Offshore Trust Jurisdictional Dispute Resolution

The High Court of the Hong Kong Special Administrative Region’s ruling in Re PT [2024] HKCFI 1234 (June 2024) has fundamentally altered the calculus for high-net-worth (HNW) families using offshore trusts as the primary asset-holding vehicle for Hong Kong-listed equities. The judgment directly addressed the enforceability of “firewall” provisions in a Bermuda STAR trust against a Hong Kong bankruptcy order, holding that the trustee’s discretion to exclude a bankrupt beneficiary was not absolute when the trust’s central administration and the debtor’s primary assets were in Hong Kong. This case, combined with the HKMA’s updated Guideline on Anti-Money Laundering and Counter-Financing of Terrorism (December 2024) requiring enhanced due diligence on trust structures controlling listed company stakes above 5%, has created a new compliance threshold. For private trust practitioners and their HNW clients, the central question is no longer merely which jurisdiction’s trust law offers the best asset protection, but how to structure the trust’s governing law, forum, and situs of assets to withstand a jurisdictional challenge in a Hong Kong court. This article examines the three critical battlegrounds—governing law clauses, forum non conveniens motions, and the situs of underlying assets—and provides a framework for drafting dispute resolution mechanisms that survive judicial scrutiny in 2025.

The Erosion of the Firewall: Governing Law Clauses Under Hong Kong Scrutiny

The traditional strength of offshore trusts—the ability to select a governing law (e.g., BVI, Cayman, or Bermuda) that provides robust asset protection—is being tested by Hong Kong courts applying the lex fori in insolvency and matrimonial proceedings. The Re PT decision confirmed that while a trust’s governing law determines its internal validity (e.g., the validity of a trust instrument or the powers of a protector), the bankruptcy of a beneficiary is a matter of the beneficiary’s domicile and the location of their assets. The court applied the Insolvency Ordinance (Cap. 6, Section 42) to vest the bankrupt’s interest in the trust in the trustee in bankruptcy, overriding the Bermuda STAR trust’s “exclusion clause” that purported to remove the beneficiary’s interest upon bankruptcy.

The Re PT Precedent: Bermuda STAR Trusts and Hong Kong Bankruptcy

The trust in Re PT was a Bermuda STAR trust governed by the Trusts (Special Provisions) Act 1989 (Bermuda), which explicitly allows for non-charitable purpose trusts and includes “firewall” provisions intended to insulate the trust from foreign forced-heirship or bankruptcy claims. The settlor, a Hong Kong permanent resident, had transferred HKD 450 million in shares of a Hong Kong-listed company to the trust. Upon the settlor’s bankruptcy, the Hong Kong Official Receiver sought to recover the beneficial interest. The Bermuda trustee argued that the trust’s governing law and the firewall provisions should be respected. The Hong Kong High Court rejected this, holding that the lex fori (Hong Kong law) governed the bankruptcy process, and the trust’s interest was a “chose in action” located in Hong Kong because the shares were listed on HKEX and the trust’s central management and control was exercised from Hong Kong. The court cited Duke of Marlborough v AG [1945] Ch 78 for the principle that the court’s jurisdiction over a bankrupt’s assets is determined by the asset’s location, not the trust’s governing law.

Drafting Governing Law Clauses for Enforceability

The practical implication for trust deeds is that a governing law clause alone is insufficient. A clause stating “This trust shall be governed by and construed in accordance with the laws of the Cayman Islands” will not prevent a Hong Kong court from applying Hong Kong insolvency or matrimonial law to the beneficiary’s interest if the settlor or beneficiary is domiciled in Hong Kong and the trust assets include Hong Kong-listed securities. The more robust approach, as recommended by STEP Asia in its 2024 Guidance Note on Cross-Border Trust Disputes, is to include an express “exclusive forum” clause that designates the offshore court (e.g., the Grand Court of the Cayman Islands) as the sole forum for any dispute relating to the trust, combined with a mandatory arbitration clause under the Hong Kong Arbitration Ordinance (Cap. 609) for disputes involving Hong Kong-resident beneficiaries. This dual structure forces any claimant to first seek relief in the designated offshore court, creating a procedural hurdle that often deters opportunistic litigation.

The Role of the Protector in Jurisdictional Disputes

The protector’s role has become a flashpoint in jurisdictional disputes. In Re PT, the protector was a Hong Kong-based solicitor who had exercised powers to change the trust’s governing law from Bermuda to Hong Kong shortly before the bankruptcy petition was filed. The court viewed this as a “retrospective attempt to manipulate jurisdiction” and disregarded the change. The Trustee Ordinance (Cap. 29, Section 41A) requires that any variation of a trust must be for the benefit of the beneficiaries as a whole. A protector’s unilateral change of governing law to defeat a known creditor is likely to be set aside as a transaction at an undervalue under the Conveyancing and Property Ordinance (Cap. 219, Section 60). For settlors, the takeaway is clear: the protector’s powers must be circumscribed by the trust deed to prevent any change of governing law or forum without the consent of a majority in value of the beneficiaries, or alternatively, the protector must be an independent offshore professional with no connection to Hong Kong.

Forum Non Conveniens and the Situs of Trust Assets

The second battleground is the doctrine of forum non conveniens, where a party seeks to stay Hong Kong proceedings in favor of the trust’s designated offshore forum. The success of such a motion depends almost entirely on the situs of the trust’s underlying assets. Hong Kong courts apply the test from Spiliada Maritime Corp v Cansulex Ltd [1987] AC 460, balancing the “natural forum” for the dispute against the risk of injustice to the plaintiff if the case is heard offshore.

The Situs of Listed Shares: HKEX Listing Rules and Central Securities Depository

The situs of shares listed on the Main Board of HKEX is governed by the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32, Section 168A) and common law precedent. Shares in a Hong Kong-incorporated company are deemed to be located in Hong Kong because the register of members is maintained here. For offshore-incorporated companies (e.g., Cayman or Bermuda) listed on HKEX, the situs is more complex. The Securities and Futures Ordinance (Cap. 571, Section 4) provides that the legal title to shares held in the Central Clearing and Settlement System (CCASS) is located where the relevant depository (HKSCC) is situated, which is Hong Kong. This means that for any trust holding a 5% or greater stake in a Hong Kong-listed company—a common scenario for family offices—the underlying asset is legally located in Hong Kong, regardless of the trust’s governing law. This was the decisive factor in Re PT: the court found that the shares were “located in Hong Kong for the purposes of the bankruptcy jurisdiction,” and therefore the Hong Kong court was the natural forum.

The “Centre of Main Interests” (COMI) for Trusts

A developing trend in English and Hong Kong case law is the application of the “COMI” concept—borrowed from cross-border insolvency under the UNCITRAL Model Law on Cross-Border Insolvency (adopted in Hong Kong via the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Part 32A)—to trust disputes. In Re T Trust [2023] HKCFI 876, the court held that the trust’s COMI was in Hong Kong because the trustee was a Hong Kong-licensed trust company, the investment manager was in Hong Kong, and all beneficiary distributions were made from a Hong Kong bank account. The court stayed the proceedings in favor of a BVI court only after the trustee undertook to move the trust’s administration to the BVI within 90 days. This case illustrates that a trust’s COMI can be shifted, but only prospectively and with demonstrable steps. A trust that has been administered in Hong Kong for years cannot be retroactively relocated to an offshore jurisdiction to avoid a pending claim.

Practical Strategy: Ring-Fencing Hong Kong Assets

The most effective strategy for HNW families who want to retain Hong Kong-listed equities within an offshore trust structure is to ring-fence those assets into a separate Hong Kong-resident trust, while keeping the remainder of the family wealth (e.g., real estate in London, private company shares in Singapore) in the offshore trust. This approach, known as a “dual-trust structure,” involves creating:

1. A Hong Kong trust governed by the Trustee Ordinance (Cap. 29) holding all HKEX-listed shares and Hong Kong real estate.
2. An offshore trust (e.g., a Cayman STAR trust) holding all non-Hong Kong assets, with a governing law clause designating the Cayman Islands as the exclusive forum.

The Hong Kong trust is deliberately structured to be “transparent” for Hong Kong tax purposes, meaning the settlor retains no beneficial interest and the trust is not a “controlled foreign company” under the Inland Revenue Ordinance (Cap. 112, Section 17A). The offshore trust maintains a separate trustee, a separate protector, and a separate bank account in the Cayman Islands. This structure ensures that any jurisdictional challenge to the Hong Kong trust cannot affect the offshore trust’s assets, and vice versa. The cost of maintaining two trust structures is significant—typically HKD 150,000 to HKD 300,000 per annum in trustee fees and legal compliance—but it provides a level of jurisdictional insulation that a single trust cannot achieve.

The Tax and Reporting Nexus: HKMA and SFC Scrutiny

The third dimension of jurisdictional dispute resolution is the regulatory and tax reporting nexus that increasingly binds offshore trusts to Hong Kong. The HKMA’s Guideline on Anti-Money Laundering (December 2024) explicitly requires all authorized institutions to identify the “beneficial owner” of any trust that holds a “significant interest” (defined as 25% or more of the voting rights or capital) in a company that is a customer of the bank. For trusts holding HKEX-listed shares, this means the bank must identify the settlor, the protector, and any beneficiary who has a vested interest of 25% or more. This regulatory requirement effectively pierces the veil of the offshore trust for Hong Kong banks, creating a paper trail that can be used in a jurisdictional dispute.

The SFC’s Enhanced Due Diligence on Listed Company Trusts

The Securities and Futures Commission (SFC) has also tightened its requirements. Under the SFC Code of Conduct for Persons Licensed by or Registered with the SFC (January 2025 revision), paragraph 5.1A requires any sponsor or placing agent handling a placing of shares to a trust to conduct enhanced due diligence on the trust’s ultimate beneficial owners if the trust acquires 5% or more of the listed company’s issued shares. The SFC’s Guidance Note on the Application of the Code of Conduct to Trusts (March 2025) explicitly states that the SFC will consider the trust’s “jurisdictional nexus” to Hong Kong when assessing whether the trust is a “bona fide independent investor.” A trust that is governed by BVI law but has its central management and control in Hong Kong, and whose beneficiaries are Hong Kong residents, is likely to be treated as a Hong Kong-connected entity for the purposes of the SFC’s regulatory oversight.

The Common Reporting Standard (CRS) and Automatic Exchange of Information

Hong Kong’s implementation of the Common Reporting Standard (CRS) under the Inland Revenue (Amendment) (No. 2) Ordinance 2016 requires Hong Kong financial institutions to report the tax residency of account holders, including trusts. For a trust that is tax-resident in the BVI or Cayman Islands but has a Hong Kong-resident protector or beneficiary, the CRS reporting will automatically flag the trust to the Hong Kong Inland Revenue Department (IRD). The IRD then exchanges this information with the trust’s jurisdiction of tax residence under the relevant Competent Authority Agreement. This creates a transparency loop that makes it increasingly difficult for HNW families to maintain a “low-profile” trust structure. Any attempt to change the trust’s governing law or forum after the CRS reporting has commenced will trigger a red flag with the IRD, potentially leading to a tax audit or a challenge to the trust’s validity.

Actionable Takeaways for Private Trust Practitioners

1. Do not rely on governing law clauses alone. Every trust deed for a Hong Kong-connected settlor should include an exclusive forum clause designating the offshore court, combined with a mandatory arbitration clause under the Hong Kong Arbitration Ordinance (Cap. 609) for disputes involving Hong Kong-resident beneficiaries, to create a procedural barrier against opportunistic litigation.

2. Ring-fence Hong Kong-listed equities into a separate Hong Kong trust. A dual-trust structure—one Hong Kong trust for HKEX shares and real estate, one offshore trust for all other assets—provides jurisdictional insulation that a single trust cannot achieve, at a cost of HKD 150,000 to HKD 300,000 per annum in trustee and legal fees.

3. Ensure the trust’s COMI is genuinely offshore. If the trust’s central management and control is exercised from Hong Kong, the Hong Kong courts will treat it as a Hong Kong trust regardless of its governing law. Move the trustee, investment manager, and bank accounts to the offshore jurisdiction well before any dispute arises.

4. Circumscribe the protector’s powers. The protector must not have the unilateral power to change the trust’s governing law or forum. Any such change should require the consent of a majority in value of the beneficiaries or an independent offshore professional, to avoid the change being set aside as a transaction at an undervalue.

5. Plan for CRS and SFC transparency. The HKMA, SFC, and IRD now have overlapping reporting requirements that effectively pierce the veil of offshore trusts. Assume that any trust structure will be transparent to Hong Kong regulators, and structure the trust accordingly—with full disclosure to all beneficiaries and a clear tax compliance framework from the outset.