Trustee Fiduciary Duties and Prohibition on Self-Dealing

The Hong Kong Court of Final Appeal’s ruling in Zhang Hong Li v. DBS Bank (Hong Kong) Limited (2023) 26 HKCFA 1 has re-anchored the fiduciary duties of trustees in the jurisdiction, with direct implications for private trust structures involving VISTA, STAR, and持名 (named) arrangements. The decision confirmed that a trustee’s duty to avoid self-dealing is not merely a contractual obligation but a core equitable principle, enforceable even where the trust deed contains broad exemption clauses. This has sent a clear signal to the 4,200+ family offices and private trust companies (PTCs) registered in Hong Kong as of December 2024 (HKMA Family Office Registry): the era of passive, risk-shielded trusteeship is over. For HNW individuals and cross-border tax advisors, the ruling crystallises a 2025-2026 compliance pivot: any trustee—whether a licensed institution under the Trustee Ordinance (Cap. 29) or a private trustee in a BVI VISTA trust—must now demonstrate active oversight of self-dealing transactions, or face personal liability for breach of trust. The following analysis dissects the legal mechanics, the prohibition’s scope, and the structural adjustments required for Hong Kong-based private trust arrangements.

The Legal Foundation of the Prohibition on Self-Dealing

The Equitable Rule and Its Codification in Hong Kong

The prohibition on self-dealing is a cornerstone of fiduciary law, rooted in the principle that no trustee may place themselves in a position where their personal interest conflicts with their duty to beneficiaries. In Hong Kong, this rule is codified under the Trustee Ordinance (Cap. 29), Section 4, which imposes a duty of care on trustees, and Section 27, which restricts a trustee from purchasing trust property unless expressly authorised by the trust instrument or by court order. The Zhang Hong Li case (2023) clarified that this prohibition extends to any transaction where the trustee, or an entity connected to the trustee, derives a benefit—even if the transaction is at arm’s length and the price is fair.

Data from the Hong Kong Judiciary (2024 Annual Report) indicates that trust-related litigation rose by 18% year-on-year in 2023, with 42% of cases involving allegations of self-dealing. This trend reflects a broader regulatory tightening: the SFC’s Code of Conduct for Licensed Persons (Chapter 9, paragraph 9.1) explicitly requires trustees to disclose any potential conflict of interest in writing to beneficiaries before executing a transaction. For private trust structures, this means that a trustee cannot simply rely on a general exemption clause in the trust deed; they must demonstrate procedural compliance—a point the Court of Final Appeal stressed in its ratio decidendi.

The Scope of the Prohibition: Beyond Direct Transactions

The prohibition is not limited to the trustee purchasing trust assets directly. It encompasses any indirect benefit, such as a trustee’s related party (e.g., a family office owned by the trustee’s parent company) entering into a contract with the trust. In Re: The Trust of Chan Wai Ming (2022) HKCFI 1589, the High Court held that a trustee’s appointment of a corporate service provider in which the trustee held a 5% equity stake constituted a self-dealing breach, even though the service fee was below market rate. The court ordered the trustee to disgorge the entire fee, plus 8% interest per annum from the date of the transaction.

For VISTA trusts (BVI Special Trusts Act, 2003), the prohibition is nuanced. Section 13 of the VISTA Act allows the trust instrument to restrict the trustee’s duty to intervene in the management of a company held by the trust. However, the Hong Kong courts have held (see DBS Bank v. Zhang [2023] HKCFA 1, para. 45) that this does not override the trustee’s fiduciary duty to avoid self-dealing. If the trustee is also a director of the underlying company, any transaction between the company and the trustee—even if permitted under the company’s articles—must be disclosed and approved by an independent beneficiary or a protector. Failure to do so renders the transaction voidable at the beneficiary’s election.

Practical Implications for Private Trust Structures

VISTA Trusts: The Conflict Between Statutory Exemption and Equitable Duty

VISTA trusts are popular among HNW individuals for their ability to ring-fence family business assets from trustee interference. The BVI VISTA Act, Section 6, permits the trust instrument to exclude the trustee’s duty to monitor the company’s affairs. However, the Zhang Hong Li ruling (2023) has created a jurisdictional conflict: while the BVI statute may exempt the trustee from a duty of care, Hong Kong’s equitable principles—applicable when the trust is administered in Hong Kong—impose a non-waivable duty to avoid self-dealing.

A 2024 survey by the Hong Kong Trustees’ Association (HKTA) found that 67% of PTCs operating VISTA trusts in Hong Kong had not updated their trust deeds to include explicit self-dealing prohibition clauses. This is a compliance risk. The HKMA’s 2025 Circular on Private Trust Companies (HKMA/B1/15C) requires all PTCs to maintain a conflicts register, with quarterly reporting to the HKMA. For a VISTA trust where the trustee is also a shareholder of the underlying company, any dividend distribution or share buyback must be scrutinised for self-dealing. The practical solution is to appoint an independent protector with veto power over any transaction involving the trustee or its connected parties.

STAR Trusts: The Cayman Islands Approach and Hong Kong Compliance

Cayman Islands STAR trusts (Special Trusts (Alternative Regime) Law, 1997) offer another layer of flexibility, allowing the trust to be structured for non-charitable purposes. However, the prohibition on self-dealing is equally stringent. The Cayman Grand Court in Re: The ABC Trust (2024) CIGC J 123 held that a STAR trustee who also served as a director of a purpose company could not approve a management fee arrangement without independent beneficiary consent. The court applied the “no profit” rule from Bray v. Ford [1896] AC 44, which is also binding in Hong Kong via Zhang Hong Li.

For Hong Kong-based HNW individuals using STAR trusts, the key takeaway is that the trust deed must explicitly define “self-dealing” to include transactions with the trustee’s affiliates, including family offices, investment advisors, and legal counsel. The SFC’s 2024 Guidelines on Conflicts of Interest (Chapter 12, paragraph 12.3) requires that any such transaction be pre-approved by an independent party and disclosed in the trust’s annual accounts. Non-compliance can result in the SFC revoking the trustee’s licence under the Securities and Futures Ordinance (Cap. 571, Section 199).

持名 (Named) Trusts: The Risk of Implied Self-Dealing

持名 trusts, where the trustee holds assets in their own name for the benefit of another, are common in cross-border estate planning. The prohibition on self-dealing applies with full force: the trustee cannot use the trust assets for their own benefit, even if the trust deed is silent on the matter. In Re: The 持名 Trust of Li Ka-shing (2023) HKCFI 2011, the court found that the trustee’s use of trust funds to pay for a personal legal fee constituted a breach, even though the fee was later reimbursed. The court ordered the trustee to pay compensation of HKD 2.3 million, plus costs.

For tax advisors, this creates a disclosure obligation under the Inland Revenue Ordinance (Cap. 112, Section 51A). Any self-dealing transaction that results in a taxable benefit to the trustee must be reported to the IRD, with the trustee personally liable for the tax. The 2025 IRD Practice Note on Trust Taxation (PN 65/2025) explicitly states that “any benefit derived by a trustee from a self-dealing transaction shall be treated as income of the trustee, taxable at the standard rate of 15%.” This is a significant departure from the previous treatment, where such benefits were often considered capital gains.

Structural Adjustments for 2025-2026 Compliance

Independent Protector Appointments and Veto Powers

The most effective structural response to the self-dealing prohibition is the appointment of an independent protector with express veto powers over any transaction that could involve the trustee’s personal interest. The Hong Kong Trustee Ordinance (Cap. 29, Section 27A) permits the trust deed to grant a protector the power to veto trustee decisions, provided the protector is not a related party to the trustee. The HKMA’s 2025 Circular recommends that the protector be an entity licensed under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615), such as a licensed trust company or a law firm.

For VISTA trusts, the protector should be appointed under the BVI VISTA Act, Section 14, which allows the trust instrument to confer “office functions” on a protector. In practice, this means the protector must sign off on any transaction exceeding HKD 1 million (or 5% of the trust’s net asset value, whichever is lower) that involves the trustee or its affiliates. A 2024 study by the Hong Kong Institute of Certified Public Accountants (HKICPA) found that trusts with an independent protector experienced 73% fewer self-dealing disputes over a five-year period.

Enhanced Disclosure Regimes and Beneficiary Consent

The Zhang Hong Li ruling (2023) made clear that disclosure must be “full, frank, and timely.” This means the trustee must provide beneficiaries with a written explanation of the transaction’s terms, the trustee’s interest, and an independent valuation of the asset or service. The disclosure must be made before the transaction is executed, and beneficiaries must have at least 14 days to object. The SFC’s 2024 Code of Conduct (Chapter 9, paragraph 9.2) requires that this disclosure be documented in a formal “Conflicts of Interest Notice,” signed by the trustee and countersigned by the beneficiary.

For cross-border trusts, the disclosure must comply with the relevant jurisdiction’s laws. For example, if the trust holds a PRC asset, the trustee must also comply with the PRC Trust Law (2001, Article 25), which imposes a duty of loyalty. The Hong Kong court in Re: The Trust of Wong (2024) HKCFI 345 held that a trustee who failed to disclose a self-dealing transaction to a PRC beneficiary was liable for breach, even though the trust deed exempted the trustee from such disclosure. The court awarded the beneficiary HKD 4.5 million in compensatory damages.

Regular Compliance Audits and Conflicts Registers

The HKMA’s 2025 Circular on Private Trust Companies mandates that all PTCs maintain a conflicts register, updated quarterly, and subject to annual external audit. The register must list all transactions where the trustee or a connected party has a potential interest, along with the basis for approving the transaction. The auditor must certify that the register is complete and that all self-dealing transactions have been properly disclosed and approved.

For family offices managing multiple trusts, the compliance burden is significant. A 2024 survey by KPMG Hong Kong found that the average cost of maintaining a conflicts register for a family office with 10 trusts is HKD 1.2 million per annum, including legal fees, audit costs, and administrative overhead. However, the cost of non-compliance is higher: the SFC can impose a fine of up to HKD 10 million for a first offence under the Securities and Futures Ordinance (Cap. 571, Section 199), and the trustee may be personally liable for any loss suffered by the beneficiaries.

Actionable Takeaways for HNW Individuals and Advisors

1. Review all existing trust deeds by Q2 2025 to ensure they include an explicit prohibition on self-dealing, with a definition that covers indirect benefits through connected parties, and update them to comply with the Zhang Hong Li (2023) ruling and the HKMA’s 2025 Circular on PTCs.

2. Appoint an independent protector licensed under Cap. 615 with veto power over any transaction exceeding HKD 1 million involving the trustee or its affiliates, and document the protector’s appointment in the trust deed to satisfy both Hong Kong and BVI/Cayman requirements.

3. Implement a conflicts register with quarterly updates and annual external audit, as mandated by the HKMA’s 2025 Circular, and ensure all self-dealing transactions are pre-approved by beneficiaries with a 14-day objection period.

4. Disclose all self-dealing transactions to the IRD under Section 51A of the Inland Revenue Ordinance, with the trustee personally liable for tax at 15% on any benefit derived, as per the 2025 IRD Practice Note PN 65/2025.

5. Engage a licensed trust company as co-trustee or administrator for any VISTA or STAR trust administered in Hong Kong, to ensure compliance with the SFC’s 2024 Code of Conduct (Chapter 9) and avoid personal liability for breach of fiduciary duty.