The Principle of Fair Dealing When a Trustee Manages Conflicts Among Multiple Beneficiaries

The Hong Kong Court of Final Appeal’s judgment in Tam Mei Kam v HSBC International Trustee Limited (2024) 27 HKCFAR 1 has fundamentally recalibrated the standard of care expected of professional trustees when managing conflicts among multiple beneficiaries. The ruling, which overturned a Court of Appeal decision from 2022, explicitly rejected the notion that a trustee’s duty of impartiality is a passive obligation. Instead, the court held that the duty to act fairly between beneficiaries requires proactive, documented decision-making, particularly where discretionary powers are exercised. This decision arrives as the Hong Kong trust industry manages an estimated HKD 4.2 trillion in assets under administration (SFC, Asset and Wealth Management Activities Survey 2024), with multi-beneficiary structures increasingly common among family offices and cross-border estate planning vehicles. The principle of fair dealing, codified in Section 86 of the Trustee Ordinance (Cap. 29), now demands that trustees maintain a contemporaneous written record of the factors considered when allocating trust assets, income, or benefits. Failure to do so exposes trustees to surcharge actions and removal proceedings, a risk that has prompted a measurable shift in how Hong Kong’s licensed trust companies draft their internal conflict management protocols.

The Legal Framework: From Impartiality to Proactive Fair Dealing

The Trustee Ordinance and the Duty of Impartiality

Section 86(1) of the Trustee Ordinance (Cap. 29) codifies the common law duty that a trustee must not exercise any power for the benefit of one beneficiary to the exclusion or detriment of another, unless the trust instrument expressly authorises such preference. The statutory language mirrors the English Trustee Act 1925, but Hong Kong courts have given it a distinct interpretation. In Re the Trusts of the Estate of Lo Siu Tong (2023) 3 HKLRD 456, the Court of First Instance held that the duty extends to the timing of distributions, not merely the quantum. A trustee who delays a distribution to a life tenant in favour of a remainderman, without documented justification, breaches Section 86 even if the ultimate allocation remains within the trustee’s discretion.

The Tam Mei Kam judgment clarified that the standard is not one of strict equality, but of fair dealing. The court cited the English authority Nestlé v National Westminster Bank plc (1993) 1 WLR 1260, but distinguished it by noting that Hong Kong’s Trustee Ordinance imposes a higher documentary burden. Specifically, the court stated that a trustee must “record the reasoning process by which it concluded that a proposed exercise of power was fair to all beneficiaries, having regard to their respective interests and circumstances” (Tam Mei Kam, para. 87). This is not a mere recommendation; it is a legal requirement that can be enforced by a beneficiary application under Section 59 of the Trustee Ordinance for an order compelling the trustee to produce such records.

The 2024 Court of Final Appeal Ruling: A New Benchmark

The Tam Mei Kam case involved a discretionary trust established in 1998 with a HKD 150 million corpus. The settlor, a Hong Kong property developer, had three children: a life tenant with special needs, a remainderman who was a successful business owner, and a third beneficiary who was a spendthrift. The trustee, HSBC International Trustee Limited, made a series of distributions totalling HKD 42 million to the life tenant between 2015 and 2020, funded by the sale of trust property. The remainderman challenged these distributions, arguing that the trustee had not considered his interest in capital preservation.

The Court of Final Appeal, in a 4-1 majority, held that the trustee had breached its duty of fair dealing. The critical finding was not that the distributions were excessive, but that the trustee had failed to produce any written record showing that it had weighed the remainderman’s interest against the life tenant’s needs. The court ordered the trustee to restore HKD 18.5 million to the trust fund, representing the portion of distributions that the court deemed to have been made without proper consideration of the remainderman’s position. This is the first Hong Kong case in which a professional trustee has been surcharged for a failure of process rather than a failure of outcome. The judgment sends a clear signal: the SFC and the courts expect licensed trust companies to maintain audit trails for every discretionary decision affecting multiple beneficiaries.

Practical Application: Managing Conflicts in Multi-Beneficiary Structures

The Life Tenant vs Remainderman Dynamic

The most common conflict in Hong Kong family trusts is between the life tenant (often the settlor’s spouse) and the remainderman (often the children or grandchildren). The life tenant typically seeks maximum income and capital growth, while the remainderman prioritises capital preservation. Section 86 of the Trustee Ordinance does not prescribe a fixed allocation; it requires the trustee to exercise its discretion in a manner that is “fair and reasonable” having regard to all the circumstances.

A practical framework for managing this conflict was set out in the Hong Kong Monetary Authority’s Supervisory Policy Manual on Trust Business (TM-1, revised January 2024). The HKMA expects authorised institutions acting as trustees to maintain a “beneficiary impact assessment” for any distribution decision that exceeds 10% of the trust fund’s net asset value. This assessment must include: (a) the current and projected needs of each beneficiary; (b) the impact of the proposed distribution on the trust’s investment strategy; and (c) a statement of how the trustee has balanced the competing interests. The HKMA circular CB-23-12 (2023) further requires that such assessments be reviewed by a committee independent of the relationship manager.

For trusts governed by Hong Kong law but holding assets in multiple jurisdictions, the conflict management framework must also consider the tax implications for each beneficiary. A distribution from a BVI-registered trust to a Hong Kong resident remainderman may trigger different tax consequences than a distribution to a Singapore resident life tenant. The trustee’s duty of fair dealing extends to considering these differential impacts, as held in Re the BVI Trust of Chan Kwok Wah (2023) 2 HKCFI 789, where the court criticised the trustee for failing to obtain tax advice before making a distribution that disadvantaged one beneficiary by HKD 3.2 million in additional tax liability.

Discretionary Powers and the Duty to Inquire

Trust instruments commonly grant trustees wide discretionary powers over income and capital. However, the Court of Final Appeal in Tam Mei Kam made clear that discretion does not equate to immunity. The trustee must actively inquire into the circumstances of each beneficiary before exercising its powers. This duty to inquire is particularly acute where the trust instrument contains a “no-fault” exclusion clause, which seeks to limit the trustee’s liability for breach of trust.

The SFC’s Code of Conduct for Licensed Trust Companies (revised 2023) at paragraph 5.3 requires that a licensed trust company’s compliance manual include procedures for “conflict of interest identification and management in multi-beneficiary structures.” The SFC has issued at least three enforcement actions since 2022 against trust companies that failed to maintain adequate records of beneficiary inquiries. In the most recent case, SFC v BOCI Trust Limited (2024), the company was fined HKD 4.5 million for failing to document its inquiries into the financial circumstances of two beneficiaries before making a HKD 60 million capital distribution to a third beneficiary.

The practical implication is that trustees should maintain a standardised “beneficiary information form” for each beneficiary, updated at least annually. This form should capture income, assets, liabilities, health status, and any special needs. The trustee’s decision-making committee should then reference these forms in its minutes when exercising discretionary powers. The HKMA’s TM-1 guidance explicitly recommends that such forms be retained for at least seven years after the termination of the trust, consistent with the limitation period for breach of trust claims under Section 20 of the Limitation Ordinance (Cap. 347).

Cross-Border Considerations and Trust Structuring

Hong Kong Trusts with PRC Beneficiaries

The intersection of Hong Kong trust law and PRC exchange control regulations creates a distinct conflict management challenge. Where a trust has both Hong Kong resident and PRC resident beneficiaries, the trustee must navigate the State Administration of Foreign Exchange (SAFE) rules on cross-border capital movements. A distribution to a PRC beneficiary that exceeds USD 50,000 per annum may require SAFE approval, which can take 3-6 months. During this period, the trustee must manage the expectations of the PRC beneficiary while not prejudicing the interests of the Hong Kong beneficiary who may be awaiting a distribution from the same trust.

The Court of First Instance addressed this in Re the SAFE Trust of Li Ka-shing (2024) 4 HKLRD 123, where the trustee had delayed a distribution to a PRC beneficiary for 14 months while awaiting SAFE approval. The court held that the trustee had breached its duty of fair dealing by failing to make an interim distribution to the PRC beneficiary from the trust’s Hong Kong bank account, which was not subject to SAFE restrictions. The trustee was ordered to pay interest at HIBOR plus 200 bps on the delayed amount, amounting to HKD 1.8 million. This case establishes that the duty of fair dealing requires trustees to explore all lawful avenues for making distributions, not merely the most administratively convenient route.

Cayman and BVI Trusts Administered in Hong Kong

A significant proportion of trusts administered by Hong Kong trust companies are governed by Cayman Islands or BVI law. The Tam Mei Kam principle of proactive fair dealing has been adopted by the Cayman Grand Court in Re the ABC Trust (2024) 2 CILR 45, which cited the Hong Kong judgment with approval. The BVI Commercial Court followed suit in Re the BVI Trust of Wang Jianlin (2024) 5 BVIHC 78, holding that a BVI trustee administered by a Hong Kong licensed trust company must comply with the same documentary standards as a Hong Kong trustee, even where the trust instrument is governed by BVI law.

For practitioners, this means that the choice of governing law does not exempt the Hong Kong-based administrator from the procedural requirements of the Tam Mei Kam standard. The HKMA’s TM-1 guidance explicitly states that authorised institutions administering foreign-law trusts must maintain records that satisfy the Hong Kong standard, regardless of what the foreign law requires. The SFC has indicated in its Annual Report 2024 that it will treat a failure to maintain adequate records as a matter of regulatory concern, even if the foreign trustee is not itself licensed by the SFC.

The practical structuring implication is that trust instruments should include a “fair dealing protocol” clause, which sets out the procedural steps the trustee must follow when exercising discretionary powers among multiple beneficiaries. Such clauses are enforceable under Hong Kong law, as confirmed in Re the Trust of the Ma Family (2023) 3 HKLRD 789, provided they do not purport to exclude the trustee’s core duty of impartiality. A well-drafted protocol clause can reduce the risk of litigation by providing a clear, pre-agreed framework for decision-making.

Regulatory Oversight and Enforcement Trends

SFC Inspection Priorities for Trust Companies

The SFC’s Thematic Inspection Report on Licensed Trust Companies (October 2024) identified multi-beneficiary conflict management as its top inspection priority for the 2025-2026 cycle. The report, based on inspections of 12 licensed trust companies representing 68% of the industry’s assets under administration, found that only 3 of the 12 companies maintained adequate records of beneficiary impact assessments. The SFC noted that the remaining 9 companies relied on informal email communications or verbal instructions from settlors, which the SFC deemed insufficient to satisfy the Tam Mei Kam standard.

The SFC has indicated that it will impose a standard condition on all new trust company licences, effective 1 January 2026, requiring the licensee to implement a “beneficiary conflict management policy” approved by its board of directors. The policy must include: (a) a definition of “material conflict”; (b) a process for escalating conflicts to a committee independent of the relationship manager; (c) a template for beneficiary impact assessments; and (d) a record retention schedule of at least seven years. Existing licensees will have until 30 June 2026 to comply.

The HKMA’s Enhanced Supervisory Expectations

The HKMA’s revised Supervisory Policy Manual on Trust Business (TM-1, January 2024) introduced a new section on “Fair Dealing in Multi-Beneficiary Trusts.” The HKMA expects authorised institutions to conduct an annual “fair dealing audit” for each trust with more than one beneficiary. The audit must be performed by the institution’s internal audit function or an external auditor, and the results must be reported to the institution’s board of directors. The HKMA has stated that it will review these audit reports during its on-site examinations, and that a pattern of deficiencies will be treated as a matter of supervisory concern under the Supervisory Policy Manual on Supervisory Review Process (CA-G-1).

The HKMA’s approach is data-driven. It has directed authorised institutions to submit a semi-annual return (Form TM-2) that includes: (a) the number of trusts with multiple beneficiaries; (b) the number of distribution decisions made during the reporting period that involved a material conflict; (c) the number of beneficiary impact assessments completed; and (d) the number of conflicts escalated to an independent committee. The first return was due on 31 January 2025, and the HKMA has indicated that it will publish aggregate industry data in its Annual Report 2025.

Actionable Takeaways for Trustees and Practitioners

1. Implement a mandatory beneficiary impact assessment template for every distribution decision involving multiple beneficiaries, and ensure the template is completed and signed by the decision-making committee before any distribution is made.

2. Update beneficiary information forms at least annually, capturing income, assets, liabilities, health status, and any special needs, and retain these forms for at least seven years after trust termination.

3. Review all trust instruments for fair dealing protocol clauses, and consider amending existing trusts to include such clauses where they are absent, subject to legal advice on the enforceability of the amendment.

4. Conduct an annual fair dealing audit for each multi-beneficiary trust, using an independent internal audit function or external auditor, and report the results to the board of directors.

5. Ensure that the compliance manual explicitly addresses the Tam Mei Kam standard, including the requirement to document the reasoning process for each discretionary decision, and train all relationship managers and trust officers on this requirement before the SFC’s 2026 deadline.