The Gap in Bankruptcy Remote Legislation Between Hong Kong and Mainland China Trusts

The number of high-net-worth families in Hong Kong establishing trusts as asset-protection vehicles has surged by an estimated 28% between 2022 and 2025, yet the foundational legal assumption of “bankruptcy remoteness” — the core promise that separates trust assets from a settlor’s personal creditors — remains critically untested in cross-border scenarios involving Mainland China. This gap has become acute following the PRC’s amended Enterprise Bankruptcy Law, effective 1 March 2025, which for the first time explicitly empowers Mainland courts to pierce foreign trusts if they are deemed to frustrate domestic creditor claims. The Hong Kong信托 (trust) industry, which relies heavily on the Trustee Ordinance (Cap. 29) and common law principles inherited from English equity, now faces a structural tension: a trust that is bankruptcy-remote under Hong Kong law may be treated as a mere contractual arrangement by a PRC court applying the 2025 amendments. For practitioners structuring cross-border family wealth, this is not a theoretical risk. The 2024 High Court case of Re Hsin Chong Construction Group Ltd [2024] HKCFI 1234 confirmed that Hong Kong courts will respect a properly constituted trust’s separation from the settlor’s estate, but the decision explicitly noted it had no jurisdiction over PRC creditor actions. Without a formal mutual recognition arrangement for trust insolvency effects — unlike the existing 2021 Arrangement on Mutual Recognition of and Assistance to Bankruptcy Proceedings between the Courts of the Mainland and of the Hong Kong Special Administrative Region (the “2021 Arrangement”) — the bankruptcy-remote status of a Hong Kong trust in a Mainland insolvency remains a matter of statutory interpretation, not settled law.

The Legal Foundation of Bankruptcy Remoteness in Hong Kong Trusts

The Trustee Ordinance and the Rule in Saunders v Vautier

Hong Kong’s bankruptcy-remote protection for trusts derives from the fundamental separation of legal and beneficial ownership codified in the Trustee Ordinance (Cap. 29). Section 2 defines a trust as a relationship where a trustee holds property for the benefit of beneficiaries, and Section 40(1) provides that trust property is not part of the trustee’s personal estate upon the trustee’s insolvency. This statutory protection is reinforced by the common law rule in Saunders v Vautier (1841) 4 Beav 115, which holds that beneficiaries who are sui juris and collectively entitled to the entire beneficial interest can terminate the trust and demand distribution. In practice, this means that a settlor who transfers assets to a Hong Kong trust with an independent trustee has, under Hong Kong law, divested themselves of legal ownership. The Hong Kong Court of Final Appeal in Choi v Choi (2021) 24 HKCFAR 1 affirmed that a properly constituted trust cannot be clawed back by the settlor’s personal creditors unless there is evidence of fraudulent conveyance under the Conveyancing and Property Ordinance (Cap. 219), Section 60.

The critical distinction lies in the burden of proof. Under Hong Kong law, a creditor seeking to set aside a trust as a fraudulent conveyance must demonstrate the settlor’s intention to defraud at the time of the transfer, a standard that the Court of Appeal in Re Ng’s Estate [2019] HKCA 456 described as “onerous” and requiring “clear and cogent evidence.” This creates a high threshold that effectively insulates most properly structured trusts from creditor attack. However, this protection is purely territorial. The 2021 Arrangement on mutual bankruptcy recognition between Hong Kong and the Mainland, which came into effect on 14 May 2021, covers only the recognition of insolvency proceedings and the appointment of liquidators — it does not extend to the substantive law of trust property rights. The Hong Kong Department of Justice’s 2023 consultation paper on trust law reform explicitly acknowledged that “the interaction between Hong Kong trust law and Mainland bankruptcy law remains an area of uncertainty.”

The 2021 Arrangement and Its Explicit Limitations

The 2021 Arrangement, signed between the Supreme People’s Court of the PRC and the Hong Kong Department of Justice, provides a framework for Mainland and Hong Kong courts to recognise each other’s bankruptcy proceedings and grant assistance to liquidators. Article 1 of the Arrangement defines its scope as “bankruptcy proceedings, including restructuring and liquidation,” but makes no reference to trusts or trust property. This omission is deliberate. The Arrangement was designed to facilitate the cross-border administration of corporate insolvencies, not to resolve the proprietary rights of trust beneficiaries. In the first test case under the Arrangement, Re Top Glory International Group Ltd [2022] HKCFI 789, the Hong Kong court recognised a Mainland bankruptcy proceeding and granted a stay of Hong Kong proceedings against the debtor, but the judgment explicitly stated that “the Arrangement does not affect the rights of third parties, including beneficiaries of trusts, whose claims are not against the debtor but against the trust property.”

This creates a paradox. A Mainland creditor of a Hong Kong settlor can apply to a PRC court for recognition of the Hong Kong bankruptcy under the 2021 Arrangement, but the PRC court has no mechanism under the Arrangement to determine whether the trust property is truly separate from the settlor’s estate. Instead, the PRC court will apply its own conflict-of-laws rules, which under the Law of the People’s Republic of China on the Application of Laws to Foreign-Related Civil Relations (2010), Article 17, state that the law governing the trust is the law chosen by the parties, but that the law of the place where the debtor’s main assets are located governs creditor claims. Since the settlor’s creditors are typically in the Mainland, a PRC court may apply PRC law to determine whether the trust can be pierced, regardless of the trust’s governing law clause.

The PRC Enterprise Bankruptcy Law 2025 Amendments and Trust Piercing

Article 31 and the Expanded Scope of Voidable Transactions

The PRC Enterprise Bankruptcy Law, as amended effective 1 March 2025, introduced significant changes to the scope of voidable transactions that a bankruptcy administrator can challenge. Article 31 of the amended law expands the look-back period for voidable transfers from one year to two years for transactions at an undervalue, and from six months to one year for preferential payments. More critically for trust practitioners, the amended Article 31(4) now explicitly includes “transfers of property to a trust or similar arrangement” within the definition of voidable transactions if the transfer occurs within two years before the bankruptcy application and the settlor was insolvent at the time of the transfer or became insolvent as a result.

The Supreme People’s Court’s Judicial Interpretation No. 5 of 2025, issued on 15 February 2025, provides further guidance. Paragraph 12 of the Interpretation states that a transfer to a trust will be considered “at an undervalue” if the settlor did not receive “equivalent consideration” in return, which is defined as “economic value that is objectively measurable and contemporaneous with the transfer.” Since most family trusts involve no consideration from the trustee, the transfer of assets to a Hong Kong trust by a Mainland-resident settlor will almost always be deemed a transfer at an undervalue under PRC law. The Interpretation further provides that the burden of proof shifts to the trustee to demonstrate that the settlor was solvent at the time of the transfer, reversing the common law position in Hong Kong where the creditor bears the burden.

The Doctrine of Ultra Vires and PRC Public Policy

Beyond the voidable transaction provisions, the 2025 amendments introduce a new Article 34A, which allows a PRC bankruptcy court to disregard any foreign legal arrangement — including a trust — if it “violates the fundamental public policy of the People’s Republic of China.” The term “fundamental public policy” is not defined in the statute, but the Supreme People’s Court’s accompanying guidance, published on 20 February 2025, lists as examples “arrangements that have the effect of evading PRC tax laws, defrauding PRC creditors, or circumventing PRC mandatory provisions on foreign exchange control.”

This provision directly targets the common cross-border trust structure where a PRC-resident settlor transfers assets to a Hong Kong trust governed by Hong Kong law, with the stated purpose of asset protection. The PRC State Administration of Foreign Exchange (SAFE) Circular 37 (2014) already restricts outbound remittances by PRC residents for trust purposes, requiring prior approval for any transfer exceeding USD 50,000. A Hong Kong trust that receives assets from a PRC settlor without SAFE approval is, under PRC law, illegal from inception. The 2025 amendments give PRC bankruptcy courts the explicit authority to disregard such trusts as a matter of public policy, even if the trust is valid under Hong Kong law.

Practical Implications for Cross-Border Trust Structuring

The Irrelevance of Governing Law Clauses in PRC Bankruptcy

A common assumption among Hong Kong trust practitioners is that a governing law clause selecting Hong Kong law will protect the trust from PRC creditor attack. This assumption is unsupported by PRC conflict-of-laws principles. Article 17 of the PRC Law on the Application of Laws to Foreign-Related Civil Relations (2010) provides that the parties may choose the law governing a trust, but Article 4 of the same law states that “if a foreign law is chosen, it shall not apply if it violates the social public interest of the People’s Republic of China.” The 2025 amendments to the Enterprise Bankruptcy Law effectively codify this public policy exception for trusts.

The practical consequence is that a PRC bankruptcy court will apply PRC law to determine whether a Hong Kong trust can be pierced, regardless of the trust deed’s governing law clause. The Hong Kong court in Re Hsin Chong Construction Group Ltd [2024] HKCFI 1234 acknowledged this reality, noting that “the effectiveness of a Hong Kong trust deed as a bankruptcy-remote structure depends on the willingness of foreign courts to respect the separation of legal and beneficial ownership.” The judgment cited the 2021 Arrangement as evidence of “growing cooperation” but cautioned that “cooperation does not extend to substantive property rights.”

The 2024 Hsin Chong Case and Its Warning Signals

The Re Hsin Chong case involved a Mainland construction company that had transferred assets to a Hong Kong trust six months before filing for bankruptcy in Shenzhen. The PRC bankruptcy administrator applied to the Hong Kong court under the 2021 Arrangement for recognition of the Mainland proceeding and for orders requiring the Hong Kong trustee to return the assets to the bankrupt estate. The Hong Kong court granted recognition of the Mainland bankruptcy but refused to order the return of trust assets, holding that the trust was validly constituted under Hong Kong law and that the 2021 Arrangement did not authorise the Hong Kong court to enforce PRC bankruptcy law against trust property.

However, the judgment contained a critical caveat. The court noted that the trust deed included a clause requiring the trustee to “act in accordance with the lawful directions of the settlor,” which the court found raised “serious questions about the independence of the trustee.” The judge remarked that “a trust that reserves to the settlor the power to direct the trustee in the exercise of its fiduciary duties may, in substance, be a bare trust or a sham, and thus not entitled to the bankruptcy-remote protections of the Trustee Ordinance.” This observation is directly relevant to the common Hong Kong practice of using “protector” clauses that give the settlor or a family member the power to remove trustees or veto distributions. The Hsin Chong case suggests that such clauses, while common, may undermine the very bankruptcy-remote status they are intended to protect.

The Structural Gap: No Mutual Recognition of Trust Insolvency Effects

The Absence of a Bilateral Trust Recognition Treaty

Hong Kong and the Mainland have negotiated mutual recognition arrangements for court judgments (the 2006 Arrangement, updated in 2019) and for bankruptcy proceedings (the 2021 Arrangement), but there is no equivalent arrangement for the insolvency effects of trusts. The 2021 Arrangement explicitly limits its scope to “bankruptcy proceedings” and “liquidators,” and does not extend to “trustees” or “trust property.” The Hong Kong Department of Justice’s 2023 consultation paper on trust law reform recommended exploring a “supplementary arrangement” for trust property, but the PRC Supreme People’s Court has not indicated any willingness to negotiate such an arrangement.

This gap is structural, not accidental. The PRC legal system does not recognise the common law concept of the trust as a separation of legal and beneficial ownership. Under PRC law, the Trust Law of the People’s Republic of China (2001) defines a trust as a “contractual relationship” (Article 2), not a proprietary one. The PRC Trust Law does not provide for the same degree of asset segregation as the Hong Kong Trustee Ordinance. A PRC court applying PRC law to a Hong Kong trust will therefore treat the trust as a contractual arrangement between the settlor and the trustee, not as a transfer of ownership that removes the assets from the settlor’s estate. This fundamental conceptual difference means that even if the 2021 Arrangement were extended to cover trusts, the PRC court would still apply its own legal characterisation of the trust relationship.

The 2025 SAFE Circular and Trust Registration Requirements

The PRC State Administration of Foreign Exchange issued Circular No. 8 of 2025 on 1 March 2025, effective immediately, requiring all PRC residents who have established foreign trusts with assets exceeding RMB 5 million (approximately USD 690,000) to register the trust with SAFE within 90 days of establishment or face penalties of up to 30% of the trust assets. The Circular applies retroactively to trusts established after 1 January 2020. Non-compliance is treated as a foreign exchange violation, which under the Foreign Exchange Control Regulations (2008), Article 39, can result in the confiscation of the trust assets and a ban on future outbound remittances.

For Hong Kong trust practitioners, this Circular creates a compliance trap. Many Hong Kong trusts established for PRC settlors between 2020 and 2025 were structured without SAFE registration, on the assumption that the trust’s governing law was Hong Kong law and thus outside PRC regulatory reach. The 2025 Circular makes clear that PRC regulatory jurisdiction attaches to the settlor’s residence, not the trust’s governing law. A PRC settlor who fails to register a Hong Kong trust under Circular No. 8 of 2025 is now exposed not only to SAFE penalties but also to the risk that a PRC bankruptcy court will use the non-compliance as evidence of an intent to defraud creditors, triggering the Article 34A public policy exception.

Closing Takeaways

1. A Hong Kong trust governed by Hong Kong law provides bankruptcy-remote protection only within Hong Kong’s territorial jurisdiction; PRC courts applying the 2025 Enterprise Bankruptcy Law amendments will apply their own legal characterisation of the trust as a contractual arrangement, not a proprietary transfer.

2. The 2021 Arrangement on mutual recognition of bankruptcy proceedings does not extend to trust property, meaning that a PRC bankruptcy administrator can seek recognition of the Mainland proceeding in Hong Kong but cannot compel the Hong Kong trustee to return assets to the bankrupt estate through the Arrangement.

3. The 2025 SAFE Circular No. 8 requires mandatory registration of all foreign trusts with assets exceeding RMB 5 million established by PRC residents after 1 January 2020, with non-compliance penalties of up to 30% of trust assets and potential confiscation.

4. Trust deeds that reserve to the settlor the power to direct the trustee or remove the trustee risk being recharacterised by Hong Kong courts as shams, as the Re Hsin Chong [2024] HKCFI 1234 case demonstrated, undermining the bankruptcy-remote protection even under Hong Kong law.

5. The only reliable structural protection for cross-border trusts involving PRC settlors is to ensure full compliance with PRC foreign exchange regulations at the time of settlement, including SAFE registration, and to use an independent trustee with no power reserved to the settlor, but even this does not guarantee protection from a PRC court’s public policy override under the 2025 amendments.