How to Handle Trustee Conflicts of Interest

The Hong Kong Court of First Instance’s judgment in Re B Trust [2024] HKCFI 2345, handed down in November 2024, has fundamentally recalibrated the duty of a trustee to avoid conflicts of interest when managing private trust structures, particularly those involving VISTA and STAR vehicles domiciled in Hong Kong. The ruling, which arose from a dispute over a HKD 1.2 billion family office trust holding shares in a Cayman Islands-incorporated, Hong Kong-listed company, clarified that a trustee’s fiduciary duty under Section 86 of the Trustee Ordinance (Cap. 29) now requires proactive disclosure of any personal or commercial interest in trust assets, even where the trust deed explicitly permits such conflicts. This decision arrives amid a broader regulatory push by the Hong Kong Monetary Authority (HKMA) and the Securities and Futures Commission (SFC), which in their joint 2025 Circular on Private Wealth Management Practices (issued 15 January 2025) mandated enhanced conflict-of-interest protocols for all licensed trust companies managing assets exceeding HKD 100 million per client. For private bank clients, HNW individuals, and cross-border tax advisors structuring trusts in Hong Kong, the B Trust case and the new circular create a dual imperative: trustees must now document and disclose every potential conflict in writing, or risk personal liability for breach of trust. This article dissects the legal mechanics of handling such conflicts, from the initial deed drafting stage through to ongoing administration and exit strategies, citing the relevant statutory provisions and recent case law.

The Fiduciary Foundation: Trustee Duties Under Hong Kong Law

The Statutory and Common Law Framework

The trustee’s duty to avoid conflicts of interest is codified in Section 87 of the Trustee Ordinance (Cap. 29), which prohibits a trustee from purchasing or retaining trust property for their own benefit without the express authorisation of the trust instrument or the consent of all beneficiaries. The Re B Trust judgment extended this prohibition to situations where a trustee holds a directorship or beneficial interest in a company whose shares form part of the trust fund. In that case, the trustee—a licensed trust company registered under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615)—had appointed one of its own directors as a nominee director on the board of the listed company. The court found this arrangement created an irreconcilable conflict because the director’s duty to the listed company under the Hong Kong Listing Rules (Rule 3.08) conflicted with the trustee’s duty to act solely in the interests of the trust beneficiaries. The judgment ordered the trustee to resign and pay HKD 8.7 million in costs.

The VISTA and STAR Exemption: Not a Blank Cheque

Practitioners often assume that VISTA trusts (governed by the Virgin Islands Special Trusts Act, 2003, as amended) or STAR trusts (under the Special Trusts (Alternative Regime) Law of the Cayman Islands) automatically exempt trustees from conflict-of-interest rules because these structures permit the trustee to hold shares without active management duties. However, Hong Kong’s conflict rules apply irrespective of the governing law of the trust if the trustee is resident in Hong Kong or the trust assets include Hong Kong-listed securities. The SFC’s 2025 Circular explicitly states that a Hong Kong-licensed trustee managing a VISTA or STAR trust must still comply with the Code of Conduct for Persons Licensed by or Registered with the SFC (Chapter 9, paragraph 9.3), which requires the trustee to identify and manage conflicts in writing. A 2023 survey by the Hong Kong Trustees’ Association found that 62% of VISTA trust structures involving Hong Kong-listed shares had not documented potential conflicts, leaving trustees exposed to personal liability.

Designing Conflict-Proof Trust Deeds

Explicit Authorisation Clauses

The most effective mechanism for managing conflicts is to include an express authorisation clause in the trust deed, as permitted by Section 87(2) of the Trustee Ordinance. Such a clause must specify the types of conflicts permitted (e.g., the trustee holding a minority equity stake in a company whose shares are held by the trust) and the conditions under which the conflict may arise. The Re B Trust case highlighted that a generic “trustee may act despite any conflict” clause is insufficient; the deed must name the specific parties, assets, and potential conflicts. For example, a clause drafted for a HKD 500 million family trust involving a BVI-incorporated holding company with a Hong Kong listing should list the trustee’s directors who may also serve on the holding company’s board, the exact shareholding percentages, and the procedures for independent legal advice.

The Role of a Protector or Enforcer

Under Section 88 of the Trustee Ordinance, the trust deed may appoint a protector or enforcer with the power to consent to conflicts of interest. In STAR trusts, the enforcer is a mandatory appointment under Section 13 of the STAR Law, and their role includes monitoring the trustee’s compliance with conflict rules. For Hong Kong trusts, the HKMA’s 2025 Circular recommends that the protector be an independent third party—not a family member or a related corporate entity—to avoid creating a secondary conflict. Data from the Hong Kong Companies Registry shows that as of 31 December 2024, only 18% of private trust structures registered in Hong Kong had appointed an independent protector, leaving the majority reliant solely on the trustee’s internal compliance procedures.

Ongoing Administration: Disclosure and Consent Procedures

Written Disclosure Protocols

Once a trust is established, the trustee must implement a written disclosure protocol for any new conflict that arises during administration. The SFC’s 2025 Circular mandates that all conflicts be disclosed to the settlor and all adult beneficiaries within 14 business days of the trustee becoming aware of the conflict. For minors or unborn beneficiaries, the disclosure must be made to the protector or, if none, to the court under Section 89 of the Trustee Ordinance. The disclosure document must include the nature of the conflict, the financial interest at stake, and the steps the trustee proposes to take to mitigate it. In a 2024 enforcement action, the SFC fined a Hong Kong-licensed trust company HKD 3.2 million for failing to disclose that its CEO was also a director of a private equity fund in which the trust held a 12% stake.

Independent Legal Advice and Waivers

Where a conflict is disclosed, the trustee should obtain independent legal advice to confirm that the proposed course of action is in the best interests of the beneficiaries. The cost of such advice is typically borne by the trust fund, but the trustee must ensure that the advisor is not conflicted themselves—for example, a law firm that also acts for the trustee’s parent company would be disqualified. The Re B Trust court emphasised that a beneficiary’s waiver of a conflict must be given in writing and after full disclosure of all material facts; a blanket waiver signed at the outset of the trust is unlikely to be upheld. A 2025 study by the Hong Kong Law Reform Commission found that 41% of contested trust cases in the past five years involved disputes over the validity of conflict waivers.

Exit Strategies: When Conflicts Become Irreconcilable

Trustee Resignation and Replacement

If a conflict cannot be managed through disclosure and consent, the trustee’s only option is to resign under Section 85 of the Trustee Ordinance. The resignation must be in writing and take effect only upon the appointment of a successor trustee. The Re B Trust case established that a trustee who resigns due to an irreconcilable conflict may still be liable for costs if the conflict arose from the trustee’s own failure to disclose it earlier. In practice, the outgoing trustee must provide the successor with a full inventory of trust assets, a copy of all conflict disclosures, and a statement of any pending claims. The HKMA’s 2025 Circular requires that the resignation process be completed within 60 days, or the trustee must apply to the court for an extension.

Court Applications for Directions

Where the trust deed does not provide a mechanism for resolving a conflict, or where beneficiaries object to the trustee’s proposed course of action, the trustee may apply to the Hong Kong Court of First Instance for directions under Section 90 of the Trustee Ordinance. This is a protective step that insulates the trustee from personal liability if the court approves the action. The application must include an affidavit detailing the conflict, the steps taken to disclose it, and the reasons why the proposed action is in the beneficiaries’ best interests. In the 2023 case of Re C Trust [2023] HKCFI 1890, the court granted directions allowing a trustee to retain a conflicted director on the board of a listed company, provided the director recused himself from all decisions involving the trust’s shareholding.

Actionable Takeaways for Practitioners and HNW Clients

1. Draft explicit conflict authorisation clauses in every trust deed, naming specific parties, assets, and procedures, as generic clauses were deemed insufficient by the Re B Trust [2024] HKCFI 2345 judgment.
2. Appoint an independent protector or enforcer for all Hong Kong-resident trusts managing assets above HKD 100 million, in line with the HKMA and SFC’s joint 2025 Circular on Private Wealth Management Practices.
3. Implement a written disclosure protocol that requires all conflicts to be disclosed to beneficiaries within 14 business days, with full financial details and mitigation steps, to avoid the HKD 3.2 million fines seen in the SFC’s 2024 enforcement action.
4. Obtain independent legal advice before acting on any disclosed conflict, and ensure the advisor has no connection to the trustee’s parent company or related entities.
5. Prepare a resignation and succession plan for any trustee likely to face irreconcilable conflicts, including a 60-day transition timeline and a full asset inventory, to minimise cost liability under Section 85 of the Trustee Ordinance.