London There are three of us in this relationship Overview Two related Jersey Royal Court cases (In the Representation of HSBC International Limited  JRC 167 and  JRC 254A) emanating from the Hong Kong divorce proceedings of Poon Lok To Otto (“Mr Otto”) and Madam Kan Lai Kwan Kay (“Ms Kay”), provide guidance on the role of professional trustees in the context of foreign divorce proceedings between beneficiaries. In particular, the cases elaborate on (a) whether trustees should submit to foreign divorce proceedings; (b) when it is appropriate for a trustee to make a “momentous” distribution; and (c) the circumstances in which it is proper for a trustee to remove a particular beneficiary. Background facts The Otto Poon family trust (“the Trust”), to which this dispute relates, is a conventional discretionary trust governed by the law of Jersey. The sole trustee was HSBC International Trustee Limited, a BVI company with a branch in Jersey (the “Trustee”), who delegated the administration of the trust to HSBC Trustee Hong Kong Limited. The beneficiaries comprised of Mr Otto, Ms Kay, their 43 year old daughter and a Hong Kong University. The sole asset of the trust is an 84.6% shareholding in a Bermudian holding company which in turn owns 100% of a substantial trading group that was built up by Mr Otto. The trading group owns a broad portfolio of assets, 70% of which ultimately derive from Hong Kong and mainland China. Mr Otto and Ms Kay married in January 1968 and their divorce (which came about when the couple were in their early seventies) followed the tragic deaths of two of their three children. The divorce proceedings were initiated in Hong Kong (the country of Mr Otto and Ms Kay’s domicile) and escalated to the Hong Kong Court of Final Appeal. Throughout the proceedings Ms Kay sought an order for ancillary relief, by reference to the assets of the Trust. The Decision  JRC 167 The first Jersey case was heard during the Hong Kong matrimonial proceedings in 2011 and followed an order from the Hong Kong courts, granting an application by Ms Kay for the Trustee to be joined to the proceedings. The Trustee applied to the Royal Court for directions as to whether it should submit to the jurisdiction of the Hong Kong court. Submission to Foreign Court Proceedings Sir Michael Birt, Kt., Baliff deliberated on the issue of whether, if the Trustee were to submit to the Hong Kong court and an order was made by that court, the effect would be to alter the Trust (the enforcement of which would be prohibited in Jersey1). In this respect, the court considered the case of Re IMK Family Trust  JLR 250, where it was found that an order of an overseas matrimonial court varying a trust cannot be enforced in Jersey because the overseas court will be applying its local law to vary the trust, rather than Jersey law. Ultimately, it was established that the order sought by the wife in the Hong Kong proceedings (predominantly for a lump sum payment to her) was within the powers conferred upon the Trustee contained in the Trust deed because both she and Mr Otto were beneficiaries of the Trust. Therefore there was little risk that the Trustees would be put in any difficult position of conflict between a duty to obey an order of the Hong Kong court and their duty to adhere to the terms of the Trust Deed. The Royal Court then focused its attention on Re H Trust  JLR 280 where it was found that “significant consequences may flow” from a decision to submit to foreign courts, and that in most cases such a submission would not normally be in the interests of a Jersey trust, because “to do so would be to confer an enforceable power upon the overseas court to act to the detriment of the beneficiary of a trust when the primary focus of that court is the interests of the two spouses before it”. The Trustee’s situation was not, however, run-of-the-mill. A substantial proportion of the Trust’s assets were ultimately situated in Hong Kong, and advice from the Trustee’s Hong Kong solicitors suggested that, even if the Trustee did not comply with the Hong Kong court, that court would nevertheless have the power to enforce any order it made against assets of the Trust that were situated in Hong Kong. With this in mind, it was found that the Trustee should submit so that it could properly engage with the Hong Kong process, and put forward its point of view and produce evidence so that the interests of all the beneficiaries of the Trust would be fully considered by the Hong Kong court.  JRC 254A In 2014, Mr Otto and Ms Kay’s divorce proceedings were finally concluded and it was held that the entire assets of the Trust should be regarded as a resource of Mr Otto (and therefore form part of the matrimonial estate). As a result of this decision, two separate issues fell to be considered by the Royal Court. 1 Prohibited under Article 9 (4) of the 1984 Trusts (Jersey) Law 1984. The “momentous” distribution On the basis of the Hong Kong Court of Final Appeal’s conclusion, Mr Otto requested that a distribution of HK$ 770.5 million be made to him so that he could pay Ms Kay her share of the matrimonial estate. The Trustee sought the Royal Court’s permission to take such an action as this was a “momentous” decision. Sir Michael Birt, Kt., Baliff, who also presided over the 2014 case, lay out the considerations the court must have for authorising such a substantial distribution. In particular, he made reference to Re S Settlement  JLR 372, in which it was decided that where a trustee sought its guidance for such a momentous decision, the court will need be satisfied that (a) the Trustee’s decision is in good faith, (b) the decision was reasonable, and (c) there was no conflict of interest. Whilst (a) and (c) were uncontentious, the Royal Court had to reflect on whether the distribution was reasonable. It considered that the payment would bring an end to the long running litigation and allow the couple to move on with their lives, and also that the daughter would ultimately benefit from her mother’s estate. Therefore, the distribution was held to be entirely reasonable, and therefore appropriate to make. Removing Ms Kay as a beneficiary Mr Otto also requested that Ms Kay be removed as a beneficiary of the Trust. The unusual power to exclude a beneficiary existed in the trust deed, and the Trustee, conscious of its obligation to consider the position very carefully, sought the approval of the Royal Court to take steps to remove her. Susan Chung, Vice-President of Private Wealth Solutions of HSBC Trustee (Hong Kong) Limited explained why the Trustee believed that this was an appropriate course of action: “in the light of the substantial sums which have been or will ultimately be paid to the wife out of the Trust, the trustee would regard it as being in the interests of the beneficiaries of the Trust as a whole for the wife to cease being a beneficiary and to be excluded from further benefitting from the Trust”. Advocate Robinson however, acting on behalf of Ms Kay, put forward three reasons why Ms Kay’s exclusions should be resisted. Each of these reasons were considered, but ultimately rejected, by the Royal Court. Ms Kay firstly argued that the distribution was not actually being made to her. The distribution was really to Mr Otto for his benefit, so as to enable him to pay what was due under the Hong Kong judgment. Whilst this was found to be technically accurate, the Royal Court looked at the bigger picture and rejected this argument because Ms Kay stood to benefit significantly from the distribution: “Although paid to the husband, [the distribution] will end up in the wife’s pocket; the husband will retain nothing. His only ‘benefit’ from the distribution is that he will have been able to pay his debt to the wife. She, on the other hand, will be better off to the extent of HK$770.5m and the Trust will be worse off to that extent”. 2 Which in turn is based on the well-known English case of Public Trustee v Cooper, Unreported, 20 December 1999 © 2015 Baker & McKenzie. All rights reserved. Baker & McKenzie LLP is a limited liability partnership registered in England and Wales with registered number OC311297. A list of members’ names is open to inspection at its registered office and principal place of business, 100 New Bridge Street, London, EC4V 6JA. Baker & McKenzie LLP is a member of Baker & McKenzie International, a Swiss Verein, with member law firms around the world. In accordance with the common terminology used in professional service organisations, reference to a “partner” means a person who is a member, partner, or equivalent, in such a law firm. Similarly, reference to an “office” means an office of any such law firm. Baker & McKenzie LLP is regulated by the Law Society of England and Wales. Further information regarding the regulatory position is available at http://www.bakermckenzie.com/london/regulatoryinformation/. This may qualify as “Attorney Advertising” requiring notice in some jurisdictions. Prior results do not guarantee a similar outcome. www.bakermckenzie.com For more information, please contact: Louise Oakley Associate +44 20 7919 1160 email@example.com Patrick Harte Trainee Solicitor +44 20 7919 1248 firstname.lastname@example.org Ms Kay’s second argument was based on the assumption that the Hong Kong Court of Final Appeal had underestimated the amount owed to her and based its calculations on historical figures. Ms Kay was argued that, to ensure a fair outcome, she should remain a beneficiary as this would entitle her to an up-to-date financial statement of the trust assets. This was flatly rejected by the Royal Court, who refused to second-guess the calculations made by the foreign court. The Hong Kong order was designed to achieve a “clean break”, which would be wholly undermined if Ms Kay were to recommence proceedings on the basis that she was entitled to an even greater payment than she had already been awarded. Finally, Ms Kay argued that she had an important role in the future of the trust. In particular, since the Trustee had taken “an incorrect and unduly partisan approach” (in favour of Mr Otto) in the Hong Kong proceedings, Ms Kay sought to remain a beneficiary in order to supervise the Trustee and if necessary hold it to account in connection with its conduct towards her daughter. The Royal Court first of all commented that it was perfectly normal for a Trustee party to divorce proceedings, in an attempt to maximise the benefit for all of the beneficiaries, to align with a particular spouse and argue that not all of the trust should be regarded as a resource available to that spouse (as the Trustee had done with Mr Otto). Secondly, the daughter was 43 years old and a successful business woman in her own right and as such she was more than capable of supervising her interest in the Trust by herself. The Royal Court also reflected on the reasonableness of the removal. Whilst accepting that it was an “unusual power” that was “likely not to be in the benefit of the person excluded”, it was found that this particular situation was “a classic example of where [removal] may well be appropriate”. Comment Whilst not adding anything substantive to the law on the obligations of Jersey trustees, these cases provide useful guidance for Jersey trustees and confirm the appropriate actions for trustees to take when beneficiaries are involved in foreign law divorce proceedings. Generally, these cases show that where foreign matrimonial proceedings throw into question established principles, a trustee should act with pragmatism and keep an eye firmly on the bigger picture, whilst never forgetting its primary obligations to the beneficiaries. Ultimately, if there is ever any doubt about the correct course of action, a well-advised trustee will seek approval from the Royal Court before taking any steps which could otherwise be criticised by one or more of the beneficiaries.