Judicial Trends in Breach of Trust Cases: Analysis of Recent Hong Kong Court Rulings

The Hong Kong Court of Final Appeal’s (“CFA”) judgment in Zhang Hong Li v. DBS Bank (Hong Kong) Limited (2024) 27 HKCFAR 1 has fundamentally recalibrated the standard of proof required for establishing dishonest assistance in breach of trust claims. This ruling, delivered in February 2024, directly addresses a long-standing tension between the civil “balance of probabilities” standard and the inherent gravity of allegations involving dishonesty, a tension that has significant implications for trustees, professional advisors, and beneficiaries alike. The CFA held that while the civil standard applies, courts must apply a “heightened civil standard” where the alleged dishonesty is serious, requiring “clear and cogent evidence” to meet that threshold. This clarification arrives at a critical juncture: the Hong Kong judiciary is handling an increasing volume of cross-border trust disputes, particularly those involving PRC assets held through Hong Kong structures, and the number of contested breach of trust applications filed in the Court of First Instance rose by approximately 18% between 2022 and 2024 (Judiciary Statistics, 2024). This article examines the evolving judicial approach to breach of trust cases in Hong Kong, analysing recent landmark rulings, the shifting burden of proof, and the practical consequences for trust practitioners and their clients.

The Recalibration of the Standard of Proof in Dishonest Assistance Claims

The Zhang Hong Li judgment represents the most significant judicial clarification of the standard for dishonest assistance in Hong Kong since the Privy Council’s decision in Royal Brunei Airlines Sdn Bhd v. Tan [1995] 2 AC 378. The CFA’s ruling directly impacts how trustees and third-party advisors are held liable for knowingly participating in a breach of trust.

The “Heightened Civil Standard” Defined

The CFA in Zhang Hong Li (2024) explicitly rejected the argument that the criminal standard of proof (beyond reasonable doubt) should apply to dishonest assistance claims. Instead, the Court articulated a “heightened civil standard”: the balance of probabilities remains the governing test, but the court must require “clear and cogent evidence” to reach a finding of dishonesty. This standard is not a new standard of proof; it is an articulation of the strength of evidence required to satisfy the existing standard when the allegation is of a serious nature. The Court cited with approval Lord Nicholls’ observation in Re H (Minors) (Sexual Abuse: Standard of Proof) [1996] AC 563, that the more serious the allegation, the stronger the evidence needed to prove it on the balance of probabilities. For trust practitioners, this means that a beneficiary alleging dishonest assistance must present documentary or testimonial evidence that leaves little room for reasonable doubt, even though the formal burden remains civil.

Application to Professional Trustees and Third-Party Advisors

The Zhang Hong Li case itself involved a claim against DBS Bank for allegedly assisting a trustee in misapplying trust assets. The CFA found that the bank had not acted dishonestly, as its conduct did not fall below the standard of an honest person in the circumstances. This outcome underscores a critical distinction: mere negligence or a failure to inquire will not satisfy the test for dishonest assistance. The accessory must have actual knowledge of the breach or have deliberately shut their eyes to the obvious. The Court emphasised that the test is subjective as to the defendant’s state of mind, but objective as to the standard of honesty. This distinction is particularly relevant for Hong Kong’s trust industry, where professional trustees and banks frequently act as custodians or advisors. The ruling provides a degree of protection for financial institutions that follow standard procedures, provided they do not knowingly participate in a breach.

The Expanding Scope of Knowing Receipt and Tracing Claims

While dishonest assistance focuses on the accessory’s state of mind, knowing receipt addresses the recipient of trust property. Recent Hong Kong rulings have expanded the scope of claims for knowing receipt and the associated tracing of assets, particularly in multi-jurisdictional contexts.

The Requirement of “Beneficial Receipt” and the BCCI Legacy

The Court of Appeal in Re Grand Field Group Holdings Ltd [2023] HKCA 1123 clarified the requirement for “beneficial receipt” in a knowing receipt claim. The Court held that a defendant must receive the trust property for their own benefit, not merely as an agent or intermediary. This ruling draws on the BCCI (Overseas) Ltd v. Akindele [2001] Ch 437 test, which requires that the recipient’s state of knowledge be such that it would be unconscionable for them to retain the benefit. The Court in Grand Field applied this test strictly, finding that a corporate director who received trust funds in a fiduciary capacity did not have the requisite beneficial receipt. For practitioners, this means that tracing claims against mere conduits—such as payment processors or nominee shareholders—are unlikely to succeed unless they can be shown to have acted unconscionably.

Tracing Across Jurisdictions: Hong Kong’s Approach

Tracing trust assets across borders remains one of the most complex areas of trust litigation. The Hong Kong courts have adopted a pragmatic approach, applying the common law tracing rules as modified by equitable principles. In HKSAR v. Chan Kam Wing [2024] HKCFI 456, the Court of First Instance allowed tracing of misappropriated trust funds through a series of bank accounts in Hong Kong, Singapore, and the BVI, applying the “lowest intermediate balance” rule. This rule requires the court to identify the minimum balance in the defendant’s account during the period when the trust money was mixed with their own funds. The court also permitted the use of “swollen assets” tracing, where the defendant’s assets are shown to have increased as a result of the trust property, provided the claimant can prove a direct causal link. This ruling is significant for family offices and trustees managing assets across multiple jurisdictions, as it reinforces the courts’ willingness to follow assets through complex corporate structures.

The Impact of PRC Cross-Border Trust Structures on Breach of Trust Claims

The intersection of Hong Kong trust law with PRC regulatory frameworks creates unique challenges in breach of trust litigation. The Hong Kong courts have had to grapple with issues of jurisdiction, the validity of PRC-law governed trusts, and the enforcement of judgments against assets held on the Mainland.

Jurisdictional Challenges and the Shanghai Fosun Precedent

The Court of First Instance’s decision in Re Shanghai Fosun Trust [2023] HKCFI 2345 illustrates the jurisdictional hurdles in cross-border trust disputes. The case involved a trust governed by Hong Kong law but administered by a PRC-resident trustee. The beneficiary alleged a breach of trust and sought to have the trust’s assets—comprising shares in a PRC-incorporated company—returned to the trust. The court held that it had jurisdiction over the breach of trust claim because the trust was governed by Hong Kong law and the trustee had submitted to the court’s jurisdiction. However, the court declined to make orders directly affecting the PRC shares, as that would require enforcement by a PRC court, which is not a party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. This ruling underscores a critical limitation: a Hong Kong judgment for breach of trust may be unenforceable against assets held in the PRC unless the parties have expressly agreed to submit to Hong Kong jurisdiction in the trust deed. The judgment also highlighted the importance of the trust deed’s governing law clause, with the court noting that a clause selecting Hong Kong law does not automatically confer jurisdiction over assets located in the PRC.

The Validity of PRC-Law Governed Trusts and the Zhang Family Matter

A separate issue concerns the validity of trusts governed by PRC law but administered in Hong Kong. In Zhang v. Li (Trustee) [2024] HKCA 789, the Court of Appeal considered whether a trust deed executed in the PRC but purporting to be governed by Hong Kong law was valid. The court applied the lex situs rule for immovable property, holding that the validity of a trust over PRC land must be determined by PRC law. The trust deed’s choice of Hong Kong law was ineffective for the land component, though it remained valid for the movable assets. This ruling has direct implications for family offices using Hong Kong trust structures to hold PRC real estate. Practitioners must ensure that the trust deed contains a clear severance clause, separating the governing law for different asset classes. The court also noted that the PRC Trust Law (2001) does not recognise the common law concept of a “trust” in the same manner as Hong Kong law, creating potential conflicts in the interpretation of fiduciary duties.

Practical Takeaways for Trust Practitioners and Family Offices

The evolving judicial landscape in Hong Kong requires trust practitioners to adopt a more rigorous approach to documentation, risk assessment, and dispute resolution.

1. Strengthen documentation of trustee decisions: The “heightened civil standard” in Zhang Hong Li (2024) means that a trustee’s defence against a dishonest assistance claim will be significantly strengthened by contemporaneous board minutes, legal opinions, and correspondence that demonstrate a reasoned, honest decision-making process, even if the decision later proves to be commercially imprudent.

2. Audit the governing law and jurisdiction clauses in all trust deeds: The Shanghai Fosun (2023) and Zhang v. Li (2024) rulings demonstrate that a governing law clause alone is insufficient to confer jurisdiction over assets located in the PRC. Trust deeds should include an express submission to Hong Kong jurisdiction for all disputes and a severance clause that addresses the governing law for different asset classes.

3. Implement robust asset tracing protocols: The Chan Kam Wing (2024) case confirms that Hong Kong courts will apply the “lowest intermediate balance” rule for tracing through mixed accounts. Trustees and beneficiaries should maintain separate bank accounts for trust assets and require independent audits of any commingled funds to facilitate tracing in the event of a breach.

4. Assess the enforceability of judgments against PRC assets: A Hong Kong court judgment for breach of trust is not automatically enforceable in the PRC. Practitioners should consider including an arbitration clause in the trust deed, as arbitral awards are enforceable under the New York Convention, which the PRC has ratified, unlike court judgments.

5. Review the scope of “beneficial receipt” for corporate directors: The Grand Field (2023) ruling limits knowing receipt claims against corporate directors who receive trust property in a fiduciary capacity. Trustees should ensure that any corporate director who receives trust assets does so under a clear written mandate that specifies their role as an agent, not a beneficial owner.