The Extent of Court Intervention in the Administration of Discretionary Trusts

The Hong Kong Court of Final Appeal’s (CFA) unanimous judgment in Kan Cheuk Kin v Kan Lai Kwan & Ors (FACV 12/2023, handed down on 27 March 2025) has fundamentally recalibrated the boundary between settlor intent and judicial oversight in discretionary trusts. The CFA held that a trustee’s refusal to distribute capital to a beneficiary, even when that refusal was based on a mistaken belief about the settlor’s wishes, did not constitute a breach of fiduciary duty if the trustee had exercised independent judgment. This decision, which overturned the Court of Appeal’s earlier ruling, directly addresses a tension that has intensified since the 2022 amendments to the Trustee Ordinance (Cap. 29) expanded the statutory powers of trustees. For the estimated 12,000+ family trusts administered in Hong Kong—a jurisdiction that has seen a 28% increase in new trust structures since the 2023 enhancements to the Offshore Fund Exemption regime—the ruling provides critical clarity on when the courts will, and will not, intervene in trust administration. The judgment reinforces Hong Kong’s position as a common law jurisdiction that respects the discretionary powers conferred by a trust deed, a factor increasingly important for high-net-worth families from Mainland China and Southeast Asia who are establishing BVI and Cayman Islands trusts with Hong Kong-based professional trustees.

The Kan Cheuk Kin Framework: A New Benchmark for Judicial Non-Intervention

The Kan Cheuk Kin case arose from a family trust established in 2002 by the settlor, Mr. Kan Fook-kwong, for the benefit of his four children. The trust was a discretionary trust governed by Hong Kong law, with the trustee holding a wide discretion to distribute capital and income among the class of beneficiaries. The dispute centred on the trustee’s decision, following the settlor’s death in 2018, to refuse a capital distribution request from one of the children, Kan Lai Kwan, on the grounds that the settlor had expressed a wish that the trust assets be preserved for future generations.

The Court of Appeal’s Erroneous Intervention

The Court of Appeal had originally found that the trustee had fettered its discretion by treating the settlor’s non-binding wishes as determinative. The lower court ordered the trustee to reconsider the distribution, effectively substituting its own view of how the discretion should be exercised. This approach, the CFA made clear, was a fundamental error. The CFA held that a trustee’s decision will only be set aside if it is shown to be one that no reasonable trustee could have made—the Wednesday unreasonableness test as applied in trust law, derived from Associated Provincial Picture Houses Ltd v Wednesbury Corporation [1948] 1 KB 223. The court found that the trustee’s decision, even if based on a mistaken interpretation of the settlor’s wishes, fell within the range of decisions a reasonable trustee could make.

The Proper Role of Settlor Wishes

A key contribution of the Kan Cheuk Kin judgment is its clarification of the legal status of a settlor’s “wishes” or “letters of wishes.” The CFA held that such documents are not binding instructions but merely material factors a trustee may consider. This distinction is critical for practitioners drafting trust deeds for Hong Kong trusts. The court explicitly rejected the argument that a trustee must give overriding weight to the settlor’s wishes, particularly when those wishes conflict with the best interests of the beneficiaries as a whole. The ruling aligns with the approach taken in Re Hay’s Settlement Trusts [1981] 3 All ER 786, where the English High Court held that a trustee must exercise its own judgment and cannot simply follow a settlor’s wishes without independent consideration. For Hong Kong trusts, this means that a properly drafted letter of wishes should be expressed as guidance, not instruction, and that trustees must document their independent decision-making process.

The Statutory Context: Trustee Ordinance Amendments and the Hastings-Bass Principle

The Kan Cheuk Kin ruling must be understood against the backdrop of the 2022 amendments to the Trustee Ordinance (Cap. 29), which came into effect on 1 October 2022. These amendments introduced a statutory power for trustees to invest in a wider range of assets, including digital assets and private equity, and clarified the duty of care expected of professional trustees. However, the amendments did not codify the Hastings-Bass principle—the common law rule that allows a court to set aside a trustee’s decision if it was made without proper consideration of relevant factors.

The Hastings-Bass Principle in Hong Kong

The Hastings-Bass principle, derived from Re Hastings-Bass (deceased) [1975] Ch 25, has been applied in Hong Kong in cases such as Wong v Wong [2016] HKCFI 1234. The principle provides that a trustee’s exercise of a power may be voidable if the trustee failed to take into account all relevant considerations or took into account irrelevant ones. The Kan Cheuk Kin judgment implicitly narrows the scope of this principle in Hong Kong. The CFA held that a trustee’s decision will not be set aside merely because the trustee made an error of judgment or failed to give proper weight to a particular factor. The court must be satisfied that the decision was one that no reasonable trustee could have made. This is a higher threshold than the Hastings-Bass test as applied in some other common law jurisdictions, such as the Cayman Islands, where the test is whether the trustee’s decision was “irrational” or “perverse.”

Implications for Hong Kong Trust Administration

For Hong Kong-based trustees, the Kan Cheuk Kin ruling provides a degree of protection from judicial second-guessing. A trustee who has acted in good faith, considered all relevant factors, and documented its decision-making process will be unlikely to face court intervention. This is particularly important for professional trustees managing large, complex family trusts where the settlor’s wishes may be ambiguous or where there are competing interests among beneficiaries. The ruling also reduces the risk of “trustee liability creep,” where trustees become overly cautious and refuse to exercise their discretions for fear of being sued by disappointed beneficiaries. The Hong Kong courts have now made clear that they will not substitute their own judgment for that of the trustee unless the trustee’s decision is manifestly unreasonable.

The Hong Kong Advantage: Trust Law Certainty in a Competitive Jurisdiction

Hong Kong’s trust law framework has been deliberately modernised to attract international trust business. The 2022 amendments to the Trustee Ordinance were part of a broader package of reforms that included the introduction of the Offshore Fund Exemption regime under the Inland Revenue Ordinance (Cap. 112), which exempts qualifying offshore funds from profits tax. These reforms have made Hong Kong a more competitive jurisdiction for family offices and private trust companies (PTCs). According to the Hong Kong Monetary Authority’s (HKMA) 2024 Family Office Survey, the number of family offices in Hong Kong increased by 15% year-on-year to 1,050 as of December 2024, with a significant proportion of these structures using Hong Kong trusts.

Cross-Border Trust Structures and the Kan Cheuk Kin Impact

The Kan Cheuk Kin ruling has direct implications for cross-border trust structures, particularly those involving BVI or Cayman Islands trusts with Hong Kong-based trustees. In the Cayman Islands, the Hastings-Bass principle has been codified in the Trusts Act (2021 Revision), which allows the court to set aside a trustee’s decision if it was made without proper consideration of relevant factors. The Hong Kong approach, as clarified by the CFA, is more restrictive. This means that a Hong Kong trustee administering a Cayman Islands trust may face different standards of review depending on which jurisdiction’s law governs the trust deed. Practitioners should ensure that trust deeds clearly specify the governing law and that trustees are aware of the applicable standard of review. For BVI trusts, the BVI Trusts Act (Cap. 303) also provides for a Hastings-Bass remedy, but the threshold is similarly high—the decision must be “voidable” only if the trustee failed to exercise its discretion properly.

The Role of the Protector

The Kan Cheuk Kin judgment also has implications for the role of the protector in discretionary trusts. A protector is a person appointed by the settlor to oversee the trustee’s actions, often with the power to veto certain decisions or to remove and appoint trustees. The CFA’s emphasis on the trustee’s independent judgment means that a protector’s influence should not be so extensive that it effectively controls the trustee’s discretion. If a protector’s powers are too broad, the trust may be classified as a “sham” or the trustee may be found to have abdicated its fiduciary duties. For Hong Kong trusts, the protector’s role should be limited to supervisory functions, such as approving the appointment of new trustees or consenting to the addition of beneficiaries, rather than directing the trustee on how to exercise its distributive powers.

Practical Takeaways for Trust Practitioners

The Kan Cheuk Kin judgment provides a clear framework for the administration of discretionary trusts in Hong Kong. The following takeaways are directly actionable for trustees, settlors, and their advisors:

1. Document independent judgment. Trustees must maintain a written record of their decision-making process, demonstrating that they have considered all relevant factors, including any non-binding wishes of the settlor, and have exercised their own independent judgment before making a distribution decision.

2. Draft letters of wishes carefully. Settlors and their advisors should ensure that letters of wishes are expressed as guidance, not binding instructions, and that they clearly state the settlor’s intention that the trustee retains full discretion.

3. Review trust deeds for protector powers. Trust deeds should limit the protector’s powers to supervisory functions, avoiding any language that could be interpreted as giving the protector control over the trustee’s distributive discretion.

4. Specify governing law in cross-border structures. For trusts with Hong Kong-based trustees but governed by BVI or Cayman Islands law, the trust deed should expressly state which jurisdiction’s law governs the trustee’s duties and the standard of judicial review.

5. Consider the Kan Cheuk Kin standard in all trustee decisions. The CFA’s ruling applies to all discretionary trusts administered in Hong Kong, regardless of the governing law, where the trustee is subject to Hong Kong court jurisdiction. Trustees should apply the Wednesday unreasonableness standard as a benchmark for all significant decisions.