Anti-Bartlett Clauses and Their Role in Trust Administration

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Anti-Bartlett Clauses and Their Role in Trust Administration

Many people decide to place their assets in a Trust for various reasons, including for tax benefits, or ring-fencing their assets from claims by other parties.

Companies and businesses are often placed under the ownership of a Trust. While this would be straightforward and uncontroversial if these entities exist only to hold assets, sometimes they act as corporate vehicles for the Settlor to conduct business and/or investment activities.

One question then arises in these latter scenarios would be: should the Trustee take responsibility for what goes on in the activities of these companies, and if so what is the level of responsibility required?

Trustee’s duties

A Trustee normally has an obligation to properly manage the assets in the Trust, and if there are underlying businesses and operating entities, this obligation extends to them as well, especially if it is a majority or sole shareholder in any companies.

If the Trustee discovers, or is made aware, that there has been mismanagement or wrongdoing with regards to these assets, businesses or companies, then it has a duty to intervene and take action, which effectively places an active obligation on the Trustee to supervise the businesses and companies. This legal principle was established in an English case back in 1980 called Bartlett v Barclays Bank Trust Company, which is where the name of today’s subject matter comes from.

Anti-Bartlett clauses

Sometimes the Settlor does not require the Trustee to manage or supervise the operations of its underlying businesses and entities, say because the business already has existing management and leadership personnel, and so the Settlor is willing to waive or exonerate a Trustee’s obligations in this regard.

To do so, the Trust Deed will include clauses to the effect that the Trustee has no duty or obligation to participate, or intervene in the management or conduct of any underlying companies or businesses that are under the ownership of the Trust. They would be exempt from liability for the acts of those persons managing said businesses.

Since the effect of these clauses is to counteract the obligations laid down in the Bartlett case, these clauses are aptly named Anti-Bartlett clauses.

Are Anti-Bartlett clauses recognised by the Courts?

Yes, in fact in Hong Kong we even have a judgment from the Court of Final Appeal, Zhang Hong Li v DBS Bank, which confirms the application of Anti-Bartlett clauses.

Briefly speaking, what happened in that case was that the Plaintiff and her husband set up a Jersey trust, for which DBS Bank Hong Kong was the Trustee at the time. DBS being the Trustee was the shareholder and banker of a private investment company, but because the Plaintiff was sophisticated enough to conduct the investment activities with the assistance of DBS, she was appointed as the investment advisor of the company, at the same time the Trust Deed contained an Anti-Bartlett clause in favour of DBS. In fact, the Trust Deed went further and specifically stated that DBS was to leave the management of the underlying companies to their own leadership.

The investment vehicle conducted its investments for a few years at a profit, but then changed its investment profile and subsequently made losses. So, the Plaintiff claimed that DBS had been negligent and breached its duties as Trustees by allowing this investment pattern.

The Plaintiffs were successful in the Court of First Instance and Court of Appeal, where those Courts held that DBS had a “high level supervisory duty” over the investment vehicle. However, this was reversed at the Court of Final Appeal, where the Court held that the Anti-Bartlett clause was effective in discharging or relieving this “high level supervisory duty” on DBS, as long as it was not aware of any dishonest activity by the company directors.

Are there any limitations in applying Anti-Bartlett clauses?

For this video I would mention 2 things to note.

Firstly, Anti-Bartlett clauses usually contain a carve-out to the effect that if the Trustee has knowledge of any misconduct or dishonest conduct by, say, company directors in the business, then the Trustee then becomes duty-bound to take appropriate action, which, depending on the circumstances, can include investigation, intervention, or even legal proceedings against the perpetrators.

So, a Settlor setting up a Trust should ensure that this carve-out is included so that the beneficiaries have an additional layer of protection. On the flip side, anyone who is taking on an appointment as a Trustee should confirm for themselves whether or not the Trust that they will administer would have this potential obligation imposed upon them.

Secondly, while an Anti-Bartlett clause means that the management of underlying companies and businesses in the Trust could be left to the Settlor, he or she should be careful not to have seen as having control over these entities. Otherwise, the Court may make a finding that these underlying assets are in fact owned and controlled by the Settlor. There is a recent case in Singapore, the Zhang Lan case, where the Court essentially found that because the Settlor had substantial control in the movement of Trust funds despite not being a beneficiary, those funds should be treated as being owned by her; this allowed her creditors to enforce judgment against those funds.

This is not the first time a Court has made this type of finding, and we can continue to expect that Courts would be willing to do so when presented with compelling evidence.

 

This video is for informational purposes only. Its contents do not constitute legal or professional advice.