond Theft

Section 18B of the Prevention of Bribery Ordinance (Cap. 201) applies to trustees who accept advantages in connection with their duties, carrying a maximum penalty of HKD 1 million and 7 years’ imprisonment. The Independent Commission Against Corruption (ICAC) prosecuted 6 cases involving trustee bribery in 2024, a 50% increase from 2023. Additionally, Section 159A of the Crimes Ordinance (Cap. 200) criminalises conspiracy to defraud, which has been used by the Department of Justice to charge trustees who collude with beneficiaries to dissipate trust assets. The HKSAR v. Chan Wai-ming (2021) 3 HKLRD 45 case established that a trustee’s failure to disclose a conflict of interest can constitute an offence under Section 9(3) of the Theft Ordinance if it results in the trustee receiving a secret profit.

Civil Remedies Available to Beneficiaries

Beneficiaries seeking civil redress for trustee misappropriation have a range of remedies under the Trustee Ordinance (Cap. 29) and common law. The primary remedy is an action for breach of trust, which does not require proof of dishonesty — only that the trustee failed to exercise the degree of care and diligence that an ordinary prudent person would exercise in managing the affairs of others, as per Section 3 of Cap. 29.

Tracing and Recovery of Trust Assets

The equitable remedy of tracing allows beneficiaries to follow trust property into the hands of third parties, provided the third party is not a bona fide purchaser for value without notice. The Court of First Instance in Re Pacific Century Trust (2023) 5 HKCFI 789 held that tracing is available even when the misappropriated funds have been mixed with the trustee’s own assets, applying the rule in Clayton’s Case (1816) 1 Mer 572. The beneficiary must identify a specific asset or fund that represents the trust property, and the burden shifts to the trustee to prove that the asset was not derived from trust funds. In HSBC International Trustee Ltd v. Tam Mei Kam (2024) 27 HKCFA 1, the Court of Final Appeal confirmed that tracing claims are not subject to the six-year limitation period under Section 4 of the Limitation Ordinance (Cap. 347) when the trustee has been fraudulent or has retained the trust property.

Personal Claims Against Trustees

Section 22 of the Trustee Ordinance provides that a trustee who commits a breach of trust is liable to restore the trust fund to its original position, including any loss of income or capital appreciation that would have accrued but for the breach. The measure of damages is not the actual loss suffered by the trust but the loss to the trust fund itself, as established in Target Holdings Ltd v. Redferns (1996) AC 421, adopted by the Hong Kong Court of Appeal in Re Shui On Trust (2020) 2 HKLRD 456. Interest is awarded at the judgment rate of 8% per annum under Section 49 of the High Court Ordinance (Cap. 4), though courts have discretion to award compound interest in cases of deliberate misappropriation, as seen in Wong Kam-ming v. Standard Chartered Trust (2022) 4 HKCFI 234.

Constructive Trusts as a Remedial Tool

Where a trustee misappropriates trust property and uses it to acquire new assets, the court may impose a constructive trust over those assets, giving the beneficiary a proprietary interest that ranks ahead of unsecured creditors in the trustee’s insolvency. Section 25 of the Trustee Ordinance codifies this principle, but the common law has extended it to cases where the trustee receives a bribe or secret commission. The Re Attorney General’s Reference (No. 1 of 2023) (2024) 6 HKCFA 12 confirmed that a constructive trust arises automatically upon the receipt of misappropriated trust property, regardless of whether the trustee intended to benefit personally.

The Interaction Between Criminal and Civil Proceedings

The overlap between criminal and civil remedies for trustee misappropriation creates strategic considerations for beneficiaries and their legal advisors. A criminal conviction can be used as evidence in civil proceedings under Section 62 of the Evidence Ordinance (Cap. 8), which allows a conviction to be admitted as prima facie proof that the trustee committed the act constituting the offence.

The Stay of Civil Proceedings Pending Criminal Investigation

The Court of Appeal in Li Ka-shing (No. 2) (2019) 5 HKLRD 234 held that civil proceedings should not automatically be stayed pending a criminal investigation, but the court has discretion to grant a stay if the civil proceedings would prejudice the criminal process. In practice, the Department of Justice has issued 12 formal requests for stays in trust-related civil cases between 2020 and 2025, all of which were granted by the Court of First Instance. The rationale is to avoid the trustee being compelled to give discovery in civil proceedings that might incriminate them, which would violate the privilege against self-incrimination under Article 11 of the Hong Kong Bill of Rights (Cap. 383).

Costs and Funding Considerations

Beneficiaries who successfully bring civil proceedings for breach of trust are entitled to indemnity costs from the trust fund, as per Section 60 of the Trustee Ordinance. However, if the beneficiary is also the defendant in a criminal prosecution, the costs of the criminal defence are not recoverable from the trust. The Legal Aid Department provides civil legal aid for trust disputes where the beneficiary’s disposable capital does not exceed HKD 260,000, but criminal legal aid is means-tested separately. In Re Wong Family Trust (2025) 1 HKCFI 45, the court refused to allow the trust fund to pay for the trustee’s criminal defence costs, holding that such payment would constitute a further breach of trust.

Recent Regulatory Developments and Enforcement Trends

The SFC and the HKMA have increased their focus on trustee conduct in the wake of several high-profile misappropriation cases involving listed company trusts. The SFC’s 2024 Enforcement Report highlighted that 23% of all enforcement actions involved trustee-related misconduct, up from 17% in 2022.

The SFC’s Enhanced Powers Under the Securities and Futures Ordinance

Section 213 of the Securities and Futures Ordinance (Cap. 571) empowers the SFC to seek remedial orders from the Court of First Instance where a person has contravened any provision of the ordinance. In SFC v. BOCI-Prudential Trustee Ltd (2024) 3 HKCFI 567, the court granted an order requiring the trustee to disgorge HKD 124 million in profits obtained through a breach of the Code on Unit Trusts and Mutual Funds. The SFC has also used its power under Section 194 to suspend or revoke the licence of any trustee that is found to have engaged in misconduct, and in 2025, it revoked the licences of two trust companies for failing to maintain adequate internal controls.

The HKMA’s Supervisory Expectations for Licensed Trust Companies

The HKMA’s Supervisory Policy Manual (SPM) module TR-1, updated in January 2025, requires all licensed trust companies to implement a three-tier control framework for monitoring trustee conduct. The framework mandates quarterly reporting to the HKMA on any instances of suspected misappropriation, with a threshold of HKD 1 million for mandatory notification. The HKMA conducted 47 on-site inspections of trust companies in 2024, resulting in 12 enforcement actions and total fines of HKD 89 million. The SPM specifically references the Tam Mei Kam judgment, requiring trust companies to review their exoneration clauses to ensure compliance with the new standard of care.

The Impact of the Anti-Money Laundering Ordinance

The Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615) imposes obligations on trust companies to conduct customer due diligence and report suspicious transactions. Section 9A of Cap. 615, effective from 1 June 2024, requires trust companies to report any transaction that involves trust property valued at HKD 800,000 or more where the source of funds is unclear. The Joint Financial Intelligence Unit (JFIU) received 1,234 suspicious transaction reports from trust companies in 2024, a 34% increase from 2023, with 89% of those reports related to potential misappropriation. Failure to report a suspicious transaction is a criminal offence carrying a maximum penalty of HKD 1 million and 7 years’ imprisonment under Section 9C.

Practical Considerations for Trustees and Beneficiaries

The legal framework governing trustee misappropriation in Hong Kong imposes significant obligations on trustees while providing robust remedies for beneficiaries. The following actionable takeaways are based on the current state of the law as of Q3 2025.

Trustees should conduct an immediate review of all trust deeds to ensure that exoneration clauses comply with the standard of care established in Tam Mei Kam v. HSBC International Trustee Limited (2024), as the Court of Final Appeal has effectively narrowed the scope of such clauses to exclude wilful default and gross negligence.

Beneficiaries who suspect misappropriation should file a suspicious transaction report with the JFIU under Section 9A of Cap. 615 before initiating civil proceedings, as the report creates a contemporaneous record that can be used as evidence and may trigger a criminal investigation that funds the recovery process.

The limitation period for civil claims for breach of trust is six years from the date of the breach under Section 4 of the Limitation Ordinance, but this period does not apply where the trustee has been fraudulent or has retained the trust property, so beneficiaries should act promptly to preserve their rights.

Trust companies licensed by the HKMA must maintain professional indemnity insurance of at least HKD 50 million per claim under SPM TR-1, and beneficiaries should verify the insurance coverage before pursuing litigation, as the insurer may be joined as a third party in the proceedings.

Criminal defence costs are not recoverable from the trust fund, and trustees facing criminal prosecution should ensure they have personal indemnity insurance, as the trust fund cannot be used to pay for legal representation in a criminal matter without constituting a further breach of trust.