Asia-Pacific Trusts Law: Volume 1: Theory and Practice in Context 9781509934799, 9781509934829, 9781509934812

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ASIA-PACIFIC TRUSTS LAW At a time when Asia represents the fastest-growing economic region, there is no better moment to consider what trusts law can contribute to societal stability and economic prosperity. This book aims to do this by offering the first work that systematically explores trusts law across the region. Many Asian-Pacific jurisdictions have integrated and developed trusts law in their legal systems, either through colonial heritage or statutory activism. But the diversity of legal traditions and local contexts has resulted in trusts laws having a significantly varied impact. In the modern globalised world there is growing need to adopt an outward-looking approach in dealing with matters of common interest. This book answers this need by bringing together leading legal actors in the region to explore the theory and practice of trusts law, contextualised to specific jurisdictions in the Asia-Pacific. Exploring 17 jurisdictions in Asia, it brings both an academic and a practitioner perspective to trusts law in the region.

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Asia-Pacific Trusts Law Volume 1: Theory and Practice in Context

Edited by

Ying Khai Liew and

Matthew Harding

HART PUBLISHING Bloomsbury Publishing Plc Kemp House, Chawley Park, Cumnor Hill, Oxford, OX2 9PH, UK 1385 Broadway, New York, NY 10018, USA 29 Earlsfort Terrace, Dublin 2, Ireland HART PUBLISHING, the Hart/Stag logo, BLOOMSBURY and the Diana logo are trademarks of Bloomsbury Publishing Plc First published in Great Britain 2021 Copyright © The editors and contributors severally 2021 The editors and contributors have asserted their right under the Copyright, Designs and Patents Act 1988 to be identified as Authors of this work. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any information storage or retrieval system, without prior permission in writing from the publishers. While every care has been taken to ensure the accuracy of this work, no responsibility for loss or damage occasioned to any person acting or refraining from action as a result of any statement in it can be accepted by the authors, editors or publishers. All UK Government legislation and other public sector information used in the work is Crown Copyright ©. All House of Lords and House of Commons information used in the work is Parliamentary Copyright ©. This information is reused under the terms of the Open Government Licence v3.0 (http://www.nationalarchives.gov.uk/doc/ open-government-licence/version/3) except where otherwise stated. All Eur-lex material used in the work is © European Union, http://eur-lex.europa.eu/, 1998–2021. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication data Names: Liew, Ying Khai, editor.  |  Harding, Matthew, 1974- editor. Title: Asia-Pacific trusts law : theory and practice in context / edited by Ying Khai Liew and Matthew Harding. Description: Oxford, UK ; New York, NY : Hart Publishing, an imprint of Bloomsbury Publishing, 2021.  |  Series: Hart studies in private law ; volume 39  |  Includes bibliographical references and index. Identifiers: LCCN 2021013837 (print)  |  LCCN 2021013838 (ebook)  |  ISBN 9781509934799 (hardback)  |  ISBN 9781509950577 (paperback)  |  ISBN 9781509934812 (pdf)  |  ISBN 9781509934805 (Epub) Subjects: LCSH: Trusts and trustees—Asia.  |  Trusts and trustees—Pacific Area. Classification: LCC KM216 .A97 2021 (print)  |  LCC KM216 (ebook)  |  DDC 346.505/9—dc23 LC record available at https://lccn.loc.gov/2021013837 LC ebook record available at https://lccn.loc.gov/2021013838 ISBN: HB: 978-1-50993-479-9 ePDF: 978-1-50993-481-2 ePub: 978-1-50993-480-5 Typeset by Compuscript Ltd, Shannon To find out more about our authors and books visit www.hartpublishing.co.uk. Here you will find extracts, author information, details of forthcoming events and the option to sign up for our newsletters.

PREFACE The ‘Asia-Pacific Trusts Law’ project grew out of a conversation that we had with YingChieh Wu in mid-2018. At that time, the idea of an event to discuss trusts law across the region was highly attractive: such an event promised to be ground-breaking, novel, and most of all, intellectually insightful. But the obstacles were daunting. Extant academic discourse on trusts law had involved only a handful of Asian-Pacific jurisdictions, and we were thus unfamiliar with the trusts law of many of the jurisdictions that we hoped the project might cover. Language barriers, unfamiliarity with local conditions, logistics, and lack of financial resources added to the long list of challenges making the organisation of an event improbable. Nonetheless, in December 2019, we hosted a symposium over two days at the Melbourne Law School, University of Melbourne. The chapters in this collection are based on the papers presented at that symposium. The success of the symposium, and the publication of this book, would not have been possible without the support of many people. First and foremost, we would like to thank all the contributors for their enthusiasm for and commitment to the project, for attending the symposium (sometimes at considerable expense to themselves), and for writing the chapters. We are also grateful to the following invited discussants at the symposium, whose insights and expertise made for lively discussions: Elise Bant, Michael Bryan, Steven Gallagher, Hitoshi Kumura, Peter Turner, Tiong-Min Yeo, Aleksi Ollikainen, and Michael Rush QC. The project benefited from generous financial support from the Melbourne Law School’s Research Excellence Grant and Research Grant Seed Funds, the Melbourne Law School’s Obligations Group, Hart Publishing, and a private donor. We are deeply grateful to all for that support. Logistical support was provided by the Asian Law Centre, Melbourne Law School, and we thank Kathryn Taylor and Debbie Yu for all their hard work. The production of this book has benefited from the research assistance of the Melbourne Law School’s Academic Research Service, and we are particularly grateful to Robin Gardner and Ken Kiat for their help. Last but not least, we thank Ying-Chieh Wu, not only for that initial conversation which sparked the project, but also for all his invaluable advice along the way. It is entirely fitting that he will be co-editing with one of us the second volume in the Asia-Pacific Trusts Law series. Ying Khai Liew Matthew Harding Pi Day 2021

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CONTENTS Preface�������������������������������������������������������������������������������������������������������������������������������������v 1. Introduction��������������������������������������������������������������������������������������������������������������������1 Ying Khai Liew and Matthew Harding PART I 2. Mere and Other Discretionary Objects in Australia���������������������������������������������������19 Jessica Hudson 3. A Lament for Trust Principles in New Zealand�����������������������������������������������������������39 Jessica Palmer 4. Trusts in Hong Kong: Historical Application and Current Practice���������������������������57 Lusina Ho and Rebecca Lee 5. Constructive Trusts and Limitation Periods in Malaysia�������������������������������������������77 Ying Khai Liew 6. Victoria Meets Confucius in Singapore: Implied Trusts of Residential Property�������������������������������������������������������������������������������������������������������������������������97 Kelvin FK Low PART II 7. The Transplantation of Trusts Law in India��������������������������������������������������������������123 Stelios Tofaris 8. Constructive Trusts under Muslim Family Law in Pakistan: Protecting Women’s Rights to Matrimonial Property������������������������������������������������143 Muhammad Zubair Abbasi 9. The Law of Trusts in Bangladesh: Theory and Practice��������������������������������������������155 Omar H Khan 10. Implied Trusts in Sri Lanka as a Creature of Legislation: The Way Forward����������175 Anton Cooray 11. Philippine Trusts: Legal and Practical Considerations����������������������������������������������195 Hector M de Leon Jr

viii  Contents PART III 12. The Transformation of Japanese Trusts Law and Practice: Historical Contexts and Future Challenges���������������������������������������������������������������������������������215 Masayuki Tamaruya 13. Debtor Rehabilitation and the Asset-Partitioning Effect of Security Trusts: The Korean Supreme Court’s Position Revisited��������������������������������������������������������237 Ying-Chieh Wu 14. Taiwan’s Trusts Law and Name-Borrowing Arrangements��������������������������������������251 Wen-Yeu (Wallace) Wang and Yueh-Ping (Alex) Yang 15. The Legal Nature of the Chinese Charitable Trust����������������������������������������������������271 Hui Jing PART IV 16. The Surviving Legacy of English Trusts Law and Trusts in Thailand�����������������������293 Surutchada Reekie and Adam Reekie 17. Arrangements Resembling Trusts under Indonesian Land Law�������������������������������313 Eddy M Leks 18. Property Management Relationships and ‘Trusts’ in Vietnam���������������������������������329 Nguyen Hung Quang and Nguyen Thuy Duong PART V 19. Offshore Trusts in the South Pacific: How Far can the Concept of the Trust be Stretched before it Breaks?������������������������������������������������������������������353 Katy Barnett 20. Identifying an Asia-Pacific Private International Law of Trusts������������������������������381 Richard Garnett Index�����������������������������������������������������������������������������������������������������������������������������������405

1 Introduction YING KHAI LIEW* AND MATTHEW HARDING**

I. Background It is as important as ever that legal discourse crosses jurisdictional boundaries. Of course, such crossings have occurred since ancient times, whether through imperial expansion, trade routes, religious or social movements, or simply the curiosity of jurists. They are so familiar in history that they often go unnoticed and unremarked upon. However, from our standpoint in the early twenty-first century, as geo-political trends in some respects push against cross-jurisdictional engagement, it is worth pointing out the many benefits that can flow when lawyers and academics understand, discuss and try to learn from each other’s legal systems. A collaborative approach, properly informed by h ­ istorical and cultural differences, stands to generate insights that may seed legal and policy solutions to social, economic and even political challenges in multiple jurisdictions. Cross-jurisdictional engagement has enriched the law of trusts as much as it has any other body of law. Again, such engagement has been present from the very beginning, reminding us of the importance of historical context in evaluating the widely accepted notion that the trust is a distinctive achievement of the peculiarly English legal practice known as equity.1 More recently, cross-jurisdictional perspectives on trusts law have been evident in initiatives such as the Hague Convention on Trusts of 1985, the Principles of European Trusts Law of 1999, and the Draft Common Frame of Reference (Principles, Definitions and Model Rules of European Private Law) of 2009. Scholarly efforts, too, have produced landmark contributions to academic literature bringing

* Associate Professor, Melbourne Law School. ** Professor, Melbourne Law School. 1 For the view of the trust as a distinctive achievement of English equity, see FW Maitland, ‘The Unincorporate Body’ in HAL Fisher (ed), The Collected Papers of Frederic William Maitland, vol 3 (Cambridge University Press 1911) 271–72. For reasons to doubt Maitland’s view: MM Gaudiosi, ‘The Influence of the Islamic Law of Waqf on the Development of the Trust in England: The Case of Merton College’ (1988) 136 University of Pennsylvania Law Review 1231.

2  Ying Khai Liew and Matthew Harding diverse jurisdictional perspectives to bear on central questions and puzzles for trusts law.2 While cross-jurisdictional dialogue on trusts law is thus well under way, there remain gaps. One significant gap relates to the theory and practice of trusts law in the Asia-Pacific region. Given the social, economic and political significance of this region, this might be thought surprising. On the other hand, the scale and rich diversity of the Asia-Pacific suggests that one reason why lawyers and academics from across the region do not talk to each other about trusts law is simply that they lack opportunities to do so. For those from jurisdictions with a common law heritage – Australia, Hong Kong, New Zealand and Singapore come immediately to mind – there are frequent and ­well-known conferences and other gatherings at which developments in trusts law in those jurisdictions can be reported, understood, discussed and critiqued. Similar opportunities exist for lawyers and scholars from the East Asian jurisdictions of Japan, South Korea, Taiwan and the People’s Republic of China (‘China’), whose trusts laws share a common genealogy. Beyond these established groupings and networks, little dialogue appears to take place – certainly none carried out in an inclusive and collaborative manner across the region. This represents a missed opportunity for trusts-advanced jurisdictions to contribute their experiences to those jurisdictions where trusts law is either less developed or absent. Equally, it represents a missed opportunity to gain insights from jurisdictions not typically looked to for trusts law expertise. With this gap in mind, we organised the inaugural meeting of the ‘Asia-Pacific Trusts Law’ project in December 2019 at the Melbourne Law School, University of Melbourne. The symposium brought together lawyers and academics from the 17 jurisdictions of the Asia-Pacific region with the highest nominal GDP according to the International Monetary Fund.3 The jurisdictions are (from highest GDP to lowest): China, Japan, India, South Korea, Australia, Indonesia, Taiwan, Thailand, Hong Kong, Malaysia, Singapore, the Philippines, Bangladesh, Pakistan, Vietnam, New Zealand and Sri Lanka. The presenters were asked to focus on trusts law questions and issues in their respective jurisdictions. To these 17 presentations were added one presentation about ‘offshore’ jurisdictions in the South Pacific (the Cook Islands, Niue, Western Samoa), and another on private international law issues as they relate to trusts law in the region. This book builds on those presentations to provide the first in a series of edited collections discussing trusts law in the Asia-Pacific region.

2 See, eg, L Smith (ed), Re-Imagining the Trust: Trusts in Civil Law (Cambridge University Press 2012); L Smith (ed), The Worlds of the Trust (Cambridge University Press 2013); D Hayton, The International Trust, 3rd edn (Jordans 2011); L Ho and R Lee (eds), Trust Law in Asian Civil Law Jurisdictions: A Comparative Analysis (Cambridge University Press 2013). In addition, note the significant contributions from jurists with deep knowledge of ‘mixed’ legal systems incorporating elements of common law and civil law. Three that stand out immediately are GL Gretton, ‘Trusts Without Equity’ (2000) 49 International & Comparative Law Quarterly 599; T Honore, ‘Trusts: The Inessentials’ in J Getzler (ed), Rationalizing Property, Equity and Trusts: Essays in Honour of Edward Burn (Oxford University Press 2003) 7; LD Smith, ‘Trust and Patrimony’ (2008) 38 Revue Générale de Droit 379. 3 Information obtained from: www.imf.org/ at the date of the symposium. Selection on the basis of GDP is not a coincidence. As the chapters in this collection make clear, trusts play crucial roles in promoting social stability and economic prosperity, and to that extent it is of special interest to investigate trusts law in economically significant jurisdictions.

Introduction  3

II.  The Book The book is presented in five parts. The 17 jurisdiction-specific chapters are spread across parts I to IV, each of which groups jurisdictions together based on perceived commonalities. We explain these taxonomical choices in more detail below; for now, it will suffice to say that they are indeed choices and reasonable minds might disagree about the taxonomy of this book. We do not shy away from such disagreement. Rather, we welcome it, for debate and discussion about the appropriate classification of the trusts laws of various Asian-Pacific jurisdictions might well generate new insights about those bodies of law. Part V of the book presents the chapters on the offshore j­urisdictions of the South Pacific and on private international law.

A.  Part I Part I contains chapters exploring aspects of trusts law and practice in five Asian-Pacific jurisdictions that are former colonies of the British Empire: Australia, New Zealand, Hong Kong, Malaysia and Singapore. These former British colonies sit plausibly together for the purposes of analysis for several reasons. First, despite having achieved political and legal independence from Britain, these are jurisdictions in which the common law (including equity) of England remains highly persuasive in local courts, including in relation to trusts. Second, the validity of trusts in these jurisdictions is not contingent on any statutory scheme. This is not to say that trusts statutes are absent in these jurisdictions; statutes governing the operation of trusts within specific contexts and regulating trustees’ duties are in fact quite commonplace. It is, rather, to point out that the recognition of trusts is a matter of common law and does not depend on the operation of any statute or ordinance. This is true even in New Zealand, where the landmark Trusts Act of 2019 purports extensively to ‘restate and reform’ the law of express trusts. As clarified by section 5(8) of that Act, the Act ‘is not an exhaustive code of the law relating to express trusts’, and ‘is intended to be complemented by the rules of the common law and equity relating to trusts (except where otherwise indicated)’. A third perceived commonality in Australia, New Zealand, Hong Kong, Malaysia and Singapore is that in each of these jurisdictions the concept of the trust closely mirrors the orthodox conception in English law. Of course, in English law there is an ongoing debate about whether the trust is primarily concerned with relations of ‘obligation’,4 or with ‘property’,5 or indeed with both.6 However, historically the orthodoxy in English law has been that, at least to some extent, the trust entails a conception of dual ownership, or, putting it another way, a notion that legal title and beneficial

4 See, eg, D Hayton, ‘Developing the Obligation Characteristic of the Trust’ (2001) 117 Law Quarterly Review 96; P Parkinson, ‘Reconceptualising the Express Trust’ (2002) 61 Cambridge Law Journal 657. 5 See, eg, AW Scott, ‘The Nature of the Rights of the “Cestui Que Trust”’ (1917) 17 Columbia Law Review 269. 6 See, eg, B McFarlane and R Stevens, ‘The Nature of Equitable Property’ (2010) 4 Journal of Equity 1; P Jaffey, ‘Explaining the Trust’ (2015) 131 Law Quarterly Review 377.

4  Ying Khai Liew and Matthew Harding interests in relation to property might be split. This reflects the historical origins of the trust in the practices of the English Court of Chancery, which operated to mitigate the rigours of common law. While common law would recognise the trustee alone as being the absolute owner of trust property by virtue of his or her legal title, equity was willing to recognise and enforce the substance of an agreement where the trustee took the property for and on behalf of another. A fourth and final commonality is that, in these jurisdictions, trusts arising by operation of law (resulting and constructive trusts) are recognised and enforced along with trusts that are directly the product of settlor intention (express trusts). In her chapter on Australia, Jessica Hudson addresses the question of whether objects of a trust power or mere power have a right to the due administration of a trust. The orthodoxy is that the right to due administration is available only to beneficiaries as ‘equitable owners’ of the property. However, for various reasons the tendency of the modern settlor is to structure the intended beneficiaries under a trust as objects within a trust structure, and this gives rise to the need to re-examine the issue. While English law has struggled to provide a decisive answer, Hudson argues that in Australian law the answer is clearly in the affirmative. More fundamentally, she argues that this is the product of two related features of Australian law: that it accepts as valid discretionary powers which suspend an entitlement to the benefit of trust property, and that such an entitlement is not essential to the validity of express trusts. In turn, she argues that Australian law subscribes to a different interpretation of the beneficiary principle than that which is traditionally found in English law. This chapter provides an important reminder that differences do exist between English and other common law jurisdictions even in relation to basic and fundamental trusts law issues, and therefore that a careful, contextualised analysis is necessary for a proper understanding of trusts law in the Asia-Pacific. New Zealand has one of the highest rates of trusts usage in the world, the majority of which are set up for private wealth management purposes. In this context settlors often attempt to retain as much control as possible over the trust, and thus it is common for litigation to challenge the validity of trusts. In Jessica Palmer’s chapter, she discusses different strategies New Zealand courts have adopted to circumvent these perceived misuses of trusts, thereby subordinating beneficiaries’ interests to other third parties such as creditors. While the courts often justify those strategies by reference to the need to take into account practical reality, Palmer explains how those strategies in fact put trusts principles under significant threat. This is of course not to say that orthodox trusts principles ought never to be departed from in order to meet the changing needs of a jurisdiction. But doing so at the expense of certainty and coherency brings the law into disrepute. Palmer’s chapter reminds us that, while trusts law can and ought to be kept alive as an organic body of law in the Asia-Pacific, caution must be exercised in order not to stretch the trust to breaking point if it is to retain its usefulness. Hong Kong has experienced extensive and dramatic changes in its political and socio-economic landscape, and in their chapter Lusina Ho and Rebecca Lee trace how trusts law has developed and adapted through those changes. From the way in which trusts law grappled with Chinese customary landholding during the colonial period, to its mobilisation to serve the purposes of first-generation local entrepreneurs, to its modern role in transforming Hong Kong into an international financial centre, trusts

Introduction  5 law’s flexibility proves to be one of its greatest assets. Yet, Ho and Lee rightly caution against going too far; for trusts law to do its unique work, they argue against diluting the trust concept and in favour of preserving well-defined parameters for the trust. Thus, while the chapter masterfully traces the theory and practice of trusts law in Hong Kong, there is a deeper message, echoed also by other chapters in this book: trusts law is only practically useful where its development is theoretically coherent. Ying Khai Liew’s chapter on Malaysia explores the ongoing influence of English law on the trusts law of Malaysia in a particular setting: that of statutory limitations to constructive trusts claims. The chapter brings to the surface a number of interesting interactions of wider significance for the trusts law of Malaysia. One is the interaction of English common law precedents and Malaysian common law precedents that build on and refer to, but differ in key respects from, their English counterparts. Another is the interaction of the English statutory heritage with local statutes; for example, the Statute of Frauds applies in some parts of Malaysia but not in others, and the same is true of limitations statutes inspired by English models. How should exogenous common law precedents and statutes be interpreted and understood in light of local legal developments since independence? And vice versa? A further interaction is that between statute and common law. Liew shows that Malaysian limitations statutes assume for their effective operation doctrinal clarity in the common law. What is to be done where such clarity is lacking? In the case of constructive trust claims, it is more important than ever that these questions receive satisfactory answers; after all, constructive trusts are an important component in the legal armoury for redressing the sort of large-scale fraud and corruption in Malaysia that has made international headlines in recent years. Kelvin Low’s chapter examines the reception and development of the English law of implied trusts over family assets in Singapore. Low appeals to the political and social history of Singapore, and in particular to the Confucian and Victorian influences informing the thinking of Lee Kuan Yew and the People’s Action Party more generally. According to Low, these influences, putting the ‘traditional’ nuclear family at the very centre of the state-building project so distinctive of modern Singapore, have had a profound influence on how Singaporean judges have worked with implied trusts to achieve justice in family assets disputes. The chapter is a reminder of the importance of understanding political settings and culture when addressing the theory and practice of trusts in context in the Asia-Pacific. At the same time, it alerts us to the possibility that trusts law, as a state-enforced mechanism for the allocation and reallocation of property, might function as an instrument of social reform as well as a means for the achievement of settlor intentions and remedial objectives.

B.  Part II The chapters in part II of the book deal with aspects of trusts law and practice in India, Pakistan, Bangladesh, Sri Lanka and the Philippines. These are all jurisdictions in which trusts arise from the operation of legislation, rather than the common law. Thus, statutory interpretation has a central role to play in the application and development of trusts laws in these jurisdictions, although arguably less so for the Philippines given the ­brevity of the provisions of its Civil Code bearing on trusts.

6  Ying Khai Liew and Matthew Harding India, Pakistan, Bangladesh and Sri Lanka are all former British colonies. However, unlike the former British colonies dealt with in part I, in these four jurisdictions trusts owe their existence and validity to the operation of a codified statute. The forerunner was the Indian Trusts Act of 1882, enacted at a time when Pakistan and Bangladesh were both part of British India. The Trusts Ordinance of Sri Lanka (Ceylon), enacted in 1917, was modelled on the Indian Trusts Act. And when Pakistan and Bangladesh achieved independence, they each passed an Adaptation Act,7 which adopted wholesale the Trusts Act of 1882. It might appear surprising that trusts statutes were thought necessary at all, given that these jurisdictions were directly influenced by English common law. On closer inspection, however, in these jurisdictions the influence of English common law was more attenuated than in the jurisdictions dealt with in part I, due mainly to the strong influence of posited and customary law already existing when the British first arrived. The clearest case of such prior local influences is Sri Lanka: upon assuming rule in 1799, the British adopted the policy that prevailing laws would not be departed from unless ‘either absolutely necessary and unavoidable, or evidently beneficial and desirable’.8 Prevailing laws included Roman-Dutch law, introduced to the island by the Dutch who had ruled Sri Lanka since the mid-seventeenth century. The result was a piecemeal introduction of English law into Sri Lanka, with Roman-Dutch law retained as the ‘common law’ of the island, as remains the case today. Unsurprisingly, the status of trusts law would have at best been left in an uncertain state had it not been for the intervention of legislation in 1917. The Philippines were never a British colony. Nonetheless, Philippine law was influenced by the common law at a time when civil law had established a legal structure within the jurisdiction. This came about because the country was historically under the rule of Spain (1521–1899) and subsequently the United States (1899–1946). As is the case with India, Pakistan, Bangladesh and Sri Lanka, Philippine trusts law is enshrined in statutory form, in Book IV, Title V of the 1950 Civil Code. However, in contrast to the other four jurisdictions, the Philippine statute is brief: there are only 18 relevant articles, containing no more than short remarks as to the relevance (or irrelevance) of formalities to ‘express’ and ‘implied’ trusts, the need (or lack of need) for trustee and beneficiary acceptance in relation to express trusts, and a non-exhaustive list of situations in which implied trusts will arise. Perhaps this reflects the fact that, in the Philippines, trusts were recognised in case law from as early as 1924,9 and as a result the Code did not aim to be exhaustive. Indeed, Article 1442 of the Code expressly incorporates ‘[t]he principles of the general law of trusts’, although it does not specify to which specific body of ‘general law’ reference is to be made. Turning to the specific chapters, Stelios Tofaris’ chapter traces how trusts law was transplanted to India. During colonial times the courts were forced to grapple with local trust-like devices in trusts law terms, such as the Islamic waqf, Hindu charitable

7 Pakistan: The West Pakistan (Adaptation and Repeal of Laws) Act 1957; Bangladesh: Bangladesh (Adaptation of Existing Laws) Order 1972. 8 The Proclamation of Governor Sir Francis North, 23 September 1799. 9 In Government of the Philippine Islands v Abadilla (1924) 46 Phil 642.

Introduction  7 endowments, and the benami transaction. Tofaris argues that this historical background is essential for a holistic understanding of the reasons for which the Indian Trusts Act of 1882 was introduced. Certainly, a policy of codifying the laws in India was a major contributing factor. However, there was also a substantive concern to move trusts law away from the traditional English concept of dual ownership in order to accommodate those extant local devices. This explain why, for example, that Act describes the trust in terms of obligation rather than property. Interestingly, while (as we noted earlier) there is ongoing debate in English law as to which is the better analysis, the conception of the trust as obligational has proven to facilitate its transplantation, not only to India, but also to other jurisdictions with a purely civilian tradition such as those discussed in part III below. Muhammad Zubair Abbasi focuses his chapter on a set of challenges generated by the operation of Muslim family law in the contemporary circumstances of Pakistan. Women who contribute to a household whether financially or in other ways may end up with no assets in the case of breakdown of their marriage. This problem is of course familiar to English trusts lawyers, because it has generated landmark cases that represent key developments in the law of resulting and constructive trusts. Abbasi sees potential for similar developments to achieve justice in family assets disputes in Pakistan. His chapter provides a fascinating insight into the interrelation of classical Islamic law, Anglo-Muslim law and common law. It also shows ways in which lessons and developments from other jurisdictions might inform legal change in Pakistan, while acknowledging that Pakistani law must also draw on local materials in fashioning legal solutions to emerging problems. Omar Khan surveys the diverse uses of trusts and trust-like arrangements in Bangladesh today, touching on family settings, retirement provisions for public officials, charity and religious practice. The chapter reveals the many ways in which the trusts law inherited from the British has developed alongside long-standing customary practices and arrangements to keep pace with changing social, economic and cultural conditions. The overall picture is of multiple legal sources and traditions serving a range of purposes. Khan’s chapter shows us that much is to be gained by exploring further the conceptual and normative analogies (and disanalogies) between English trusts arrangements and those arising from other legal traditions. For example, more work could be done to understand similarities and differences between the Islamic waqf and the ­charitable purpose trust of English law (and, indeed, non-charitable purpose trusts where these are found). And the same is true of Hindu trust-like arrangements in which an object such as a temple might have legal personality and thus the capacity to hold property on trust for a religious purpose. Anton Cooray’s chapter on Sri Lanka focuses on implied trusts, that is, constructive and resulting trusts. Statutory provisions for these trusts are found in Chapter IX of Sri Lanka’s Trusts Ordinance of 1917, which essentially sets out specific situations in which such trusts will arise. But as Cooray points out, courts during the time of the British administration had, prior to the Ordinance, already recognised implied trusts, if only in substance rather than name. One important issue raised in Cooray’s chapter concerns strategies to keep the law alive as a living organism. There are obvious fundamental disadvantages in adopting English law (as the Trusts Ordinance essentially did) as a set of rules frozen in time, which leads to the law being unyielding and

8  Ying Khai Liew and Matthew Harding unresponsive to modern requirements. This is no truer that in relation to implied trusts – constructive trusts, in particular – which have seen much judicial development in English law since 1917. Cooray observes that the Trusts Ordinance contains both a section to catch a miscellany of constructive trusts situations, as well as a casus omissus section, which provides statutory blessing for Sri Lankan courts to take cognisance of developments in English law. The burden therefore falls on the courts to interpret these sections liberally to ensure that trusts law in Sri Lanka does not degenerate into a mere living fossil. Hector M de Leon’s chapter on Philippine trusts law begins by noting the surprising scarcity of trusts provisions in the Civil Code. This provides the context for his chapter, which explores how, in piecemeal fashion, the gaps caused by that scarcity have (and can) be filled. One practical strategy has been for settlors intricately to design the terms of the trust, in view of the fact that few or no mandatory trusts rules apply. Another strategy has been for the state to issue special trusts rules in specific – usually ­commercial – circumstances, a legal complexity which parties and their legal advisers must grapple with. Overall, de Leon’s chapter paints a picture of Philippine trusts law as being highly complex and uncertain, with a significant amount of legal risk marring the utility of the trust structure. The Philippine experience indicates that comprehensive and constantly evolving statutory intervention is the bedrock of a successful introduction or transplantation of trusts law in jurisdictions with a legal system that is not purely a common law system.

C.  Part III Part III of the book shifts to East Asia. Japan, South Korea, Taiwan and China were never part of the British Empire. Their respective civil codes were variously influenced by German, French and Soviet legal traditions.10 Given the trust’s historical connection with the English common law system, then, trusts law has been in a sense foreign to these jurisdictions. However, this does not mean that trusts law is unknown to these jurisdictions. Far from it. As the chapters in part III discuss, statutory schemes expressly recognising and adopting the trust were introduced in Japan in 1922, South Korea in 1961, Taiwan in 1996 and China in 2001. And Japan and South Korea updated their statutes in 2006 and 2011 respectively. The legislative history of trusts law in Japan, South Korea, Taiwan and China reflects narratives that are intertwined, each jurisdiction drawing heavily on the others in enacting or updating their respective statutes.11 As a result, the trusts laws of these ­jurisdictions may be viewed as similar in at least three respects. First, in these jurisdictions, the civilian legal tradition exerts a strong influence on trusts law. Often this tradition appears to act as a constraint on the development of trusts law, in the sense that rules of trusts law are analysed and interpreted so as to

10 Japan: German and French influences; South Korea and Taiwan: German influences; China: Soviet influences. 11 For a detailed discussion, see Ho and Lee (n 2).

Introduction  9 do the least possible violence to civilian legal concepts. One example is the way trusts are analysed, easily or uneasily, through the lens of contract law. Another is the way in which rescission is key to allowing trust beneficiaries to make proprietary claims against third parties in whose hands original or traceable trust proceeds may be located. However, at other times the civilian tradition arguably liberates trusts law in East Asia, sanctioning possibilities which would be controversial within a common law system. A clear example can be seen in the Japanese Trust Act of 2006 which allows a sole settlor to act as sole trustee and sole beneficiary, for a limited period, in order to facilitate the securitisation of assets.12 Another example is the recognition of private purpose trusts in Japan and South Korea.13 Second, although nothing in the trust statutes of Japan, South Korea, Taiwan and China expressly limits the purposes for which trusts can be created, in these jurisdictions trusts have been utilised primarily to facilitate commercial ends associated with enhancing financial infrastructure.14 Many rules of trusts law in East Asia can be understood as enabling practices associated with this end. For example, the Chinese Trust Law of 2001 confers significant rights on settlors such that they may play an active monitoring and enforcement role during the life of the trust.15 (In the common law world, this commercial objective is achieved via reservation of power clauses.) That said, it is arguable that the focus of trusts practice may shift towards family settings in East Asia in light of changing social conditions. With that possibility in mind, it is noteworthy that in Japan there is a move towards using trusts in the domestic context, spurred on by the country’s ageing population.16 Third, trusts law in East Asia has encompassed only express trusts, that is, trusts that respond to the intentional act of creation by a settlor. In Japan, South Korea, Taiwan and China, there is no legal recognition of trusts arising by operation of law and imposed on parties in remedial settings, viz resulting and constructive trusts. For the common lawyer, this might be thought surprising; after all, resulting and constructive trusts play a significant role in providing security of title and enforcing desirable social norms.17 For civilian lawyers, however, the absence from the scene of constructive and resulting trusts makes much more sense. Civilian legal systems adopt a strict taxonomy dividing areas of law according to an overall scheme that aspires to integrated coherence. In such a scheme, trusts arising by operation of law and responding to diverse salient facts and claims cannot be easily categorised. They are, in the words of Ying-Chieh Wu, ‘systematically undefinable and taxonomically heterogenous’, alien to civilian habits of thought.18 Turning, then, to the chapters in part III, Masayuki Tamaruya offers a sweeping overview of the history of trusts law and practice in Japan, from the enactment of the Trusts

12 ibid 29. 13 Japanese Trust Act, art 258(1); Korean Trust Act, art 68(1). 14 L Ho, ‘The Reception of Trust in Asia: Emerging Asian Principles of Trust’ [2004] Singapore Journal of Legal Studies 287, 287. 15 Ho and Lee (n 2) 91–93. 16 M Tamaruya, ‘Japanese Law and the Global Diffusion of Trust and Fiduciary Law’ (2018) 103 Iowa Law Review 2229, 2258–60. 17 See Ying Khai Liew, ‘Justifying Anglo-American Trusts Law’ (2021) William & Mary Business Law Review (forthcoming). 18 Ying-Chieh Wu, ‘Constructive Trusts in the Civil Law Tradition’ (2018) 12 Journal of Equity 319, 342.

10  Ying Khai Liew and Matthew Harding Act of 1922 to the present day. He highlights both common law and civilian influences on the development of trusts law in Japan, and he also highlights foreign influences on trusts practice in Japan, and the influence of practice on Japanese trusts law. On this last point, Tamaruya’s historical narrative tells a story in which Japanese trusts were once used almost exclusively for commercial purposes but have come more recently to be used in both philanthropic and family settings. In the English legal tradition, historical narrative tells a different story, of trusts in family and charitable settings giving way to commercial applications of the trust. These family and charitable applications of trusts help to explain the English orthodoxy of the trust as a property institution rather than a species of contract. Equally, commercial uses of trusts suggest the plausibility of the idea that the trust is a species of contract. As trusts practice changes in Japan, might this spur the analysis of trusts law in that jurisdiction away from the contractarianism of the civilian tradition and towards the English view? Ying-Chieh Wu’s chapter on South Korea addresses a specific issue of ­fundamental importance affecting ‘security trusts’, that is, trusts created by a debtor-settlor by transferring land to a trustee as security for a borrowing, the trustee being under a duty to transfer the property to the creditor-beneficiary upon default. Where a rehabilitation order is given to the debtor, South Korean courts have held that the land is not subject to the rehabilitation procedure due to the asset-partitioning effect of the trust. But Wu argues that this is the result of a formalistic understanding of the trust structure and relevant statutory provisions. In substance, a security trust is more of a security than a trust, and precluding the land detracts from the very essence of rehabilitation orders, which are designed to help debtors trade their way out of financial distress. More widely, Wu’s chapter cautions against the temptation to read statutory trust provisions in a vacuum without regard to their substance or their interaction with other areas of law such as insolvency. Wallace Wen-Yeu Wang and Alex Yueh-Ping Yang provide a fascinating insight into a distinctly Taiwanese legal practice: the ‘name-borrowing’ arrangement. This refers to a contract in which A (the ‘name-borrower’) and B (the ‘name-lender’) agree that A’s property will be registered in B’s name but A will continue to enjoy rights of use and disposal. In such an arrangement, A is in substance the owner of the property in question even though B holds the title. Wang and Yang’s chapter raises the question of how such arrangements might best be framed both in light of transplanted legal concepts such as the trust and in light of civilian concepts such as the mandate and, of course, contract. They also highlight the urgent public policy considerations that surround name-borrowing practices, given the use of name-borrowing arrangements for asset shielding and avoidance purposes. As many have pointed out, trusts and analogous arrangements are apt to facilitate socially undesirable goals, and it is important that trusts law, and other bodies of law, respond robustly to such deviant uses, whether through requiring the registration of beneficial interests, applying doctrines of sham, or simply rendering certain arrangements illegal. Wang and Yang show clearly that, on this score, Taiwanese law has more work to do. Hui Jing’s chapter on China explores the legal nature of charitable trusts in the context of the newly minted Chinese Charity Law of 2016. Jing points out that charitable trusts are distinct from other analogous institutions such as the public welfare trusts introduced in the Chinese Trust Law of 2001, as well as foundations, social

Introduction  11 associations and privately operated non-enterprise organisations. By analysing charitable trusts as a distinct institution, Jing then draws out the unique features and aims of the Charity Law, and he demonstrates that Chinese charitable trusts are informed by both public and private law norms. The same can, of course, be said of the charity laws in English and English-influenced legal systems. But Jing’s careful analysis of the Chinese landscape demonstrates how in China the weight accorded to public and private norms differs from that accorded to their common law counterparts. More specifically, the private law norm is always subject to the overriding public law norms, as seen, for example, in the applicable regulatory framework and supervisory measures undertaken by the state. More widely, Jing’s chapter demonstrates how trusts law, although largely a private law device, can be used overtly to achieve public policy aims.

D.  Part IV In part IV, focus shifts to another three civilian jurisdictions, Thailand, Indonesia and Vietnam. As is the case with the jurisdictions addressed in part III, the civilian jurisdictions grouped together in part IV do not, for the large part, recognise trusts in the absence of express statutory provisions. However, they deserve distinct and separate treatment because they are jurisdictions in which historically there have been minimal legislative efforts to incorporate trusts law. For example, in Thailand, the Trust for Transactions in Capital Market Act BE 2550, which was enacted in 2007, enacts a trusts law for capital market transactions, not a general law of trusts of wide application. In 2018, a promising development emerged in the form of the Private Asset Management Trust Bill. Although an official English version of the Bill was not made available, sources indicated that the Bill, if enacted, would provide for the recognition and enforcement of (only) trusts: (i) which are created inter vivos; (ii) for personal asset management purposes; (iii) established by contract between settlor and trustee; (iv) involving a transfer of trust assets from settlor to ­trustee (rather than settlor self-declaration); (v) with a trustee whose core activity concerns banking or finance; and (vi) with a perpetuity period of no more than 100 years. At the time of writing, however, the Bill has not yet been passed, as the 2019 parliamentary term expired before it was passed into law. As matters stand, then, there is little to show by way of statutory trusts law in Thailand. In Indonesia, there is no lack of civilian devices which perform functions similar to those performed by trusts. However, none of these come close to reflecting the core features of the trust. Take, for example, the Dana Investasi Real Estate (DIRE), which is the Indonesian functional analogue of the real estate investment trust (REIT) seen elsewhere in Asia-Pacific. A REIT entails a company that owns and invests in real estate, the relationship between the company and its investors taking the form of a trust. In contrast, a DIRE is based conceptually on an Indonesian legal device known as the Kontrak Investasi Kolektif (KIK), or ‘collective investment contract’; this is essentially a contractual agreement between investment managers and custodian banks which binds mutual fund unit holders. The KIK resembles the trust insofar as it separates the management, stewardship and benefit of assets, and under Indonesian law KIK assets

12  Ying Khai Liew and Matthew Harding are also bankruptcy remote. However, these select features of the KIK do not suffice to justify calling it a trust of any description. Finally, consider Vietnam. Again, while Vietnamese law recognises and gives effect to civilian devices that perform functions similar to those performed by trusts, there is no provision for the recognition and enforcement of trusts. Indeed, in Vietnamese law there appears to be no recognition of trusts or even trust-like arrangements in any context. It might be thought that an exception is to be found in Circular 04/2012/ TT-NHNN issued by the State Bank of Vietnam, which regulates lending ‘trusts’ and the acceptance of lending trusteeship concerning the banking activities of credit institutions.19 However, upon close inspection, the Circular contains no provision which acknowledges trusts at all; this is unsurprising, for the term ‘trust’ is in fact simply a rough – and non-technical – translation of the original Vietnamese term. Ultimately, the Circular contemplates a relationship created by an agency agreement, under which one party ‘entrusts’ to another the task of carrying out banking activities on the former’s behalf.20 The chapters in part IV show that, against this backdrop of relative statutory inaction in relation to trusts, trusts or trusts-analogous law and practice in Thailand, Indonesia and Vietnam are nonetheless worthy of close investigation. Thailand supplies an excellent case in point. In 1935, Book 6 of the Civil and Commercial Code (CCC) of Thailand came into force. According to the provisions of that Book, trusts have no legal effect in Thailand except where they are created pursuant to a specific statutory enactment. However, as Surutchada Reekie and Adam Reekie show in their chapter, trusts formed in Thailand before 1935 have survived the promulgation of Book 6 of the CCC and fall to be interpreted and enforced even today. The chapter explores the interplay of judge-made and statutory law, in both common law and civilian traditions, as well as the interplay of legal systems in circumstances of pluralism. As Reekie and Reekie note, these various engagements have compelled the Thai Supreme Court to develop its own trusts jurisprudence, independent from, but informed and influenced by, English trusts law, notwithstanding Book 6 of the CCC and the fact that Thailand was never a British colony (or, for that matter, a colony of any other European power). Eddy Leks argues in his chapter that the resources of Indonesia’s civilian legal system can be deployed to mimic the incidents and effects of common law trusts in a range of ways, even though Indonesian law cannot admit of the dual ownership idea that lies at the heart of the trust concept in English law. Moreover, Leks points out that Islamic law facilitates the waqf form in Indonesia, much in the way it does in other AsianPacific jurisdictions such as Bangladesh and Pakistan. Leks’s chapter is testament to the creativity and flexibility of civilian law in meeting social, economic and cultural needs. However, the chapter also brings to the surface the question whether it is now time for Indonesia to legislate to recognise trusts understood in the common law sense, to ensure that its legal system remains able to respond to changing conditions.

19 See: thuvienphapluat.vn/van-ban/Tien-te-Ngan-hang/Circular-No-04-2012-TT-NHNN-regulations-onentrustment-profession-and-entrustme-142327.aspx. 20 See: www.vietnamlaws.com/vlu/mar_2012.pdf, fn 1.

Introduction  13 In their chapter on Vietnam, Hung Quang Nguyen and Thuy Duong Nguyen comprehensively survey the various property management relationships in Vietnamese law which might be said to approximate to the trust. Many of those relationships are staples in typical civilian codes, for example, agency, guardianship, and usufructuary and surface rights; but the authors also explore other uniquely Vietnamese innovations such as the securities investment fund and trusteeship of credit institutions. Their discussion demonstrates that the crucial distinguishing feature between trusts and those property management relationships is the absence of transfer of property title to a trustee. Nguyen and Nguyen express regret that state officials they have interviewed are unenthusiastic about introducing trusts law in Vietnam. They rightly note that the introduction of trusts law ought to be considered seriously, given the instrumental role that it can play in attracting foreign investment. In this regard, useful lessons can be drawn from the experience of the East Asian jurisdictions discussed in part III, where trusts law has been incorporated into civilian jurisprudence to great success.

E.  Part V The final part of the book focuses on offshore trusts in the South Pacific and on private international law as it bears on trusts law and practice in context in Asia-Pacific. These two chapters remind us, each in a different way, that trusts figure in a global economic system that reaches well beyond economically significant jurisdictions and that at least some of the challenges thrown up by trusts law and practice in the region demand global attention and solutions. Katy Barnett’s chapter takes a critical look at trusts law and practice in three offshore jurisdictions in the South Pacific: the Cook Islands, Niue and Western Samoa. In these jurisdictions, Barnett shows that trusts law enables arrangements to be stood up and enforced that push to the very limit the notion of the trust as it has developed in the English legal tradition. Barnett highlights the serious public policy concerns that relate to such arrangements, not only in the onshore jurisdictions where settlors tend to live, but also in the offshore jurisdictions themselves. She questions the idea that South Pacific offshore jurisdictions benefit economically from the trusts industry; rather, she argues that the trusts industry represents the manipulation of sovereign states by powerful business interests from foreign parts. As offshore laws and practices intrude more and more into ‘onshore’ jurisdictions, Barnett’s chapter sounds a salutary warning to judges and legislators everywhere. Richard Garnett’s chapter provides a detailed examination of the private international law topics of applicable law and jurisdiction as they apply to trusts law. The chapter focuses on those jurisdictions discussed in part I, namely Australia, New Zealand, Hong Kong, Malaysia and Singapore – jurisdictions where private international law principles in relation to trusts are most fully developed. Garnett identifies various points at which these jurisdictions’ private international laws differ, for example, as to the appropriate approach towards constructive trusts, and as to the applicable test for declining jurisdiction. On the whole, however, those differences are relatively minor, with all jurisdictions generally tending towards a willingness to enforce trusts where possible. Although not stated in so many words, Garnett’s chapter highlights the need to introduce and develop

14  Ying Khai Liew and Matthew Harding a vigorous body of private international law rules in those jurisdictions discussed in parts II–IV of this book, a need which is increasingly urgent given the pace at which globalisation is occurring.

III.  Emerging Themes Looking across the collection as a whole, several themes emerge from the various chapters. We point here to some of these themes, which stand to inform future research and thinking on trusts law and practice in the Asia-Pacific region.

A.  Legal Pluralism In the Asia-Pacific region, trusts law and practice are affected by legal pluralism in at least two ways. First, the political, social and economic history of the region means that in many jurisdictions there are multiple legal traditions and even multiple legal systems operating side by side and interacting with each other. Such pluralism is evident in jurisdictions where the British colonial power recognised extant customary and posited law at the time of occupation, but also – as in the case of Thailand – in jurisdictions where there has been an effort to expunge the legacy of prior legal ordering at key political moments.21 It is also manifest in jurisdictions – Bangladesh, Indonesia, Pakistan, to name just three – in which the law of religious traditions interacts with the secular law of the state. Second, in all jurisdictions law emerges from different sources, whether a civil code, legislation, common law, religious authorities, or customary practices, and these sources of law interact and affect each other in interesting ways. The implications of legal pluralism for trusts law in the Asia-Pacific region are teased out in many of the chapters in this book, but there is more work to be done to understand those implications and how they, in turn, inform trusts practice in the region.

B.  Conceptualising the Trust The trust is a distinctive product of English legal history, including the history of the jurisdiction and traditions of equity. Unsurprisingly, then, the English conception of the trust most commonly serves as the benchmark for comparative work on trusts. As we said earlier, there is debate among English lawyers about the content of their conception of the trust, but the orthodoxy is that the trust entails some division of legal title and beneficial interests in respect of property. Moreover, the English view is that the trust is taxonomically separate from contract and from property, even though it engages both. The chapters in this book have shown us that, unsurprisingly, the English

21 The same may be said of jurisdictions such as Australia, where Indigenous legal systems were present at the time of colonial occupation and have survived it notwithstanding efforts to erase them: see Mabo v State of Queensland [No 2] (1992) 175 CLR 1.

Introduction  15 conception of the trust has had a profound influence on the trusts law of jurisdictions whose legal heritage lies in English law. However, those chapters have also shown that in other jurisdictions, the trust is conceptualised as an expression of other legal categories such as contract. The influence of civilian thinking is clearly the biggest influence in this tendency to incorporate other legal categories in an understanding of the trust; thus, the tendency is most pronounced in civil law jurisdictions such as Japan, South Korea and Taiwan. The fact that trusts are conceptualised differently in civilian jurisdictions from common law jurisdictions is of more than theoretical interest. It affects the trusts law rules that are adopted in the jurisdictions in question, as we see in relation to Taiwan where self-declarations of trust are not possible except for charitable purposes. Grasping the different ways in which trusts are conceptualised in the Asia-Pacific region in light of different legal traditions opens up fruitful lines of enquiry for thinking about trusts generally, and serves as a reminder to lawyers steeped in the common law tradition that the English conception of the trust is but one way of understanding how the law can support the range of goals and purposes for which trusts are used.

C.  Uses of Trusts Students of English trusts law may be forgiven for thinking that trusts are used primarily for dynastic purposes in the familial context, given the emphasis on such uses of trusts in seminal cases in the field. If that picture of trusts was ever accurate – and the long history in English law and society of trusts for charitable purposes suggests not – then today, as John Langbein has shown with reference to the US setting, it is radically inaccurate.22 Trusts practice in the Asia-Pacific bears this out. Not only are trusts and trust-analogues used for a range of commercial purposes, they are also used for a wide variety of public benefit, religious and other non-dynastic purposes. The chapters in this book have shown that, in the Asia-Pacific region, trusts have proved versatile and effective vehicles for achieving many different social, cultural and economic goals against a backdrop of changing social circumstances. And it is, of course, precisely this versatility and effectiveness that justifies Frederic Maitland’s famous assertion that the trust is a great and distinctive achievement as a facilitative legal instrument.23 The chapters in this collection also show, however, that the uses of trusts in the Asia-Pacific are not always for the good. Various avoidance and asset shielding uses have been discussed, from sidestepping restrictions on foreign ownership of land, to enabling enjoyment of land without adhering to corresponding registration requirements, to the various offshore distortions of the South Pacific. Such uses of trusts point to the importance of balancing the social, cultural and economic gains that trusts enable against public policy concerns about the rule of law and distributive justice.

22 JH Langbein, ‘The Secret Life of the Trust: The Trust as an Instrument of Commerce’ (1997) 107 Yale Law Journal 165. 23 Maitland (n 1). Note that one need not sign up to Maitland’s insistence that this is an achievement of English jurisprudence to agree with him about the usefulness of the trust as a facilitative device.

16  Ying Khai Liew and Matthew Harding

D. Trusts and Society This last point brings us to a final theme to emerge from reflection on the chapters in this book. Throughout the Asia-Pacific region, trusts may be viewed as having social causes and effects, including those embedded in the objectives and concerns of the state. For example, in Singapore, trusts help to reinforce a politically sponsored view of the traditional family unit. In Pakistan, they may help to resolve problems of distributive justice occasioned by the operation of Muslim family law. And in China they are breathing life into the project of state-sanctioned philanthropy that sits behind the new Charity Law of 2016. Years ago, Roger Cotterrell argued powerfully that trusts were to be understood and evaluated in light of their social causes and effects,24 and since then scholarship on trusts has sought to do that.25 This collection underscores the continuing importance of the study of trusts and society, and the truth of the proposition that trusts are not only – perhaps not even primarily – instruments of private ordering. They also take their place in the overall structure of society and to that extent their desirability and success may be measured against political ideals and critiques.26

IV. Conclusion The chapters in this collection give a rich sense of the breadth and depth of trusts law and practice in the Asia-Pacific region, as well as the complex and multilayered social, economic and political setting in which that law and practice figures. At the same time, the chapters raise more questions than they answer, demonstrating the great value of ongoing reflection on trusts in Asia-Pacific. It is our hope that, far from being the last word on that topic, this book will be the first contribution to a dialogue that will endure for many years to come.

24 R Cotterrell, ‘Power, Property, and the Law of Trusts: A Partial Agenda for Critical Legal Scholarship’ (1987) 14 Journal of Law and Society 77. For a recent exploration, from a range of perspectives, of Cotterrell’s thinking on trusts and trusts law, see N Piska and H Gibson (eds), Critical Trusts Law: Reading Roger Cotterrell (Counterpress forthcoming 2021). 25 See, eg, IJ Goodwin, ‘How the Rich Stay Rich: Using a Family Trust Company to Secure a Family Fortune’ (2010) 40 Seton Hall Law Review 467; A Hofri-Winogradow, ‘The Stripping of the Trust: From Evolutionary Scripts to Distributive Results’ (2014) 75 Ohio State Law Journal 529; JA Soled and MM Gans, ‘Asset Preservation and the Evolving Role of Trusts in the Twenty-First Century’ (2015) 72 Washington and Lee Law Review 257; A Hofri-Winogradow and M Bennett, ‘The Use of Trusts to Subvert the Law: An Analysis and Critique’ (2021) Oxford Journal of Legal Studies (forthcoming). 26 For one attempt to do this: M Harding, ‘Trustees’ Powers and Social Justice’ in K Barker, S Degeling, K Fairweather and R Grantham (eds), Private Law and Power (Hart Publishing 2017).

part i

18

2 Mere and Other Discretionary Objects in Australia JESSICA HUDSON*

I. Introduction Discretionary trusts raise a range of legal issues; the label ‘discretionary trust’ itself lacks a fixed meaning.1 This chapter is concerned with one issue: whether objects of wide discretionary powers, such as an object of a non-exhaustive power (referred to as a mere object) and an object from an open class of an exhaustive power, have a right to the due administration of a trust? These objects are interesting because they do not have an entitlement to the benefit of trust property (sometimes referred to as ‘equitable ownership’ or an ‘equitable proprietary interest’). It is thus not possible to say they have a right to due administration because they also have an entitlement to the benefit of trust property. Outside Australia, the position of these objects is contested. There are cases that find in favour of the mere object, such as Schmidt v Rosewood Trust Ltd,2 where a * Associate Professor, UNSW Sydney. An earlier version of this chapter was presented at the Global Seminar in Private Law Theory, hosted by Professor Lionel Smith, McGill University. I thank the participants for their valuable comments. I am also grateful to Matthew Harding, Lusina Ho, Ying Khai Liew, John Mee, Charles Mitchell, James Penner, Alexandra Popovici, Philip Santucci, Lionel Smith, Magda Raczynska, Rob Stevens and Peter Turner for their helpful comments on earlier drafts of this chapter. This research was completed with the support of the UNSW Law School Research Fellowship, which I acknowledge with much gratitude. All errors are mine. 1 ‘Discretionary trust’ can refer to an express trust relationship that contains a range of different powers. See Chief Commissioner of Stamp Duties (NSW) v Buckle [1998] HCA 4, (1998) 192 CLR 226 [8] (Brennan CJ, Toohey, Gaudron, McHugh and Gummow JJ); Australian Securities and Investments Commission v Carey [No 6] [2006] FCA 814, (2006) 153 FCR 509 [19] (French J); M Leeming, ‘“Chameleon-Hued Words”: A Note on Discretionary Trusts’ (2015) 89 Australian Law Journal 371. 2 Schmidt v Rosewood Trust Ltd [2003] UKPC 26, [2003] 2 AC 709, 729 (Lord Walker). See also Lemos v Coutts (Cayman) Ltd (2005) 8 ITELR 153 [47] (Levers J); Freeman v Ansbacher Trustees (Jersey) Ltd [2009] JRC 003, [2009] JLR 1, 41–43; R Nolan, ‘Invoking the Administrative Jurisdiction: The Enforcement of Modern Trust Structures’ in P Davies and J Penner (eds), Equity, Trusts and Commerce (Hart Publishing 2017) 159–69; P Turner, ‘The Entitlements of Objects as Defining Features of Discretionary Trusts’ in RC Nolan, KFK Low and TH Wu (eds), Trusts and Modern Wealth Management (Cambridge University Press 2018) 249–50; D Waters, ‘The Power to Add and Delete Beneficiaries’ (2012) 31 Estates, Trusts & Pensions Journal 173, 197–99. The rights of beneficiaries of deceased estates may also support the discretionary object: see, eg, Commissioner of Stamp Duties (Qld) v Livingston [1965] AC 694 (PC) 712–14; C Mitchell, ‘Commissioner

20  Jessica Hudson right to due administration is said not to depend on an object also having an entitlement to the benefit of trust property. Although those cases have been discounted3 as coming from jurisdictions that have abandoned fundamental tenets of trusts law, such as the beneficiary principle, this issue is of practical and analytical importance. As has been observed before,4 express trusts are being used internationally to create, sometimes wide, discretionary powers. It is important to be sure about the rights the objects of these powers have and why. This chapter draws on the Australian experience of discretionary trusts to show that a mere object, and an object from an open class of an exhaustive power, do have a right to due administration. This chapter will explain that the Australian position is an outcome of that jurisdiction’s conception of the essential feature of an express trust and its recognition of discretionary powers that have the effect of suspending an entitlement to the benefit of trust property. The chapter will go on to address the risk of the opportunistic object, and explain why the object’s right to due administration is consistent with the beneficiary principle as an expression of the basic imperative that a legal relationship must be constituted by more than one legal person. The arguments in this chapter may have future relevance to the question whether it is possible for a settlor to confer a right to due administration on someone who is not an object of a dispositive power of appointment. Sometimes this other power-holder is referred to as a protector, enforcer, appointor, or guardian.5 Whether the right to due administration can be conferred on this other power-holder is an important issue for defining the boundaries of settlor autonomy, and also has implications for the validity of so called non-charitable purpose trusts.6 However, resolution of these issues is left for another day. A further caveat is that in adopting an Australian focus, this chapter should not be understood as making a comparison with other jurisdictions. Whether or not Australian law is entirely unique in its treatment of the mere object and object from an open class of an exhaustive power, is also left for another day. The arguments in this chapter will proceed as follows. Section II outlines the use of discretionary trusts in Australia and will unpack the nomenclature identifying a mere object and an object from an open class of an exhaustive power. Section III discusses the cases showing that the right to due administration does accrue to these objects and goes on to explain how the Australian cases can be understood as a consequence of

of Stamp Duties (Queensland) v Livingston (1964): Rights of Estate Beneficiaries and Trust Beneficiaries Compared’ in B Sloan (ed), Landmark Cases in Succession Law (Hart Publishing 2019). 3 L Smith ‘Massively Discretionary Trusts’ (2017) 70 Current Legal Problems 17, 23 fn 16, 36–37. See also P Matthews, ‘From Obligation to Property, and Back Again? The Future of the Non-Charitable Purpose Trust’ in D Hayton (ed), Extending the Boundaries of Trusts and Similar Ring-Fenced Funds (Kluwer Law International 2002). 4 ibid; Schmidt (n 2) [1]–[2]; Mercanti v Mercanti [2016] WASCA 206, [2016] 50 WAR 495 [26]; I Hardingham and R Baxt, Discretionary Trusts, 2nd edn (Butterworths 1984). 5 See generally Blenkinsop v Herbert [2017] WASCA 87 [69]–[71] (the Court); L Ho, ‘“Breaking Bad”: Settlor’s Reserved Powers’; R Nolan, ‘Trustees and Third-Party Powers’; and K Low, ‘Non-Charitable Purpose Trusts’ in RC Nolan, KFK Low and TH Wu (eds), Trusts and Modern Wealth Management (Cambridge University Press 2018). 6 See generally D Waters, ‘Reaching for the Sky: Taking Trust Laws to the Limit’ in D Hayton (ed), Extending the Boundaries of Trusts and Similar Ring-Fenced Funds (Kluwer Law International 2002); D Hayton, ‘Developing the Obligation Characteristic of the Trust’ (2001) 117 Law Quarterly Review 96.

Australia  21 Australia’s rejection of the essentiality of an entitlement to the benefit of trust property and its recognition of discretionary powers. Section IV addresses the risk of the opportunistic object. Section V explains how Australian law is consistent with the beneficiary principle. Section VI concludes.

II.  Discretionary Trusts in Australia A.  The Use of Discretionary Trusts in Australia The express trust has been utilised in Australia for a wide variety of ends.7 It is employed for various personal pursuits, including wealth distribution, asset management and succession planning. Various commercial and public pursuits are also advanced by the express trust, including small to large business ventures and financial investment schemes. Express trusts are also the key institutional form for superannuation in Australia and are used for the pursuit of charitable and other community and public ends. Across these domains discretionary trusts have ‘flourished’8 in Australia. There are various reasons why parties may wish to create a trust that contains discretionary powers, including for example, tax minimisation.9 The terms of an express trust may create a range of powers that attract the label of a ‘discretionary trust’, such as a power of appointment, or a power to vary the class of objects, or powers to remove or replace a trustee, for example. Powers can be categorised in different ways, not all of which are relevant to this chapter. The focus is on powers to create or vary an entitlement to the benefit of trust property (referred to as ‘dispositive powers’) and the objects of these powers. An entitlement to the benefit of trust property is a ‘right in equity to be put, so far as practicable … into a position where directly, or indirectly, or for all practical purposes, [the beneficiary] … enjoys or exercises the rights which the law has vested in the trustee’.10 As mentioned in the Introduction, this particular entitlement is labelled in various ways, including in metaphorical terms such as ‘beneficial ownership’ or ‘equitable ownership’.11

7 NSWLRC Consultation Paper 19, ‘Laws Relating to the Beneficiaries of Trusts’, October 2017, [2.1]. 8 Mercanti [2016] (n 4) [26]. 9 ibid. See also Hardingham and Baxt (n 4). The influence of taxation regimes in England on discretionary trusts is observed by Lord Walker in Schmidt (n 2) [34]. 10 DKLR Holding Co (No 2) Pty Ltd v Commissioner of Stamp Duties [1980] 1 NSWLR 510, 518–20 (Hope JA). This entitlement may mean an object has a right to possession: see J Penner ‘The (True) Nature of a Beneficiary’s Equitable Proprietary Interest Under a Trust’ (2014) 26 Canadian Journal of Law and Jurisprudence 473. 11 About the use and limits of these labels, and their varied contextual meanings, see Glenn v Federal Commissioner of Land Tax (1915) 20 CLR 490, 498 (Griffith CJ), 501–04 (Isaacs J); Federal Commissioner of Taxation v Linter Textiles Australia Ltd (In liq) [2005] HCA 20, (2005) 220 CLR 592 [52]–[53] (the Court); CPT Custodian Pty Ltd v Commissioner of State Revenue [2005] HCA 53, (2005) 224 CLR 98 [25]–[26], [40]–[52] (the Court); W Swadling, ‘Explaining Resulting Trusts’ (2008) 124 Law Quarterly Review 72, 90–92. ‘Beneficial ownership’ can also refer to the way in which certain rights and powers are held, relevantly that they are not held on trust for another.

22  Jessica Hudson An object which has an entitlement to the benefit of trust property, ie equitable ownership, is sometimes referred to as a ‘beneficiary’ or ‘fixed beneficiary’, and may also, subject to meeting other requirements, have a power to call for the trust property from the trustee.12 Sometimes, the trust terms will make the creation or existence of an entitlement to the benefit of trust property dependent upon the exercise of a dispositive power, such as (i) an exhaustive power; or (ii) a non-exhaustive power.13 These labels are unpacked next to explain why the objects of these powers do not have an entitlement to the benefit of trust property.

B.  Objects of Exhaustive and Non-Exhaustive Dispositive Powers A non-exhaustive power is one that the power-holder (donee) can choose whether to exercise. The donee is not subject to a duty to exercise the power, and she may not exercise her power to confer an entitlement to the benefit of trust property amongst the class of mere objects. A mere object does not have an entitlement to the benefit of trust property on either an individual or collective basis, and has only a chance of acquiring this entitlement. An exhaustive power is one where the donee has a choice about the object(s) in whose favour she will confer an entitlement to the benefit of trust property, and the donee is subject to a duty to exercise the power. The position of the object of an exhaustive power is more complex as it may not be possible to say, categorically, that this object does not have an entitlement to the benefit of trust property. On a collective basis, it may be possible to say that the objects, together, have an entitlement to the benefit of trust property owing to the donee’s duty to exercise the power. Whether this collective entitlement exists depends on a further distinction between an open or closed class of objects.14 Where the class of objects is closed, the objects together exhaust the entitlement under the power, and on a collective basis, these objects may be considered to have an entitlement to the benefit of trust property. There is an interesting question about whether or not the hypothetical collection of the objects of a closed class is an adequate basis upon which to treat an individual object from this class as having an entitlement to the benefit of trust property. Resolution of this question is beyond this chapter. Assuming it is, then the object of an exhaustive power from a closed class does not categorically show that her right to due administration exists independently of any entitlement to the benefit of trust property she may be considered to have. The more telling example is the object from an open class of objects who does not have, on either a collective or individual basis, an entitlement to the benefit of trust 12 Saunders v Vautier (1841) 4 Beav 115, affirmed on appeal in Saunders v Vautier (1841) Cr & Ph 240. In Australia, see CPT (n 11) 117–21; Beck v Henley [2014] NSWCA 201 [32]–[44] (Leeming JA). 13 In relation to this distinction, see Carey (n 1) [21] (French J); Secretary, Department of Families, Housing, Community Services and Indigenous Affairs v Elliott (2009) 174 FCR 387, [2009] FCAFC 37 [21]–[25] (the Court); Glenn (n 11) 503–05. These categories are not unique to Australian law, see, eg, Gartside v Inland Revenue Commissioners [1968] AC 553 (HL) 606 (Lord Reid); McPhail v Doulton [1971] AC 424 (HL) 441–42 (Lord Hodson), 445 (Lord Guest), 448–49 (Lord Wilberforce). 14 As explained in Elliott (n 13) [21]–[25] (the Court). See also Leeming (n 1) 373–74.

Australia  23 property. This is because the objects of an open class may not represent the entirety of the class at any one point in time. The objects of an open class therefore do not exhaust the entitlement under the power, and thus cannot be said to have an entitlement to the benefit of trust property on either an individual or collective basis. To sum up, the objects from an open class of an exhaustive power and the mere object of a non-exhaustive power (with an open or closed class of objects) are thus in the same position in that they have neither a collective entitlement to the benefit of trust property, nor an individual entitlement. It is for this reason that these objects have significance for our understanding of Australia’s approach to the conferral of the right to due administration, in particular, whether a right to due administration can accrue to objects who do not have, on either a collective or individual basis, an entitlement to the benefit of trust property. The right to due administration is the central mechanism for control of the trustee in her exercise of power over trust property. This right is described in various ways, such as a ‘right to due administration’15 and a ‘right to have the trust property properly managed and to have the trustee account for his management’.16 The ‘right to due administration’ is a general and collective description of specific entitlements17 that give substance to the trustee’s essential duty to exercise her power over trust property in accordance with the trust terms,18 and the requirements for power to be exercised properly and in good faith, whether those powers are held by a trustee or third-party donee.19 This ‘right’20 is the basis for equitable relief as necessary to ensure the due administration of a trust, which, depending on the circumstances, might include orders for access to trust information,21 declaratory or specific relief consequent upon an unauthorised or improper exercise of power,22 recovery of misapplied property from third parties,23 and orders for an account against the trustee.24 Given the centrality of this right to the enforcement of a trust, the question of to whom this right accrues is important. Set out next in sections III.A–B are the cases that show that in Australia, the right to due administration accrues to an object from an open class of an exhaustive power and an object of a non-exhaustive power. Section III.C further explains how these cases can be understood in light of Australia’s recognition of discretionary powers that suspend the creation of an entitlement to the

15 Buckle (n 1) 242 (the Court). 16 Spellson v George (1987) 11 NSWLR 300, 315–16 (Powell J). 17 See also Turner (n 2) 249–50; Mitchell, ‘Livingston’ (n 2) 273, 280–82. 18 Youyang Pty Ltd v Minter Ellison Morris Fletcher [2003] HCA 15, (2003) 212 CLR 484 [32] (the Court). 19 As to the essentiality of these requirements and their application to trustees and other donees of powers under express trusts, see, eg, Cock v Smith (1909) 9 CLR 773, 793–94, 800–02 (Griffiths CJ), 807–10 (O’Connor J); Karger v Paul [1984] VR 161, 163–66, 176–78 (Brooking J). 20 ‘Right’ refers to an equity for relief that is subject to equitable discretion: see Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6, (2012) 200 FCR 296 [503] (the Court); W Gummow, ‘Equity: Too Successful?’ (2003) 77 Australian Law Journal 30, 40–41; J Campbell, ‘Access by Trust Beneficiaries to Trustees’ Documents, Information and Reasons’ (2009) 3 Journal of Equity 97, 145–47. 21 Spellson (n 16). 22 Karger (n 19). 23 Strang v Owens (1925) 42 WN (NSW) 183. 24 Youyang (n 18).

24  Jessica Hudson benefit of trust property and the rejection of the idea that this entitlement is essential to an express trust.

III.  Objects with a Right to Due Administration A.  Australian Cases in Favour of the Mere Object and Object from an Open Class of an Exhaustive Power The first category of cases25 contains express judicial recognition that a right to due administration accrues to a mere object. An illustrative example is Wright v Stevens, where Hallen J found that an object of an exhaustive power to appoint new beneficiaries from an open class of objects defined as a ‘person … residing in or otherwise carrying on business in Dorrigo in New South Wales or surrounding area as defined by post code 2453’ had ‘a chose in action which a court of equity will protect’,26 including to seek relief in relation to an unauthorised exercise of a power of appointment, or a trustee’s unauthorised distribution of trust funds. In Randall v Lubrano,27 Holland J emphatically stated that ‘there is no doubt in my mind that [the objects of a mere power] … would be proper parties to seek relief in this Court’28 in response to a trustee’s misapplication of trust funds or other breach of trust. Again, in Public Trustee v Smith29 White J found that a mere object ‘was entitled to enforce due administration of the trust’,30 despite not being ‘the beneficial owner of the trust property’.31 In Australian Securities & Investments Commission v Carey (No 6) French J (as the former Chief Justice of the High Court of Australia then was) stated ‘there are some rights enjoyed, even by the beneficiaries of a non-exhaustive discretionary trust with an open class of beneficiaries’ including ‘a right to enforce the proper management of the trust by the trustee’.32 There are a further four categories of cases that recognise that a mere object, or an object from an open class of an exhaustive power, has an entitlement: (a) to seek relief in relation to an unauthorised exercise of power; (b) to bring derivative proceedings to assert rights accruing to the trustee; (c) to access trust information; and (d) to replacement of the trustee. Each is discussed in turn.

25 In addition to the cases discussed next, see also Kennon v Spry [2008] HCA 56, (2008) 238 CLR 366 [77] (French CJ), [125] (Gummow and Hayne JJ), cf [161] (Heydon J); Kafataris v The Deputy Commissioner of Taxation [2008] FCA 1454 [42]–[44] (Lindgren J); Yazbek v Commissioner of Taxation [2013] FCA 39 [20]–[24] (Bennett J); Elliott (n 13) [21]–[25]; In the matter of Gondon Five Pty Ltd [2016] NSWSC 1401 [37] (Brereton J). 26 Wright v Stevens [2018] NSWSC 548 [56], [94], [235]–[246]. 27 Randall v Lubrano (Supreme Court of New South Wales, Holland J, 31 October 1975), published as an annexure to McDonald v Ellis (2007) 72 NSWLR 605, [2007] NSWSC 1068. 28 Randall (n 27) 622. 29 Public Trustee v Smith [2008] NSWSC 397, the relevant trust terms are set out at [14]–[30], [77]. 30 ibid [107]. 31 ibid [108]. See also [107], [139]. 32 Carey (n 1) [21] (French J).

Australia  25

i.  Equitable Relief in Response to an Unauthorised Exercise of Power Mere objects of a non-exhaustive power sought relief in relation to the trustee’s allegedly bad faith and improper exercise of a power of exclusion in Curwen v Vanbrack Pty Ltd.33 The objects were not granted relief as an improper purpose was not made out. However, this case is important because the objects’ ability to seek relief was not questioned at first instance or on appeal,34 despite them being mere objects of a non-exhaustive power who did not otherwise have an entitlement to the benefit of trust property in default of appointment. Next, there is Mercanti v Mercanti,35 where two objects were able to seek relief in relation to allegedly improper exercises of a power to amend the trust terms, and powers to replace the trustee, guardian and appointor. Ultimately, the objects were unable to demonstrate there had been an exercise of power that was contrary to the trust terms or was improper.36 However, one object was awarded interlocutory relief by the High Court of Australia, restraining the trustee, guardian and appointor from exercising powers until the final determination.37 The significance of Mercanti v Mercanti is that the objects were able to maintain the proceedings, and one was granted interlocutory relief, even though they were (i) objects of a non-exhaustive power, and (ii) objects from an open class of an exhaustive power arising in default of exercise of the non-exhaustive power.38 Newnes and Murphy JJ acknowledged that these objects did not have an entitlement to the benefit of trust property;39 nonetheless, they did ‘have the right to due administration of the trust’.40

ii.  Derivative Proceedings The right to due administration includes an entitlement to assert a right that accrues to another person, such as the trustee, via derivative proceedings, sometimes referred to as derivative or ‘Vandepitte’ proceedings.41 Special circumstances must exist before an object will be permitted to bring derivative proceedings, such as the trustee’s failure to commence proceedings that amounts to the trustee’s breach of her duty to protect the trust property.42 This chapter is not concerned with the principles that identify such circumstances. The point for now is that a mere object has an entitlement to bring derivative proceedings (assuming special circumstances are made out) and this entitlement is 33 Curwen v Vanbreck Pty Ltd [2009] VSCA 284, [2009] 26 VR 335. Two of four plaintiffs were mere objects, the other two were mere objects and entitled in default of appointment. See [6]–[11]. 34 Curwen (n 33) [10], [15]. 35 Mercanti [2016] (n 4). 36 ibid [271], [377]–[379]. 37 Mercanti v Mercanti [2017] HCA 1, [2017] 340 ALR 225 (Kiefel J). 38 The trust terms are summarised in Mercanti [2016] (n 4) [30]–[42]. 39 Mercanti [2016] (n 4) [31]–[34]. 40 ibid [376]. 41 Vandepitte v Preferred Accident Insurance Corp of New York [1933] AC 70 (PC) 79. In Australia, this label is less frequently used, however, in substance the proceedings are the same: see Alexander v Perpetual Trustees WA Ltd [2004] HCA 7, (2004) 216 CLR 109 [55] (Gleeson CJ, Gummow and Hayne JJ). 42 See also Alexander (n 41) [55]; Ramage v Waclaw (1988) 12 NSWLR 84, 91–93 (Powell J); J Heydon and M Leeming, Jacobs’ Law on Trusts in Australia, 8th edn (LexisNexis 2016) [23-03].

26  Jessica Hudson part of the mere object’s general right to the due administration of trust. An illustrative example is Deutsch v Deutsch43 where the plaintiffs were described as being ‘[f]or the most part’ mere objects who were able to bring derivative proceedings.

iii.  Access to Information A mere object’s access to trust documents,44 is also instructive. The weight of Australian cases45 shows that ‘a person whose status is only that of a potential object of the exercise of a discretionary power’ has a ‘right to know what the trust property is and how it has and is being administered by the trustee’.46 This is part of any object’s general ‘right to have the trust property properly managed and to have the trustee account for his management’.47

iv.  Replacement of Trustee In Blenkinsop v Herbert a plaintiff successfully sought the replacement of the trustees of two discretionary trusts,48 and maintained proceedings, although was not successful, in her claim for the removal of the guardian(s) of the same discretionary trusts.49 The plaintiff was (i) an object of a non-exhaustive power, (ii) an object from an open class of an exhaustive power arising in default of exercise of the non-exhaustive power and (iii) held powers in her capacity as one of the joint holders of the offices of ‘Guardian’ and ‘Appointor’. The analytical significance of this case is reduced as it cannot be said with certainty that the plaintiff was awarded relief in her capacity as an object, whether it be (i) an object of a non-exhaustive power or (ii) an object from an open class of an exhaustive power, as distinct from her capacity as (iii) a guardian or appointor. That said, it is unclear that the plaintiff would have had any right to due administration in her capacity as a guardian or appointor.50 To the extent she did not, then this case can be cited tentatively as an example of a mere object and object from an open class of an exhaustive

43 Deutsch v Deutsch [2012] VSC 227 [39]–[41] (Hargrave J). See also El Sayed v El Hawach [2015] NSWCA 26, [2015] 88 NSWLR 214 [47]–[59] (the Court); Mitchell, ‘Livingston’ (n 2) 280–82. 44 Beyond the trust accounts which ‘indubitably’ fall within the concept of ‘trust documents’, there is a related issue as to what other information and documents fall within the scope of an object’s entitlement to trust documents. See also Re Simersall (1992) 35 FCR 584, 588 (Gummow J). 45 See, eg, Spellson (n 16) 315–16; Hartigan Nominees Pty Ltd v Rydge (1992) 29 NSWLR 405, 422 (Kirby P), 442–45 (Sheller JA); Randall (n 27) 623; Wright (n 26) [333], [298] ff. See also Spellson v Janango Pty Ltd (unreported, NSWSC, 8 December 1987) (Hodgson J); Avanes v Marshall [2007] NSWSC 191, [2007] 68 NSWLR 595 [15] (Gzell J); Carey (n 1) [30] (French J). See also Re Simersall (n 44) 588, where Gummow J did not express a decided view but stated there was ‘weighty support for Powell J’s conclusions’ in Spellson (n 16). See also Campbell (n 20) 142–46. 46 Randall (n 27). 47 Spellson (n 16) 315–16. 48 Blenkinsop v Blenkinsop Nominees Pty Ltd [2015] WASC 463. 49 Blenkinsop v Blenkinsop Nominees Pty Ltd [No 2] [2016] WASC 61, appeal dismissed in Blenkinsop v Herbert (n 5). 50 See generally Nolan, ‘Invoking the Administrative Jurisdiction’ (n 2) 169–71. In Blenkinsop v Herbert (n 5), the trust terms did not confer any positive entitlement to the benefit of trust property on the Guardian or Appointor [1]–[25].

Australia  27 power asserting a right to due administration, including the replacement of a trustee. In support, the Court of Appeal expressly acknowledged that the plaintiff did not have an entitlement to the benefit of trust property, yet had ‘a right to seek the intervention of the court … to supervise and, if necessary, intervene in the administration of the trust’.51

B.  Objects who have only a Chance of Acquiring an Entitlement to the Benefit of Trust Property do have a Right to Due Administration The cases discussed in section III.A show that the right to due administration accrues to objects who have only a chance of acquiring an entitlement to the benefit of trust property, being a mere object and an object from an open class of an exhaustive power. Further, the object’s right includes an entitlement to: (i) relief when there has been an unauthorised or improper exercise of a power to replace a trustee, appointor or guardian;52 (ii) relief when there has been an unauthorised disbursement of trust property;53 (iii) pursue derivative proceedings;54 (iv) disclosure of trust information;55 and (v) relief for the replacement of a trustee or other power-holder under an express trust.56 A final case is Crossman v PILT Nominees Pty Ltd.57 In this case, an object of a discretionary power under a sub-trust was awarded interlocutory relief against the trustee of the head-trust, restraining what would have been a grant of security over trust property contrary to the terms of the head-trust. The object of the sub-trust had no entitlement under the sub-trust or head-trust, but was able to maintain proceedings, and was awarded interlocutory relief against the head-trustee. In related litigation,58 Ward JA also found that this object of the sub-trust had an entitlement to equitable relief against the head-trustee, and for removal and replacement of the head-trustee. Relief was available irrespective of the fact that the object of the sub-trust had no entitlement to the benefit of trust property in relation to the sub-trust or head-trust. In summary, section III has so far presented the Australian cases that show that a mere object and an object from an open class of an exhaustive power do have a right to due administration. For the reasons discussed in section II.B above, these objects do not have, on either a collective or individual basis, an entitlement to the benefit of trust property. It is thus not possible to understand an object’s right to due administration in relation to that object having an entitlement to the benefit of trust property, on either a collective or individual basis. We must make sense of these cases another way, which is the focus of section III.C below. 51 Blenkinsop v Herbert (n 5) [72]. 52 Mercanti [2016] (n 4). 53 As contemplated in Randall (n 27) 622; Wright (n 26) [246]. 54 See section III.A.ii above. 55 See section III.A.iii above. 56 See section III.A.iv, bearing in mind the qualifications set out in that section. 57 Crossman v PILT Nominees Pty Ltd [2008] NSWSC 557 [1]–[2] (Hamilton J); Crossman v PILT Nominees [2009] NSWSC 393 (White J). 58 Crossman v Sheahan [2016] NSWCA 200, [2016] 115 ACSR 130 [50], [262]–[266] (Ward JA, Payne JA agreeing).

28  Jessica Hudson Before moving on, it must be acknowledged that Australian case law is not uniform. Some cases condition an object’s right to due administration, and in particular her access to trust information, on an object having an entitlement to the benefit of trust property, and the ‘proprietary’ nature of this entitlement.59 These cases must be balanced against those discussed in sections III.A–B, and which show that an object’s right to due administration does not depend on her also having an entitlement to the benefit of trust property. Further, and as a matter of principle, the right to due administration cannot depend on whether an object has a ‘proprietary’ entitlement. There is a closed list of proprietary rights,60 and an object’s entitlement to the benefit of trust property, if she has one, is not one. The availability of equitable relief in favour of an object against a trustee, the trustee’s creditors or assignees, and third parties has made it possible for analogies to be drawn between an object’s entitlement(s) under an express trust, and true proprietary rights, including ownership,61 and explains the use of the metaphorical labels of ‘equitable ownership’ or ‘equitable property’ in this regard. But the fact that this analogy can be drawn is not a reason from which conclusions can be made about an object’s other entitlements, such as access to trust information, and a right to due administration generally. This has been pointed out before.62 For example, Bell, Gageler and Nettle JJ in Carter Holt Harvey v The Commonwealth63 commented, in relation to the ‘proprietary’ nature of a trustee’s indemnity for expenses that ‘the choice of description should conform to, rather than dictate, the application of fundamental principles to “solving a concrete legal problem”’.64 These comments apply to the right to due administration. The ‘proprietary’ nature of an object’s entitlement to the benefit of trust property, if any, is not determinative of the existence and content of the object’s (other) right to due administration.

C.  Making Sense of an Object’s Right to Due Administration i.  An Outcome of Permitting the Suspension of an Entitlement to the Benefit of Trust Property An object’s right to due administration is best understood as an outcome of Australian law’s recognition of discretionary powers that suspend an entitlement to the benefit of trust property and its conception of the essential feature of an express trust, each of which 59 See, eg, Hartigan (n 45) 436; McDonald (n 27) [35], [46]; Breen v Williams (1996) 186 CLR 71, 89 (Dawson and Toohey JJ). See also Campbell (n 20) 146. 60 Keppell v Bailey (1834) 2 My & K 517, 535–36 (Lord Brougham LC); W Swadling, ‘Opening the Numerus Clausus’ (2000) 116 Law Quarterly Review 354. 61 Smith Kline & French Laboratories (Aust) Ltd v Secretary, Dept Community Services and Health (1990) 22 FCR 73, 120–21 (Gummow J), affirmed on appeal (1991) 28 FCR 291; Yanner v Eaton [1999] HCA 53, (1999) 201 CLR 351, 366 [17]–[20] (Gleeson CJ, Gaudron, Kirby and Hayne JJ), [85] (Gummow J); Akers v Samba Financial Group [2017] UKSC 6, [2017] AC 424 [82]. 62 See, eg, SFC Milsom, Historical Foundations of the Common Law, 2nd edn (Butterworths 1981); L Smith, ‘Trust and Patrimony’ (2008) 38 Revue Générale de Droit 379, 392. 63 Carter Holt Harvey Woodproducts Australia Pty Ltd v Commonwealth [2019] HCA 20. 64 ibid [84], referring to Livingston v Commissioner of Stamp Duties (Qld) (1960) 107 CLR 411, 448 (Kitto J).

Australia  29 are discussed in sections III.C.ii–iii below. In summary, the terms of an express trust can suspend the creation of an entitlement to the benefit of trust property to some point in the future, provided the rules against perpetuities are complied with. In the meantime, the right to due administration must accrue to someone which includes the mere object and an object from an open class of an exhaustive power.

ii.  Suspension Explained An entitlement to the benefit of trust property is suspended when the trust terms delay the creation of this entitlement until a future point in time and before which an entitlement to the benefit of trust property does not exist for anyone. This is exemplified by trusts, such as those in Mercanti v Mercanti,65 where a non-exhaustive power is followed, in default of appointment, by an exhaustive power in favour of an open class of objects. For reasons explained above in section II.B, the mere object has no entitlement to the benefit of trust property unless there is an appointment in her favour. Further, the objects of an open class of an exhaustive power are in the same position: no one has an entitlement to the benefit of trust property until there is an exercise of power in their favour owing to the fluidity of the open class. Someone will eventually get this entitlement. In Mercanti v Mercanti,66 the trust terms required the creation of this entitlement on the final date of distribution. Irrespective of the settlor’s intention, the rules against perpetuities will apply to vary the terms as declared by the settlor to ensure the creation of an entitlement to the benefit of trust property within the prescribed time limits.67 But until then, the existence of an entitlement to the benefit of trust property has been suspended. It is possible to create an express trust where, for a period of time, an entitlement to the benefit of trust property, whether labelled as such or as equitable or beneficial ownership, does not exist and may be reposed in no one.68 Suspension is different from the situation where an entitlement to the benefit of trust property is created and exists from the outset, but the terms do not entitle the object(s) to benefit until a future point in time. Objects entitled in default of appointment in equal or defined shares, for example, may be considered to have an entitlement to the benefit of trust property from the outset.69 However, the terms of this entitlement do not 65 Mercanti [2016] (n 4) [30]–[42]. See also Blenkinsop v Herbert (n 5) [1]–[25]; Wright (n 26) where there was a mere power and in default of appointment a duty to hold on trust in equal shares for beneficiaries as selected by the trustee [56], [62]. Another, but different, example is CPT (n 11) [25]–[28], [37]–[42]. 66 Mercanti [2016] (n 4). 67 The common law rule is that an interest must vest no later than 21 years after the termination of a life in being at the creation of the interest, and if not the interest is void; Cadell v Palmer (1883) 1 Cl & Fin 372; Congregational Union of NSW v Thistlethwayte (1952) 87 CLR 375. Australian states have modified this rule, to allow a longer time for vesting, and, for example introduce a ‘wait and see’ approach: see, eg, Perpetuities Act 1984 (NSW). The rule is abolished in South Australia: Law of Property Act 1936 (SA) s 61. Some trusts, such as charitable trusts and superannuation trusts are exempt from these rules: see, eg, Perpetuities Act 1984 (NSW) ss 13, 16; Superannuation Industry (Supervision) Act 1993 (Cth) s 343; Corporations Act 2001 (Cth) s 1346. 68 Contrary to the view of Lord Upjohn in Vandervell v IRC [1967] 2 AC 291 (HL) 313, that a resulting trust will arise if a settlor fails to create a ‘beneficial interest’ in favour of another and assuming that ‘beneficial interest’ means an entitlement to the benefit of trust property. 69 Smith ‘Massively Discretionary Trusts’ (n 3) 37. Although compare Montevento Holdings Pty Ltd v Scaffidi (2012) 246 CLR 325 [7] (the Court), where the objects entitled in default of appointment in equal shares were not considered to have a ‘vested’ entitlement to the benefit of trust property.

30  Jessica Hudson entitle objects to anything until a future point in time, and are defeasible upon future occurrences, sometimes referred to as conditions subsequent. Similarly, for reasons discussed above in section II.B, if the provisions upon default of appointment confer a further power to distribute amongst a closed class of objects, then it may be possible to say that, at least collectively, the objects have an entitlement to the benefit of trust property from the outset, and there is no suspension. As mentioned in section II.B above, it might be asked whether the hypothetical aggregation of the closed class of objects is enough to support the conclusion that such an object has, or is vested of, any entitlement.70 It is not necessary to resolve these issues for this chapter’s purposes. That it is possible for a settlor to create an express trust that suspends the creation of an entitlement to the benefit of trust property is demonstrated by the cases discussed above already concerning a mere power followed by an exhaustive power to distribute amongst an open class of objects, as in Mercanti v Mercanti. Before moving on, it is necessary to acknowledge that there is debate about whether it should be possible for settlors to be able to create an express trust with terms that have this effect, and whether an express trust with wide discretionary powers is truly an express trust.71 We might ask, for example, whether either of the arrangements in Mercanti v Mercanti, as discussed above, or in Wright v Stevens, where trust property was held for beneficiaries to be selected from an open class of objects defined as a ‘person … residing in or otherwise carrying on a business in Dorrigo in New South Wales or surrounding area as defined by post code 2453’,72 should constitute an express trust. Underlying these concerns is a particular view about what is an express trust, including the essentiality of the creation of an entitlement to the benefit of trust property, and correlatively, the trustee’s obligation with respect to the benefit of trust property.73 These are important concerns that speak to the foundations of our understanding of the law of express trusts and our conception of the express trust itself, resolution of which is beyond the scope of this chapter. The aim for now is to rationalise the rights of mere objects and objects from an open class of an exhaustive power as an outcome of, and accepting, Australia’s choice to permit discretionary powers and that jurisdiction’s conception of the essential feature of an express trust, discussed next.

iii.  The Essential Feature of an Express Trust in Australia In addition to allowing the suspension of an entitlement to the benefit of trust property, Australian cases have expressly and emphatically rejected the view that this entitlement

70 As Campbell JA explained in Fairbairn v Varvaressos [2010] NSWCA 234, (2010) 78 NSWLR 577 [35]–[37], ‘vested’ is derived from a Latin metaphor for ‘clothed’ and ‘vested’ and its derivations such as ‘vested in interest’ and ‘vested in possession’ vary depending on the context. 71 See, eg, J Palmer and C Rickett, ‘The Revolution and Legacy of the Discretionary Trust’ (2017) 11 Journal of Equity 157, 182–83; Waters, ‘Reaching for the Sky’ (n 6) 282–83; Smith, ‘Massively Discretionary Trusts’ (n 3) 20–21 fn 9, 24 fn 19, 52–54. 72 Wright (n 26) [246]. 73 See, eg, Smith, ‘Massively Discretionary Trusts’ (n 3) 20, 28, 36–39, 52–53; Matthews (n 3) 217–31; JE Penner, The Law of Trusts, 7th edn (Oxford University Press 2010) 244, where it is argued that a trust requires

Australia  31 is essential to an express trust.74 The terms of an express trust do not need to create at all times a complex of legal relations that amounts to an entitlement to the benefit of trust property. What is essential to an Australian express trust is the trustee’s subjection to the control of her exercise of power over trust property, and in particular, the trustee’s duty to obey the trust terms.75 It is acknowledged that sometimes this feature is described, for example by Hope JA in DKLR Holding Co (No 2) Pty Ltd v Commissioner of Stamp Duties,76 as being ‘the trustee[’s] … obligation to deal with the trust property for the benefit of the beneficiaries’.77 For the benefit of the beneficiary means that someone, who we can label a ‘beneficiary’, holds the corelative right to the trustee’s performance of her duty to exercise her power(s) in accordance with the trust terms. The ‘beneficiary’ holds this right for her own benefit in the sense that she is not subject to the trust terms in relation to the exercise of this right. This is distinct from a trustee who holds the same right against a co-trustee or previous trustee,78 for example, in a fiduciary capacity, and must comply with the trust terms in the exercise of this right against another trustee.79 Hope JA’s reference to ‘for the benefit of the beneficiaries’ does not mean that an entitlement to the benefit of trust property is essential to an express trust. The trust terms may or may not create an entitlement to the benefit of trust property at any one point in time. This is explained later on in DKLR Holding Co (No 2)80 where Hope JA states that the beneficiary’s ‘interest is essentially a right to compel the trustee to hold and use his legal rights in accordance with the terms of the trust’ and that a beneficiary will only have an entitlement to the benefit of trust property where the trust terms so provide.81 Pausing here, the idea82 that the label ‘beneficiary’ can be ascribed to someone because they have a right to due administration is very different from the view that someone is a beneficiary because they have (or will have, for example in relation to a beneficiary entitled in default) an entitlement to the benefit of trust property.83 However, and a beneficiary to have an interest akin to ownership. This view is continued in Penner, ‘The (True) Nature’ (n 10) 486, 495–96; however, Professor Penner in this article also focuses on the beneficiary’s interest in the trustee’s ‘exercise of his powers over the trust assets in accordance with the terms of trust’: 500. 74 See, eg, Glenn (n 11) 497 (Griffith CJ); CPT (n 11) 112 (the Court); Kafataris (n 25) [42]–[44]; J Harris, ‘Trust, Power and Duty’ (1971) 87 Law Quarterly Review 31, 47. 75 See, eg, Countess of Bective v Federal Commissioner of Taxation (1932) 47 CLR 417, 418–22 (Dixon J); DKLR (n 10) 518–20; Spellson (n 16) 315–16; Youyang (n 18) [32]; Federal Commissioner of Taxation v ElecNet (Aust) Pty Ltd [2015] FCAFC 178, (2015) 239 FCR 359 [85] (Pagone and Edelman JJ); Carter (n 63) [25]–[27], [82]. Similarly, there is an irreducible core of trustee duties and correlative beneficiary rights: Armitage v Nurse [1998] Ch 241 (CA) 253–54 (Millett LJ) and applied or referred to favourably in Australian cases, including Segelov v Ernst & Young Services Pty Ltd [2015] NSWCA 156, (2015) 89 NSWLR 431, 458–59 (Gleeson JA, Meagher and Leeming JJA agreeing); Crossman v Sheahan (n 58) [307]–[308]; Australian Securities and Investments Commission v Drake [No 2] [2016] FCA 1552, [2016] 340 ALR 75 [284]–[285] (Edelman J). 76 DKLR (n 10). 77 ibid 518–19 (emphasis added); Heydon and Leeming (n 42) [1-10]. 78 Young v Murphy [1996] 1 VR 279, 281–83 (Brooking J); Morlea Professional Services Ltd v Richard Walter Pty Ltd (in liq) (1999) 96 FCR 217 [51] (the Court). 79 Young (n 78). 80 DKLR (n 10). 81 ibid 520 (emphasis added). 82 See, eg, Kafataris (n 25) [42]–[43]: ‘a beneficiary is any person for whose benefit a trust is to be administered and who is entitled to enforce the trustee’s obligation to administer the trust according to its term … the word “beneficiary” reaches beyond a person who has a beneficial interest in the trust property’ (emphasis added). 83 See, eg, Smith, ‘Massively Discretionary Trusts’ (n 3) 20–24; Matthews (n 3) 221–23. See, eg, Molard International (PTC) Limited v Rusnano Capital AG (In Liquidation) [2019] GCA 077.

32  Jessica Hudson irrespective of the labels, the point is that the inevitable consequence of Australian law’s recognition of powers that suspend an entitlement to the benefit of trust property, is that the right to due administration cannot be confined to a ‘beneficiary’ in the narrower sense of someone who has (or will have) this entitlement. For the reasons discussed above in this section, a ‘beneficiary’ in this sense may not exist at any one point in time. At all times, there must be someone to whom the right to due administration accrues and who can compel the trustee to adhere to the trust terms. Without this legal person, the trust cannot exist. That imperative is the beneficiary principle, which will be discussed further in section V below. In Australia, objects who have only a chance of acquiring an entitlement to the benefit of trust property, such as the mere object and an object from an open class of an exhaustive power, may satisfy this imperative. If these objects are denied the right to due administration, then the essential feature of an express trust would be missing in the situation where the trust terms also suspend an entitlement to the benefit of trust property. A similar point is made by Holland J in Randall v Lubrano,84 to the effect that if a mere object is unable to seek relief against a trustee, then, [the trustee] … could do as he pleases with the trust property and commit any breach of trust that he cared to commit. There may be no way of detecting it and no person could require him to reveal what he had been doing.85

It is acknowledged that the Australian position raises the risk of the opportunistic object, which is addressed in section IV below.

iv.  Other Explanations of a Mere Object’s Right to Due Administration There are other ways of explaining the rights of mere objects and other objects who do not have an entitlement to the benefit of trust property. Set out now are the reasons why this chapter’s explanation should be preferred. First, there is the view that the fiduciary capacity in which a power is held is determinative.86 On this view, mere objects of a fiduciary power have a right to due administration, and mere objects of non-fiduciary power do not. The label ‘fiduciary’ can be used in different senses to describe the way in which a power is held,87 and without going into this detail, in none of the Australian cases considered above in section III.A was the fiduciary capacity ‘determinative’. The fiduciary capacity of a power, if mentioned at all, was only relevant to identify some of the duties that constrained the donee in execution. The objects had a right to due administration irrespective of whether they were objects of a fiduciary power. 84 Randall (n 27). 85 ibid. 86 Nolan, ‘Invoking the Administrative Jurisdiction’ (n 2) 166–69. See also L Tucker, N Poidevin and J Brightwell, Lewin on Trust, 20th edn (Sweet & Maxwell 2020) [41-073]–[41-074]. 87 The label ‘fiduciary’ can be employed in different ways to characterise a power. For example, in In re Somes [1896] 1 Ch 250 (ChD) 255 (Chitty J) ‘fiduciary’ describes powers that must be exercised in good faith and for a proper purpose. See further, G Thomas, Thomas on Powers (Oxford University Press 2012) [1.52]; T Barkley, ‘Conceptions of the Fiduciary in Trust Law’ (2019) 13 Journal of Equity 23.

Australia  33 In Mercanti v Mercanti,88 for example, the fiduciary capacity of the power was relevant only to identification of some of the duties that determined the lawfulness of the impugned execution, and not whether the mere objects had a right to due administration. Newnes and Murphy JJ acknowledged that it was not necessary to determine whether the subject power was held in a fiduciary capacity because, either way, the donee was subject to the same fundamental requirements to comply with the trust terms, and act properly and in good faith.89 The plaintiff mere objects had a right to relief in the event of non-compliance with these fundamental requirements, irrespective of whether the power was held in a fiduciary capacity. The second way of explaining an object’s right to due administration is in terms of ‘standing to sue’ or ‘locus standi’.90 An object’s right to due administration should not, however, be understood in these terms alone. As discussed above in section III.A.ii an object does have, in special circumstances, an entitlement to assert a right that accrues to another person, such as the trustee. However, and as shown by the other cases discussed in section III.A, the object’s right to due administration is not confined to asserting rights that accrue to another. Further, it may not always be possible to analyse an object’s right(s) in terms of her entitlement to sue on another’s behalf, as this presupposes there being another person to whom the subject right(s) accrue. As pointed out in section III.C.i above, an express trust may suspend the creation of an entitlement to the benefit of trust property, and the object(s) who are to acquire this entitlement may not be ascertainable, let alone alive. Thus, at any one point in time there may be no one on whose behalf an object may bring derivative proceedings. The object’s right to due administration cannot be understood in terms of her having standing to sue for another when this other person does not exist. Finally, the Australian cases discussed in section III.A might be rationalised on the basis that the objects were the ‘true intended beneficiaries’.91 While the objects did not actually have an entitlement to the benefit of trust property, their relationship to the settlor, and other surrounding circumstances, mean that they can be treated as if they did. In turn, these cases conform to the view that the right to due administration goes hand-in-hand with an entitlement to the benefit of trust property. This is not, however, a satisfactory way of making sense of the Australian cases because it prioritises the settlor’s subjective intention over the settlor’s objective intention in relation to who, if anyone, has an entitlement to the benefit of trust property. Assuming there is a validly created express trust, then the fundamental principles of construction preclude reliance

88 Mercanti [2016] (n 4) [396]–[398]. See also LGSS v Egan [2002] NSWSC 1171 [107]–[108] (Austin J). A power held by a trustee will likely be held in a fiduciary capacity although the fiduciary capacity of a power will ultimately depend on the trust terms, rather than the particular office of the donee. See generally, Re Skeats’ Settlement (1889) 42 Ch D 522 (ChD) 526 (Kay J); Re Wills Trusts Deeds [1964] Ch 219 (ChD) 227–29 (Buckley J); Basel Trust Corporation v Ghirlandina [2008] JLR 1, 54; Fitzwood Pty Ltd v Unique Goal Pty Ltd [2001] FCA 1628, (2002) 188 ALR 566 [98] (Finklestein), reversed on other grounds at [2002] FCAFC 285; Blenkinsop v Herbert (n 5) [90]–[114] (the Court). 89 Mercanti [2016] (n 4) [396]–[398]. 90 Strathalbyn Show Jumping Club Inc v Mayes [2001] SASC 73, (2001) 79 SASR 54 [50] (Bleby J); Wright (n 26) [333] (Hallen J); Tucker, Poidevin and Brightwell (n 86) [41-071]–[41-074]. 91 Schmidt (n 2) [34]. See also Murphy v Murphy [1999] 1 WLR 282, 293 (Neuberger J); Smith, ‘Massively Discretionary Trusts’ (n 3) 26–27; Nolan ‘Invoking the Administrative Jurisdiction’ (n 2) 168.

34  Jessica Hudson upon the settlor’s subjective intention.92 For this reason, the Australian cases should not be rationalised on the basis the plaintiff objects were the ‘true intended beneficiaries’.

IV.  The Opportunistic Object The Australian position does risk a trustee becoming tied down in spurious litigation commenced by an opportunistic object who has identified some strategic self-interest in asserting a right to due administration. This risk, however, is one that Australian courts are conscious of, and, with respect, are capable of dealing with given that equitable relief, including that available to an object in relation to the administration of an express trust, is discretionary.93 The ‘right’ to due administration is more accurately described as an equity for relief,94 and like any other equity for relief, the object’s ‘right’ to due administration is not absolute and is subject to discretion.95 Nonetheless, as explained by Professor Campbell in relation to objects’ access to trust information, the discretionary nature of equitable relief ‘does not involve deserting the firm ground of sure principles for a trackless sea of uncertainty’.96 Equitable discretion does not import a broad-ranging remedial enquiry and the focus is on the relief necessary to require the trustee ‘faithfully to perform the intention of the settlor and the office of trustee’.97 The risk of the opportunistic object is a specific factor taken into account by courts when considering whether to exercise the discretion to award relief, and in what form. Cases show that it is unlikely that an opportunistic object would succeed in maintaining her claim if it is not otherwise in the interests of the due administration of the trust. This is shown by AIT Investment Group Pty Ltd v Markham Property Fund No 2 Pty Ltd,98 where Bergin CJ in Eq found that the discretion to award access to trust information should not be exercised having regard to the interests of the objects (unit holders without any entitlement to the benefit of trust property)99 and what was necessary for

92 Byrnes v Kendle [2011] HCA 26, (2011) 243 CLR 253 [53]–[59] (Gummow and Hayne JJ), [99]–[115] (Heydon and Crennan JJ). 93 See, eg, AIT Investment Group Pty Ltd v Markham Property Fund No 2 Pty Ltd [2015] NSWSC 216 [85] (Bergin CJ in Eq); Rouse v IOOF Australia Trustees Limited [1999] SASC 181, (1999) 73 SASR 484 [100]–[101]. Some Australian cases refer to Erceg v Erceg [2017] NZSC 28, [2017] 1 NZLR 320 [56] (the Court). 94 See (n 20) above. This term should not be confused with a ‘mere equity’ which refers to the relative priority status of a plaintiff ’s interest in specific property where that interest presupposes the award of consequential proprietary relief which is dependent upon a successful claim and orders for equitable rescission, about which, see Phillips v Phillips (1861) 4 De GF & J 208; Latec Investments Ltd v Hotel Terrigal (1956) 113 CLR 265; D O’Sullivan, ‘The Rule in Phillips v Phillips’ (2002) 118 Law Quarterly Review 296. 95 A contrary view is expressed in some English cases: see, eg, Foskett v McKeown [2001] 1 AC 102, 109 (Lord Browne-Wilkinson), 128 (Lord Millett). Australian cases do not conform to this view and a beneficiary’s claim to relief against a trustee or third party is subject to equitable discretionary factors: see, eg, Harper v Brown (1884) 8 LR (NSW) Eq 86 (Manning PJ) 107, affirmed on appeal, [1887] NSWR 116, 121 (the Court); Hourigan v Trustees, Executors and Agency Co Ltd (1934) 51 CLR 619, 629 (Rich J), 651 (Dixon J); Orr v Ford (1989) 167 CLR 316, 323 (Mason CJ), 329–32 (Wilson, Toohey and Gaudron JJ), 337–46 (Deane J). 96 Campbell (n 20) 145. See also White v Damon (1802) 7 Ves 30, 35 (Lord Eldon). 97 Campbell (n 20) 146. 98 AIT (n 93) [85]–[96] (Bergin CJ in Eq). 99 The trust terms expressly stated that a Unit Holder had ‘no interest in any asset or part of any asset of the Trust’ and was ‘not entitled to call for or assert an interest in any part of the Trust Property’: AIT (n 93) [76].

Australia  35 the proper administration of the trust. Relief was denied because in the circumstances of the particular private trading trust, Bergin CJ in Eq found that disclosure of the requested information was not in the interests of all objects and not necessary for the proper administration of the trust.100 Another case showing how the discretionary nature of equitable relief will provide safeguards against the opportunist object, mentioned already, is Wright v Stevens.101 Recall, the plaintiff was an object of an exhaustive power to appoint a ‘Beneficiary’ from an open class of objects defined as a ‘person … residing in or otherwise carrying on business in Dorrigo in New South Wales or surrounding area as defined by post code 2453’. The object was awarded access to trust information,102 but only after Hallen J considered the object’s motivations for seeking relief for access to trust information. Hallen J distinguished between a disappointed object wishing to challenge a trustee’s exercise of power that was not in the object’s favour, and an object who is concerned about the administration of the trust and is seeking information to hold a trustee to account, and, if necessary, commence an action for breach of trust.103 Hallen J also weighed the object’s interest in ensuring the proper administration of the trust against the interests of the trustee, including the cost of disclosure, and other third-party interests.104 These two cases illustrate how courts are sensitive to, and, with respect, capable of addressing the risk of the opportunistic object. This risk should not mean that, as a matter of principle, the mere object, or object from an open class of an exhaustive power, should not have a right to due administration. Finally, it is important to be clear that the Australian position does not mean that an object is able to seek relief that, for example, affects the transfer of trust property to herself. Prima facie, the object’s right is to relief necessary for the due administration of the trust, which might include where there has been an unauthorised transfer of trust property, relief facilitating the return of property to the (replacement) trustee either from a recipient third-party, or defaulting trustee. If the object has an entitlement to the benefit of trust property and satisfies other conditions so that she has a power to call for the trust property, then the object may be able to seek relief that short circuits the step of return into trust, and require the transfer of trust property or money to the object directly.105

V.  The Beneficiary Principle Simply stated, the beneficiary principle requires a trust to exist for a beneficiary, or charitable purpose.106 The beneficiary principle is relevant because it has been invoked in

100 AIT (n 93) [91]–[96]. 101 Wright (n 26). 102 ibid [235]–[246], [286]. 103 ibid [299]. 104 ibid [334]. 105 Akers (n 61) [46], [82]. 106 Cases such as Morice v Bishop of Durham (1804) 9 Ves 399, 404–05 (Sir William Grant MR); Morice v Bishop of Durham (1805) 10 Ves Jr 522, 539–40 (Lord Eldon LC); Bowman v Secular Society Ltd [1917]

36  Jessica Hudson support of the view that objects without an entitlement to the benefit of trust property should not have a right to due administration.107 On this basis, cases that recognise mere objects as having a right to due administration, such as Schmidt v Rosewood,108 have been discounted as they come from ‘offshore’ jurisdictions that have abandoned, and thus are not constrained by, the beneficiary principle.109 The beneficiary principle is fundamental to the law of express trusts in Australia and it is important to explain why the Australian position in relation to mere objects, and other objects who do not have an entitlement to the benefit of trust property, can be reconciled with this principle. First, it is necessary to explain what this principle is. The beneficiary principle expresses the imperative that a legal or equitable right can only accrue to a legal person, such as an individual or an entity with a recognised legal personality, such as a corporation.110 Without this legal person, the relationship of an express trust is incomplete. As discussed in section III.C.iii above, an express trust is essentially a complex of legal relations concerning the control of the trustee’s power over trust property, including the essential duty of the trustee to obey the trust terms and the corelative right to due administration. The existence of this legal relationship, that we call an express trust, depends on there being a legal person who can be the repository of the right to due administration to complete this relationship. This may be an individual or a corporation,111 or, in relation to charitable and statutory trusts, the Crown which is represented by the Attorneys-General.112 Thus an express trust cannot exist where the trust terms purport to require the trustee to hold for an entity without legal personality, such as an unincorporated association,113 a polo club,114 or a carillon on Sydney Harbour.115 These are not legal

AC 406 (HL) 441 (Lord Parker); In Re Astor’s Settlement Trusts [1952] Ch 534 (ChD) 541–49 (Roxburgh J), have been applied in Australia: see Public Trustee v Nolan (1943) 43 SR (NSW) 169, 172 (Roper J); Leahy v Attorney-General for New South Wales [1959] AC 457 (PC) 478 (Viscount Simonds); Attorney-General (NSW) v Donnelly (1958) 98 CLR 538 (HC) 579 (Kitto J); Strathalbyn (n 90) [50]; Yeomans v Yeomans [2005] QSC 85, (2006) 1 Qd R 390 [8] (McMurdo J); Doherty v Doherty [2006] QSC 257, [2007] 2 Qd R 259 [28] (Jones J); Radmanovich v Nedeljkovic [2001] NSWSC 492, [2001] 52 NSWLR 641 [113] (Young CJ in Eq). 107 See, eg, Matthews (n 3) 217–25; Nolan, ‘Invoking the Administrative Jurisdiction’ (n 2) 168–69, 171; Smith ‘Massively Discretionary Trusts’ (n 3) 22–24, referring to Re Manisty’s Settlement [1974] Ch 17 (ChD) 25 (Templeman J). Professor Smith does allow for a mere object to have a right to relief to ensure the proper exercise of power. Australian law affords objects a wider right to due administration as discussed in sections III.A–B above. 108 Schmidt (n 2) [59]. See also Lemos (n 2); Freeman (n 2). 109 Smith, ‘Massively Discretionary Trusts’ (n 3) 23 fn 16, 36–37. 110 Legal personality, not legal capacity is required. An individual does not need to be capable of making decisions for herself, and a child or someone without legal capacity can be a beneficiary, for example. About legal personality, see generally Communications, Electrical, Electronic, Energy, Information, Postal, Plumbing and Allied Services Union of Australia v Queensland Rail [2015] HCA 11, (2015) 256 CLR 171 [52]–[53] (Gageler J); B Smith, ‘Legal Personality’ (1928) 37 Yale Law Journal 283; F Maitland, ‘Moral Personality and Legal Personality’ (1905) 6 Journal of the Society of Comparative Legislation 192. 111 See, eg, Leahy (n 106), 478–79, 484. 112 Charitable trusts are enforceable by the Attorney-General on behalf of the Crown, see Attorney-General v Try (1891) 12 LR (NSW) Eq 23, 29–32 (Owen CJ in Eq); Charitable Trusts Act 1993 (NSW) ss 5–8; Heydon et al (n 42) ch 10. Likewise, a statutory trust is enforceable by the Attorney-General regardless of whether it is charitable: Western Australia v Ward (2002) 213 CLR 1, [2002] HCA 28 [241] (Gleeson CJ, Gaudron, Gummow and Hayne JJ). 113 Bacon v Pianta (1966) 114 CLR 634. 114 Strathalbyn (n 90). 115 Nolan (n 106).

Australia  37 persons and cannot be a repository of the legal relations that constitute an express trust.116 This is a theme evident in statements such as that by McMurdo J in Yeomans v Yeomans,117 that ‘[t]he reason [for the beneficiary principle] … is that there must be some person who can call for the enforcement of the trust’. The beneficiary principle has, sometimes, been understood as a rule concerned with the enforceability of an express trust, and sometimes (re-)labelled as the ‘enforcer principle’.118 On this view, the enforcer/beneficiary principle is satisfied by the conferral of a right of due administration on a nominated legal person, sometimes referred to as an ‘enforcer’. With respect to these views, this chapter advocates a different understanding of the beneficiary principle which is not concerned with the enforceability of an express trust.119 There is a difference between the enforceability of an express trust and its existence.120 The beneficiary principle speaks to a more fundamental and prior concern, on which the enforceability of an express trust depends, being the very existence of the express trust relationship. The principle requires a legal person to whom the right to due administration can accrue because without this legal person, the express trust relationship cannot exist, let alone be capable of enforcement. It is useful to note that the imperative for more than one legal person, in this case the beneficiary and trustee, to constitute the express trust, is basic to, but not expressly evident in, the principles that determine the existence of other legal relationships. There is no beneficiary principle in the law of contract, or principles determining the existence of a fiduciary relationship, for example. These legal relationships are created by the interactions between the very two legal persons who will be party to the relevant legal relationship. An express trust, on the other hand, can be created without the involvement of the putative beneficiary, whether by self-declaration or by transfer to a trustee.121 The asymmetric constitution of an express trust explains why the imperative for a legal relationship to be between more than one legal person is expressed as an independent principle in this context and not in others where it is still fundamental but otherwise satisfied. I turn now to explain why the Australian position is consistent with the beneficiary principle. That principle requires the right to due administration to be reposed in a legal person. All the objects in the cases in sections III.A–B above had legal personality, and this principle is satisfied. The beneficiary principle does not directly stipulate to whom a right to due administration does or does not accrue. The principle does not preclude the right to due administration accruing to an object who does not have, and has only a possibility of acquiring, an entitlement to the benefit of trust property. 116 The terms may instead create a power allowing the trustee to apply property towards the non-charitable purpose. Unappointed property will vest in default, or on resulting trust, with the right to due administration accruing to the legal person who is the default beneficiary or settlor: see Heydon and Leeming (n 42) ch 11. 117 Yeomans (n 106). See also Donnelly (n 106), quoting Morice (n 106). 118 See Hayton (n 6). 119 See also, Heydon and Leeming (n 42) [11-06]. 120 The difference between the enforceability and existence of an express trust has been made before, and the enforceability, rather than the existence, of an express trust over land depends upon the declaration being evidenced in writing (Law of Property Act 1925, s 53(1)(b); Rochefoucauld v Boustead [1897] 1 Ch 196 (CA) 206–07) and the creation and existence of the trust depends rather on the settlor’s external manifestation of her intention, however that occurs and is evidenced. 121 The beneficiary can disclaim her interest, although this is after the creation of the express trust: see Y Liew and C Mitchell, ‘The Creation of Express Trusts’ (2017) 11 Journal of Equity 133.

38  Jessica Hudson Finally, it is respectfully submitted that the argument that the beneficiary principle precludes a mere object, or other object without an entitlement to the benefit of trust property, from having a right to due administration is not applicable to Australian law. At the heart of this argument is a different interpretation of the beneficiary principle that understands the essential feature of an express trust as being an entitlement to the benefit of trust property. In turn, the right to due administration is confined to a beneficiary who has, or will have, this entitlement. As explained in section III.C.iii above, Australian law has a different conception of the express trust that rejects the essentiality of an entitlement to the benefit of trust property. An interpretation of the beneficiary principle that assumes otherwise should not apply to preclude a mere object, or other object without an entitlement to the benefit of trust property, from having a right to due administration in Australia.

VI. Conclusion Discretionary trusts challenge our ideas about the fundamental tenets of trusts law and the nature of the express trust itself. Once the nomenclature is unpacked it is clear that in Australia mere objects and objects from an open class of an exhaustive power, do have a right to due administration, despite not having an entitlement to the benefit of trust property on either a collective or individual basis. This chapter has sought to make sense of the Australian position as an outcome of that jurisdiction’s recognition of discretionary powers and its rejection of the essentiality of an entitlement to the benefit of trust property. There is the risk of the opportunistic object. However, Australian courts have dealt with this risk by distinguishing between the object who is concerned about the administration of the trust and is seeking relief to hold a trustee to account, and, the opportunistic or disappointed object. This chapter has also explained how the Australian position does not contravene the beneficiary principle, on the basis that this principle expresses an imperative for the existence of an express trust: a legal person to whom the trustee owes her duty to duly administer the trust.

3 A Lament for Trust Principles in New Zealand JESSICA PALMER*

I. Introduction The trust is well known for being an ‘institute of great elasticity and generality; as elastic, as general as contract’.1 Yet, it nevertheless has a common core to it – a trustee holds title to property for the benefit of another (or, in limited situations, for a purpose), and is empowered to do so on certain terms. Those terms may be expressed in a deed by a settlor upon the creation of an express trust, and many are also imposed by general principles of trusts law and/or by statute. In this way, trustees are constrained in the exercise of their powers, and certain rights of enforcement accrue to beneficiaries. The trust concept is not altogether settled. Its nature is contested. At the heart of that contest is the identification of what it is that a beneficiary has.2 While the trust may once have been understood, whether rightly or wrongly, as the split of ownership between trustee and beneficiary, I have argued elsewhere that that paradigm weakened significantly in the latter part of the twentieth century.3 This was, in large part, due to the increasing attractiveness to settlors of settling property for the benefit of discretionary objects who take no vested interest in the trust property, and are instead at the whim of the trustee, albeit a trustee who must act in good faith and with reasonable care.4 In more recent times, the trust has evolved further still so that in addition to giving less to the beneficiaries, it also retains more for the settlor. It is understandable that a

* Professor of Law, University of Otago, New Zealand. 1 FW Maitland, Equity, 2nd edn, revised by John Brunyate (Cambridge University Press 1937) 17. 2 See, eg, LD Smith, ‘Trust and Patrimony’ (2008) 38 Revue Générale de Droit 379; B McFarlane and R Stevens, ‘The Nature of Equitable Property’ (2010) 4 Journal of Equity 1; JE Penner, ‘The (True) Nature of a Beneficiary’s Equitable Proprietary Interest Under a Trust’ (2014) 27 Canadian Journal of Law & Jurisprudence 473; S Agnew and B McFarlane, ‘The Paradox of the Equitable Proprietary Claim’ in B McFarlane and S Agnew (eds), Modern Studies in Property Law, vol 10 (Hart Publishing 2019) 306. 3 See further, J Palmer and C Rickett, ‘The Revolution and Legacy of the Discretionary Trust’ (2017) 11 Journal of Equity 157. 4 In re Hastings Bass [1975] Ch 25, [1974] 2 All ER 193 (CA); Pitt v Holt [2013] UKSC 26.

40  Jessica Palmer settlor may want to retain as much control as possible, and trusts lawyers have found ways to do this, most commonly through the use of a range of powers, retained by a settlor or granted to a protector, of appointment and removal both of trustees and of beneficiaries, but also through veto powers and the like.5 In other situations, the settlor might simply continue to exercise significant de facto control of the trust property, usually in his or her dual capacities of settlor and trustee and usually without any objection from a co-trustee. It is no surprise that over time questions have been raised about the veracity of these trusts and of their controllers.6 These concerns have been keenly felt in New Zealand, particularly in relation to private family trusts, where the statutory power of courts to disregard such trusts when determining property entitlements upon separation is limited.7 Litigation seeking to challenge these trusts has been a regular feature of the trusts landscape in New Zealand in the past two decades. It has in most cases proved difficult to convince the courts to look through these trusts in the absence of a fraudulent intention on the part of the settlor. However, two recent developments by the courts raise real cause for concern and are the subject of this chapter. In response to the domineering settlor, the courts have recognised some powers as themselves giving rise to a property interest held by the settlor (and equivalent to the value of the trust property); and, in other cases, courts have recognised a constructive trust over the trust property in favour of a third party on account of the settlor-trustee’s actions towards that third party. The effect of both of these approaches is to subjugate the beneficiary’s interests to the interests of the settlor or third party and, in so doing, to undermine the express trust construct. In both of these developments, when reaching their decisions the courts have spoken of the need for ‘worldly realism’,8 and have declared that ‘traditional rules … must bend to the practical realities’.9 References to the peculiarities of ‘the New Zealand trust landscape’ as a significant justification are common.10 These comments raise important questions about the content and nature of trusts law. To what extent ought trusts law ‘bend’ to changing social circumstances? And is there a breaking point? This chapter will question the extent to which these recent developments in New Zealand are a departure from trust orthodoxy, and, if so, whether such departure is an appropriate development of the law of trusts.

5 L Smith, ‘Massively Discretionary Trusts’ (2017) 70 Current Legal Problems 17; D Waters, ‘Settlor Control: What Kind of Problem Is It?’ (2009) 15 Trusts & Trustees 12. 6 In re Esteem Settlement [2003] JLR 188, [2004] 1 WTLR 1 (Jersey); A v A [2007] EWHC 99 (Fam); Re AQ Revocable Trusts [2010] 13 ITELR 260 (Bermuda); Kan Lai Kwan v Poon Lok To Otto [2014] HKCFA 66; JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev [2017] EWHC 2426 (Ch); Webb v Webb [2017] CKCA 4. See also J Palmer, ‘Controlling the Trust’ (2011) 12 Otago Law Review 473. 7 The New Zealand statutory context is explained briefly below. 8 Clayton v Clayton [Vaughan Road Property Trust] [2016] NZSC 29, [2016] 1 NZLR 551 [77]; Hawke’s Bay Trustee Company Ltd v Judd [2016] NZCA 397 [45]. 9 Vervoort v Forrest [2016] NZCA 375 [62]. 10 ibid [63], [70].

New Zealand  41

II.  The New Zealand Trusts Landscape It is helpful to start first with a brief description of the New Zealand context. During the past few decades, many New Zealanders have increasingly used trusts to hold assets they have accumulated during their lifetime.11 Individuals or couples typically transfer their home, holiday house, valuable chattels and financial investments into a trust of which they are discretionary beneficiaries and trustees, with or without an independent trustee. Some settlors appoint a corporate trustee of which they are the directors and shareholders.12 The settlor’s current or future spouse or partner, children and remoter issue, as well as any nominated charity, are also listed as discretionary beneficiaries. The children or grandchildren are usually the final beneficiaries. As in many other countries, there are several incentives for settling trusts quite apart from succession planning. Trusts became popular in New Zealand in the 1950s when estate duty and personal tax rates were high. The abolition of estate duty in 1993 served to increase the attraction of trusts because settlors were then able to benefit directly from the trust assets. Gift duty was abolished in 2011, further encouraging the use of trusts. The differential between personal and trust tax rates no longer exists but other benefits of settling trusts have meant that they continue to be popular. In addition to the usual protection against claims by creditors and spouses, the benefits of hollowing out one’s personal wealth using a trust have included eligibility for state support in the form of residential care subsidies for the elderly and income supplements for working families. As mentioned earlier, it has become common for New Zealand settlors to retain the power to appoint and remove trustees and the power to add and remove beneficiaries. As trustees, they generally have wide dispositive and administrative powers including the power to appoint income and capital to any of the discretionary beneficiaries, including themselves. It is in this context that creditors and/or ex-spouses often cry foul that a settlor can appear to maintain all control and yet be free from any claims against the property. This problem is not necessarily unique to New Zealand. The question whether a discretionary interest in a trust can be directly or indirectly used to satisfy claims by spouses and creditors is a familiar one.13 But the problem is perhaps more acute in New Zealand because of the high rate of trust usage. It is impossible to be precise about the number of trusts, because they are not registered, but it is estimated that there are some 450,000 trusts in New Zealand in a population of only 4.8 million. In its Review

11 The number of tax returns filed for trusts and estates in New Zealand rose from 145,000 in 2001 to 250,000 in 2016: www.classic.ird.govt.nz/aboutir/external-stats/tax-returns/customers-by-returns/taxreturns-customers-by-returns.html. This figure does not include the many family trusts for which tax returns are not filed. The New Zealand Law Commission described New Zealanders as having ‘a predilection for trusts beyond that experienced in similar countries’: Law Commission, Review of Trust Law in New Zealand: Introductory Issues Paper (NZLC IP19, 2010) 6, available at: www.lawcom.govt.nz. 12 Harrison v Harrison (2008) 27 FRNZ 202 (HC) is a typical example. 13 Kennon v Spry [2008] 251 ALR 257 (HCA); Lewis v Condon [2013] NSWCA 204; Charman v Charman [2006] 2 FLR 422 (EWCA); Badenhorst v Badenhorst 2006 (2) SA 253 (SCA).

42  Jessica Palmer of Trust Law in New Zealand the Law Commission reported that New Zealand had a significantly higher rate of trust usage per capita than Australia, Canada and England.14 Parliament has responded to the problem of settlor-controlled trusts only to a limited extent and, predominantly, to protect the public purse. The new Trusts Act 2019 does not address the problem directly, although it is groundbreaking for other reasons.15 There is some creditor- and spousal-protection legislation that applies to trusts in limited circumstances but statutory remedies are currently subject to tough jurisdictional constraints. With regard to creditors, clawback provisions in the Insolvency Act 2006 enable dispositions made close to bankruptcy to be set aside but they are time limited16 and have not been applied to partial releases of debts because there is no transfer of property involved.17 Dispositions of property intended to prejudice the interests of creditors can be set aside under the Property Law Act 200718 and the necessary proof of intent has been held by the Supreme Court not to depend on evidence of a fraudulent motive or purpose.19 The relevant intent can be established by showing that the debtor knew or ought to have known at the time that by disposing of the property there was a risk that creditors would not be able to recover payment of the debts owing to them. While this test of intention may ease the burden on creditors seeking to set aside a settlor’s dispositions, the onus of proving the required knowledge at the time of the disposition is still a significant obstacle to creditors’ recovery of payments. In relation to spouses and partners, the presumption of equal sharing legislated for in the Property (Relationships) Act 1976 does not generally apply to trust property. Two provisions enabling limited access do exist, however. First, dispositions to trust can be set aside if the disposition was made with the intent to defeat a partner’s rights under the Act.20 Initially, the courts required proof of a fraudulent motive21 but that has been reinterpreted in line with the intention test used under the Property Law Act discussed above.22 The test is less demanding but proving that the transferor knew that a

14 Law Commission, Some Issues With the Use of Trusts in New Zealand: Review of the Law of Trusts (NZLC IP20, 2010) 7–9, available at: www.lawcom.govt.nz/sites/default/files/projectAvailableFormats/NZLC%20 IP20.pdf. Figures cited were 1–18 in New Zealand; 1–34 in Australia; 1–148 in Canada; and 1–294 in the United Kingdom. 15 The Trusts Act 2019 (NZ) is intended to make trusts law more understandable and accessible to the public, using modern English and by stating ‘core principles’ (s 3). Significant features include a stated definition and characteristics of a trust (ss 13–15); sets of mandatory and default trustee duties, a presumption of disclosure of information to beneficiaries (ss 51–52); and a prohibition on trustee exemption clauses for gross negligence (s 40). 16 The Official Assignee has the power to cancel insolvent transactions and gifts and to recover the property, but only if they were made within two years of bankruptcy (ss 194, 204; the Official Assignee has similar powers in the Companies Act 1993, s 292). A gift made more than two years but less than five years before bankruptcy may also be cancelled if the donor was unable to pay his or her debts at the time of making the gift (s 205). 17 Official Assignee v Mayers [2012] NZHC 34. Partial releases of debts were used in trusts to avoid gift duty. Although gift duty was abolished in 2011, practice is still to catch up in many trusts. 18 Property Law Act 2007, ss 344–50. 19 Regal Castings v Lightbody [2008] NZSC 87, [2009] 2 NZLR 433 (in the context of a similar section in the old Property Law Act 1952). 20 Property (Relationships) Act 1976, s 44. 21 Coles v Coles [1987] 4 NZFLR 621 (CA). 22 Ryan v Unkovich [2010] 1 NZLR 434 [33].

New Zealand  43 consequence of the disposition was that it would defeat the rights of the spouse still sets a reasonable hurdle when many trusts are settled prior to the relationship forming.23 Where a partner’s entitlement has been defeated by a disposition but requisite intent to defeat a partner’s entitlement cannot be shown, a second provision grants the court power to order compensation from assets outside the trust or, as a last resort, from trust income but not trust capital.24 The provision does not apply if the settlement is made by someone other than a party to the relationship thus excluding ‘dynastic trusts’, or if the property transferred into trust is not relationship property at the time of settlement.25 The New Zealand Law Commission recently undertook a full review of the Property (Relationships) Act 1976, upon which it recommended to the government in 2019 that a replacement statute be enacted that would provide, amongst other things, greater powers for the courts to divide trust property where such property was produced, preserved or enhanced by the relationship.26 In the meantime, however, trusts have remained an effective fortress against spouses and de facto partners.

III.  Trust Principles under Threat I turn now to analyse the two judicial developments in the New Zealand law of trusts mentioned at the outset of this chapter which have arisen in the context of these significantly discretionary and significantly settlor-controlled trusts. I will argue that both have worrying implications for the legitimacy of the express trust and other jurisdictions ought to be suspicious of them.

A.  Extensive Powers and Lack of Accountability Direct challenges to the sort of discretionary trust now common in New Zealand on the grounds that it is merely the alter ego of the settlor,27 a sham,28 or illusory29 have all been made before the courts in the last 20-odd years. The New Zealand Supreme Court had a rare opportunity to address some of these doctrinal arguments in 2016 in Clayton v Clayton.30 The parties settled after the case had been heard but, unusually, the Court proceeded to issue judgment nonetheless, given the importance of the issues. 23 See, eg, K v V [2012] NZHC 1129. 24 Property (Relationships) Act 1976, s 44C. 25 In addition, the abolition of gift duty makes this provision less effective for an aggrieved partner. In the absence of debts back which are no longer necessary to avoid gift duty, there is usually less outside the trust from which compensation can be awarded. 26 Law Commission, Review of the Property (Relationships) Act 1976 (NZLC R143, 2019) 265–93. 27 Prime v Hardie [2003] NZFLR 481 (HC); Glass v Hughey [2003] NZFLR 865 (HC); Begum v Ali (FC Auckland, FP 004/128/00, 10 December 2004, Judge O’Donovan); O v S (FC Dunedin, FAM 2004-002-80, 12 December 2006, Judge O’Dwyer); ECB v KDB (FC North Shore, FAM 2003-44-1031, 31 August 2005, Judge Ryan). 28 Official Assignee v Wilson [2008] 3 NZLR 45; KA No 4 Trustee Ltd and KA No 3 Trustee Ltd v Financial Markets Authority [2012] NZCA 370; Rosebud Corporate Trustee Ltd v Bublitz [2014] NZHC 2018. 29 Harrison v Harrison (2008) (n 12); The Financial Markets Authority v Hotchin [2012] NZHC 323. 30 Vaughan Road Property Trust (n 8).

44  Jessica Palmer Mr Clayton was the sole shareholder and director of a number of companies that owned and operated joinery and sawmilling businesses. During the course of his marriage, Mr Clayton settled a trust of which he was the sole trustee and he and his wife and children were discretionary beneficiaries. The purpose of the trust was to separate the land and buildings from the operating assets of the businesses. Mr Clayton had the power to appoint and remove trustees and the power to add and remove discretionary beneficiaries. He had reserved these powers to himself not in his capacity as trustee but in his separate capacity as the ‘Principal Family Member’ as defined in the trust deed. The deed expressly provided that as trustee, he had an absolute discretion to appoint any or all of the income and capital to any of the discretionary beneficiaries without considering the interests of all beneficiaries and could exercise dispositive powers contrary to the interests of any beneficiary. The trust deed included a clause permitting trustees who were also beneficiaries to exercise any of the powers or discretions in their own favour. When Mr and Mrs Clayton separated, Mrs Clayton challenged the legitimacy of this trust, arguing that, by virtue of Mr Clayton’s powers, the trust was a sham or should otherwise be disregarded. The sham submission was rejected. Instead, it was accepted that Mr Clayton genuinely intended to create a trust and that he did so for legitimate business purposes. The trust deed was not a façade or pretence intended to conceal the true nature of the ­transaction as something other than a trust, and thus not a sham.

i.  Illusory Trusts A more general claim that the trust was illusory or otherwise invalid was also considered. The Court of Appeal had previously rejected the notion that an ‘illusory trust’ concept is distinct from a sham trust.31 It referred to the treatment of the illusory trust in academic writings as a trust ‘that looks like or appears to be a trust but has no real substance or effect so that no trust was intended’.32 The Court interpreted this to mean the same thing as sham intention, saying: Both terms focus on the real or true intention of the settlor. The question in both cases is, notwithstanding the existence of a trust deed, did the settlor genuinely intend to create a valid, enforceable trust. In the absence of the requisite genuine intention, there will be no trust at all. As we have already noted, this question involves an examination of all the relevant evidence relating to the determination of the settlor’s real or true intentions. The inquiry focuses not on the legal form of the otherwise valid trust deed but on those intentions.33

The Supreme Court, on the other hand, accepted the theoretical possibility of an illusory trust.34 However, it was unable to agree on a unanimous approach and, instead, decided the case on the alternative basis, discussed below, that the combination of powers and entitlements held by the husband amounted to a general power of appointment.

31 Clayton v Clayton [2015] NZCA 30 [76]–[85]. 32 ibid [77]. 33 ibid [78]. 34 Vaughan Road Property Trust (n 8) [123], although rejecting the label in preference for speaking more simply of there being ‘no valid trust’.

New Zealand  45 In its obiter comments on the illusory trust point, the Court noted two competing views: either the settlor had failed to dispose completely of the property and the trustee was not sufficiently accountable to the beneficiaries such that there was no trust;35 or the trust was ‘effectively defeasible’ on the exercise of particular powers but nevertheless still valid up until such exercise.36 The Court’s failure to reach a clear position on these two opposing views is, with respect, disappointing and leaves the law on the nature of discretionary trusts with some ambiguity. In the author’s opinion, the question of whether an apparent trust is in substance not a trust, but illusory, must be answered by reference to the essential or core features of the trust construct.37 A complete list of those features is not without controversy but I suggest it must include an alienation of the property from the settlor’s own personal estate; an ultimate dispositive power that vests only in the trustee; and an enduring accountability of the trustee to the beneficiary. Without these, the trust is just a form of revocable agency or gift. In Clayton, the settlor had the ability to dispose of property to himself without having to consider or act in the interests of other beneficiaries. This effectively stripped the arrangement of any real accountability to the other beneficiaries. Indeed, the Court ruled that he could distribute property to himself ‘unrestrained by fiduciary obligations’.38 Yet, if his powers were so extensive that he was not bound by any fiduciary obligation to the beneficiaries, how could there have been a trust at all?39 A similar problem occurs in other jurisdictions where the mechanism of a protector with wide powers is employed by trust drafters. The modern trend of conferring upon protectors absolute and uncontrolled discretion in the exercise of their powers while also excluding them from owing any fiduciary duty is problematic. As Smith has argued: Trust drafters know that they cannot create a trust in which the trustees do not owe a duty of loyalty; it is not obvious that they should be allowed to get around this principle by giving significant powers to a protector and then seeking to alleviate the protector of the same duty.40

In New Zealand, trusts lawyers have skipped the step of using (and indeed misusing) a protector in this way and have instead gone straight to permitting the settlor a worrying amount of his or her own control. In extreme cases like Clayton v Clayton, the answer must surely be that no trust is created when the trust deed effectively empowers someone to access the trust assets without any accountability. What may appear in form to be a trust, is in substance not. The form is illusory. The Supreme Court’s reluctance to clearly denounce the use of illusory trusts threatens the coherence of express trusts.

35 ibid [124]. 36 ibid [125]. 37 Armitage v Nurse [1998] Ch 241 (CA) 253 (Millett LJ); Spread Trustee Co Ltd v Hutcheson [2011] UKPC 13, [2012] 2 AC 194; Re Esteem Settlement [2004] WTLR 1 (Royal Court of Jersey) [122]. 38 Vaughan Road Property Trust (n 8) [58]. 39 The new Trusts Act 2019 serves to reinforce this criticism, providing in s 13(a) that one of the charactersitics of an express trust is that it must create ‘a fiduciary relationship in which a trustee holds or deals with trust property for the benefit of the beneficiaries or a permitted purpose’. 40 L Smith, ‘Mistaking the Trust’ (2010) 40 Hong Kong Law Journal 787.

46  Jessica Palmer

ii.  Powers as Property The Supreme Court’s unhelpful ambivalence on its view of the illusory trust claim was made possible by its finding on the alternative claim by Mrs Clayton that Mr Clayton’s powers could themselves amount to property owned personally by Mr Clayton and which therefore formed part of the pool of relationship property in which Mrs Clayton was to share. The Court ruled that the combination of powers and entitlements held by Mr Clayton, pursuant to the trust deed, amounted to a general power of appointment that came within the broad statutory definition of property in the Property (Relationships) Act 1976 as a ‘right or interest’.41 The powers had been acquired during the relationship and were, therefore, an interest coming within the pool of relationship property subject to division. The value of that interest equated to the value of the trust assets.42 This analysis is a development of the bundle of rights idea earlier used by Chambers J in Walker v Walker.43 There, a power to appoint and remove trustees was considered part of a bundle of property items which also included the directorship of the trustee company; the shares held by the trustee company; the power to appoint and remove directors of the trustee company; and the husband and wife’s discretionary interests under the trust.44 His Honour described these assets together with a debt-back from the trust to the couple as forming a ‘very valuable package’ because they conferred control over the business, the major subject of the trust. The bundle or package of rights idea had initially been reasonably popular in the lower courts45 but difficulties valuing the bundle and explaining why all elements of it are property led to its criticism.46 In reaching its conclusion in Clayton, the Supreme Court relied upon the Privy Council’s decision in Tasarruf Mevduati Sigorta Fonu v Merrill Lynch Bank and Trust Co (Cayman) Ltd (TMSF).47 There, a power of revocation retained by the settlor was described as ‘tantamount to ownership’ and therefore subject to receivership.48 The Supreme Court also referred to several other cases from jurisdictions with statutory schemes that employ a wide definition of property that extends beyond orthodox

41 Property (Relationships) Act 1976, s 2; Vaughan Road Property Trust (n 8) [98(a)]. See also [38]–[84]. 42 Vaughan Road Property Trust (n 8) [104]–[107]. 43 Walker v Walker [2007] 2 NZLR 261. 44 ibid [49]. 45 The bundle of rights notion has been mentioned or used with approval in Harrison v Harrison [2009] NZFLR 687 (CA) [10]; Dyas v Elliott (2010) 11 NZCPR 252 (HC) [24]; SMB v GAC (HC Auckland, CIV 2010404-8320, 25 July 2011, Peters J), and in several Family Court cases. 46 Justice Paul Heath, ‘Some Thoughts on a (New Zealand) Judicial Approach to Trust Law’ (Address to STEP New Zealand Conference, 29 March 2012); F Gush, ‘The “Bundle of Rights”: Unravelling Trust Principles’ (2012) 7 New Zealand Family Law Journal 157; A Grant, ‘Might the Bundle of Rights Theory Emerge in Another Form?’ (NZ Lawyer, Issue 190, 10 August 2012); S Griffiths, ‘Valuing “Bundles of Rights” for the PRA: When Neither Art Nor Science Is Enough’ (2011) 7 New Zealand Family Law Journal 98; M O’Regan and A Butler, ‘Equity and Trusts in a Family Law Context’ (paper presented to the New Zealand Law Society Family Law Conference, November 2011) 267. 47 Tasarruf Mevduati Sigorta Fonu v Merrill Lynch Bank and Trust Co (Cayman) Ltd [2011] UKPC 17, [2012] 1 WLR 1721. 48 At [60]–[62], following Re Triffitt’s Settlement [1958] Ch 852 (Ch) 861.

New Zealand  47 ownership.49 The Court spoke of the need for ‘worldly realism’,50 similar to the approach taken by the Privy Council in TMSF, where Lord Collins made clear that equity might at times consider the holder of a general power as owner ‘for all practical purposes’.51 The Supreme Court’s approach has been praised by some as being ‘consistent with the goal [of the Property (Relationships) Act 1976] to reflect the equal contributions of the parties and to address economic disadvantage’.52 It certainly represents a less formalistic approach to the meaning of ‘property’, with the Court declaring an ‘acceptance that strict concepts of property law may not be appropriate in a relationship property context’.53 Property can be a very broadly construed,54 and the general understanding that powers are not property is not a universal rule. Property subject to a general power of appointment exercised by will, for example, can be treated as property of the appointor for the purpose of satisfying his or her debts.55 However, there is a significant difference between the powers recognised as property in each of TMSF and Clayton. While in TMSF the settlor was free to exercise the power of revocation as he liked unfettered by any duty to the beneficiaries,56 that did not affect the trustee’s fiduciary duty to carry out the trust in what it believed to be the best interests of the beneficiaries. Hence a trust existed, despite the inclusion of the power of revocation and up until the power was exercised. But in Clayton, the effect of the combination of powers and entitlements bestowed on the settlor/trustee meant that there was no effective accountability of the trustee to beneficiaries at any time. The trustee’s fiduciary duties had been so watered down as to be non-existent. The proper response should have been, with respect, that there was no trust in the absence of this fundamental characteristic. Mr Clayton was entirely free, as trustee, to appoint trust assets to himself. That is an anathema to a trust. It was both unnecessary and unnecessarily complicated to hold that the powers amounted to property distinct from, but equal to the value of, the trust assets. Mr Clayton was holding the assets beneficially despite the apparent form of a trust, because the required substance of a trust was absent. If the response to this objection is that some sort of trust duty nevertheless applied to the trustee, then it cannot be said that the powers provided direct and unfettered access to the trust property. A power that comes with duties attached cannot be beneficial property. The two conclusions are inconsistent with each other.

49 Kennon v Spry [2008] HCA 56, (2008) 238 CLR 366; Charman v Charman [2005] EWCA Civ 1606, [2006] 1 WLR 1053; Charman v Charman (No 4) [2007] EWCA Civ 503, [2007] 1 FLR 1246; Whaley v Whaley [2011] EWCA Civ 617, [2012] 1 FLR 735 [40]; Kan Lai Kwan v Poon Lok To Otto (2014) 17 HKCFAR 414 (CFA). 50 Vaughan Road Property Trust (n 8) [77]. 51 Tasarruf Mevduati Sigorta Fonu (n 47) [33]. 52 B Atkin, ‘What Kind of Property is ‘Relationship Property’?’ (2016) 47 Victoria University of Wellington Law Review 345, 360. 53 Vaughan Road Property Trust (n 8) [79]. 54 Jones v Skinner (1835) 5 LJ (NS) Ch 87, 90, XLII RR 274, 276 (Sir Pepys MR). 55 Beyfus v Lawley [1903] AC 411 (HL) 413. See also T Molloy, ‘The Vulnerability of Asset Protection Trusts Revocable by the Settlor: “Equity’s Tenderness for Creditors” and the Privy Council’s Judgment in Tasarruf Mevduati Sigorta Fonu’ (2011) 17 Trusts & Trustees 784. But, it is understood to be an exception granted by equity, rather than a rule of property law: O’Grady v Wilmot [1916] 2 AC 231 (HL). 56 Tasarruf Mevduati Sigorta Fonu (n 47) [62].

48  Jessica Palmer An additional problem that arises from the recognition of powers as property is the determination of the value of such powers. The powers were given a value equal to the net worth of the trust assets on the basis that a general power of appointment enables the holder to access the trust assets for his own benefit at any time.57 All sorts of difficult questions arise here. First, why is the full value of the trust assets to be ascribed to the powers as well when it is often not likely that the settlor will in fact distribute the property to himself? Why not have a discount for likelihood? Second, the Supreme Court referred to the sale price in Clayton as being the relevant measure,58 but to whom would such powers be sold? And would the buyer really be willing to pay full price? And third, what difference would it make if the power-holder is not also the trustee? Are the powers then worth less to acknowledge that the trust assets cannot be accessed without the trustee’s accession? Quite apart from these difficulties, it is also not clear what combination of powers is necessary in order to amount to a general power of appointment capable of constituting property. In the cases since Clayton where the powers as property argument has been raised, none has yet been successful. It would seem that the power to appoint property to oneself without restraint is considered crucial to the success of a powers-as-property claim.59

iii.  Illusory Trusts in Other Jurisdictions While the current approach of the New Zealand Supreme Court seems to undermine the trust construct by permitting a trust to exist without accountability, two recent notable cases on similar issues in other jurisdictions show a willingness by other courts to do the opposite – to reject a trust too readily on the basis of significant powers, where the powers in those cases do not in fact cut across the trustee’s ultimate accountability to the beneficiary in the way that they did in Clayton. In JSC Mezhdunarodniy Promyshlenniy Bank v Sergei Viktorovich Pugachev, a discretionary trust had been created with the settlor appointing himself and his solicitor as trustees, but also appointing himself a ‘Protector’ whose consent was required by the trustees in relation to all distributions, investments, removal or exclusion of beneficiaries, and variations.60 As Protector, he also had the power to direct sale of the trust property; to appoint and remove trustees; and to add new beneficiaries. Birss J in the English High Court ruled that the protector’s powers were not fiduciary and amounted to an effective power of veto that allowed the settlor to retain his beneficial ownership of the assets. In such circumstances, there could be no trust. This was despite there being no express power in the trust deed for the trustee to benefit himself. In Webb v Webb,61 the Privy Council made a similar finding where the settlor had reserved to himself the power to add and remove beneficiaries and was also the sole



57 Vaughan

Road Property Trust (n 8) [104]–[105]. [105]. 59 Roberts v Henderson [2016] NZHC 1363; Da Silva v Da Silva [2016] NZHC 2064. 60 JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev (n 6) [15]. 61 Webb v Webb [2020] UKPC 22 (on appeal from the Court of Appeal of the Cook Islands). 58 ibid

New Zealand  49 trustee and one of the beneficiaries. Lord Kitchin, writing for the majority, advised that the settlor’s powers enabled him ‘to arrange matters in such a way that he alone would hold the trust property on trust for himself and no-one else, with the consequence that the legal and beneficial interest in all of that property would vest in him’.62 His Lordship recognised two different ways in which the reserved powers could be analysed: either by determining whether the powers were so extensive that the settlor failed to dispose of the property or failed to create any accountability on the part of the trustees to the beneficiaries; or by asking whether such powers gave the settlor rights which were tantamount to ownership.63 The parties had agreed that the two different methods made no difference to the outcome. The former aligns with the approach taken by Birss J in Pugachev and the latter was ultimately the approach taken by the New Zealand Supreme Court in Clayton, but there is an important distinction. In Webb, the result under either appeared to be that the trust was not valid while in Clayton, the powers were themselves recognised as property in the hands of the settlor separate from the trust, albeit equivalent in value to that of the trust property. The Webb outcome seems, at least to this author, more coherent if indeed the powers could be used to effectively collapse the trust. However, the analysis in these cases is not without difficulty. It is, with respect, too quick to ignore trust essentials. The trustees were still obliged to act in the interests of the beneficiaries, and the protector in Pugachev and the settlor in Webb had no direct access to the trust property by virtue of their powers. In other words, the arrangement included an alienation of the property from the settlor’s own estate, a dispositive power vested ultimately in the trustees, and accountability of the trustees to the beneficiaries. In Pugachev, had the trustees refused to follow a direction of the protector, surely they would have been entitled and empowered to so do. The result would be a deadlock, but not the absence of a trust. In Webb, the trustee was accountable to both beneficiaries until such time as the settlor chose to remove the other beneficiary leaving only himself as standing to benefit. Indeed, Lord Kitchin made clear that a clause in the trust deed that empowered the trustee to act despite any conflict of interest did not exclude the trustee’s fiduciary duties owed to the benericiaries.64 There is a further question as to whether it is indeed right that protectors and settlors hold powers that affect the very constitution of the trust in a non-fiduciary capacity.65 But assuming this is true, at the point at which non-fiduciary powers are exercised in a way that collapses any separation of interest between trustee and beneficiary (because the sole trustee is also the sole beneficiary) or renders the accountability of the trustee to the beneficiary non-existent (because, for example, the trustee is required to submit to the directions of another in relation to the distribution of trust property), then it would be true to say there is no longer a trust. But until then, these arrangements are surely trusts and any concerns about their veracity ought to be dealt with by control



62 ibid

[87]. [89]. 64 ibid [84]. 65 See, eg, Carmine v Ritchie [2012] NZHC 1514. 63 ibid

50  Jessica Palmer mechanisms on the powers,66 or by targeted legislation where the effects in particular contexts are considered undesirable as a matter of public policy. As can be seen, there is a fine line between extensive powers that can coexist with a trust relationship, and those powers that have the effect of negating a trust. Trust fundamentals need to be kept in mind: if the settlor has intended to create a trust,67 has effectively alienated the property from his or her own personal estate and the ultimate dispositive power vests in the trustee, an enduring accountability of the trustee to the beneficiary is created that gives substance to the trust. It is difficult to see how any retained powers on the part of the settlor in that situation could amount to a general power of appointment capable of being understood as a property right and carrying the same value as the trust assets. Excessive powers can test a trust, but courts must be careful not to either undervalue or overvalue such powers, and in so doing, threaten the very institution of the trust.

B.  Third-Party Contributions to Trust Property and Beneficiary Interest The second area of concern for trust principles in New Zealand is the courts’ pronouncements that express trust property can be made subject to a constructive trust. There has been a growing trend to resort to a constructive trust over property held subject to an express trust in order to recognise a third-party interest in the property. The particular form of constructive trust relied upon is what is known as the Lankow v Rose reasonable expectation constructive trust.68 This trust developed in a series of cases involving de facto relationships in the days before the Property (Relationships) Act 1976 was amended to include de facto relationships in the equal-sharing regime.69 The claim was made by one partner against the other that the former had made contributions to property owned by the latter which gave rise to an interest in the property. The claimant must show: • • • •

Contributions, direct or indirect, to the property in question. The expectation of an interest in the property. That such expectation is reasonable. That the defendant should reasonably expect to yield the claimant an interest.

66 eg, that the power must not have been exercised ultra vires, capriciously, or following inadequate deliberations, but rather bona fides, and consistently with the fraud on a power doctrine. 67 A distinct argument may be made in these cases that the particular mix of powers vested in parties other than the trustee and/or the inclusion of a significant exemption clause that undermines accountability might show a lack of the requisite trust intention needed to create a trust. While most courts appear to discount this given the presence of a formal trust deed, the Cook Islands Court of Appeal held in Webb v Webb that the key issue was whether the settlor had evinced an intention to irrevocably relinquish a beneficial interest. The Court held that the settlor had not by reason of his retained powers: Webb v Webb CA7/17 [56] (24 November 2017). 68 Lankow v Rose [1995] 1 NZLR 277, 294. 69 Gillies v Keogh [1989] 2 NZLR 327; ibid 294.

New Zealand  51 The contribution to the property must be more than contributions commonly made in any ordinary household and there must be ‘a causal relationship between the contributions and the acquisition, preservation or enhancement of the defendant’s assets’.70 There are two instances in which a constructive trust of this sort may arise in relation to property subject to an existing express trust. First, where qualifying contributions were made to the property before it was settled on trust, the claim of a reasonable expectation is against the original owner and the resulting property right is traced through to the trustees now holding the property. The claim against the trustees in this instance is a vindication of pre-existing property rights that arose prior to the settlement of the express trust and is not controversial. It is not necessary to establish any knowledge, expectation or wrongdoing on the part of the trustees. A claim of this sort was affirmed by the High Court in Marshall v Bourneville.71 The second and more controversial instance of a constructive trust in this context concerns a claim directly against trustees for contributions made to property while it has been owned by the trustees. Inevitably, these cases concern situations where one trustee exercises significant control, whether by specific powers or simply as a matter of fact over the trust property, while the other trustee plays no active part. The controlling trustee’s spouse or partner seeks to assert that the trustees should reasonably expect to yield an interest in the trust property to the spouse, on account of the behaviour of the controlling trustee giving rise to a reasonable expectation of an interest. Claims of this sort have been affirmed by the Court of Appeal in Murrell v Hamilton,72 Vervoort v Forrest73 and Hawke’s Bay Trustee Co Ltd v Judd.74 The facts and decision of Vervoort v Forrest provide a good example. Mr Duffy and Ms Vervoort had been in a de facto relationship for 12 years. Mr Duffy had settled a trust prior to the relationship, appointing himself and an independent party as the trustees. Mr Duffy exercised complete control over the affairs of the trust. The first independent trustee had little knowledge of the trust finances and was not involved in decisions in relation to the trust property. Following his resignation, a second independent trustee was appointed who gave an irrevocable power of attorney to Mr Duffy for all trust affairs. Ms Vervoort’s claim that her contributions to the trust property gave rise to a constructive trust was refused by the Court of Appeal because she had already received significant benefit from the trust throughout the relationship. However, in so doing, the Court made some specific observations that confirmed that a constructive trust over assets subject to an express trust is doctrinally possible. It rejected the concerns expressed by the High Court at first instance that recognition of a constructive trust ‘would surely violate orthodox trust principles of unanimity and non-delegation’ where only one of the trustees had any knowledge and acceptance of the spouse’s contribution

70 Lankow v Rose (n 68) 282. 71 Marshall v Bourneville [2013] NZCA 271, [2013] 3 NZLR 766; the claim being good against all but the bona fide purchaser for value. See also Foskett v McKeown [2001] 1 AC 102 (HL). 72 Murrell v Hamilton [2014] NZCA 377. 73 Vervoort v Forrest [2016] NZCA 375, [2016] 3 NZLR 807. 74 Hawke’s Bay Trustee Co Ltd v Judd [2016] NZCA 397, (2016) 4 NZTR 26-019.

52  Jessica Palmer and the resulting expectations. In a decision that echoes the Supreme Court’s emphasis on ‘worldly realism’ in Clayton v Clayton,75 the Court of Appeal stated that: [T]hose principles [of unanimity and non-delegation] must bend to the practical realities when one trustee is in absolute control of all trust activities and the other trustees have effectively abdicated their trustee responsibilities. Any other conclusion would mean settlors, who appointed themselves as trustees, would be able to take advantage of their own wrong in failing to ensure the trust is properly administered by all trustees. The trust would get a windfall, not available but for the use of the trust format.76

In my opinion, the Court’s approach is worrying because it is conceptually inconsistent with the trust construct. This is not, though, primarily because of the rules of unanimity and non-delegation despite the lower Court’s concern. Those rules relate only to the relationship between the trustee and beneficiary and cannot be a reason for denying an interest to the third party. Where a trustee purports to enter into a contract or to pass legal title to trust property to a third party, agency principles of actual and apparent authority will apply to bind fellow trustees as between the trust and the third party, despite breaches of the trustee rules of unanimity and non-delegation. In such a situation, these breaches are committed by the transacting trustee against the beneficiaries for which the beneficiaries can seek relief from the trustee. Instead, the issue concerns what interest it is that the trustee has available to give over to the third-party partner. One answer is to say that, as Rickett has argued,77 the trustee does not have the beneficial interest in the property and so cannot transfer it to the third party. The trustee does not have any right to benefit from the trust property and accordingly cannot deal with the beneficial ownership of the property. The benefit already belongs to the beneficiaries of the express trust. The trustee is obliged in equity to hold the property for the trust beneficiaries and cannot redistribute the beneficial interest to another, so to speak. This view assumes the trust creates a split of ownership and the beneficiaries are the equitable owners. However, as we move further away from the traditional understanding of the trust with its fixed and contingent interests, arguments based on exclusive beneficial ownership become less persuasive, particularly where the beneficiaries seeking protection are merely discretionary objects of the trust. But the point should not be rejected outright. The focus on the beneficiaries’ interest is necessary. It is important to keep basic trust principles in mind. The existing beneficial interest (whether it amounts to ‘ownership’ or not) matters. While a trustee can manage and dispose of property as a normal legal owner would, any unauthorised disposition will not extinguish the beneficiary’s interest. The trustee has not disposed of the beneficial interest and the beneficiary can assert his or her right against the property in the hands of a third party, except where the recipient is a bona fide purchaser.78 Even if the

75 Vaughan Road Property Trust (n 8) [77]. 76 Vervoort v Forrest (n 73) [62]. 77 C Rickett, ‘Instrumentalism in the Law of Trusts: The Disturbing Case of the Constructive Trust Upon an Express Trust’ (2016) 47 Victoria University of Wellington Law Review 463. 78 Akers v Samba Financial Group [2017] UKSC 6.

New Zealand  53 beneficiary does not have a fixed right to the property but is only a discretionary beneficiary, he or she is nevertheless entitled to insist that misapplied property is returned to the trust corpus. The beneficiary’s interest is enforceable. The beneficiary’s equitable interest (again, whether or not we concieve of it as itself property) runs with the trust property and will defeat all except the bona fide purchaser for value, even if the outside party does not know of the trust. So, in application to a constructive trust claim by a third party to property already subject to an express trust, a difficulty arises but it is not any apparent conflict with the rules of unanimity and non-delegation. These rules relate only to the relationship between the trustee and beneficiary and cannot be a reason for denying an interest to the third party. Instead, the difficulty for the third-party claimant is that its equitable interest competes with the prior one of the beneficiary and, as such, the first equitable interest in time prevails. The claimant’s interest only trumps if she is a bona fide purchaser of the interest without notice of the prior express trust interest in the property. In most of the cases that have arisen in New Zealand, the third party claiming they have made contributions to the trust property knows of the existence of the trust and therefore of the beneficiaries’ prior interest. The true analysis is that the controlling trustee has, by his own actions, given rise to an expectation of an interest without the involvement of the other trustees and against the terms of the trust. In such a situation, the third party cannot reasonably expect an interest in the trust property. Yet, in none of the cases does this point of competing equities appear to have been made. In Hawke’s Bay v Judd, the Court noted that the claimant knew of the trust and that she was not a beneficiary, but surprisingly did not accept that this meant she could not have a reasonable expectation of a share in the property.79 The New Zealand Court of Appeal made it plain that despite these objections, the modern context in which trusts are operating to defeat partnership claims demands a response: It is acknowledging the reality of the New Zealand trust landscape as it has developed that has justified the recognition of the constructive trust beneficiary’s claim. It is a further reality of that landscape that the trustees of family discretionary trusts are more often than not the beneficiaries of those trusts and in control of them. It is common in many trusts in New Zealand ‘for the settlor to retain some extent of control or to vest that control in someone other than the trustee’. The effect is that the reality of a trustee’s ability to give a third party expectations (in return for that third party’s contributions) over trust property, which that trustee deals with as if their own, must be recognised. There is no misappropriation of property in that the beneficiaries of the express trust have no claim in conscience to the increases in value resulting from the contributions. Beneficiaries cannot expect trustees to retain for them an unearned benefit, extracted by expectations engendered by the trustees. The express trust beneficiaries should reasonably expect to yield the third parties an interest.80

With the greatest of respect, while their Honours’ motivations are understandable, the mechanisms being employed ultimately serve to undermine and confuse established



79 Hawke’s

Bay Trustee Co Ltd v Judd (n 8) [34]–[36]. v Forrest (n 73) [70], quoting Palmer (n 6) 477–78.

80 Vervoort

54  Jessica Palmer principles of private property rights. The recognition of a constructive trust over property already held on express trust undermines the coherence of the express trust. An unauthorised understanding or expectation as between trustee and third party does not bring the beneficial interest pursuant to the express trust to an end. The Court’s acceptance of a constructive trust has the effect of defeating the beneficial interest contrary to established principle and, in so doing, undermines the express trust. In addition to the conceptual difficulties of justifying the impostion of a constructive trust on property already subject to a trust in these circumstances, the second point worth noting is that despite these cases being argued and decided on the basis of a constructive trust, the relief awarded in each successful claim has been a personal remedy against the trustees. Only one was made in reference to the value of the trust property81 as would be expected of all of them if the relief were properly to give effect to the constructive trust. The constructive trust finding should ordinarily lead to a property remedy, otherwise the claim and relief do not connect coherently, which suggests that these are not, in fact, constructive trust cases. This is not to say that there can be no relief for the claimant in these situations, only that it is not a constructive trust. Claims against the trustee might potentially be mounted in estoppel,82 unjust enrichment,83 or on the basis of an improver’s lien. Indeed, the outcome in Vervoort v Forrest suggests that the Court of Appeal was in fact concerned with unjust enrichment and not with the expectation of a property interest, despite its indication to the contrary. There, the constructive trust was rejected on the facts because the claimant had already received benefits from the trust property equivalent to the contributions she had made in the form of the funding of her lifestyle. In other words, any unjust enrichment to the trust property (and therefore the beneficiaries) brought about by her contributions had been neutralised by other benefits she received such that the enrichment had been restored to her already. That reasoning should not justify the loss of a proprietary constructive trust interest if there is one, but it does justify the refusal of a personal remedy for unjust enrichment. The terminology of enrichment and value may appear similar to the constructive trust analysis, but it is crucial to distinguish a claimed trust interest from a personal right to restitution. The beneficiaries may be liable to make restitution of value conferred, but this is quite different from an order that the property is held on trust for the claimant in direct conflict with the prior interest of the express trust beneficiaries. It is unfortunate that the Court in Vervoort viewed the law of unjust enrichment as not sufficiently developed to respond to these situations.84

81 Murrell v Hamilton (n 72), where the property had already been sold so the remedy was a 15% share in the net proceeds from the sale on the basis that this was the value of the claimant’s contribution to the property. This appears consistent with the constructive trust as a recognition of a property interest, yet the analysis should have also required establishing the claimant’s reasonable expectation to obtain an interest equivalent to the value of her contributions. The judgment was silent on this. 82 Vervoort v Forrest (n 73) [78]–[83]. 83 ibid [68]. 84 ibid.

New Zealand  55

IV. Conclusion The fundamental conception of what an express trust is, is under pressure in New Zealand as a consequence of a mismatch between a developing trust practice and societal expectations of the boundaries of trusts. Yet, just as a contract may be used for both good and bad, so too may a trust. The trust is simply a mechanism of organising rights in relation to property. Where a specific use of a trust or contract is perceived as being morally untenable, it is important to ensure that the correction of that use does not itself undermine the institution of the trust or contract. This chapter has discussed recent judicial responses in New Zealand to excessive powers in trusts and to third-party contributions to trust property and has shown that they are inconsistent with trust principles. What makes these developments particularly notable is the courts’ express willingness to depart from trust principles to provide the relief which was considered appropriate given the realities of current trust use in New Zealand. The unfortunate result is a confused and increasingly incoherent law of trusts which is all the more regrettable given that, as I have here argued, existing principles do in fact provide the courts with the means to give relief. With regard to excessive powers, the better analysis is that such powers render a trust illusory rather than that those powers amount to property that is separate and distinct from the trust property. With regard to contributions made to trust property by third parties, the better analysis is that the third party has a right to restitution for the value conferred or an improver’s lien, and not that there is a constructive trust over the property that is already subject to the express trust. It has always been accepted that the trust is a flexible construct but, for this author at least, core tenets of the trust – trustee accountability and beneficiary interest – must remain if the trust is to continue to have any objective meaning.

56

4 Trusts in Hong Kong: Historical Application and Current Practice LUSINA HO* AND REBECCA LEE**

I. Introduction For over half a year in 2019, Hong Kong was roiled by terrible unrest, which set off the deepest political crisis it has experienced in decades. Doubts have been raised about the continuation of its special status as an international financial centre, which is key to thriving trusts businesses in the city. This special status rests crucially upon the implementation of the innovative political idea of ‘one country, two systems’, which preserves Hong Kong as a common law jurisdiction that enshrines the rule of law in a civil law country that is the People’s Republic of China (‘China’). ‘One country, two systems’ was guaranteed by the Basic Law, Hong Kong’s miniconstitution, which was promulgated in 1997. But the guarantee is not perpetual. Article 5 of the Basic Law provides that ‘the previous capitalist system and way of life shall remain unchanged for 50 years’.1 On the eve of the twenty-third anniversary of the handover of Hong Kong to China, China bypassed the city’s legislature and enacted the HKSAR National Security Law, which criminalises four types of act: secession; subversion; terrorist activities; and collusion with a foreign country or with external elements to endanger national security. The National Security Law prevails over local laws in case of conflict and the Standing Committee of the National People’s Congress, China’s top legislative body, has the authority to interpret the National Security Law. These vaguely defined offences also mandate harsh penalties, including life imprisonment and confiscation of funds in the most serious cases. The new Law will cast a long shadow over trusts planners, who may find it prudent to avoid choosing Hong Kong law as the governing law of their trusts.

* Professor, Faculty of Law, The University of Hong Kong. ** Associate Professor, Faculty of Law, The University of Hong Kong. Research for this chapter was funded by the RGC General Research Fund 2017–18 (Project Number: 17610217). 1 The Basic Law of the Hong Kong Special Administrative Region of the People’s Republic of China, art 5 (emphasis added).

58  Lusina Ho and Rebecca Lee The present chapter seeks to survey the dramatic changes that the last nearly two centuries have seen in trusts law in Hong Kong, so as to draw theoretical insights on how it should go forward towards 2047 and beyond. For convenience of exposition, we shall divide the development of Hong Kong trusts law and practice into three periods. The first, and longest, period is from 1842, when common law trusts principles were first introduced in Hong Kong, to the 1970s. Socio-economic conditions in Hong Kong were very different from those in England throughout the period, and there was a clear segregation between the expatriate and local communities. The second is from the 1980s to the 1990s, when Hong Kong emerged as an ‘Asian Tiger’ and international financial centre. The third is from the early 2000s onwards, when the Hong Kong economy has become increasingly linked to that of mainland China. From this survey, we hope to make three observations that may guide us in future. First, because of its flexibility, the trust is an extremely adaptable tool for asset management, which may range from perpetual lineage landholding to settlor-directed trusts that allow settlors to have the benefit of a trust without relinquishing control over the trust property. Second, elastic though the trust concept is, it is not without limit. Jurisdictional competition for business has driven many offshore and even some onshore jurisdictions to adopt legislation that dilutes the trust concept. This puts Hong Kong (and other onshore jurisdictions) at a crossroads, as trusts industries put pressure on their governments to join if not lead the pack. Third, the long-term sustainability of the trust institution depends heavily on a shared commitment to its core concept. A better strategy for any jurisdiction vying for trusts business would be to improve the quality of its professional services rather than to compromise the quality of its trusts laws.

II.  Trusts Practice in Hong Kong before the Economic Boom During the first period, between the founding of the British colony in 18412 and the economic boom in the 1970s, Hong Kong developed steadily from a fishing and farming village to a stronghold for light industry and entrepot trade. The population grew from approximately 7,450 on Hong Kong Island in 18413 to nearly four million in the 1960s, as a series of disturbances in mainland China brought waves of immigrants to Hong Kong.4 According to a 1971 government census, only about 1 per cent of the population were expatriates, of whom about half were British; about 2 per cent were indigenous villagers, and the majority were new immigrants or locals from other parts of Hong Kong.5

2 Hong Kong Island was formally ceded to China by the Treaty of Nanking on 29 August 1842. For details, see J Carroll, A Concise History of Hong Kong (Hong Kong University Press 2007) ch 1. 3 Government Gazette of 15 May 1841, discussed in Fan Shuh Ching, The Population of Hong Kong (UN Committee for International Coordination of National Research in Demography 1974) 1. In 1841, only Hong Kong Island was part of the British colony, so the statistics did not include the population of Kowloon or the New Territories. 4 See Carroll (n 2) ch 4. 5 Statistics derived from Census and Statistics Department of the Hong Kong Government, Hong Kong Population and House Census 1971 Main Report (1972) 15.

Hong Kong  59 Trusts were used by the expatriate population in much the same way as in England, but rarely by indigenous villagers who continued to follow local customs, or immigrants who simply did not have enough wealth to need trusts. This section will evaluate the attempt by the courts to make sense of customary landholding devices used by indigenous villagers through the lens of trusts law. The clash between the trust concept and the customary device also reveals the deeper differences in social values that underlay them. Before that, a brief outline of the reception of trusts in Hong Kong is in order. The reception of trusts in Hong Kong is inextricably linked to its colonial history. In 1843, shortly after the colony was founded, the Supreme Court Ordinance was enacted to apply English law (including the principles of equity and trusts) directly to Hong Kong from 5 April 1843 ‘except so far as the said laws are inapplicable to the local circumstances’ or not modified by local legislation.6 Where English law is inapplicable, customary law applies.7 Thus, a dual system of law was created; and customary rules on marriage and family were preserved until a spate of legislative reforms.8 It is remarkable that until then customary law applied to many Chinese in Hong Kong, who comprised some of the most cultured and westernised people in the Far East.

A.  Hereditary Landholding in Customary Law: Tsos and Tongs One area of customary law that continues to be preserved in Hong Kong is the tsos and tongs, which date back to the sixteenth century during the Ming dynasty in China. ‘Tso’ literally means ancestor, and ‘tong’ refers to a hall as in ancestral halls, but in the present context the word is often used figuratively to refer to a lineage group. These are arrangements for land to be held in perpetuity for the benefit of all living male descendants of a lineage from time to time in undivided shares, subject to designated purposes that may range from ancestral worship to communal welfare, and even to business ventures.9 Living male descendants enjoy co-ownership subject to the rules of the lineage group.10 The manager, appointed by village elders, is bound by clan rules and convention to manage the land on behalf of the group. Decisions are reached through consensus and compromise.11 Recurring revenue such as rents may be distributed to beneficiaries from time to time, but the land is not meant to be divided. 6 Supreme Court Ordinance 1843, s 5 (Ordinance No 15 of 1844). The relevant provision was subsequently improved by a series of laws culminating into the Application of English Law Ordinance 1966, s 3(1), repealed on 1 July 1997. Customary law is preserved in the Basic Law and applicable to the present day. 7 See generally MB Hooker, ‘The Relationship between Chinese Law and Common Law in Malaysia, Singapore, and Hong Kong’ (1969) 28 Journal of Asian Studies 723. 8 Marriage Reform Ordinance 1970; Adoption Ordinance 1971; Legitimacy Ordinance 1971; Wills Ordinance 1970; Intestate Estates Ordinance 1971. The legislative changes were introduced to implement the recommendations of George Strickland, ‘Report on Chinese Law and Customs in Hong Kong’ (Hong Kong Government Printer 1950). See D Evans, ‘The New Law of Succession in Hong Kong’ (1973) 3 Hong Kong Law Journal 7; D Evans, ‘The Wills Ordinance 1970 (No 32 of 1970)’ (1971) 1 Hong Kong Law Journal 107. 9 G Jamieson, Chinese Family and Commercial Law (Kelly & Walsh 1921) 142; Li Chok Hung v Li Pui Choi (1910) 5 HKLR 121; Lau Leung Shi v Lau Po Tsun (1911) 6 HKLR 149. 10 Tang Yau Yi Tong v Tang Mou Shau Tso [1996] 2 HKLRD 212; Li Tang Shi v Li Wai Kwong and AG [1969] HKLR 367, 372. 11 S Selby, ‘Everything You Wanted to Know about Chinese Customary Law (But Were Too Afraid to Ask)’ (1991) 21 Hong Kong Law Journal 45, 64.

60  Lusina Ho and Rebecca Lee Hereditary landholding is typically designated in a name devised by attaching the term ‘tso’ or ‘tong’ to the name of the ancestor for whom the estate is established. So if the ancestor is Mr Kan Shiu Cheung, the ‘tso’ will be ‘Kan Shiu Cheung Tso’.12 ‘Tso’ is used when the arrangement is set up posthumously by the descendants of the deceased ancestor, and ‘tong’ is used when it is set up by the ancestor himself.13 The effect of the designation is to tie up the property, so that every dealing made in the name of the tso or tong by any member is made on behalf of the lineage estate.14 ‘Tong’ may also be used for wider purposes such as the worshipping of deities or communal welfare for the lineage group (for example, education of group members to sit the civil service examination). It is also commonly used as an alias in trade and business to conceal a businessman’s identity or to designate a fund separate from his own general funds.15 For example, a businessman may participate in a firm formed with other business partners under a tong name that he made up, such as Tung Lok Tong (Mutual Rejoice Hall).16 In modern days, one would use a one-man company. Whilst a lawyer trained in common law may find it inconceivable to hold property in the name of someone long dead or in an imaginary person, it made perfect sense in agricultural China. Because the Chinese family, linked by lineage, was the unit of economic production as well as social and charitable activities, it was common to preserve wealth within the family by holding it collectively in the name of a lineage.17 The ‘tong’ operated as a surrogate of the company form, and it was common for accounts to be entered and contracts to be made in the name of a ‘tong’.18 Its lack of legal status was of little concern, as the business community only transacted with those whom they trusted, and commercial debts were honoured collectively by members of a lineage. This was possible because there never was any clear demarcation between the family and the business unit. In fact, even charity or communal welfare was lineage-based, as the lineage group was the public community. These features, which are deeply ingrained in familism that is enshrined in Confucian China, defy the legal framework of the West. English law, for example, puts priority on individualistic choices to form business associations, clear demarcation of rights and duties between individuals, clarity and public notice of property rights, and scepticism of tying up properties in perpetuity. The next section will examine how the tension between the Chinese and Western paradigms is resolved by the mutual adaptation of trusts law principles and customary law in the context of lineage estates.

12 Tang Kai Chung v Tang Chik Shang [1970] HKLR 276. 13 JW Hayes, ‘The Pattern of Life in the New Territories in 1898’ (1962) 2 Journal of the Hong Kong Branch of the Royal Asiatic Society 15, 80. 14 Li Chok Hung v Li Pui Choi (1911) 6 HKLR 12, 44. 15 Tung Sang Wing firm v Chow Chun Kit (1910) 5 HKLR 238, 239. 16 Reuter, Brockelmann & Co v Tung Lok Tong (1909) HKLR 37, 92. 17 P Hase, ‘The Traditional Land Law of the New Territories: Before and After 1899’ in SW Cheung (ed), Colonial Administration and Land Reform in East Asia (Routledge 2017) 90, noting that in 1899, ‘most registered land tax payments [in the New Territories] were men dead for generations, even centuries, and were represented by trusts set up in their names’. 18 D Faure, ‘Lineage as Business Company: Patronage versus Law in the Development of Chinese Business’ in R Brown (ed), Chinese Business Enterprise, Critical Perspectives on Business and Management, Vol 1 (Routledge 1996).

Hong Kong  61

B.  When Chinese Hereditary Landholding Meets English Trusts Law In traditional China, disputes arising from tsos and tongs were resolved by village elders who applied a mixture of moral norms and customary convention, as civil matters were of secondary interest to local magistrates and left to customary law.19 This explains why tsos and tongs were informal and non-legalistic. However, when they interfaced with the common law through interactions with third parties, English judges in the early colonial period struggled to understand them by reference to common law principles. It took them a few decades to develop an appropriate set of rules for hereditary landholding.

i.  Statutory Interface with Tsos/Tongs In Hong Kong, the necessary legal interface between hereditary landholding and the common law was put in place by legislation. Shortly after a full-scale land survey much like the Doomsday Book in England, the government enacted the New Territories Land Ordinance 1905 to grant courts ‘the power to recognise and enforce’ local customary rights affecting land.20 The Ordinance underwent a series of amendments and consolidations to reach its current form.21 Without using the terminology of the trust, the Ordinance grants the manager legal power over the land as if he were a trustee, but subject to important fetters on his power:22 that he needs to be registered with the Land Officer; and that all of his dealings with the land need to be approved by the Officer.

ii.  Tsos and Tongs as (Non-Charitable, Perpetual) Trusts The legislation does not contain remedial provisions to hold managers accountable for their deviation from authority. Instead of looking to customary rules by default, judges characterised hereditary landholdings as trusts to access ready-made principles on trustees’ duties and tracing.23 For example, in Li Chok Hung v Li Pui Choi, trusts principles were applied in a tong dispute to recover allegedly embezzled funds.24 The most

19 Liang, Qingdai Xiguan Fa: Shehui yu Guojia [Customary Law in Qing Dynasty: Society and State] (Chinese University of Political Science and Law Press 1996) 249; Huanyue Gao, ‘The Uniqueness of Ancient Chinese Civil Code’ (1997) 3 China Law 90, 92; Kan Fat Tat v Kan Yin Tat [1987] HKLR 516 [182], Deputy High Court Judge Tang (now Tang PJ) referred to the expert evidence of Professor Anthony Dicks that when in dispute, a magistrate was likely to send the litigants to their villages for conciliation. 20 New Territories Land Ordinance 1905, s 11, subsequently New Territories Regulation Ordinance 1910, s 25. 21 The current legislative provisions are ss 13 and 15 of the New Territories Ordinance. 22 Light Ocean Investments Ltd & Anor v Enway Development Ltd [1994] 3 HKC 31, 40 (Litton JA). See also Lai Chi Kok Amusement Park Co Ltd (No 2) v Tsang Tin Sun [1966] HKLR 124, 130 (Briggs J). 23 See, eg, Tang Kai Chung (n 12): the manager was treated as a trustee and hence subject to the Trustee Ordinance; Tang Kan Yip v Tang Lik Yuen [2016] 4 HKLRD 593 [47]–[48]. 24 Li Chok Hung v Li Pui Choi (1910) (n 9) 132–33; decision reversed by the Full Court on other points: Li Chok Hung v Li Pui Choi (1911) (n 14). See also Chu Tak Hing v Chu Chan Cheung Kiu [1968] HKLR 542.

62  Lusina Ho and Rebecca Lee influential adoption of the trust analysis is found in the obiter by Mills-Owens J in Tang Kai Chung v Tang Chik Shang,25 which has been repeatedly endorsed by subsequent courts,26 including the Court of Final Appeal in Secretary for Justice v To Kan Chi.27 This quick solution has its limitations. It brings on trusts principles that are steeped in the values of an English society, as well as legislative provisions that are drafted with trusts but not hereditary landholding in mind. First, hereditary landholding infringes the trust rule against perpetuities. The issue was considered in Kan Fat Tat v Kan Yin Tat, where Deputy High Court Judge Tang (now Tang PJ, a descendant of indigenous villagers himself) disapplied the rule against perpetuities to a tso on the ground that the application of English law would be unjust and oppressive.28 Kan was endorsed by the Court of Final Appeal in re Lau.29 This approach departs from the contrary view taken in early decisions of the Supreme Court of the Straits Settlement, in Choa Choon Neoh v Spottiswoode,30 which was confirmed by the Privy Council in Yeap Cheah Neo v Ong Cheng Neo.31 Second, in sharp contrast, Hong Kong courts have accepted the view of the Choa case in relation to whether ancestral worship is charitable.32 Applying Choa, the Hong Kong Court of Appeal in Ip Cheung Kwok v Ip Siu Bun33 held that a tong created to hold private ancestral worship ceremonies attended only by male descendants had no public benefit, because the nexus between the beneficiaries was to a single propositus. Is the disparate treatment between the definition of charity and the rules of perpetuities justifiable? The arguments are finely balanced. On the one hand, the Anglo-centric view of public benefit fails to appreciate that traditional Chinese society was built upon consanguinity.34 Members of the same lineage typically resided together in walled villages for mutual protection from rival villages. For them, the public sphere only extended as far as the reach of lineage. On the other hand, legitimate questions may be raised as to why the general public should subsidise lineage-based benefits through tax reliefs that are

25 Tang Kai Chung (n 12), 278–79, 304: the trust analysis allowed the court to treat the managers as trustees and subject to the Trustee Ordinance. 26 Kan Fat Tat (n 19) [32]–[33]; Leung Kuen Fai v Tang Kwong Yu (or U) Tong [2002] 2 HKLRD 705 (Deputy High Court Judge Lam) [24] (Leung v Tang); Tang Kun Nin v Cheng Wai Fong [2014] HKCFI 449 [74]; Man Mi Sang v Man Shek Tong [2018] HKCFI 2755. 27 Secretary for Justice v To Kan Chi (2000) 3 HKCFAR 481, observing also that tongs are ‘essentially in the nature of unincorporated associations’. 28 Kan Fat Tat (n 19) [67]. See also Tang Kai Chung (n 12) 294–95, which held that the phrase ‘shall have power’ to recognise and enforce tsos and tongs in s 13 of the New Territories Ordinance means that they must recognise them. cf earlier decisions such as Yeap Cheah Neo v Ong Cheng Neo (1869) 1 Ky 216; Lau Leung Shi (n 9); In Re Chan Quan Ee (1920) 15 HKLR 74. 29 Re Lau Wai Chau (2000) 3 HKCFAR 98. 30 Choa Choon Neoh v Spottiswoode (1869) 1 Kyshe 216 (Sing). 31 (1875) LR 6 PC 381. 32 Choa Choon Neoh (n 30) 218–19; applied in Kan Fat Tat (n 19) 524C. See Hang Wu Tang, ‘From Waqf, Ancestor Worship to the Rise of the Global Trust: A History of the Use of the Trust as a Vehicle for Wealth Transfer in Singapore’ (2018) 103 Iowa Law Rev 2263, 2270–72. 33 [1990] 2 HKLR 499. See also Kan Fat Tat (n 19). 34 See similar criticism in S Mariani, ‘Traditional Chinese Religion Trusts in Hong Kong’ (2015) 21 Trusts & Trustees 538.

Hong Kong  63 meant to be available to a section of the public. A better analysis is to recognise that they are not charitable (and so do not enjoy tax privileges) but are valid as an exception to the rule against private purpose trusts. As they are regulated by the Ordinance, the usual concerns of lack of enforcement of private purpose trusts do not apply. Third, the trust characterisation brings about the unintended consequence of giving hereditary landholding immunity from claims of adverse possession.35 This is because in relation to land held upon trust, the limitation period does not run until all the beneficiaries have an interest in possession.36 As Deputy High Court Judge Lam (later Lam LJ) explained in Leung Kuen Fai v Fai v Tang Kwong Yu (or U) Tong,37 in the case of hereditary landholding, a tso beneficiary’s life interest is vested in possession upon his birth, so that a new limitation period arises whenever an infant beneficiary is born, making it unlikely to extinguish rights under a tso unless no more male descendants are born.38 A better approach is to accept that hereditary landholdings are trusts only for the purposes of enhancing their internal governance, but not as against a third-party squatter. An even better solution has been offered by Lok J in Man Mi Sang v Man Shek Tong, namely to enact tailor-made legislation to regulate hereditary landholding.39

C.  Economic Boom and the First Generation of Local Entrepreneurs As the Hong Kong economy began to soar in the late 1970s and 1980s, the colony saw the rise of local entrepreneurs who initially accumulated wealth through industrial successes and then through property investments. In the 1980s and early 1990s, as Hong Kong’s first generation of local entrepreneurs and property tycoons aged, they began to use trusts, and more specifically offshore trusts, to mitigate estate duties and to preserve wealth within the family.

i.  Onshore and Offshore Private Family Trusts When the trust first began to become popular as an asset management tool in the 1980s and early 1990s, the main motivation to set one up was to mitigate estate duty, although the prospect of the handover of sovereignty to mainland China in 1997 also provided an incentive for some wealthy locals to relocate family companies and assets offshore. Estate duty was payable, until its de facto abolition in 2006,40 in respect of property situated in Hong Kong exceeding HK$7.5 million (US$0.97 million) at the date of the taxpayer’s death. To circumvent the payment of estate duty, many local



35 M

Merry, ‘Are T’sos Really Trusts?’ (2012) 42 Hong Kong Law Journal 669, 682–83. v Scott [1854] 4 HLC 1065; Re Nisbet & Pott’s Contract [1906] 1 Ch 386. 37 Leung v Tang (n 26), followed in Wong Shing Chau v To Kwok Keung [2008] 5 HKC 372. 38 Leung v Tang (n 26) [45]. 39 [2018] HKCFI 2755 [115]. 40 Revenue (Abolition of Estate Duty) Ordinance 2005, which came into effect in February 2006. 36 Scott

64  Lusina Ho and Rebecca Lee wealthy tycoons set up trusts (in some cases, offshore trusts). Such trusts did not stray too far from the common law paradigm, and even if litigation did arise it usually pertained to whether such trusts arrangements infringed anti-avoidance rules.41 For example, in Shiu Wing Ltd & Others v Commissioner of Estate Duty,42 when the 85-year-old Mr Pong, the owner of a leading steel manufacturer and the patriarch of one of the richest families in Hong Kong, was very ill with cancer he transferred his Hong Kong property to an offshore trust for the benefit of his family in the form of a sale. The sale transactions were financed by a bank loan that was repaid on the same day as the transactions were completed. When Mr Pong died just a few days short of the three-year period for the properties disposed of to fall outside the charge to estate duty, the Inland Revenue Department attacked the transfer on the basis that it had no commercial purpose other than the avoidance of estate duty and thus that the sale should be characterised as a gift of Hong Kong property (made within three years of Mr Pong’s death to which estate duty was still payable). The Inland Revenue Department succeeded before the Court of Appeal, but the Court of Final Appeal ultimately held that estate duty was not payable on the basis that even if the inserted steps could be disregarded as having no commercial purpose, the end result was that Mr Pong transferred Hong Kong property to his company in consideration of issuing units to the discretionary trusts, and thus the transfer of property for value could not be recharacterised as a transfer by way of a gift. Offshore trusts have been the more popular type of family trust amongst wealthy entrepreneurs in Hong Kong since the 1990s. Initially, apart from mitigation of estate duty, the preference for offshore trusts was also due to the confidentiality they provide. Very often, an offshore trust is also used in conjunction with an underlying company to convert onshore assets (for example, substantial property in Hong Kong) into offshore assets and to interpose an additional layer of confidentiality in the chain of ownership. Despite the preference for offshore trusts, some family trusts established in the 1980s and small-scale family trusts did adopt Hong Kong law as their governing law. However, irrespective of whether the trusts were established onshore or offshore, they by and large followed the common law paradigm of the traditional family trust, wherein the settlor retains little or no control over the trust assets after the trust’s creation. They were typically structured as discretionary rather than fixed trusts to preserve the confidentiality of their beneficiaries, who need not be named in the trust deed. Letters of wishes were drawn up by either the settlor or the trustee to express the former’s non-binding requests concerning how the latter’s wide dispositive discretion was to be exercised.43 Two recent examples of family trust

41 See, eg, WT Ramsay Ltd v Inland Revenue Commissioners [1982] AC 300, where Lord Wilberforce held that self-cancelling transactions not intended to produce a gain or a loss were not genuine and the court could look to the actual substance of the transactions, rather than merely their legal form, in determining the nature of the transactions. 42 Shiu Wing Ltd & Others v Commissioner of Estate Duty (2000) 3 HKCFAR 215. 43 See Hartigan Nominees Pty Ltd v Rydge (1992) 29 NSWLR 405, 408; Breakspear v Ackland [2008] EWHC 220 [5] (Ch); In re Rabaiotti 1989 Settlement [2000] JLR 173, 173–74.

Hong Kong  65 litigation provide useful illustration. Tao Soh Ngun (also known as Lo To Lee Kwan) v HSBC International Trustee Ltd44 concerned Madam Lo, a co-founder, with her late husband, of Hong Kong property giant Great Eagle Holdings. In 1984, the couple set up two discretionary trusts governed by Hong Kong law for the purpose of long-term succession planning and to minimise estate duty. Tam Mei Kam v HSBC International Trustee Ltd45 concerned a family trust set up in Hong Kong by Anita Mui, a local canto-pop singer, shortly before she passed away in 2003. Both cases involved classic onshore discretionary trusts that gave the trustee wide discretion in appointing beneficiaries and distributing the trust funds. The respective trust deeds were also accompanied by letters of wishes that recorded the non-binding instructions of the settlors. The details of the two trusts became known to the public only because Madam Lo and Mui’s mother, respectively, had disputes with the trustees that culminated in legal proceedings.

ii.  Charitable Trusts The trust has historically been the predominant organisational structure for charities in English law,46 but it had little impact in the early days of the charitable sector in Hong Kong, whose earliest charities took the form of small, informal, communitybased self-help societies.47 Larger, more formal charities such as the Tung Wah Group of Hospitals and Po Leung Kuk were established primarily through legislation.48 Today, many charities structure themselves through corporate vehicles to provide limited liability protection to their members and to secure the benefits of incorporation.49 As of September 2016, there were nearly 9,000 tax-exempt charities in Hong Kong, but only 6 per cent (540) of them took the form of a trust.50 Indeed, if a charity has broad

44 Tao Soh Ngun v HSBC International Trustee Ltd [2019] HKCFI 1268. 45 Tam Mei Kam v HSBC International Trustee Ltd (2011) 14 HKCFAR 512. 46 See G Jones, History of the Law of Charity, 1532–1827 (Cambridge University Press 1969) on the development of the law of charitable uses. 47 The early local population mainly comprised refugees from mainland China with limited resources, and charitable works were mainly delivered by Christian missionaries and community-based self-help societies to relieve the emergency needs of the poor. The government only began playing a more active role in social welfare provision after social unrest in the 1960s. See, eg, Wai-Fung Lam and James L Perry, ‘The Role of the Nonprofit Sector in Hong Kong’s Development’ (2000) 11 Voluntas: International Journal of Voluntary and Nonprofit Organizations 355; J Chevalier-Watts, Charity Law: International Perspectives (Routledge 2018) ch 9. 48 Tung Wah Hospital was initially established under the Tung Wah Hospital Ordinance in 1870, which was repealed and replaced by the Tung Wah Group Hospitals Ordinance in 1971 (Cap 1051 of the Laws of Hong Kong). Po Leung Kuk was established under the Po Leung Kuk Incorporation Ordinance in 1893, which was repealed and replaced by the Po Leung Kuk Ordinance in 1973 (Cap 1040 of the Laws of Hong Kong). On the philanthropic role of Tung Wah in early colonial Hong Kong, see E Sinn, Power and Charity: A Chinese Merchant Elite in Colonial Hong Kong (Hong Kong University Press 2003). 49 To enable trustees to enjoy the benefits of incorporation, they are permitted to be incorporated under the Registered Trustees Incorporation Ordinance (Cap 306 of the Laws of Hong Kong), thereby affording registered trustees corporate status with perpetual succession. 50 Audit Commission of Hong Kong, Government’s Support and Monitoring of Charities (April 2017) 5. In contrast, 74% of tax-exempt charities were registered as companies.

66  Lusina Ho and Rebecca Lee objectives and a broad membership, then a company is likely to be the most appropriate structure. Despite the limited use of the trust in Hong Kong’s general charitable landscape, charitable trusts form an important component of the private family trust planning of many wealthy local tycoons. These local tycoons often donate through their own foundations51 or trusts, with the funds injected from the family businesses. A trust is very often the most appropriate structure if the charity fulfils very specific or narrow objectives and has only one or a limited number of donors (such as an individual or family), making it unnecessary to engage in fundraising. A common example is the charitable trust established by wealthy families to fund academic prizes or scholarships. A controversial one is that adopted by the late property tycoon Nina Wang, former chairperson of the Chinachem Group, a large Hong Kong-based property developer. Secretary for Justice v Joseph Lo Kin Ching52 centred on a dispute that arose over the legal effect of Wang’s 2002 homemade will, which comprised just four clauses, written in Chinese, passing on her entire estate, valued at an estimated HK$83 billion (US$10.7 billion), to the Chinachem Charitable Foundation. The Foundation argued that it should receive Wang’s entire estate as an absolute gift to be used for various charitable purposes as they arose. The Court of Final Appeal disagreed, holding that the Foundation should hold her estate as a trustee and be obliged to give effect to her will and use the estate for the specific purpose stated therein so far as possible.53 Based on its inherent jurisdiction to supervise the administration of charitable trusts,54 the Court decided that a scheme should be established to administer the charitable trusts in Wang’s will with the two principal objectives set out therein: the establishment of a supervising body, along with its terms of reference and membership; and the detailed working-out of arrangements for a Chinese prize of worldwide significance similar to that of the Nobel Prize.

D.  Financial Service Hub for Local and Mainland Chinese Entrepreneurs Based on an industry report published in 2017, the current Hong Kong trusts industry is divided into four main sectors – corporate trusts, pension schemes, private trusts and charitable trusts – as follows:55

51 eg, the three biggest property tycoons in Hong Kong – Li Ka-Shing, the Kwok brothers and Lee Shau Kee – all have their own foundations: see E Chan and DWF Lam, ‘Giving Hong Kong: A Growing Sector Evading Regulation’ in P Wiepking and F Handy (eds), Generous People, Generous Nations: A Comparative Study of Global Giving (Palgrave Macmillan 2015) 375. 52 Secretary for Justice v Joseph Lo Kin Ching (2015) 18 HKCFAR 169. 53 ibid [13]. 54 ibid [41]. 55 KPMG and Hong Kong Trustees Association, ‘Hong Kong Trust Industry Spotlight: Enhancing its Competitive Edge’ (October 2017) 32–34, available at: https://assets.kpmg/content/dam/kpmg/cn/pdf/ en/2017/10/hk-trust-industry-spotlight-enhancing-its-competitive-edge.pdf.

Hong Kong  67 Figure 4.1  Major types of trust services provided by the Hong Kong trusts industry (excerpted from ‘Hong Kong Trust Industry Spotlight: Enhancing its Competitive Edge’) ▶▶Type of trust administration services provided

Corporate trusts

Pension schemes (MPF & ORSO)

Private trusts

Charitable trusts 0%

10%

20%

30%

40%

50%

60%

70%

Source: Joint KPMG and HKTA survey

Within the four categories, the corporate trusts sector is the most popular with more than 63 per cent of respondents to the survey in question offering corporate trusts services to clients. These include trustee and custodian services relating to fund management, as well as wholesale and retail investment. The corporate trusts sector is followed closely by private trusts (59 per cent), which will be discussed in the following sections. Whilst the primary use of private trusts remains wealth management and estate planning, in the past two decades or so, the needs and appetite of clients in Hong Kong have changed dramatically from those of the earlier generation of settlors. The new generation are very often younger and still actively managing their businesses at the time the trust is established. In some cases, a trust is even set up as an investment vehicle.56 At the same time, as wealth has accumulated at an astonishing rate in mainland China,57 there has been an explosion of demand for offshore trust services for the purposes of tax mitigation, succession planning, asset protection and insurance against political risks. With its free flow of capital and sophisticated expertise in financial services, Hong Kong has become the natural place to serve mainland clients. To capture the business of local and 56 See Zhang Hong Li v DBS Bank (Hong Kong) Ltd [2019] HKCFA 45, discussed in text to (n 79) below. 57 According to a recent report on private wealth in the country, there were approximately 180,000 highnet-worth individuals (HNWIs, defined as individuals with investable assets over RMB10 million) in 2008. By the end of 2018, the number of HNWIs had risen to 1.97 million. Amongst this group, the number of ultra-HNWIs (defined as individuals with investable assets worth over RMB100 million) was about 170,000, rising from about 10,000 in 2008. The investable assets held by mainland Chinese individuals at the end of 2018 totalled RMB190 trillion, having grown at a compound annual growth rate of 7% from 2016 to 2018. In 2018, the average investable assets per capita amongst HNWIs stood at about RMB30.8 million, with the total investable assets held by such individuals reaching RMB61 trillion. For details, see China Merchants Bank and Bain & Company, ‘China Private Wealth Report 2019’, available at: https://www.bain. cn/pdfs/201909241138056108.pdf.

68  Lusina Ho and Rebecca Lee mainland Chinese entrepreneurs alike, new trust products with massive settlor reserved powers, attenuated trustee duties and disenfranchised beneficiary rights have become the norm.

i.  Offshore Settlor-Directed Trusts As noted, the needs and appetite of the modern – generally younger – clientele of the trusts industry differ dramatically from those of the earlier generation of settlors. They are more reluctant to relinquish control over trust assets, which often comprise the business empires they are still actively managing or using as an investment vehicle. Consequently, whilst acknowledging that they are supposed to transfer their ownership of those assets to the trustee to achieve the trust’s asset protection function, many settlors seek to retain as much control as possible over the trust. An offshore trust is thus usually seen as the preferred solution because it often allows massive control to be retained over what the settlor perceives to continue to be the settlor’s – as opposed to the trustee’s – own property through the reservation of the settlor’s powers and the use of protectors. It is now customary for settlors to reserve the power to direct trustees to make investments; to add or remove beneficiaries; to appoint income or capital to beneficiaries (or to give and withhold consent before such distributions are made); to appoint or remove trustees; to revoke the trust;58 and to veto the trustee’s administrative or dispositive decisions. In addition, a settlor may also reserve powers for a third party known as the ‘protector’ of the trust.59 The office of protector is now well established in offshore trusts, and allows settlors some degree of influence over a trustee’s exercise of discretion such that the trust is administered in accordance with the settlor’s wishes.60 The protector is usually a company controlled by the family of the settlor which is able to provide checks on the trustee, with whom the settlor may not be familiar. It is worthy of note that in the recent 2013 overhaul of the Trustee Ordinance of Hong Kong, the government considered – but ultimately did not pursue – reforms that would instil offshore trust features in Hong Kong legislation in order to encourage settlors to use Hong Kong trusts law as the governing law of their trust.61 Recent family trust litigation provides a useful illustration of a classic modern offshore settlor-directed family trust set up by a wealthy local businessman. As will be seen, such trusts are very different from the earlier, more traditional private family trusts discussed above. Kan Lai Kwan v Poon Lok To Otto62 concerned Otto Poon, a 58 In relation to the power to revoke a trust, see generally, Tasarruf Mevduati Sigorta Fonu v Merrill Lynch Bank & Trust Co (Cayman Ltd) [2011] UKPC 17, which held that an unfettered power to revoke could be treated as a type of property that could be claimed by the settlor’s receivers for the benefit of his creditors. 59 DWM Waters, ‘The Protector: New Wine in Old Bottles?’ in AJ Oakley (ed), Trends in Contemporary Trust Law (Oxford University Press 1996); M Conaglen and E Weaver, ‘Protectors as Fiduciaries: Theory and Practice’ (2012) 18 Trusts & Trustees 1, 17, 19–20. 60 Waters (n 59) 64; Conaglen and Weaver (n 59) 19. 61 Financial Services and the Treasury Bureau of the Hong Kong Government, Review of the Trustee Ordinance and Related Matters: Consultation Paper (June 2009); Review of the Trustee Ordinance and Related Matters: Consultation Conclusions (February 2010). The proposed amendments to update the Trustee Ordinance to bring it in line with modern trusts statutes in onshore common law jurisdictions were adopted and implemented by the Trust Law (Amendment) Ordinance 2013. 62 Kan Lai Kwan v Poon Lok To Otto (2014) 17 HKCFAR 414 (Otto Poon).

Hong Kong  69 leading engineer in Hong Kong and the chairman of Analogue Holdings Ltd, a company holding all of the shares in the operating companies that generated profits. In 1995, Poon set up an offshore (Jersey) discretionary family trust whose assets consisted mainly of shares in Analogue and whose beneficiaries were his three children. Poon was the trust’s settlor, protector and a potential beneficiary. As settlor and protector, he reserved important powers to himself, including the power to remove beneficiaries and to remove and appoint trustees.63 The trustee was given the power ‘to appoint capital and to distribute income to any eligible object of its discretion to the exclusion of the others’.64 In other words, it was possible for the trustee to appoint the entire trust fund to a single beneficiary (including Poon himself). The trustee played only a passive role in running the company, as the trust deed authorised it to leave the administration, management and conduct of Analogue’s business to the company’s directors and managers. In addition, the trustee also had the power to remove beneficiaries at its discretion with the consent of Poon as protector. Poon had also written letters of wishes to the trustee, which revealed that the trustee had accorded Poon’s wishes great weight and implemented them in a timely manner. Poon’s efforts to place the trust assets beyond the reach of the local courts, however, proved unsuccessful in subsequent divorce litigation. Poon married his wife in 1968. In the course of their divorce in 2009, his wife argued successfully in ancillary relief ­proceedings that the entire trust should be treated as Poon’s ‘financial resource’ and hence as matrimonial property for the purpose of the divorce, and was awarded HK$840 million (US$108 million) in matrimonial assets.65 The Court of Final Appeal arrived at that conclusion after taking into consideration Poon’s high level of involvement throughout the creation and management of the trust, including his reserved powers as settlor, his powers as protector to consent to the removal of beneficiaries, and the passive role of the trustee in running the company and in complying with Poon’s wishes.66 Whilst the trust structure in Poon remained intact67 and the court focused on different considerations in the ancillary relief proceedings (namely, Poon’s access to or control over the resources, rather than his ownership thereof),68 the case still highlights the risk of over-aggressive settlor control, which may not be sanctioned by the courts.69

ii.  Pre-IPO Trusts The growth in Chinese high-net-worth individuals (HNWIs) has been driven in part by the exceptional boom in the number of Chinese entrepreneurs. In the past few decades,

63 The CFA considered that the husband’s power as protector to remove and appoint trustees ‘might well be lawfully exercisable’: ibid [69]. 64 Otto Poon (n 63) [62]. 65 ibid [89]–[90]. 66 ibid [63]. 67 ibid [55]. 68 ibid [28], citing Whaley v Whaley [2011] EWCA (Civ) 617 [113]. 69 A similar point is discussed in Palmer’s chapter, ‘A Lament for Trust Principles in New Zealand’, ch 3 in this book.

70  Lusina Ho and Rebecca Lee China’s industrial sector has undergone rapid expansion and seen a shift from hightech manufacturing to IT and fintech. Many new HNWIs in mainland China started their own businesses, and are looking for opportunities to list those businesses overseas. In 2012, the China Securities Regulatory Commission relaxed and simplified its regulations to allow small- and medium-sized companies to publicly list their businesses and access overseas capital markets.70 Then, in 2018, the Hong Kong Stock Exchange (HKEX) also broadened its listing rules to further encourage China-based companies from emerging and innovative sectors to list in Hong Kong.71 The number of Chinabased companies listed on the HKEX has risen steadily over the past decade. The Hong Kong trusts industry has also witnessed the growth of another type of trust, namely, the so-called pre-IPO trust, a family trust arrangement made ahead of an initial public offering (IPO) for a company’s shares. Prior to the listing of a founder’s trading company, the founder generally holds a substantial holding of the shares in that company through an (offshore)72 operating company. The founder can create a pre-IPO trust and transfer all of his shares in the holding company (Holdco) to the trustee, and the trustee will then indirectly hold shares in the trading company to be listed (Listco) through Holdco. In Hong Kong, Listco tends to be a Cayman Islands company. When Listco is finally listed on the HKEX, the trustee will be disclosed as a substantial shareholder in Listco, and the names of the trust and founder (as the settlor of the trust) will also be disclosed. The names of the beneficiaries, however, are usually withheld given that a pre-IPO trust is often structured as a discretionary trust, and the beneficiaries’ interests therein are not fixed but determined by the trustee in accordance with the terms of the trust deed. At first glance, a (pre-IPO) trust appears to offer little to appeal to a Chinese entrepreneur about to list his business. The typical Chinese entrepreneur, such as the founder of a tech firm, is a young, driven man in firm control of his business. Because he has worked very hard to build his business from scratch and is still sufficiently young to continue offering valuable input, the idea of relinquishing control constitutes a huge cultural and psychological hurdle. However, most business founders now realise the benefits of estate planning, even at an early stage of their career. Moreover, in light of the tightening of regulatory and tax measures in many parts of the world, there is an incentive for founders to search for a safe environment for their families and businesses. In fact, there are a few reasons for making estate planning arrangements before the listing of a company in addition to all of the advantages of an ordinary trust, such as asset protection,73 confidentiality74 and so on. First, by transferring the founder’s shares 70 China Securities Regulatory Commission, Guidelines for Supervising the Application Documents and Examination Procedures for the Overseas Stock Issuance and Listing of Joint Stock Companies [2012] Announcement No 45. The Guidelines came into effect on 1 January 2013. 71 See Hong Kong Stock Exchange, Consultation Conclusions: A Listing Regime for Companies from Emerging and Innovative Sectors (April 2018). 72 The holding company is usually based offshore to protect it from legal risks and liabilities faced by the trading company. 73 In particular, some founders may have incurred contingent personal liability in the course of running their businesses and wish to protect their personal assets from the reach of potential creditors. Note, however, that a trust may not be set up for the purpose of defrauding creditors. 74 The beneficiaries of a discretionary trust do not need to be named and identified in the trust deed. Further, almost no offshore trust jurisdiction maintains a public register of trusts.

Hong Kong  71 in the company to a trust, a pre-IPO trust affords the IPO application a measure of stability by insulating it from adverse personal events (such as the founder’s divorce75 or death or a scandal) that might jeopardise or delay it, as such events in theory cannot affect the legal ownership of the shares held by a separate (and, invariably, institutional) trustee.76 Second, placing assets into a pre-IPO trust ensures the concentration of the founder’s shareholding, preventing his shares from being diluted upon his death. China has a limited forced heirship regime under which the dependants of the deceased are entitled to succession to the extent that they otherwise cannot support themselves.77 Hence, if no trust structure is in place upon the death of the founder, the principle of forced heirship may operate such that his shares in the company are included in his estate, and thus inherited by his family members. Over time, those shares will likely be diluted, with the founder’s family eventually losing control of the company. Shares held in a pre-IPO trust, in contrast, are held in the trustee’s hands, regardless of how many family members are beneficiaries of that trust or whether the founder is still alive. Last but not least, it is common for a founder’s shares to be subject to a lock-up period after an IPO, thereby preventing any share transfers or tax or estate planning. Consequently, there is a small window of opportunity for estate planning, and that is prior to the IPO.

iii.  Preserving Settlor Control Just as in the settlor-directed trust, an important theme underlying the pre-IPO trust is the objective of preserving settlor control. An important consideration for a business founder in deciding whether to set up a pre-IPO trust is whether he will be able to retain control over his business. To allow him to do so, the pre-IPO trust invariably takes the form of an offshore trust, which affords the settlor maximum power and flexibility. Just as importantly, many offshore jurisdictions also have firewall legislation that renders the trust less susceptible to onshore challenges. In relation to a settlor’s powers and a trustee’s duties, many founder-settlors who transfer their companies into a trust naturally wish to retain management of the corporate assets rather than leaving it to the trustee, who has less knowledge of the company’s affairs and may lack the expertise to supervise its conduct. An important aspect of settlor control is that the trustee’s obligation to oversee and intervene in the underlying operating (holding) company can be partly or wholly removed such that his only duty is to hold shares, not to enhance their value. The trust deed may accordingly

75 A well-known example involves the CEO of Tudou, a Chinese online video website. Tudou’s application to list on the Nasdaq in 2010 was disrupted and delayed by the CEO’s wife’s divorce proceedings against him in China. 76 The IPO trust will also reduce the risk of fluctuations in the share price caused by such unforeseeable events after the listing. 77 Law of Succession of the People’s Republic of China (1985), art 19: ‘[r]eservation of a necessary portion of an estate shall be made in a will for a successor who neither can work nor has a source of income’. Another notable feature of Chinese succession law is to reward those who have cared for the deceased irrespective of whether the estate is distributed by intestacy or will (art 14).

72  Lusina Ho and Rebecca Lee contain ‘anti-Bartlett’ clauses to exclude the trustee’s duty of care78 in the management of the company’s affairs unless he has actual knowledge of dishonesty on the part of the company’s directors or officers. Such clauses not only reduce the trustee’s ability to influence the management of the company (except in accordance with the trust deed), but also effectively ensure that such management is left to those with the requisite skills and expertise, ie, the company directors (of whom the settlor is often one). The latest judicial examination of anti-Bartlett clauses was in Zhang Hong Li v DBS Bank (Hong Kong) Ltd.79 In that case, a married couple, Zhang and Ji, were the settlors of a Jerseylaw governed family trust that had been established with the assistance of their banker, DBS Bank. The only trust asset was the sole share of a private investment company called Wise Lords Limited, a BVI company incorporated and owned by Ji to invest in various financial products. The trustee was a subsidiary company of DBS Bank (DBS Trustee). Pursuant to the wishes of Zhang and Ji, the trust deed contained detailed antiBartlett clauses which excluded DBS Trustee’s duty to interfere with the management or conduct of the business of Wise Lords (unless it had actual knowledge of dishonesty of the company directors) and allowed Ji to retain decision-making power over Wise Lords’ investment activities. The lower courts held, controversially, that despite the anti-Bartlett clauses the trustee still owed a residual high-level supervisory duty. However, the Court of Final Appeal unanimously overturned the lower courts’ decisions on the ground that the existence of a ‘high-level supervisory duty’ was inconsistent with the anti-Bartlett clauses in the trust deed and there was no legal basis for any such residual obligation that might contradict or override the express anti-Bartlett clauses in the trust deed.80 The only obligation that can be said to be ‘residual’ is the obligation to act in cases involving actual knowledge of dishonesty not covered by anti-Bartlett clauses.81 It is difficult to dispute the conclusion reached by the Court of Final Appeal. The couple should not be able to have their cake and eat it too: the anti-Bartlett clauses in the trust deed allowed the settlor-couple to direct an investment profile of their choice rather than being restricted to the more conservative approach that DBS Trustee would likely have preferred, earning huge profits as a result. Only when their investment decisions went wrong did they seek to argue for a residual obligation underlying those clauses to minimise their losses. However, whilst the case outcome is certainly defensible, and the apex court decision will be welcomed by the wealth management industry, there remains the question of whether a settlor can be given an excessive amount of control such that the trust becomes a form of revocable agency and the trustee has no accountability at all to the beneficiary. In addition to anti-Bartlett clauses, the following provisions are common in the trust deeds of pre-IPO trusts for the purpose of weakening trustee control and instead reserving relevant powers to the settlor and/or protector nominated by him: the trustee may

78 The trustee’s duty of care was laid down in Bartlett v Barclays Trust Co Ltd [1980] 2 WLR 430, which has now been codified by statute: English Trustees Act 2000, s 1; Hong Kong Trustee Ordinance, s 3A. 79 [2019] HKCFA 45. 80 ibid [45]. 81 ibid [61]–[63].

Hong Kong  73 dispose of the shares in the holding company only with the consent of its directors; the trustee must exercise his voting powers with respect to the appointment, removal and remuneration of the directors in specified manners; and the trustee cannot appoint directors of his own choosing. Further, beneficiaries have minimal rights under such trusts. Contrary to English law, which allows all ascertainable beneficiaries to come together to terminate a trust under the rule in Saunders v Vautier,82 a pre-IPO trust can prevent beneficiaries from terminating the trust by not giving them any standing to enforce the trust or any enforceable right against the trustee.83 As a corollary, the beneficiaries are not entitled to receive information on accounts concerning the trust, nor are they entitled to notification of the trust’s existence or of any interest they may have under it. The different permutations of modern offshore trust products, be they settlordirected trusts or pre-IPO trusts, give extensive control to settlors. However, if a settlor retains too much control, the trust may be rendered a sham84 or illusory.85 Both doctrines were discussed by the English High Court in JSC Mezhdunarodniy Promyshlenniy Bank v Sergei Viktorovich Pugachev.86 The issue in that case was whether the properties settled in various discretionary trusts by Mr Pugachev could be used to meet the claims of his creditors when his bank went into insolvency. The trusts were typical settlor-directed trusts in which Pugachev was named both a beneficiary and the trust protector. In his capacity as protector, he could veto all major decisions regarding investments, the distribution of income and capital, variation of the trust deed and the appointment of new beneficiaries. He could also remove a trustee who did not act in accordance with his wishes. Birss J held that given Pugachev’s extensive powers, which could be exercised freely for his own benefit without the need to consider the interests of other beneficiaries, it was difficult to see how the trustee could act without Pugachev’s consent in any significant way, leading to the Court’s finding that the ‘true effects of the trusts’ were to allow Pugachev to retain ownership of the assets. Consequently, the discretionary trusts amounted to bare trusts of assets held by the trustees for the benefit of Pugachev, and could therefore be used to satisfy the claims of his creditors.

82 Saunders v Vautier (1841) 4 Beav 115. 83 See, eg, Cayman Islands Trusts Law (2018 Revision) s 100(2). cf Rusnano Capital AG (in liquidation) v Molard International (PTC) Limited and Pullborough International Corp [2019] GRC 011, where the Guernsey Royal Court held, controversially, that the existence of a power to add beneficiaries does not affect the ability of the existing beneficiaries to terminate a trust and distribute the trust property under s 53 of the Trusts (Guernsey) Law, 2007 (which codifies the rule in Saunders v Vautier). 84 Snook v London and West Riding Investments Ltd [1967] 2 QB 786; Abdel Rahman v Chase Bank (CI) Trust Co Ltd [1991] JLR 103. In a sham trust, both the settlor and trustee share a common intention to subjectively create different rights and obligations from those appearing in the trust document in order to mislead third parties. cf YK Liew, ‘“Sham Trusts” and Ascertaining Intentions to Create A Trust’ (2018) 12 Journal of Equity 237. 85 Clayton v Clayton [2016] 1 NZLR 551; Webb v Webb [2017] CKCA 4. An illusory trust is a failed attempt to create a trust, either because the beneficiaries are unable to hold the trustee accountable or because the settlor or trustee has such control that he is able to use the property for his own benefit. As a result, no valid trust has come into existence. In Clayton v Clayton, it was argued that the purported trust’s terms provided such extensive powers of control to Mr Clayton as settlor and trustee that no trust actually existed. Although the New Zealand Supreme Court did not rule on the illusory trust doctrine, it disputed its utility ([123]). 86 [2017] EWHC 2426 (Pugachev). Pugachev contained a detailed discussion of Clayton v Clayton and concluded that the ‘illusory’ trust label was not helpful ([169]).

74  Lusina Ho and Rebecca Lee The decision in Pugachev provides valuable, if not groundbreaking, lessons for the modern trusts industry. Even where a settlor-directed trust is not found to be a sham (as in Pugachev, where there was no difference between the trust documentation and the settlor’s intention not to divest control of the trust), Pugachev provides support for an additional line of attack against such trusts by looking at the terms of the trust to assess whether a settlor has effective control and ownership of the trust assets. In this connection, despite the English High Court’s preference for not labelling such trusts ‘illusory’,87 a settlor’s reservation of wide-ranging powers to himself may point to the conclusion that the ‘true effects of the trust’ are ineffective in divesting himself of his beneficial ownership of the trust assets. In light of Pugachev, the modern offshore trust products discussed above smack of a failure to understand the ‘true effects of the trusts’ they create. Such trust products typically curtail the scope of a trustee’s accountability to beneficiaries and independent exercise of discretion, and ultimately undermine the delicate balance of rights and obligations in the trust relationship that lies at the core of the trust concept.88 One of the core features of a trust is the alienation and transfer of (trust) property from the settlor’s own estate. The extensive reservation of powers by settlors, however, has significantly weakened such a core feature. More significantly, such reservation, particularly of the power to make investment and administrative decisions, ultimately undermines the trustee’s accountability to beneficiaries.89 We believe that such client-driven approaches are not only short-sighted, but also risk undermining the integrity of the trust institution.

III. Conclusion This chapter has surveyed the dramatic developments in trusts law in Hong Kong, which coincided with the transformation of the enclave from a fishing village to a global financial centre through its role as a gateway to mainland China. That being said, the survey reveals immense challenges facing the Hong Kong trusts industry in at least three dimensions, the first of which is unique to Hong Kong. First, the political dimension. The HKSAR National Security Law has affected the stability and predictability of the business environment of Hong Kong and may have made Hong Kong trusts law less attractive than those of its main competitors such as Singapore. Second, the regulatory dimension. The trusts industry is not immune from the need to negotiate the tension between tightening international regulation of trusts and mounting commercial pressure to stay competitive.90 Third, the doctrinal dimension. At the moment, most extreme forms of modern express trusts nominate a foreign governing law and so it is arguable that the impact of the modern developments discussed above is still minimal

87 ibid [169]. 88 See, eg, D Hayton, ‘The Irreducible Core Content of Trusteeship’ in AJ Oakley (ed), Trends in Contemporary Trust Law (Oxford University Press 1996). 89 See also Palmer, ‘A Lament for Trust Principles in New Zealand’, ch 3 in this book. 90 See also L Smith, ‘Give the People What They Want? The Onshoring of the Offshore’ (2018) 103 Iowa Law Review 2155.

Hong Kong  75 on local trusts law. However, given that innovative features of the modern express trusts have rendered the use of a trust more palatable to settlors, the local trusts industry has exerted and will continue to exert pressure on the government to introduce similar reforms to enhance Hong Kong’s competitiveness in attracting offshore trust business. Even if the legislature stands firm against introducing controversial offshore features into local trusts law, the wheels of international trust litigation are already set in motion. Local courts will inevitably confront legal issues about the legitimacy of innovative trust features. Pugachev and Zhang Hong Li are good cases in point. It is very tempting to respond to jurisdictional competition by relaxing the trust concept. But this would be a short-sighted solution. A better, long-term solution is to enhance the environment for quality trust services and to provide clear demarcation of the permissible scope of the trust. As to enhancing the business environment for trusts, legislation may be amended to facilitate the development of trust arbitration and mediation. Regulatory policies may be rationalised to remove unnecessary barriers for non-resident holding corporations to open bank accounts in Hong Kong.91 As to clarification of the trust concept, it is no longer adequate to leave such an important issue to the accidents of litigation, a slow and chancy form of legal development. The New Zealand Trust Act of 2019 has demonstrated the feasibility of a proactive approach to set forth mandatory and default duties of a trust. Following this lead, onshore legislatures may further define the core parameters of the trust such as the minimum bundle of rights enjoyed by the beneficiary and the duties of protectors. Equally, instead of massaging the trust concept to suit clients’ needs, most of which are no doubt legitimate, legislation may introduce new forms of legal structures, such as foundations or foundation companies, to broaden the range of legal options that cater for these needs. These efforts help the industry remain competitive without compromising the commitment to the core of the trust.

91 I ten Teije, ‘5 Reasons Why It’s Difficult to Open a Corporate Bank Account in Hong Kong’ (Neat, 24 October 2020), available at: www.neat.hk/blog/why-difficult-open-corporate-bank-account-hong-kong.

76

5 Constructive Trusts and Limitation Periods in Malaysia YING KHAI LIEW*

I. Introduction Malaysia, as a former British colony, has inherited much of its trusts law from the English. This gives rise to an interesting interaction between the two sets of laws in the modern day. On the one hand, English case law remains highly persuasive postindependence; after all, the applicability of English law was preserved by section 3(1) of the Civil Law Act 1956, which (subject to qualifications irrelevant for present purposes) provides that ‘the common law of England and the rules of equity’ apply in Malaysia. On the other hand, the Constitution (Amendment) Act 1983 abolished civil appeals to the Privy Council, and this means that decisions of higher local courts bind lower local courts.1 In combination, these interactions raise interesting but difficult questions where English and Malaysian law is uncertain. One notoriously difficult area of trusts law, in Malaysia as elsewhere, is constructive trusts. Precisely when and why constructive trusts arise are fundamental but imperfectly understood matters. This is unfortunate, because the lack of understanding might, in practice, be critically relevant for the determination of liability. To illustrate, consider the ongoing infamous ‘1MDB’ saga. 1MDB was a government-run strategic development company allegedly utilised by the former Prime Minister of Malaysia, Najib Razak, and many others (including his aide, Jho Low) to siphon money to their personal and company accounts. The key events of the highly complex fraudulent scheme took place over a six-year period, leaving behind a long money trail which crossed multiple jurisdictional borders and involved numerous shell companies, international banks, investment companies and even Hollywood celebrities. While the Malaysian

* Associate Professor Law, Melbourne Law School. I thank Hang-Wu Tang for his comments on an earlier draft. 1 The Malaysian Federal Court is the apex court. The Court of Appeal and the High Court are respectively one and two levels below it.

78  Ying Khai Liew government has focused its efforts on the criminal liability of those allegedly involved, little attention has thus far been paid to the potential private law liabilities, either of those directly breaching trusts or fiduciary duties, or those receiving proceeds of those breaches. These claims will likely be pursued as a matter of course,2 for example by the liquidators or new directors of 1MDB. At that stage, the law of constructive trusts will be crucial for the determination of liability. One of the first practical hurdles, should such claims be brought, would be the question of limitation: are the constructive trust claims time-barred? As with the law of constructive trusts, the law of limitation in Malaysia is closely modelled on English law. Here, again, the interactions between Malaysian and English law throw up interesting but difficult issues of law. This chapter considers those interactions in the particular context of the applicable limitation periods to constructive trusts claims in Malaysia, to evaluate and assess how English jurisprudence and local developments have shaped the law. This chapter first sets out in section II the relevant statutory provisions on limitations concerning trusts in Malaysia. Section III notes the starting point for analysis which has been adopted by Malaysian courts, which is Millett LJ’s distinction between two classes of constructive trust in Paragon Finance plc v DB Thakerar & Co (a firm).3 Sections IV and V then deal respectively with constructive trust doctrines which clearly fall within one of Millett LJ’s two classes of case, while section VI deals with three doctrines which are less clear-cut. Section VII briefly explores the potential grounds on which the running of time may be delayed. Section VIII concludes.

II.  Malaysian Limitation Periods for Trusts For historical reasons, the sources of limitation statutes in Malaysia are not unitary. In West Malaysia, section 22 of the Limitation Act 19534 provides:5 Limitation of actions in respect of trust property (1) No period of limitation prescribed by this Act shall apply to an action by a beneficiary under a trust, being an action – (a) in respect of any fraud or fraudulent breach of trust to which the trustee was a party or privy; or (b) to recover from the trustee trust property or the proceeds thereof in the possession of the trustee, or previously received by the trustee and converted to his use. (2) Subject as aforesaid, an action by a beneficiary to recover trust property or in respect of any breach of trust, not being an action for which a period of limitation is

2 At the time of writing, there is an ongoing effort to secure the return of relevant assets and funds seized outside Malaysia, particularly from the USA. 3 Paragon Finance plc v DB Thakerar & Co [1999] 1 All ER 400. 4 Statutes in this chapter refer to Malaysian statutes unless otherwise indicated. 5 s 22(1) and 22(2) are cognate with s 21(1) and 21(3) of the English Limitation Act 1980.

Malaysia  79 prescribed by any other provision of this Act, shall not be brought after the expiration of six years from the date on which the right of action accrued.6

The East Malaysian states of Sabah and Sarawak have their respective Limitation Ordinances,7 which are materially identical. Section 9 of these Ordinances expressly provides that no time bar is applicable to suits against ‘express trustees’, that is, ‘against a person in whom property has become vested in trust’. Rule 97 of the Schedules to these Ordinances provides a six-year time bar for suits not specifically provided for in the Ordinances. This chapter will focus on the Limitation Act 1953. It is observable that there is a complete absence of case law concerning limitation periods for trusts in relation to the East Malaysian Ordinances: discussions have exclusively concerned the West Malaysian regime. It follows that, subject to allowances made for textual differences between the different statutes, future cases concerning the East Malaysian Ordinances would most likely be considered in line with the case law on the Limitation Act 1953. Where relevant, those textual differences and their likely consequences will be highlighted in the discussion in this chapter. In Malaysia, as in England,8 the law’s policy is to relieve errant trustees from perpetual liability unless they perpetrate a fraudulent breach of trust or have kept property for themselves.9 The primary target is, obviously, trustees of express trusts.10 It might have been thought that the statutory regime also automatically includes constructive trusts, given that section 2 of the Limitation Act 1953 provides that ‘“trust” and “trustee” have the same meanings respectively as in the Trustee Act 1949’, and section 3 of the 1949 Act provides that those terms ‘extend to […] constructive trusts’.11 However, courts have not taken this approach,12 but only include constructive trusts which are somewhat analogous to express trusts. At once two points of difficulty can be noted. First, constructive trusts arise in a wide variety of contexts, and their similarities to and differences from express trusts is a question of degree on a ‘spectrum of analogy’.13 There is therefore a critical question of where the cut-off point, for limitation purposes, ought to be drawn on that spectrum. Second, disapproval towards the defendant’s fraudulent act or keeping of property is clearly insufficient to justify categorising a trustee under a non-express trust as falling within section 22: whether the defendant is a relevant ‘trustee’ is a prior question. Therefore, there is little within the statute which informs the courts as to which constructive trusts fall within the section. It is necessary, therefore, to turn to case law. 6 The six-year limitation period provided for in subsection 2 is subject to other periods provided in the Act; so, for example, if the action is for recovery of land, s 9 provides a 12-year limitation period (Panchanath Ratnavale v Sandra Segara Mahalingam [2012] 5 MLJ 109 [22]). 7 In Sabah: Limitation Ordinance (Cap 72); in Sarawak: Limitation Ordinance (Cap 49). 8 See Williams v Central Bank of Nigeria [2014] UKSC 10 [22]. 9 See, eg, Panchanath (n 6) [22]; Abdul Razak Sheikh Mahmood v Bhupinder Singh Avtar Singh [2012] 3 MLJ 348 [29]. 10 Burnden Holdings (UK) Ltd v Fielding [2018] UKSC 14 [18]. 11 Similarly, s 38 of the UK Limitation Act 1980 refers to the UK Trustee Act 1925, s 68 of which extends the meaning of the relevant terms to constructive trusts. 12 See, in the English context, Paragon Finance (n 3) 409–14. 13 D Jensen, ‘A Typology of Trusts by Analogy’ in E Bant and M Bryan (eds), Principles of Proprietary Remedies (Thomson Reuters 2013) 59.

80  Ying Khai Liew

III.  Two Classes of Constructive Trust In Malaysia, as in England, the starting point for analysis has invariably been the extended dictum of Millett LJ in Paragon Finance plc v DB Thakerar & Co (a firm): [T]he expressions ‘constructive trust’ and ‘constructive trustee’ have been used by equity lawyers to describe two entirely different situations. The first covers those cases … where the defendant, though not expressly appointed as trustee, has assumed the duties of a trustee by a lawful transaction which was independent of and preceded the breach of trust and is not impeached by the plaintiff. The second covers those cases where the trust obligation arises as a direct consequence of the unlawful transaction which is impeached by the plaintiff. … In the first class of case … the constructive trustee really is a trustee. He does not receive the trust property in his own right but by a transaction by which both parties intend to create a trust from the outset and which is not impugned by the plaintiff. His possession of the property is coloured from the first by the trust and confidence by means of which he obtained it, and his subsequent appropriation of the property to his own use is a breach of that trust. Well-known examples of such a constructive trust are McCormick v Grogan (1869) LR 4 HL 82 (a case of a secret trust) and Rochefoucauld v Boustead [1897] 1 Ch 196 (where the defendant agreed to buy property for the plaintiff but the trust was imperfectly recorded). Pallant v Morgan [1953] Ch 43 (where the defendant sought to keep for himself property which the plaintiff trusted him to buy for both parties) is another … The second class of case is different. It arises when the defendant is implicated in a fraud. Equity has always given relief against fraud by making any person sufficiently implicated in the fraud accountable in equity. In such a case he is traditionally though I think unfortunately described as a constructive trustee and said to be ‘liable to account as constructive trustee’. Such a person is not in fact a trustee at all, even though he may be liable to account as if he were. He never assumes the position of a trustee, and if he receives the trust property at all it is adversely to the plaintiff by an unlawful transaction which is impugned by the plaintiff. In such a case the expressions ‘constructive trust’ and ‘constructive trustee’ are misleading, for there is no trust and usually no possibility of a proprietary remedy; they are ‘nothing more than a formula for equitable relief ’.14

For limitation purposes, only trustees of Class 1 constructive trusts fall within section 22 and may be deprived of the benefit of lapse of time. ‘Trustees’ of Class 2 constructive trusts – as well as those of Class 1 constructive trusts which do not fulfil the relevant requirements of sections 22(1)(a) and (b) – have the benefit of a six-year time bar. It is unclear whether Millett LJ intended his two classes exhaustively to cover all constructive trusts,15 but it has never been suggested otherwise. More importantly, Malaysian judges have consistently taken that distinction as the template for analysis.

14 Paragon Finance (n 3) 408–09. 15 C Daly and C Mitchell, ‘Paragon Finance plc v DB Thakerar & Co (a firm)’ in C Mitchell and P Mitchell, Landmark Cases in Equity (Hart Publishing 2012) 666.

Malaysia  81

IV.  Class 2 It is clear that claims against strangers to a trust for dishonestly assisting a breach of trust or fiduciary duty (‘dishonest assistance’), or knowingly receiving assets representing the proceeds of a breach (‘knowing receipt’), fall within Class 2, and are always subject to a six-year time bar. This proposition, established in Paragon Finance itself, was subsequently affirmed by the UK Supreme Court in Williams v Central Bank of Nigeria.16 Malaysian courts have adopted wholesale this proposition17 – as have courts in Hong Kong18 and Singapore19 where cognate limitation provisions operate. As a matter of rationale, Malaysian courts have emphasised the truism that a dishonest assistant or knowing recipient is not ‘a “true trustee” who was in receipt of property or money on account of being a true trustee’ but ‘a constructive trustee arising out of equitable relief ’.20 However, there is sometimes an unfortunate tendency for some courts to utilise language which suggests otherwise. For example, the Federal Court in CIMB Bank Bhd v Maybank Trustees Bhd21 held, in relation to a knowing recipient, that the court ‘must intervene by imputing a constructive trust upon [the recipient] for her role in misapplying the trust monies … in order to satisfy the demands of justice and good conscience’. Such language is liable to cause the erroneous application of limitation rules, and is best avoided. A knowing receipt claim is not a proprietary claim but a personal claim against the recipient, and therefore no question of a trust arises.22 This last statement might be thought to be inconsistent with Millett LJ’s suggestion that there is ‘usually no possibility of a proprietary remedy’,23 which appears to imply that a knowing receipt claim may sometimes lead to a proprietary remedy. However, it is trite that a recipient who retains any relevant proceeds is always liable at the suit of the beneficiaries for the return of those proceeds unless the third party is a bona fide purchaser for value without notice (BFP)24 or has some other valid defence.25 The beneficiaries’ right against non-BFPs is a feature of their ‘entitle[ment] to assert their beneficial rights’;26 its exercise does not depend on the third party fulfilling the 16 Williams (n 8). 17 See, eg, Takako Sakao v Ng Pek Yuen [2010] 1 CLJ 381 [15]; Ho Hup Construction Co Bhd v Zen Courts Sdn Bhd [2018] 1 LNS 340; Eramara Jaya Sdn Bhd v Ong Cheng Heang @ Ong Cheng Hean [2018] 1 LNS 1851. 18 Peconic Industrial Development Ltd v Lau Kwok Fai [2009] 5 HKCFA 16. 19 Yong Kheng Leong v Panweld Trading Pte Ltd [2012] SGCA 59. 20 ESPL (M) Sdn Bhd v Radio & General Engineering Sdn Bhd [2004] 4 CLJ 674, 688–89; Kuan Shin @ Kuan Nyong Hin v Ng Aik Kee [2016] 1 AMCR 701; Ho Hup (n 17) [103]; Eramara Jaya (n 17) [91]. 21 CIMB Bank Bhd v Maybank Trustees Bhd [2014] 3 MLJ 169 [129]. 22 In CIMB Bank (n 21), the claim against the recipient was simply for a personal remedy of ‘indemnity or contribution’ for losses caused: see [124], [131]. 23 Paragon Finance (n 3) 410. 24 See, eg, Takako Sakao (n 17) [21]; Lee Hark Lam v Kebun Rimau Sdn Bhd [2017] 1 CLJ 277 [54]; Tan Sri Dato’ Dr Rozali Ismail v Chua Lay Kim [2016] 3 CLJ 84 [43]. 25 Unlike in Australia, where the property is land the third party does not have a valid defence by reason simply of having registered title, since ‘the nature of the Torrens system in Malaysia provides for deferred rather than immediate indefeasibility’: Macnamara v Kuan [2008] 2 MLJ 450 [31]. See too L Griggs, ‘Resolving the Debate Surrounding Indefeasibility through the Eyes of a Consumer’ (2009) 17 Australian Property Law Journal 260, 267–68. 26 Malaysia Discounts Bhd v Pesaka Astana (M) Sdn Bhd [2008] 5 CLJ 130 [73]. See also Malaysian International Trading Corporation Sdn Bhd v RHB Bank Bhd [2016] 2 CLJ 717 [22]. The applicable law of limitation to this situation is discussed in section VI.C below.

82  Ying Khai Liew ‘knowledge’ requirement of recipient liability. It is only where the third party dissipates those proceeds that knowing receipt liability is necessary to determine whether he or she incurs personal liability. On a proper analysis, therefore, no question of a true ‘trust’ arises in relation to knowing receipt, and therefore such claims are always subject to the six-year time bar.

V.  Class 1 A.  A Core Group of Constructive Trust Doctrines There is no doubt that Malaysian courts recognise Class 1 constructive trusts. Thus, the three doctrines alluded to in Paragon Finance, namely the doctrine in Rochefoucauld v Boustead, secret trusts, and the doctrine in Pallant v Morgan, have clearly been applied by Malaysian courts.27 This indicates that Malaysian courts do recognise constructive trusts which give effect to the intention of the parties, contrary to the Federal Court’s observation that ‘by definition … constructive trust [sic] is a trust which is imposed by equity in order to satisfy the demands of justice and good conscience, without reference to any express or presumed intention of the parties’.28 It is observable that those three doctrines fit Millett LJ’s description of Class 1 constructive trusts perfectly. They exhibit a common factual matrix: by way of an informal agreement between A and B which is reached before B acquires the property over which a constructive trust later arises, B promises to hold the property on trust for A or C, and A relies on B’s promise in such a way which helps B to acquire the property in question.29 Having said that, it is not clear that it was necessary for Malaysian courts to call into play the law of constructive trusts at all in the instances in which those doctrines have been applied. In English law, one main reason for those doctrines’ existence is that the parties have not fulfilled the requisite statutory formality requirements such that their intentions can be expressly given effect to:30 despite the lack of requisite writing, constructive trusts may be triggered where there is the relevant promise and reliance.31 In Malaysia, however, not all states have cognate formality statutes.32 In East Malaysia, 27 The doctrine in Rochefoucauld: Ng Tien v Chow Nim Yan [1990] 3 MLJ 373, 378; Sanmaru Overseas Marketing Sdn Bhd v Pt Indofood Interna Corp [2009] 2 MLJ 765 [165]. Secret trusts: Chin Hua Yean v Chin Jhin Thien [2019] 5 MLJ 673. The doctrine in Pallant: Zaharah A Kadir v Ramunia Bauxite Pte Ltd [2012] 1 MLJ 192 [106]. 28 Hassan Kadir v Mohamed Moidu Mohamed [2011] 4 MLJ 190 [27]. See also Takako Sakao (n 17) [20]; Perbadanan Kemajuan Pertanian Selangor v JW Properties Sdn Bhd [2017] 8 CLJ 392 [59]. 29 See Ying Khai Liew, Rationalising Constructive Trusts (Hart Publishing 2017) chs 4–6. 30 Agreements in the context of the doctrine in Rochefoucauld would be enforceable as express inter vivos trusts if the parties complied with s 53(1)(b) of the UK Law of Property Act 1925. In the context of secret trusts and mutual wills, the agreements would be enforceable as express testamentary trusts if the parties complied with s 8 of the UK Wills Act 1837. Agreements in the context of the doctrine in Pallant, would be expressly enforceable as contracts if the parties complied with s 2(1) of the UK Law of Property (Miscellaneous Provisions) Act 1989. 31 See Liew, Rationalising Constructive Trusts (n 29) 47 ff, 92 ff, 112 ff. 32 See generally, S Ramalingam, J Shamsuddin bin Hj Sabaruddin and S a/p Dhanapal, ‘The Reception and Application of English Law in Malaysia’ [2018] 1 LNS(A) xlix, 1.

Malaysia  83 the Application of Laws Ordinances of 1951 (Sabah) and 1949 (Sarawak) provide that English statutes of general application in force at the commencement of those Ordinances are applicable locally. Case law confirms that the UK Statute of Frauds 167733 is thereby applicable in East Malaysia.34 In contrast, the Civil Law Ordinance 1956 which applies in West Malaysia makes no reference to English statutes. Thus, only formalities relating to testamentary express trusts apply in West Malaysia by virtue of section 5 of the Wills Act 1959; no formality requirements arise in relation to inter vivos express trusts and contracts concerning interests in land, given that the Statute of Frauds does not apply.35 The upshot of this statutory landscape is that, in many of the relevant cases (which have emerged from West Malaysia), nothing stands in the way of the direct enforcement of those ‘informal’ agreements as express trusts; there is no role for constructive trusts. Fortunately, that confusion does not affect the application of limitation periods. It was historically the position in English law that an express trustee would not benefit from any time bar because ‘the possession of an express trustee is never in virtue of any right of his own but is taken from the first for and on behalf of the beneficiaries’;36 and constructive trusts where ‘a person is in terms nominated to be the trustee of that trust’ were treated similarly.37 Trustees of Class 1 constructive trusts fall to be treated as trustees of express trusts for limitation purposes, and therefore their erroneous labelling in Malaysia does not affect the applicable limitation rules.

B.  Company Directors Misappropriating Company Property A closely analogous case which does not perfectly match Millett LJ’s description of Class 1 constructive trusts but also falls to be considered as part of that Class concerns a company director (D) misappropriating company property.38 If the property in question passes through D’s hands before being misappropriated, D is clearly in breach of trust. However, D might also cause the company directly to transfer money to a recipient in breach of duty. English authority clearly treats such cases within Class 1,39 because

33 It is the Statute of Frauds 1677, and not the UK Law of Property Act 1925, because the latter is not a statute ‘of general application’: Tay Guan Ho v Chin Hurt Hin Co [1987] 2 MLJ 704, 708. Note, however, that in Tay Guan Ho (at 708) the court noted, without deciding the possibility of an argument, that the formality requirements in the UK Statute of Frauds 1677 were repealed by the UK Law of Property Act 1925 and therefore the former did not apply in Sabah (see too Fusing Construction Sdn Bhd v Eon Finance Bhd [1997] 1 LNS 239). 34 See, eg, Lee Phek Choo v Ang Guan Yau [1975] 2 MLJ 146, 147; MN Guha Majumder v RE Donough [1974] 2 MLJ 114, 117; Diamond Peak Sdn Bhd v DR Tweedie [1982] 1 MLJ 97, 103. 35 Wan Naimah v Wan Mohmad Nawawai [1974] 1 MLJ 41; Diamond Peak (n 34); Ali Ibrahim v TML Mohd Hussain [1988] 1 CLJ Rep 332. But cf Syarikat Ong Yoke Lin Sdn Bhd v Giant Cash & Carry Sdn Bhd [2000] 4 CLJ 733; Cheah Kim Leong v Ramlan Ihsan [2014] 1 LNS 291 [23]. 36 Paragon Finance (n 3) 408. 37 Soar v Ashwell [1893] 2 QB 390, 393. See also Rochefoucauld v Boustead [1897] 1 Ch 196, 202. 38 Whether confidential information is property is a vexed and unsettled question in English and Australian law: see, eg, T Aplin, ‘Confidential Information as Property?’ (2013) 24 Kings Law Journal 172; M Bryan, ‘Boardman v Phipps’ in Landmark Cases in Equity (n 15) 594–95. In Malaysia this matter has not been directly addressed, although the assumption appears to be that it is property: see, eg, Jeremy John Figgins v Kenneison Bros Sdn Bhd [2016] 1 LNS 1590 [86]; Measat Broadcast Systems Sdn Bhd v Woo Chee Seong [2017] 1 LNS 2251 [239]. 39 See, eg, Paragon Finance (n 3) 408; Williams (n 8) [9].

84  Ying Khai Liew the rationale underlying Class 1 constructive trusts is similarly applicable: ‘the directors are the fiduciary stewards of the company’s property’,40 and ‘they should be in lawful possession of trust property’.41 The Malaysian Court of Appeal has also observed that in such a case a ‘trust or trust-like relationship existed even before the wrongful transaction in question’, as is true of Class 1 cases.42 It is obvious, however, that a D who does not receive company property never in fact becomes a ‘real trustee’. This concern may have led the judge in Sharikat Ying Mui Sdn Bhd v Ho Kiang Po43 to label D as a ‘trustee … under a constructive trust for breach of fiduciary duties owed as a director’ in order to justify treating the case as within Class 1. But this is analytically misleading and practically unnecessary. The better view is that stated in Burnden Holdings (UK) Ltd v Fielding, namely that the limitation statute is applicable to D by way of analogy.44 This avoids forcing courts to distort the law by labelling D as a trustee when that is analytically inaccurate.

C.  Section 22(1) In West Malaysia, as in England, categorising a claim as a Class 1 case does not necessarily mean that no time bar will apply. It is necessary further to demonstrate that the claim falls within either section 22(1)(a) or (b) of the Limitation Act 1953. The discussion which follows would not apply to the East Malaysian Limitation Ordinances, which do not contain corresponding provisions: a textual analysis of section 9 of those Ordinances indicates that it is sufficient simply to establish that a relevant claim is a Class 1 case in order for no limitation period to apply.

i.  Subsection (a) Under the Limitation Act 1953 regime, Malaysian courts have unmistakably diverged from English law in relation to section 22(1)(a). English law requires ‘actual fraud’, ie, ‘dishonesty’, which entails at the minimum an intention on the part of the trustee to pursue a particular course of action, either knowing that it is contrary to the interests of the beneficiaries or being recklessly indifferent whether it is contrary to their interests or not.45

Differently phrased, there must be ‘an absence of honesty or good faith’ on the part of the trustee; even a deliberate breach of trust is insufficient.46 In contrast, in Malaysia ‘equitable fraud’ suffices. This is said to include misrepresentation, procuring a gift to another’s disadvantage, a fiduciary putting herself in conflict



40 Burnden

Holdings (n 10) [19]. Subsea Ltd (formerly BSW Ltd) v Balltec Ltd [2018] Ch 25 [45]. Sdn Bhd v Bipinchandra Balvantrai [2016] 1 LNS 743 [104]. 43 Sharikat Ying Mui Sdn Bhd v Ho Kiang Po [2016] 1 LNS 1442 [13]. 44 Burnden Holdings (n 10) [18]. 45 Armitage v Nurse [1998] Ch 241, 260; Newgate v Penfold [2004] EWHC 2993 (Ch) [249]. 46 First Subsea (n 41) [64]. 41 First

42 Kamdar

Malaysia  85 of interest, and agreements which are in fraud of third persons.47 Proof of an actual intention to deceive is unnecessary.48 The source of this divergence is probably the 1992 decision in Sivapiran v Lim Yoke Kong,49 where Eusoff Chin J, in dealing with the ‘fraudulent concealment’ provision of section 29 of the Limitation Act 1953,50 held that the term ‘fraud’ did not only include common law fraud but also equitable fraud. The two English decisions relied upon for this proposition51 were concerned with the concept of ‘fraudulent concealment’ in section 26 of the now replaced UK Limitation Act 1939.52 Those two decisions were also relied upon by counsel in Armitage in an attempt to argue that section 21(1)(a) of the UK Limitation Act 1980 covered equitable fraud, but Millett LJ rejected that argument. The cognate subsection in the Malaysian Limitation Act 1953 (section 22(1)(a)) likewise arose for consideration in the Malaysian case of Koh Siew Keng v Koh Heng Jin.53 Surprisingly, however, the Court of Appeal made no reference to Armitage (a case which post-dated Sivapiran), but instead simply held that Sivapiran was good authority not only in relation to section 29 but also in relation to section 22. Later cases have simply adopted this (arguably misconceived) proposition in Koh Siew Keng as good law.54 The upshot is that in Malaysia, save perhaps in cases of the most innocent of breaches, trustees who commit any breach of trust potentially incur unlimited liability. This is particularly troubling for those who find themselves at the wrong end of a Class 1 constructive trust claim. Because Class 1 constructive trusts typically arise where, for one reason or another, there is no express declaration of trust, it may well be the case that defendants-trustees who renege on an informal promise do so without acting dishonestly or in bad faith, but rather act on a genuine (but misguided) belief that their promise was not legally binding. But it would seem that not even compelling evidence of their honesty and good intentions would allow them the benefit of any time bar, because it has been held by Gopal Sri Ram JCA, in relation to the core Class 1 doctrines, that: The illustrations of a constructive trust given by Millet [sic] LJ … are cases where property was acquired lawfully in circumstances in which his or her conscience was bound by the rights of another or others but was later sought to be appropriated by the acquirer for himself through unconscionable conduct, that is to say, equitable fraud.55

In other words, the mere breach of a Class 1 constructive trust might be treated as equitable fraud such that no limitation period applies.

47 Sharikat Ying Mui (n 43) [13]. 48 ibid. 49 Sivapiran v Lim Yoke Kong [1992] 2 MLJ 381. 50 Discussed in section VII below. 51 Beaman v ARTS Ltd [1949] 1 KB 550; Kitchen v Royal Air Force Association [1958] 2 All ER 241. 52 That concept has now been replaced with the concept of ‘deliberate concealment’ in the current UK Limitation Act 1980. 53 Koh Siew Keng v Koh Heng Jin [2008] 3 MLJ 822 [23]–[24]. 54 See, eg, Amaran Hj Abdullah v Amanah Raya Bhd [2011] 3 CLJ 281 [34]; Yap Lan v Kong See Kuan [2018] 1 LNS 819 [20]. 55 Koh Siew Keng (n 53) [11] (emphasis added).

86  Ying Khai Liew

ii.  Subsection (b) The last-mentioned quotation may also have an undesirable knock-on effect for section 22(1)(b) of the Limitation Act 1953. In the quotation, Gopal Sri Ram JCA appears to suggest that an ‘appropriation by the acquirer for himself ’ is a precondition for a Class 1 constructive trust. This would, in turn, suggest that section 22(1)(b) has no role to play until and unless a misappropriation occurs, since prior to that there would be no (constructive) trust. This is mistaken, first, because a Class 1 constructive trust arises when the relevant events – promise and reliance (as explained earlier) – occur, and does not require a misappropriation; and second, because it is possible to make a claim against trustees of a constructive trust in the absence of a breach. For example, in Re Duke of Marlborough56 the Duchess of Marlborough (A) assigned a leasehold to the Duke (B) absolutely for B to raise a mortgage in his own name. B died before re-conveying the equity of redemption to A according to their agreement. Although B had clearly not reneged on his promise to reconvey, the court held that it was A, instead of B’s creditors, who would benefit from the equity of redemption, presumably by virtue of a constructive trust which arose to that effect the moment B acquired legal title to A’s property. Applied to the context of the present discussion, therefore, a Class 1 constructive trust may arise in the absence of any wrongdoing, and a claim against the trustee (or his or her estate) where the trust property is in the trustee’s (or the estate’s) possession could potentially engage section 22(1)(b). In relation to company directors, the phrase ‘received by the trustee and converted to his use’ takes on an extended meaning. In Re Pantone 485 Ltd,57 it was held: [W]here a fiduciary uses his beneficiary’s money to confer a benefit on a company he controls he is denying the beneficiary’s title to the money for his own purposes and this amounts to a conversion for his own use. The same is true where a fiduciary causes his beneficiary to incur a liability for the benefit of a company which the fiduciary controls.

Section 22(1)(b) would therefore be applicable in these situations.58

VI.  Three Controversial Doctrines It is observable that Millett LJ’s distinction between Class 1 and Class 2 constructive trusts relies on a number of dichotomies. These are: (i) the assumption versus nonassumption of trusteeship; (ii) a trust arising by virtue of a lawful transaction preceding a breach versus by virtue of an unlawful transaction; (iii) the presence versus the absence of intention to create a trust from the outset; and (iv) a real trust versus a trust which is ‘not real’.

56 Re Duke of Marlborough [1894] 2 Ch 133. This case was applied in Malaysia in Chong Kok Yong @ Ku Lon v Syarikat Union Wood Industry Sdn Bhd [2012] 1 LNS 1212. 57 Re Pantone 485 Ltd [2002] 1 BCLC 266 (Ch). 58 Of course, s 22(1)(a) could also be called into play: ‘[t]he deliberate use of a corporate vehicle to distance a defaulting trustee from the receipt or possession of misappropriated trust property … would in most cases justify a finding of fraud’: Burnden Holdings (n 10) [16].

Malaysia  87 These dichotomies are certainly helpful for distinguishing between ‘core’ and ‘closely analogous’ Class 1 constructive trusts, on the one hand, and Class 2 constructive trusts, on the other. However, other constructive trusts do not fall nicely within either class, and it is unclear how Millett LJ’s dichotomies should be applied. What weighting should be given to them? To date, there has only been one hint in Malaysia, where it was said that ‘[t]he line between Class 1 and Class 2 constructive trustees turns on whether the trust or trust-like relationship existed even before the wrongful transaction in question’.59 This section considers three controversial constructive trust doctrines and discusses what limitation rule ought to apply.

A.  Company Directors Receiving Unauthorised Profits A company director (D) who makes unauthorised profits may face a claim by the company for the disgorgement of those profits. In this sort of case, the profits obtained by D – for example, a secret commission or a bribe – does not represent traceable proceeds of company property, unlike the situation discussed in section V.B above. It is first necessary to note that such profits are held on constructive trust for the company. In England, this was authoritatively confirmed in FHR European Ventures LLP v Cedar Capital Partners LLC.60 In Singapore, FHR was adopted and approved by the Court of Appeal in Guy Neale v Nine Squares Pty Ltd.61 Surprisingly, this issue has not yet arisen directly for consideration in Malaysia, although on one occasion over 20 years ago a High Court judge applied without discussion the Privy Council decision of Attorney-General of Hong Kong v Reid62 to the same effect.63 Given that Malaysian courts have a propensity for following apex English and Singaporean decisions, and in line with the High Court decision to the same effect, the same rule probably applies in Malaysia. What, then, is the applicable limitation rule? In English law, the present position is that D may fall to be considered within section 21(1)(a) of the UK Limitation Act 1980, but not section 21(1)(b). The rationale is that D is only ever a trustee of the profit by virtue of a Class 2 constructive trust, as a result of her ‘fraud’, and therefore a claim against D to recover the profit cannot fall within section 21(1); however, since a company director is, in general, treated analogously as a ‘trustee’ for the purposes of this section,64 D’s breach of fiduciary duty is treated as analogous to a ‘breach of trust’ for the purposes of section 21(1)(a).65

59 Kamdar (n 42) [104]. The phrasing used is identical to that found in the earlier Singaporean Court of Appeal judgment in Panweld (n 19) [37], although not so attributed. The ‘pre-existing versus existing’ dichotomy was also given much weight in Williams (n 8): see, eg, [9], [18], [75], [118]. 60 FHR European Ventures LLP v Cedar Capital Partners LLC [2014] UKSC 45. 61 Guy Neale v Nine Squares Pty Ltd [2014] SGCA 64. 62 Attorney-General for Hong Kong v Reid [1994] 1 AC 324. 63 The Board of Trustees of the Sabah Foundation v Datuk Syed Kechik bin Syed Mohamed [1999] 1 LNS 36. 64 See section V.B above. 65 See Gwembe Valley Development Company Ltd v Koshy [2003] EWCA Civ 1048 [119]–[120]; First Subsea (n 41) [62].

88  Ying Khai Liew In Singapore, the situation is different. In Yong Kheng Leong v Panweld Trading Pte Ltd,66 the Court of Appeal held that only cases of misappropriation of company property would be treated analogously as Class 1 cases; thus, claims concerning unauthorised profits are always treated as attracting Class 2 constructive trusts and therefore subject to the six-year time bar. It is unclear what the position is in Malaysia. In the only case where the issue has arisen, Kamdar Sdn Bhd v Bipinchandra Balvantrai, three different approaches may be detected in a single paragraph of the Court of Appeal’s judgment.67 First, the Court cited with apparent approval the English Court of Appeal decision of Gwembe Valley Development Company Ltd v Koshy68 which is a key case establishing the English limitation approach discussed above. This might suggest that that position prevails in Malaysia. However, and second, the Court proceeded to draw from Gwembe Valley the conclusion that ‘directors ought not to profit from a breach of trust, which is why limitation does not apply as expressly provided for in s 22(1)(a) and/or s 22(1)(b)’. This might suggest that D is treated analogously as a Class 1 trustee for limitation purposes regardless of whether D’s breach involves the misappropriation of company property, since either way D ought not to profit from the breach. Third, immediately thereafter, the Court cited Panweld with approval, explicitly stating that only directors who misappropriate company property are considered as Class 1 constructive trustees. To resolve the matter, it is suggested that Malaysian courts should direct their minds to the basal question, which is: to what extent is D a ‘trustee’ under a constructive trust arising over a bribe or secret commission for the purposes of section 22? From this perspective, it is submitted that the second of the three views in Kamdar has much to commend it, even though it appears to be the product of a misunderstanding of Gwembe Valley. It is first necessary to note that ‘fiduciary duties were historically conceptualised not as duties, breach of which leads to a loss-based or gain-based award, but as disabilities which prevent fiduciaries from entering certain types of transaction’.69 The reason why a fiduciary is so disabled is that her original implied intention, when taking up office, was to act in the principal’s best interests.70 In Malaysia, courts have assumed that the disability view is the prevailing view.71 On this basis, a company director who receives unauthorised profits can be analogised to a trustee of a Class 1 constructive trust. First, D’s initial assumption of the office of director – and hence assumption of fiduciary duties – is analogous to the assumption of trusteeship by virtue of a lawful transaction preceding the breach. Second, D’s assumption of office was based on an intention, both on D’s part and on the company’s part, to enter into a fiduciary relationship from the outset. Third, the constructive trust which arises upon D’s receipt of unauthorised

66 Panweld (n 19) [47], [51]. 67 Kamdar (n 42) [104]. 68 Gwembe Valley (n 65). 69 Daly and Mitchell (n 15) 668. See also C Mitchell, ‘Causation, Remoteness, and Fiduciary Gains’ (2006) 17 King’s Law Journal 325. 70 Daly and Mitchell (n 15) 669. 71 Tengku Abdullah Ibni Sultan Abu Bakar v Mohd Latiff Shah Mohd [2010] 5 MLJ 437 [323]; Hiroto Watanabe v Law Yen Yen [2012] 8 MLJ 202 [39] – although in neither case did the matter arise directly for consideration.

Malaysia  89 profits is a ‘real trust’:72 after all, English courts would not consider the constructive trust as ‘remedial’ but ‘institutional’ in nature.73 Thus, there is no reason why a claim against D for unauthorised profits cannot be treated as analogous to Class 1 constructive trusts for limitation purposes.

B.  Proprietary Claims Against Third Parties It is trite law that, where a trustee (T) misappropriates trust property belonging to his or her beneficiary (B) and exchanges that property for a new property, B may trace and make a proprietary claim against the new property if it subsists in T’s hands. Similarly, B has a proprietary claim against a third party (X) who retains the original or traceable proceeds of a breach of trust, unless X is a BFP or other valid defence. These propositions were authoritatively laid down by Lord Millett in Foskett v McKeown,74 and have been adopted on numerous occasions in Malaysia as good law.75 Certainly, a proprietary claim against T falls within section 22(1): traceable proceeds ‘are subject to the same trusts as the original [trust property]’,76 that is, the original express trust. Moreover, ‘[t]he statutory expression “trust property” is an abstract rather than a concrete concept, like the concept of “trust fund”’,77 and therefore T does not fall outside the scope of section 22(1)(b) simply because he or she swaps the original trust asset with a new asset. Less straightforward is the analysis of proprietary claims against X. In Williams, the UK Supreme Court held that section 21(1)(a)78 and (b)79 of the UK Limitation Act 1980 applied only to claims against trustees, not third parties. Williams has been adopted in Malaysia,80 and this might suggest that proprietary claims against X fall outside the scope of section 22, which entails that the six-year time bar always applies.81 Indeed, this was the conclusion reached in what appears to be the only case in the Commonwealth dealing with limitation periods where traceable proceeds remain extant in X’s hands. In Timmerton Co Inc v Equity Trustee Ltd,82 the Hong Kong Court of Appeal, citing Williams, considered that the claim against X was time-barred because there was ‘nothing to show at the time of receiving the [traceable proceeds, that X] intended to act as trustees … and/or had assumed the obligations of a trustee’.83 Further, citing Paragon 72 See also J Gordon and J Connell, ‘Dust Off Your Old Files’ (New Law Journal, 13 February 2015), available at: www.newlawjournal.co.uk/content/dust-your-old-files. 73 See, eg, FHR (n 60) [47]. 74 Foskett v McKeown [2001] 1 AC 102. 75 See, eg, Lee Hark Lam (n 24); K Nageswary S Karuppiah v Sethra Devi S Karuppiah [2015] 1 LNS 1305; Iskandariah Tower Sdn Bhd v Yaakob Puteh [2014] 1 LNS 226; Malaysia Discounts (n 26); Takako Sakao v Ng Pek Yuen (No 3) [2010] 1 CLJ 429. 76 Re EVTR Ltd (1987) 3 BCC 389, 393. 77 D Hayton, P Matthews and C Mitchell, Underhill and Hayton: Law Relating to Trusts and Trustees, 19th edn (LexisNexis Butterworths 2016) [94.2]. 78 Williams (n 8) [32], [102]. 79 ibid [36], [100]. 80 See, eg, Eramara Jaya (n 17) [92]; Ho Hup (n 17) [104]. 81 The same is assumed in Lewin on Trusts [44-023], although no reason is given in support of this proposition. 82 Timmerton Co Inc v Equity Trustee Ltd [2015] 1 HKLRD 247. 83 ibid [25].

90  Ying Khai Liew Finance, the Court held that X ‘had no entitlement to the [traceable proceeds] … [and the receipt was] therefore wrongful. It [was] therefore not a lawful transaction independent of and preceding the breach of trust and one which [was] not impeached by the plaintiff ’.84 However, Williams was only concerned with ‘ancillary liability’, that is, the personal liability of third parties by virtue of knowing receipt and dishonest assistance claims.85 As discussed earlier, a claim in knowing receipt against X is only relevant where X has dissipated the trust property or traceable proceeds. It is surely ‘wrong’ to dissipate the property despite knowing that the property is the proceeds of a breach of trust and knowing that the beneficiary’s equitable property right persists in it; and it is surely correct that X does not intend to act as trustee when X dissipates the property while having the requisite knowledge. But a proprietary claim against X is not based on knowledge but on B’s pre-existing equitable proprietary right against X, where X is not a BFP and does not otherwise have a valid defence.86 What, then, ought to be the applicable limitation rule? On one view, the answer is straightforward and does not even involve a consideration of the law of constructive trusts. On this view, claims against X are always treated as a claim against an express trustee, and therefore always potentially within section 22(1). The following part of Lord Browne-Wilkinson’s judgment in Foskett v McKeown supports this view: This case [which involved a claim against third parties] does not involve any question of resulting or constructive trusts. [O]nly [express] trusts [are] at issue … Under [an] express [trust, A is] entitled to equitable interests in the original [trust property held by the trustee]. Like any other equitable proprietary interest, those equitable proprietary interests under the [express trust] … now exist in any other property which, in law, now represents the original trust assets. Those equitable interests … are also enforceable against whoever for the time being holds those assets other than someone who is a bona fide purchaser for value of the legal interest without notice or a person who claims through such a purchaser.87

However, this analysis has not been consistently applied, either in England or in Malaysia. For example, in Independent Trustee Services Ltd v GP Noble Trustees Ltd,88 Lloyd LJ suggested that [s]ince the trust [between A and X] arises from the asset having been extracted, in breach of trust, from a fund held on express trusts, it seems correct to characterise the trust as a constructive trust, rather than an express trust.

And in Datuk M Kayveas v See Hong Chen & Sons Sdn Bhd,89 the Malaysian Federal Court described the relevant third parties in the case as having ‘assumed the role of 84 ibid [26]. 85 Williams (n 8) [9]. 86 See, eg, M Furness, ‘Statutory Limitation Periods for Claims Related to Breaches of Trust’ (2017) 23 Trusts & Trustees 527, 540. 87 Foskett (n 74) 108–09. See also P Millett, ‘Proprietary Restitution’ in S Degeling and J Edelman (eds), Equity in Commercial Law (Lawbook Co 2005) 315–16. 88 Independent Trustee Services Ltd v GP Noble Trustees Ltd [2012] EWCA Civ 195 [80]. See also PS Davies, ‘Limitation in Equity’ [2014] Lloyd’s Maritime and Commercial Law Quarterly 313, 315, but cf Daly and Mitchell (n 15) 668. 89 Datuk M Kayveas v See Hong Chen & Sons Sdn Bhd [2014] 4 MLJ 64 [46].

Malaysia  91 constructive trustees’, the reason being that they ‘had notice of the [original] trusts’ and were therefore not BFPs. There is good reason to believe that a constructive trust categorisation is both unnecessary and liable to mislead.90 But even if the constructive trust categorisation prevails, it is not entirely clear that proprietary claims against X should be treated as Class 2 constructive trusts. Certainly, it remains true that X does not assume trusteeship, and that B and X do not intend to create a trust from the outset. But B’s claim against X does not depend on X perpetrating any breach or committing some wrongdoing91 as in Class 2 cases: any wrongdoing arises on the part of T and (ex hypothesi) not X. Moreover, it might also be said that the trust arises by virtue of a lawful transaction preceding any breach of trust, given that the trust invariably arises from the moment X acquires the property in question. When measured against Millett LJ’s dichotomies, the scales are finely balanced, and there is an urgent need for the courts to provide guidance as to how such claims are to be treated for limitation purposes.

C.  Remedial Constructive Trusts It is sometimes suggested that Classes 1 and 2 map on respectively to ‘institutional’ and ‘remedial’ constructive trusts.92 This dichotomy is inaccurate, because dishonest assistants and knowing recipients are under a personal liability only, while a ‘remedial’ constructive trust ‘create[s] a proprietary right’.93 Rather, properly analysed, case law indicates that the ‘institutional’/‘remedial’ distinction essentially concerns whether the trust is subject to the discretion of the court.94 It is not entirely clear whether remedial constructive trusts exist in Malaysia. While English judges have reiterated that English law does not recognise remedial constructive trusts,95 the Federal Court on one occasion took the view that ‘the notion of a remedial constructive trust is already part of English law’,96 and therefore also part of Malaysian law. Cited in support of that proposition, however, were trusts that are undoubtedly ‘institutional’ in nature, for example those arising to revest property following 90 Ying Khai Liew, ‘Third-Party Liability for Breach of Fiduciary Duty in Malaysia’ (2020) 1 Malayan Law Journal cxxii. 91 Unless X can be analysed as having committed a strict liability wrong, analogous to conversion at common law: suggested in B McFarlane and C Mitchell, Hayton and Mitchell: Text, Cases and Materials on the Law of Trusts and Equitable Remedies, 14th edn (Sweet & Maxwell 2015) [12-115]. See also C Mitchell and S Watterson, ‘Remedies for Knowing Receipt’ in C Mitchell (ed), Constructive and Resulting Trusts (Hart Publishing 2010) 116 fn 5. As Underhill and Hayton (n 77) [99.62] notes, however, this analysis has never provided the basis on which such cases have been decided. 92 See, eg, Feiglin v Ainsworth [2015] VSCA 326 [38]–[39]; Low Boon Eng v Teo Kiong Huat [2018] 1 LNS 923 [22]; B Collins, ‘The Remedial Constructive Trust “between a Trust and a Catch-Phrase”’ (2014) 20 Trusts & Trustees 1055. 93 RHB Bank (n 26) [23]. 94 Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669, 714–15. 95 See, eg, Re Goldcorp Exchange Ltd (in receivership) [1995] 1 AC 74; Re Polly Peck International plc (in administration) (No 2) [1998] 3 All ER 812, 827, 831; De Bruyne v De Bruyne [2010] EWCA Civ 519 [47]–[48]; Sinclair Investments (UK) Ltd v Versailles Trade Finance Limited (in administrative receivership) [2011] EWCA Civ 347 [37]; Crossco No 4 Unlimited v Jolan Ltd [2011] EWCA Civ 1619 [84]; FHR (n 60) [47]. 96 RHB Bank (n 26) [21].

92  Ying Khai Liew rescission, tracing-related claims and subrogation. In a different case, the Federal Court suggested that ‘[a] constructive trust is a remedial device that is employed to prevent unjust enrichment’97 – a conception which appears to be aligned with Canadian jurisprudence on the remedial constructive trust.98 On yet other occasions, the Federal Court has also suggested that constructive trusts are imposed where ‘it is unconscionable for a party to assert beneficial rights over property’99 – in a tenor similar to the Australian conception of remedial constructive trusts.100 Nevertheless, when examined closely, it is unlikely that a remedial constructive trust has ever in fact been imposed by any Malaysian court.101 Of note, however, is the case of Madujaya Development Sdn Bhd v Kosbina Konsult (K) Sdn Bhd,102 where the High Court found that a (presumably remedial) constructive trust arose on the basis of unjust enrichment, and further held (without discussion) that the trust would fall within the ambit of section 22(1). Although the case was reversed on appeal,103 the basis of the reversal was that no constructive trust ought to have arisen on the facts;104 nothing was said as to how such a trust would fall to be treated for limitation purposes if it had arisen. It is submitted that, even if remedial constructive trusts are recognised, they should be treated as falling within Class 2. Remedial constructive trusts do not arise from the occurrence of relevant events – they are subject to the exercise of judicial discretion – and therefore by definition they are not sourced in an intention to create a trust from the outset. Neither do they respond to an assumption of trusteeship or arise by virtue of a lawful transaction. In fact, it is doubtful whether remedial constructive trusts are ‘real’ trusts at all, since in all but name they appear simply to be orders for the conveyance of property. If this is right, then remedial constructive trusts are not ‘trusts’ which fall within the ambit of section 22(1).

VII.  Delaying the Running of Time Section 29 of the Limitation Act 1953 provides: Where, in the case of any action for which a period of limitation is prescribed by this Act, either – (a) the action is based upon the fraud of the defendant or his agent or of any person through whom he claims or his agent; or

97 Perbadanan Kemajuan (n 28) [59]. But cf Balakrishnan Kaliappan v Shameena Nathesan [2019] 5 MLJ 661 [10]. 98 See, eg, Kerr v Baranow [2011] 1 RCS 269 [50]; LAC Minerals Ltd v Int Corona Resources Ltd [1989] 2 SCR 574, 678. 99 RHB Bank (n 26) [79]; Hassan Kadir (n 28) [27]. 100 See, eg, Muschinski v Dodds (1985) 160 CLR 583. 101 See generally, Low Weng Tchung, The Law of Restitution and Unjust Enrichment in Malaysia (LexisNexis 2015) ch 14. 102 Madujaya Enterprise Sdn Bhd v Kosbina Konsult (K) Sdn Bhd [2015] 1 LNS 786 [89], [128]. 103 Kosbina Konsult (K) Sdn Bhd (in liquidation) v Madu Jaya Development Sdn Bhd [2019] 3 MLJ 471. 104 Kosbina Konsult (n 103) [42].

Malaysia  93 (b) the right of action is concealed by the fraud of any such person as aforesaid; or (c) the action is for relief from the consequences of a mistake, the period of limitation shall not begin to run until the plaintiff has discovered the fraud or the mistake, as the case may be, or could with reasonable diligence have discovered it.

On the basis of this section, where a constructive trust claim fails to be excepted from limitation periods by virtue of section 22(1), a claimant may yet argue for a delayed running of time. Take subsection (c)105 first, which can be dealt with briefly. It was observed earlier that certain (probably doubtful) dicta emanating from the Federal Court have suggested that remedial constructive trusts can be imposed based on unjust enrichment. It was also argued that a remedial constructive trust should be classified as a Class 2 constructive trust. If Malaysian courts decide to develop these dicta, and if the Class 2 classification is correct, then it may be that claimants whose unjust enrichment claim is based on mistake can rely on section 29(c) to delay the running of time. Section 29(b)106 is also straightforward. As noted earlier, in Sivapiran107 where section 29(b) was squarely in consideration, Eusoff Chin J held that ‘fraud’ includes equitable fraud. Citing Lord Evershed MR in Kitchen v Royal Air Force Association,108 Chin J held that all that was necessary was ‘conduct which, having regard to some special relationship between the two parties concerned, is an unconscionable thing for the one to do towards the other’. In such a case, the claimant might rely on section 29(b) to delay the running of time even if the claim falls outside section 22.109 As to section 29(a),110 it is first necessary to note that the position in English law is at best uncertain. In Williams, Lord Neuberger suggested in passing that a dishonest assistance or knowing receipt claim may, in the appropriate case, fall within the ambit of section 32 of the UK Limitation Act 1980. In spite of that obiter, Zacaroli J held in Brent LBC v Davies111 that only dishonest assistance – and not knowing receipt – was an ‘action based on the fraud of the defendant’ because ‘dishonesty is not an essential element in a cause of action based on knowing receipt’. He relied on a previous High Court decision in Chagos Islanders v AG,112 where Ouseley J had held that ‘an action based on fraud requires an allegation of fraud to be a necessary part of the cause of action’.

105 Note that there is no corresponding provision in the East Malaysian Limitation Ordinances, where ‘relief on the ground of mistake’ is subject to a limitation period of three years from the time ‘the mistake becomes known to the plaintiff ’: Rule 78 of the Schedules to the Sabah and Sarawak Limitation Ordinances. 106 An essentially similar provision is found in s 18 of the Sabah and Sarawak Limitation Ordinances. 107 Sivapiran (n 49), approved by the Supreme Court in Lim Yoke Kong v Sivapiran Sabapathy [1992] 2 MLJ 571. 108 Kitchen (n 51) 249. 109 Thus, in Brent LBC v Davies [2018] EWHC 2214 (Ch), the cognate provision in the UK Limitations Act 1980 was applied to a knowing receipt claim (although note that the concept in the current UK statute is ‘deliberate concealment’ instead of ‘fraudulent concealment’, as discussed at n 52 above). 110 There is no corresponding provision in the Sabah and Sarawak Limitation Ordinances. 111 Brent (n 109) [574]–[576]. 112 Chagos Islanders v AG [2003] EWHC 2222 (QB) [619].

94  Ying Khai Liew Turning to Malaysia, it was discussed earlier113 that the Court of Appeal in Koh Siew Keng had extended the decision in Sivapiran – which held that ‘fraudulent’ in section 29(b) included equitable fraud – such that it also applied to ‘fraud’ in section 22. However, in the course of so doing, the Court of Appeal made the sweeping claim that ‘[i]t is settled law that that the word “fraud” wherever it appears in the Limitation Act is not limited to actual fraud at common law but includes equitable fraud’.114 This suggests that a knowing receipt claim can fall within section 29(a): it can be said to be ‘unconscionable’ for such a recipient to dissipate property with knowledge that it belongs not to her but to the beneficiary. There is also a separate and additional reason for which this view probably represents the law in Malaysia. On two occasions Malaysian courts have suggested that the touchstone of liability for knowing receipt is, in fact, dishonesty. In CIMB Bank Bhd v Maybank Trustees Bhd,115 the Federal Court held that a knowing receipt claim was made out on the basis that the third party ‘had not acted as an honest person would in the circumstances’, citing the dishonest assistance case of Royal Brunei Airlines v Tan.116 And in Ooi Meng Khin v Amanah Scotts Properties (KL) Sdn Bhd, the Court of Appeal said: [T]he essential element that [a claimant] will have to establish against [a recipient] is that his receipt of [the claimant]’s property must be one that was dishonest … we are concerned with the concept of knowing receipt or dishonest receipt … Central, therefore, in this concept of knowing receipt is the proof of dishonesty on the part of the recipient.117

There is no doubt that these cases misunderstand the relevant law; as the High Court in Syarikat Ying Mui Sdn Bhd v FRG Investments Ltd118 correctly observed, ‘in a claim for knowing receipt, the recipient’s state of knowledge must be such as to make it unconscionable for him to retain the benefit of the receipt. This state of mind is a lower level of culpability than dishonesty’. However, given that the misleading statements of principle are found in decisions emanating from the two highest courts in Malaysia, there is a real likelihood that later cases may follow in their footsteps. If this occurs, it would then be easier for a claimant to delay the running of time by virtue of section 29(a), since a knowing receipt claim would imply dishonesty, and therefore an action based on ‘fraud’.

VIII. Conclusion In Malaysia, the prevailing Limitation Act 1953 was enacted at a time when Malaysia (then Malaya) was a colony of the British Empire. Unsurprisingly, English cases have provided the starting point for an interpretation of the Limitation Act 1953. In relation to constructive trusts, Millett LJ’s extended dictum on constructive trusts in Paragon Finance has proved to be particularly influential in Malaysia. However, there is much



113 See

main text from n 53 above. Siew Keng (n 53) [23] (emphasis added). 115 CIMB Bank (n 21) [128]. 116 Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378. 117 Ooi Meng Khin v Amanah Scotts Properties (KL) Sdn Bhd [2014] 6 MLJ 488 [21], [34]. 118 Syarikat Ying Mui Sdn Bhd v FRG Investments Ltd [2017] 1 LNS 340 [23]. 114 Koh

Malaysia  95 uncertainty in the law of constructive trusts itself, which makes that dictum of limited assistance in difficult cases. In the introductory remarks, this chapter noted the potential practical impact of constructive trusts and limitation periods on future civil litigation concerning the 1MDB saga. In closing, the arguments in this chapter are now summarised, along with observations as to how they may practically impact on that civil litigation. 1. Knowing receipt and dishonest assistance claims are personal claims which are subject to a six-year time bar. In relation to 1MDB, it is likely that third-party recipients and assistants would have sought to conceal their deeds from being detected by potential claimants. In such cases, the running of time may be delayed until the moment when claimants could with reasonable diligence have discovered the right of action. Alternatively, or in addition, the running of time may be delayed in relation to actions ‘based upon the fraud of the defendant’ until the time when the fraud was or could reasonably have been discovered. This latter rule undoubtedly covers dishonest assistance claims; and it probably also covers knowing receipt claims. 2. Constructive trust claims based on the ‘core group’ of Class 1 doctrines – namely the doctrine in Rochefoucauld v Boustead, secret trusts, and the doctrine in Pallant v Morgan – as well as proprietary claims against company directors who misappropriate company property are not subject to any time bar, where the claims are against trustees or directors whose breaches were fraudulent, and where the claims are to recover trust or company property in the possession of or converted by the trustees or directors. Claims against company directors are the most significant of these in the 1MDB context, since the siphoned money would have passed through multiple (shell) companies. As ‘fraud’ includes equitable fraud, a significant number of implicated directors will be deprived of the benefit of a lapse of time. 3. Although it is by no means straightforward, it is strongly arguable that constructive trust claims to unauthorised profits received by company directors and tracingrelated claims against non-BFP third parties fall to be treated in the same way as those constructive trusts described in the preceding paragraph. If this argument prevails, implicated directors in the 1MDB saga will not obtain the benefit of the lapse of time simply because they have not misappropriated company property as such, and close aides of those implicated directors and other errant trustees, for example friends and family members who have received and tainted proceeds and retain these in hand, will likewise not obtain the benefit of a time bar. 4. Of less relevance to the 1MDB saga is remedial constructive trusts. It is clear that such claims ought to be subject to a six-year time bar.

96

6 Victoria Meets Confucius in Singapore: Implied Trusts of Residential Property KELVIN FK LOW*

Lee Kuan Yew, whom I heard on several occasions describe himself as ‘the last Victorian’, certainly was and is a staunch Confucianist as well. He and his followers have attempted to inculcate Singapore’s younger generation with Confucian virtues. John H Holdridge, US Ambassador to Singapore (1975–78)1

I. Introduction A diamond may be forever, but every Singaporean knows that a 99-year Housing and Development Board (HDB) lease for a Build To Order (BTO) flat will outlast a joint lifetime,2 much less most marriages.3 So pragmatic are Singaporeans that it is now a well-worn cliché that many a marriage proposal in Singapore does not take the form of ‘[w]ill you marry me?’ but rather, ‘[d]o you want to apply for a BTO together?’4

* Professor, Faculty of Law, National University of Singapore. I am grateful to Dr Brian Sloan, Emeritus Professor Leong Wai Kum, Professor Chan Wing Cheong, Mrs Tan Sook Yee, Associate Professor Ying Liew, and Professor Matthew Harding, for their valuable comments on an earlier draft. The usual caveats apply. 1 JH Holdridge, Crossing the Divide: An Insider’s Account of Normalization of US–China Relations (Rowman & Littlefield 1997) 258, quoted in Lee Kuan Yew, From Third World to First: The Singapore Story (HarperCollins 2000) 489. 2 Based on the latest data from 2018 from the Department of Statistics Singapore, current life expectancies are 81 years for men and 85.4 years for women: see Department of Statistics Singapore, ‘Death and Life Expectancy’, available at: www.singstat.gov.sg/find-data/search-by-theme/population/deathand-life-expectancy/latest-data. 3 Based on the latest data from 2018 from the Department of Statistics Singapore, there were 27,007 marriages in 2018 as compared to 7,344 divorces and annulments: see Department of Statistics Singapore, ‘Marital Status, Marriages and Divorces’, available at: www.singstat.gov.sg/find-data/search-by-theme/ population/marital-status-marriages-and-divorces/latest-data. 4 Cara Wong, ‘BTO First, Propose Later: Young Couples Don’t Regret Applying for Flat First’ The Straits Times (Singapore, 4 June 2017).

98  Kelvin FK Low The HDB was set up in 1960, after Singapore achieved self-government in 1959, but before it achieved full independence from the British, first as part of Malaysia in 1963, and then as an independent republic in 1965. It succeeded the ineffective Singapore Improvement Trust, which had been set up by the British colonial government in the 1920s to provide affordable public housing to its colonial residents. Today, the humble HDB flat comprises the bulk5 of Singapore’s much admired 91 per cent resident home ownership rate.6 Although this figure needs to be tempered by the observation that the non-resident population in Singapore is not insubstantial, it remains an impressive achievement nonetheless. It also significantly ameliorates the classification of Singapore property as seriously unaffordable in the annual Demographia International Housing Affordability Survey,7 with median home prices coming in at 4.6 times the median annual gross pre-tax household income. As the authors of the survey observe, the most expensive four-room HDB flats were only moderately unaffordable, at a median multiple of 3.8 times the household income, and developments in the middle of the HDB market had a median multiple of only 3.2. These numbers are further reduced once housing grants are taken into consideration. The amount of the grants differs according to household income but can be as much as S$80,000 for a household whose average gross monthly income for the 12 months prior to the application for a flat is not more than S$1,500. The HDB has been described as ‘a linchpin of economic and social policy and an anchor for the ruling People’s Action Party’8 and the HDB was conceived as a means ‘to give every citizen a stake in the country and its future’.9 One of the means by which the HDB effects social policy is by limiting the availability of HDB flats to singles, who generally may only buy a limited selection of subsidised flats directly from the HDB or any HDB flat at full market value only, if they are 35 years or older.10 Otherwise, in order to be eligible, citizens or permanent residents are expected to form a family nucleus with one of three groups of persons: (i) spouse and children; (ii) parents and siblings; or (iii) children under legal custody, care and control (for widowed or divorced persons). A special fiancé/fiancée scheme is distinguished from the general public scheme as it lays down special conditions – generally, marriage must occur within three months of completion or collection of keys. These conditions in effect allow for the purchase of an HDB flat in anticipation of the formation of a family nucleus. These rules generally ensure that the vast majority of HDB flats are co-owned rather than solely owned. Although there are no similar rules in relation to private property, co-ownership, at least in equity, is also commonplace given the relative unaffordability of such property. As most households will have more than one wage earner, what is classified by Demographia as moderately unaffordable for a dual income household is realistically severely unaffordable on a single income. The significance of co-ownership in equity is particularly apposite in the context of the recent 5 ‘Why 80% of Singaporeans Live in Government-Built Flats’ The Economist (London, 6 July 2017). 6 Phang Sock-Yong, ‘Home Prices and Inequality: Singapore Versus Other “Global Superstar Cities”’ The Straits Times (Singapore, 3 April 2015). 7 W Cox and H Pavletich, 15th Annual Demographia International Housing Affordability Survey (2019) 2. 8 ‘Why 80% of Singaporeans Live in Government-Built Flats’ (n 5). 9 Lee, From Third World to First (n 1) 95. 10 Limited exceptions are available for Singaporeans aged 21 or older if they are either widowed or orphaned.

Singapore  99 wave of conversion of co-owned private property into registration in single names11 to avoid the stinging additional buyer’s stamp duty (ABSD) imposed by the government since 8 December 2011,12 and regularly revised, on citizens and permanent residents13 purchasing second or subsequent residential property14 in order to moderate demand for residential property in light of the rising property market. These properties, originally co-owned by spouses who likely both contributed to its financing, are transferred to the name of one spouse, freeing up the other spouse to acquire another residential property without being subject to the ABSD. Given that the ABSD was imposed precisely because prices were rising, this subsequent purchase, even though in the name of only one spouse, is likely to either see financial contributions from both or be funded from joint assets. Provided the marriage holds and no third-party rights intervene, the spouses are unlikely to quarrel over their equitable entitlements. However, in the event of a breakdown of the marriage or more significantly the intervention of third parties, and particularly if the two properties are of unequal value, either by their nature or because the loan on one or the other is less fully paid up, the equitable holding raises its ugly head.

II.  Implied Trusts in Singapore: Blast or Break from the Past? Trust lawyers will no doubt be familiar with Lord Diplock’s famous quotation from Gissing v Gissing, in which his Lordship remarked, in the context of a claim for an equitable share of a family home, that it was unnecessary to distinguish between resulting, implied or constructive trusts.15 This muddying of the waters between resulting trusts and the common intention constructive trusts has plagued the category of implied (in the sense of non-express) trusts of the family home since this genus16 of trusts was first identified in Gissing v Gissing.17 Lord Diplock’s meaning is not the meaning of implied trusts used in this chapter. Rather, the expression ‘implied trusts’ is used simply as shorthand to refer to non-express trusts that are determined to govern the parties’ equitable

11 Lorna Tan, ‘Get the Sums Right before “Decoupling” to Buy Property’ The Straits Times (Singapore, 11 February 2018). 12 Monetary Authority of Singapore, ‘Additional Buyer’s Stamp Duty for a Stable and Sustainable Property Market’ (7 December 2011), available at: www.mas.gov.sg/news/media-releases/2011/absd-for-astable-and-sustainable-property-market. 13 Foreigners and corporate entities are subjected to the ABSD regardless of whether they have purchased a first or a subsequent residential property. 14 The policy discriminates between Singapore citizens and permanent residents. Originally, the latter were subject to the ABSD for their second or subsequent residential property purchase, whereas the former were only subject to the ABSD for their third or subsequent residential property purchase. However, from January 2013, the ABSD was levied on Singapore citizens from their second or subsequent residential property purchase and permanent residents were subject to the ABSD for all residential property purchases. 15 Gissing v Gissing [1971] AC 886, 905. 16 Comprising, as it does, both presumed resulting trusts and the common intention constructive trusts, it seems clear that it would be inappropriate to refer to this category as a species of trusts. 17 Most recently, see Faizi v Tahir [2019] EWHC 1627 (QB), noted in B Sloan, ‘Resulting or Constructive Trust: Does it Matter?’ [2020] Conveyancer and Property Lawyer 81. See also Marr v Collie [2017] UKPC 17, noted in MP George and B Sloan, ‘Presuming Too Little about Resulting and Constructive Trusts?’ [2017] Conveyancer and Property Lawyer 303. cf Drake v Whipp [1996] 1 FLR 826, 827 (Peter Gibson LJ).

100  Kelvin FK Low shares in residential property. In some cases, this will be by way of resulting trust. In others, this will be by way of the common intention constructive trust. I have also deliberately chosen to reference residential property rather than the family home because as the cases have shown, although most cases involve disputes over the family home,18 in some cases, the residential property in dispute is not the family home of one or more of the claimants.19 As we shall see, Singaporean law likely reflects the most conservative position among the leading Commonwealth jurisdictions, both in relation to the resulting trust and with respect to the common intention constructive trust. It is convenient to begin our analysis with English law and the common intention constructive trust. The role of common intention in gestating an implied trust may be traced to the House of Lords decision of Pettitt v Pettitt,20 though at the time this case was decided, the nature of the trust was innominate. Lord Diplock’s famous refusal in Gissing v Gissing to classify the trust as resulting, implied or constructive, paved the way for Lord Denning MR, in a series of Court of Appeal decisions,21 to formulate his ‘new model’ constructive trust based on ‘justice and good conscience’. Despite his efforts, however, the new model constructive trust failed to take root and by 1990, the House of Lords in Lloyds Bank plc v Rosset22 severely curtailed the role of vague notions such as ‘justice or good conscience’ and brought to the fore a highly structured conception of common intention. According to Lord Bridge, in a passage that deserves quoting in full: The first and fundamental question which must always be resolved is whether, independently of any inference to be drawn from the conduct of the parties in the course of sharing the house as their home and managing their joint affairs, there has at any time prior to acquisition, or exceptionally at some later date, been any agreement, arrangement or understanding reached between them that the property is to be shared beneficially. The finding of an agreement or arrangement to share in this sense can only, I think, be based on evidence of express discussions between the partners, however imperfectly remembered and however imprecise their terms may have been … In sharp contrast with this situation is the very different one where there is no evidence to support a finding of an agreement or arrangement to share, however reasonable it might have been for the parties to reach such an arrangement if they had applied their minds to the question, and where the court must rely entirely on the conduct of the parties both as the basis from which to infer a common intention to share the property beneficially and as the conduct relied on to give rise to a constructive trust. In this situation direct contributions to the purchase price by the partner who is not the legal owner, whether initially or by payment of mortgage instalments, will readily justify the inference necessary to the creation of a constructive trust. But, as I read the authorities, it is at least extremely doubtful whether anything less will do.23

In the meantime, the remedial constructive trust began to take root elsewhere in the Commonwealth and came to be seen as an appropriate device for the resolution of 18 See, eg, Lau Siew Kim v Yeo Guan Chye Terence [2008] 2 SLR(R) 108; Chan Yuen Lan v See Fong Mun [2014] 3 SLR 1048. 19 See, eg, Su Emmanuel v Emmanuel Priya Ethel Anne [2016] 3 SLR 1222. 20 Pettitt v Pettitt [1970] 1 AC 777. 21 Eves v Eves [1975] 1 WLR 1338; Cooke v Head [1972] 2 All ER 38; Hussey v Palmer [1972] 3 All ER 744. 22 Lloyds Bank plc v Rosset [1991] 1 AC 107. 23 ibid 132–33 (emphases added).

Singapore  101 disputes over the equitable ownership of the family home. In Pettkus v Becker,24 the Supreme Court of Canada married the remedial constructive trust to the principles of unjust enrichment to determine the de facto couples’ equitable ownership of the family home that had been purchased in Pettkus’s sole name. The remedial constructive trust spread to Australia in Muschinski v Dodds,25 albeit on the basis of unconscionability rather than unjust enrichment. When the common intention constructive trust was adopted in Singapore in the late twentieth century, the Singapore courts were completely uninfluenced by these Canadian and Australian developments, choosing, instead, to rely upon the strict requirement of common intention as set out in Lloyd’s Bank plc v Rosset.26 At the turn of the millennium, in the face of criticisms by leading scholars over the rigidity of Lloyds Bank plc v Rosset and its progeny,27 the House of Lords in Stack v Dowden28 departed from this inflexibility and dragged the English common intention constructive trust into a bold new era by legitimising the resort to imputed common intentions to construct such trusts.29 In Singapore, the Court of Appeal decided Lau Siew Kim v Yeo Guan Chye Terence30 at around the same time, along more traditional lines of reasoning, consistent but without citing Stack v Dowden. Predictions31 that Stack v Dowden would be rejected by the conservative Singaporean courts were proven correct when the Court of Appeal in Chan Yuen Lan v See Fong Mun32 expressed a definitive preference for Lord Neuberger’s dissenting view in Stack v Dowden. The Singaporean courts’ conservatism with respect to the common intention constructive trust is matched by its traditionalism in developing the presumption of advancement in the context of resulting trusts. Traceable to the seventeenth century,33 the situations in which a presumption of advancement would displace or rebut a presumption of resulting trust that persisted through much of the twentieth century would appear anachronistic and chauvinistic to many towards the end of that century, given the progress made in the emancipation of women, much less to twenty-first century scholars. As the Canadian Supreme Court explained, the presumption of advancement historically applied in two situations:34 ‘[t]he first is where the transferor 24 Pettkus v Becker [1980] 2 SCR 834. 25 Muschinski v Dodds (1985) 160 CLR 583. 26 [1991] 1 AC 107. See Tan Thiam Loke v Woon Swee Kheng Christina [1991] 2 SLR(R) 595; PQR v STR [1992] 3 SLR(R) 744; Tan Poh Soon v Phua Sin Yin [1995] 2 SLR(R) 583; Shi Fang v Koh Pee Huat [1996] 1 SLR(R) 906; Cheong Yoke Kuen v Cheong Kwok Kiong [1999] 1 SLR(R) 1126; Sitiawah Bee bte Kader v Rosiyah bte Abdullah [1999] 3 SLR(R) 606. 27 See, eg, K Gray and SF Gray, Elements of Land Law, 4th edn (Oxford University Press 2004) 905–07; EH Burn, Cheshire and Burn’s Modern Law of Real Property, 16th edn (Butterworths 2000) 263; C Harpum, Megarry & Wade: The Law of Real Property, 6th edn (Sweet & Maxwell 1999) 558; Martin Dixon, Modern Land Law (5th edn, Cavendish Publishing 2005) 165–67. See also C Harpum, ‘Adjusting Property Rights Between Unmarried Cohabitees’ (1982) 2 Oxford Journal of Legal Studies 277. 28 Stack v Dowden [2007] 2 AC 432. 29 In the eyes of some commentators, effectively overruling Pettitt (n 20); Gissing (n 15); and Rosset (n 22): see W Swadling, ‘The Common Intention Constructive Trust in the House of Lords: An Opportunity Missed’ (2007) 123 Law Quarterly Review 511. 30 [2008] 2 SLR(R) 108. 31 Tan Sook Yee, Tang Hang Wu and KFK Low, Tan Sook Yee’s Principles of Singapore Land Law, 3rd edn (LexisNexis 2009) 147, 151. 32 [2014] 3 SLR 1048. 33 Grey (Lord) v Grey (Lady) (1677) Rep Temp Finch 338, 23 ER 185. 34 See, eg, Pecore v Pecore [2007] 1 SCR 795, [28].

102  Kelvin FK Low is a husband and the transferee is his wife … The second is where the transferor is a father and the transferee is his child’. The scope of the historical presumption essentially reflected idealised Victorian family values: Late-Victorian middle-class society had developed a very marked sexual division of labour. Men went outside the home to earn money to maintain the household. Their wives, on the whole, stayed in the home and were economically dependent on the male breadwinner.35

Although there were bouts of indecisiveness regarding the possibility of the demise of the presumption of advancement at the turn of the century,36 this brief period of dithering was decisively ended by the Court of Appeal in Low Gim Siah v Low Geok Khim.37 The presumption of advancement in Singapore was extended to transfers from mother to child in Re Estate of Chong Siew Kum, deceased,38 but notably the updating to gender neutrality of the presumption of advancement in parent to child settings was not similarly modernised in respect of transfers from wife to husband.39 Although this state of the law may strike outsiders as odd, it will be seen that there is method to the Singaporean courts’ apparent capriciousness.

III.  Perpetrating Gender Disparity? This state of the law relating to implied trusts in Singapore, particularly the prominent residual role of the presumed resulting trust, has led to criticisms that the law is unfair to women.40 According to Ruth Yeo: The emphasis placed on monetary contributions by the resulting trust analysis is disadvantageous to the woman on two fronts: not only does it inherently prejudice her because she is typically of lower or no earning power, it strikes a second blow because it accords no weight whatsoever to her domestic and nonmonetary contributions to the family.41

These are serious charges in a society that prides itself on meritocracy.42 Indeed, it could be added that the continued refusal to permit the imputation of a common intention is

35 C Dyhouse, Girls Growing Up in Late Victorian and Edwardian England (Routledge 1981) 4. The reality, of course, is that Victorian society was remarkably diverse, for which see C Nelson, Family Ties in Victorian England (Praeger 2007). 36 See, eg, Lee Kuan Yew v Tang Liang Hong [1999] 3 SLR 630; Teo Siew Har v Lee Kuan Yew [1999] 4 SLR 560; Lai Min Tet v Lai Min Kin [2004] 1 SLR 499. cf Re Estate of Chong Siew Kum, deceased [2005] 2 SLR 324. cf Tsun Hang Tey, ‘Singapore’s Muddled Presumption of Advancement’ [2007] Singapore Journal of Legal Studies 240. 37 Low Gim Siah v Low Geok Khin [2007] 1 SLR 795. 38 [2005] 2 SLR 324. 39 Yeo Guan Chye Terence v Lau Siew Kim [2007] SGHC 7, [71]. This issue was not addressed on appeal. 40 RS Yeo, ‘The Presumptions of Resulting Trust and Advancement in Singapore: Unfairness to the Woman?’ (2010) 24 International Journal of Law, Policy and the Family 123. 41 ibid 124. 42 In Singapore, meritocracy is a key principle of governance which implies non-discrimination: selection must be blind to race, gender, sexuality, age, or class differences: see KP Tan, ‘Meritocracy and Elitism in a Global City: Ideological Shifts in Singapore’ (2008) 29 International Political Science Review 7.

Singapore  103 equally detrimental to female partners since Lord Bridge’s exhortations to find an agreement, ‘however imperfectly remembered and however imprecise their terms may have been’,43 is unrealistic. Save perhaps for ultra-high net worth individuals for whom prenuptial agreements are common, romantic partners simply do not have such discussions and it is fanciful to expect couples to contemplate the breakdown of the relationship in the heat of courtship. An honest arbiter would find no such agreement for most couples, to the disadvantage of most women. A less scrupulous judge would take advantage of the shadowy realm in which inference shades into imputation to ‘infer’ an agreement which, in truth, is imputed. It is, of course, true that there still remains a disparity in wages between men and women in Singapore. The latest studies suggest that women in Singapore earn between 9 per cent44 and 13 per cent45 less than their male counterparts. However, considering how quickly this gap has closed since Singapore’s days as a colony, much credit is due to the People’s Action Party (PAP) government, which was historically extremely progressive. When the British decided, in 1957, to grant Singapore self-government, one of the key policies of the PAP in the elections was the emancipation of women. According to Dr Toh Chin Chye, then Party Chairman: Women who form nearly half of our population have an important part to play in our national construction. In the first instance in order to emancipate them from the binds of feudalism and conservatism a monogamous marriage law will be passed … Furthermore to free working-class women from domestic drudgery … we shall carry out an extensive education campaign on family limitation and the rights of women … We shall foster the principle, if necessary by legislation, that there shall be equality of women with men in all spheres and we shall encourage them to come forward to play a leading role in politics, administration, business and industry, education and in other spheres.46

In his memoirs, the founding Prime Minister of Singapore, Lee Kuan Yew, also explained the importance to the PAP of the emancipation of women in Singapore: I wanted to implement it early, although it meant urgent work for the legal draftsmen in the attorney-general’s chambers. They searched for precedents in the legislation of other countries, and drew up the Women’s Charter, which we passed into law within a year.47

It is notable that the legislation for monogamy in self-governed Singapore, enacted in 1961, preceded the same law reform in British colonial Hong Kong by a full decade.48 One of the sources of inspiration for the Women’s Charter was the Swiss Civil Code,

See also TJ Bellows, ‘Meritocracy and the Singapore Political System’ (2009) 17 Asian Journal of Political Science 24. 43 Rosset (n 22) 132. 44 Ministry of Manpower, ‘What the Gender Pay Gap is Not Telling You’ (13 December 2018), available at: stats.mom.gov.sg/genderpaygap/index.aspx. See also Joanna Seow, ‘Women in Singapore Earn 9% Less than Men’ The Straits Times (Singapore, 19 January 2019). 45 Seow Bey Yi, ‘Women in Singapore Earn 13% Less than Men As Gender Wage Gap Persists: Glassdoor’ The Straits Times (Singapore, 27 March 2019). 46 People’s Action Party, The Tasks Ahead: PAP’s Five Year Plan, 1959–1964 (Petir 1959) 11. 47 Lee Kuan Yew, The Singapore Story: Memoirs of Lee Kuan Yew (Prentice Hall 1998) 325–26. 48 cf DJ Lewis, ‘A Requiem for Chinese Customary Law in Hong Kong’ (1983) 32 International & Comparative Law Quarterly 347.

104  Kelvin FK Low which inspired the unusual (for common law jurisdictions) clause 45.49 Comprising four exhortational sub-clauses, the renumbered section 46 of today’s Charter provides: (1) Upon the solemnization of marriage, the husband and the wife shall be mutually bound to co-operate with each other in safeguarding the interests of the union and in caring and providing for the children. (2) The husband and the wife shall have the right separately to engage in any trade or profession or in social activities. (3) The wife shall have the right to use her own surname and name separately. (4) The husband and the wife shall have equal rights in the running of the matrimonial household.

Indeed, the government of the day was so progressive that the original clause 45 included the phrase ‘and in the ownership and management of the family properties’, almost introducing the concept of ‘community of property’ into Singapore.50 However, the idea of ‘community of property’ proved to be too much for the community and came under criticism before being eventually excised from the final Charter as enacted. Quite apart from objections over its impact on relations within the family, concerns were also raised as to its implication on the law of property more generally. According to Mr AP Rajah, an opposition legislator, ‘[t]he implications of this sub-clause could be very drastic. Some of the phrases used are such that they cut across the whole conception of property and operation of property in Singapore’.51 It must be recalled that, at this stage of Singapore’s development, its economic future was uncertain.52 Merger with Malaya was regarded as imperative but hardly assured given the attitude of Tunku Abdul Rahman.53 As Lee observed of Singapore’s prospects when independence was finally thrust upon her, merger having floundered, ‘Hong Kong was the one island most like us, but it was still governed by the British and it had China as its hinterland’.54 Nor, it might be added, did Singapore have the benefit of the wealthy industrialists who fled from Shanghai to Hong Kong with the founding of the People’s Republic of China.55 Being more dependent upon small and medium enterprises (SMEs) founded locally,56 the prospect of invisible property rights arising through ‘community of property’ would likely have been met with horror by the business community. When the offending clause was expunged in 1961, no replacement was offered until 1980. Although it is believed that a Review Committee was established in 1973 to consider reform along the lines of the English Divorce Reform Act 1969, no report was ever published57 and it was left to the Women’s Charter (Amendment) Act of 1980 to introduce the jurisdiction to divide matrimonial assets upon divorce through the then

49 Leong Wai Kum, ‘Fifty Years and More of the Women’s Charter of Singapore’ [2008] Singapore Journal of Legal Studies 1, 11–14. 50 ibid 14–16. 51 Singapore Legislative Assembly Debates, vol 12, no 1, col 458 (6 April 1960). 52 cf Lee, The Singapore Story (n 47) 328–50. 53 ibid 351–72. 54 Lee, From Third World to First (n 1) 7. 55 S Tsang, A Modern History of Hong Kong (IB Tauris & Co Ltd 2004) 161–79. 56 cf Royal Bank of Scotland v Etridge (No 2) [2002] 2 AC 773 [34] (Lord Nicholls). 57 Leong, ‘Fifty Years and More’ (n 49) n 67.

Singapore  105 section 106, which was supplanted, in 1996, by an improved section 112.58 A leading Singapore scholar has likened the regime thus introduced to the Scandinavian innovation of ‘deferred community of property’,59 an affinity since endorsed by the Singapore Court of Appeal.60 It is this regime, and not the law of implied trusts, that is intended to serve to equalise the economic positions of men and women in Singapore.61 Two main gaps arguably arise out of relying on the Women’s Charter ‘deferred community of property’ regime to this end. First, the spouse who does not legally own the relevant property has no protection against third-party creditors. Second, unmarried cohabitees are unable to rely on the regime. It is not obvious that the Singaporean courts or the community at large regard either as true gaps in the law. The former facilitates entrepreneurial activity among start-ups and SMEs by protecting third parties from invisible equitable property rights. In this respect, it is important to recall that equity’s darling reflects a jurisdictional rule,62 rather than a rule protecting bona fide purchase per se, as the failure to acquire a legal interest (for example, an equitable mortgage or a charge) will disqualify the third party from such status automatically. The latter merely reflects ‘the formidable barrier of public policy which upholds the sanctity of the traditional notion of marriage in Singapore’.63

IV.  Reflecting Confucian Family Values A.  The Implied Trust in England and Wales: The Importance of Context The law relating to implied trusts has always been inextricably tied up with familial relations, whether those relations take on a traditional or non-traditional form. This is perhaps clearest in the very earliest cases such as Pettitt v Pettitt,64 Gissing v Gissing,65 Falconer v Falconer,66 Heseltine v Heseltine,67 Hazell v Hazell68 and Cowcher v Cowcher,69

58 Introduced by the Women’s Charter (Amendment) Act 1996. 59 Leong Wai Kum, ‘Division of Matrimonial Assets: Recent Cases and Thoughts for Reform’ [1993] Singapore Journal of Legal Studies 351, 353. This probably does not amount to deferred community of property in the strict sense of the phrase but approximates its effects de facto even if not de jure. 60 Lock Yeng Fun v Chua Hock Chye [2007] 3 SLR 520 [40]; Lau Siew Kim (n 18) [80]. BPC v BPB [2019] 1 SLR 608 [49]. 61 Leong Wai Kum, ‘The Just and Equitable Division of Gains between Equal Former Partners in Marriage’ [2000] Singapore Journal of Legal Studies 208; Chan Wing Cheong, ‘Giving Homemakers Due Recognition: Five Landmark Cases on the Road to Gender Equality’ [2011] Singapore Journal of Legal Studies 111. See also Lau Siew Kim (n 18) [79]–[82]; BPC v BPB (n 60) [48]–[52]. 62 J Hackney, Understanding Equity & Trusts (Fontana Press 1987) 24–25. 63 Tey (n 36) 255. 64 [1970] 1 AC 777. 65 [1971] AC 886, 905. 66 Falconer v Falconer [1970] 1 WLR 1333. 67 Heseltine v Heseltine [1971] 1 WLR 342. 68 Hazell v Hazell [1972] 1 WLR 301. 69 Cowcher v Cowcher [1972] 1 WLR 425.

106  Kelvin FK Low where the last names of the parties give away the context. They are part of a series of cases in which reformist judges, in particular Lord Denning, sought to confer rights first upon wives, and subsequently upon mistresses and other cohabitees. The implied trust was not the first battleground for the expansion of the rights of women in the family in England. That honour lies with section 17 of the Married Women’s Property Act 1882, which succeeded section 9 of the Married Women’s Property Act 1870. The relevant part of section 17 provided: In any question between husband and wife as to the title to or possession of property, either party … may apply by summons or otherwise in a summary way to any judge of the High Court of Justice … and the judge … may make such Order with respect to the property in dispute … as he thinks fit.

Lord Denning MR seized upon the discretionary language of the section to suggest, in Hine v Hine: It seems to me that the jurisdiction of the Court over family assets under section 17 is entirely discretionary. Its discretion transcends all rights, legal or equitable, and enables the Court to make such order as it thinks fit. This means, as I understand it, that the Court is entitled to make such order as appears to be fair and just in all the circumstances of the case.70

That particular battle was laid to rest by the House of Lords in Pettitt v Pettitt itself, in which Lord Denning MR was suitably chastised. Lord Hodson, borrowing from Coke, remarked that ‘this would be to substitute the uncertain and crooked cord of discretion for the golden and straight metwand of the law’.71 Lord Upjohn, commenting on Lord Denning MR’s decision of Gissing v Gissing,72 said: My Lords, we have in this country no doctrine of community of goods between spouses and yet by judicial decision were this doctrine of family assets to be accepted some such a doctrine would become part of the law of the land.73

As Lord Diplock explained, ‘[section 17] is, in my view, a procedural section. It provides a summary and relatively informal forum which can sit in private for the resolution of disputes between husband and wife as to the title to or possession of any property’74 and no more. Although the dispute over section 17 of the Married Women’s Property Act 1882 was decisively resolved, Lord Denning MR’s liberal interpretation had opened the floodgates. Lord Reid acknowledged the many problems which are coming before the court in increasing numbers. We were informed that last year there were 900 applications in the High Court besides an unknown number in the county courts. The whole question can only be resolved by Parliament and in my opinion there is urgent need for comprehensive legislation.75



70 Hine

v Hine [1962] 1 WLR 1124, 1127. (n 20) 808. 72 [1969] 2 Ch 85. 73 Pettitt (n 20) 817. 74 ibid 820. 75 ibid 797. 71 Pettitt

Singapore  107 Within months of Pettitt v Pettitt being decided by the House of Lords, the Law Commission issued a report which acknowledged, in relation to property adjustments, ‘[t]he urgent need … to rationalise and extend the powers of the court when the marriage breaks down’.76 Reform followed in the Matrimonial Proceedings and Property Act 1970 and the Matrimonial Causes Act 1973, in particular section 21 of the latter. That ­provision, it has been suggested, might have been considered necessary because [w]hereas the Report referred to ‘property adjustment’, the 1970 Act which was based on it did not do so in those words, and there may have been some fear that the powers to make property adjustment orders would be used … infrequently.77

As it turned out, the fear proved unfounded and Lord Denning MR, in Wachtel v Wachtel78 and Trippas v Trippas,79 adopted a liberal view of the 1970 Act. Nevertheless, by then, ‘the new Act was too far on its way to the Royal Assent for anything to have been done about that, even if the draftsmen have awakened to the fact’.80 Although it may be thought that these legal reforms would resolve the problems, all they did, together with the openings for the implied trust laid down by their Lordships in Pettitt v Pettitt and Gissing v Gissing, was to provide the opportunity for the shifting of the battlegrounds. Lord Denning MR, in particular, started to turn his attention to disputes between unmarried cohabitants.81 Furthermore, as both the Matrimonial Proceedings and Property Act 1970 and the Matrimonial Causes Act 1973 only provided relief upon the breakdown of the relationship, the implied trusts were also relied upon by spouses in disputes with third parties, particularly banks in such cases as Midland Bank plc v Dobson82 and Lloyds Bank plc v Rosset.83 The role of implied trusts, in particular the common intention constructive trust, in disputes between cohabitees and others living together would be reinvigorated by the House of Lords in Stack v Dowden.84 The resurrection and renaissance of Lord Diplock’s imputed common intention in Pettitt v Pettitt85 would, on this occasion, be motivated by yet further Law Commission studies. The first was a report entitled Sharing Homes: A Discussion Paper,86 which covered ‘a broad range of people – not only “couples”, married or unmarried, but also friends, relatives and others who may be living together for reasons of companionship or care and support’.87 The second was a consultation paper entitled Cohabitation: The Financial Consequences of Relationship Breakdown.88 76 Law Commission, Family Law: Financial Provision in Matrimonial Proceedings (Law Com No 25, 1969) [64]. 77 PT O’Neill, ‘The Matrimonial Causes Act 1973’ (1973) 36 Modern Law Review 638, 640. 78 Wachtel v Wachtel [1973] 2 WLR 366. 79 Trippas v Trippas [1973] 2 WLR 585. 80 O’Neill (n 77) 640. 81 Eves (n 21); Cooke (n 21); Hussey (n 21); Grant v Edwards [1986] Ch 638. 82 [1986] 1 FLR 171. 83 Rosset (n 22). 84 [2007] 2 AC 432. 85 [1970] 1 AC 777, 822–26. cf Gissing (n 15) 904; Rosset (n 22) 132–33. 86 Law Commission, Sharing Homes: A Discussion Paper (Law Com No 278, 2002). 87 ibid vi. 88 Law Commission, Cohabitation: The Financial Consequences of Relationship Breakdown (Law Com CP No 179, 2006).

108  Kelvin FK Low As Baroness Hale observed, the former report was unusual in that ‘[u]nlike most Law Commission publications, this did not contain even provisional, let alone final, proposals for reform’.89 This led her Ladyship to conclude that ‘its importance for us is that the evolution of the law of property to take account of changing social and economic circumstances will have to come from the courts rather than Parliament’,90 an observation that proved prescient when the Law Commission’s Report on Cohabitation: The Financial Consequences of Relationship Breakdown,91 published within three months of Stack v Dowden being decided, passed unheeded by a then Labour-led Parliament. These recent developments in England led by Stack v Dowden mark an intensification of the process of ‘familialisation’ of the law of property,92 being ‘the process by which both judges and the legislature have modified general principles of land law or trusts to accommodate the specific needs of family members’.93 Although in England such ‘familialisation’ may be regarded as ‘an avowedly imperfect yet truly necessary development’,94 the socio-political context in Singapore points the courts to the opposite conclusion. That which the English courts and commentators regard as a pragmatic, if flawed, response to social change is viewed instead by the Singaporean government as a direct assault on the family as the basic unit of society.

B.  Ethics in Singapore: Victorian and Confucian Dimensions Even before independence, Singapore always faced an existential crisis. From the moment it was granted self-government by the British, the Singaporean government pursued a merger with Malaya, Singapore’s hinterland, upon full British withdrawal as ‘an inevitable historical development’.95 On the notion of independence, Lee Kuan Yew succinctly explained that ‘[i]t is a political, economic and geographical absurdity’.96 In 2007, in an interview with the International Herald Tribune, Lee repeated, ‘[t]o understand Singapore, you’ve got to start off with an improbable story: It should not exist’.97 As the newspaper elaborated, ‘[i]t is a nation with almost no natural resources, w ­ ithout a common culture, a fractured mix of Chinese, Malays and Indians, relying on its wits to stay afloat and prosper’.98 Accordingly, one of the first tasks that the government

89 [2007] 2 AC 432 [46]. 90 ibid [46]. 91 Law Commission, Cohabitation (n 88). 92 A Hayward, ‘“Family Property” and the Process of “Familialisation” of Property Law’ (2012) 24 Child and Family Law Quarterly 284. 93 J Dewar, ‘Land, Law, and the Family Home’ in S Bright and J Dewar (eds), Land Law: Themes and Perspectives (Oxford University Press 1998) 327, 328. 94 Hayward (n 92) 303. cf ibid 331. 95 Lee Kuan Yew, as Prime Minister, responding to the petition by 17 Barisan Sosialis assemblymen who petitioned the United Nations Special Committee on Colonialism on 26 July 1962 in New York, archived at: www.nas.gov.sg/archivesonline/data/pdfdoc/lky19620726c.pdf. 96 ibid. 97 Seth Mydans and Wayne Arnold, ‘Excerpts from an interview with Lee Kuan Yew’ International Herald Tribune (Paris, 29 August 2007). 98 ibid.

Singapore  109 faced was the construction of a national identity. Nationhood, according to Kohn, tends to take one of two forms, a civic form or an ethnocultural one.99 For Singapore, the latter was ‘effectively ruled out’ because it had ‘a multi-ethnic population [with] a recent history of ethnic conflict’.100 Accordingly, ‘[o]ne of the most consistent elements in the school curriculum since independence is citizenship education’.101 Ever present, citizenship in Singapore has always embodied a moral and ethical dimension, perhaps best exemplified by the name of the subject which schoolchildren were taught upon independence: ‘Ethics’. Although often regarded as hostile to the Chinese elite, Lee ‘wanted to preserve what was good in the Chinese schools: the discipline, self-confidence, and moral and social values they instilled in their students, based on Chinese traditions, values, and culture’.102 This task was left to Goh Keng Swee, one of Lee’s ablest lieutenants,103 after he had sorted out defence and the economy. Goh served two stints as Minister for Education, from February 1979 to May 1980, and from June 1981 to December 1984. He produced the Report on the Ministry of Education104 just before taking office as Minister for Education in February 1979 and the Report on Moral Education105 was published in May 1979, in accordance with proposals made in the former report, which came to be known as the Goh report, after its chief author. In its preface, Lee himself exhorted: The best of the East and West must be blended to advantage in the Singaporean. Confucianist ethics, Malay traditions, and the Hindu ethos must be combined with sceptical Western methods of scientific inquiry, the open discursive methods in the search for truth. We have to discard obscurantist and superstitious beliefs and practices of the East, as we have to reject the passing fads of the West. Particularly important are intra-family relationships. We must reinforce these traditional family ties found in all Asian societies. But we must excise the nepotism which usually grows out of this extended family net of mutual help.106

Out of the Report on Moral Education were born two new citizenship education programmes, the English medium ‘Being and Becoming’ and the Mandarin medium ‘好公民’ (‘Good Citizens’), both introduced in 1981. From these early beginnings in the late 1970s through the 1980s, Lee was to undergo a voyage of discovery of traditional Chinese culture107 and a wave of Confucianism swept over Singapore. The Report on Moral Education also recommended the use

99 H Kohn, The Idea of Nationalism: A Study in its Origins and Background (Macmillan 1944). 100 C Han, ‘Citizenship Education: 50 Years of Constructing and Promoting National Identity in Schools’ in J Lim and T Lee (eds), Singapore: Negotiating State and Society, 1965–2015 (Routledge 2016) 202. 101 ibid 202. 102 Lee, From Third World to First (n 1) 153. 103 Goh Keng Swee alone, among the PAP old guard, merited two entire chapters in Lam Peng Er and KYL Tan (eds), Lee’s Lieutenants: Singapore’s Old Guard (Allen & Unwin 1999), respectively T Doshi and P Coclanis, ‘The Economic Architect: Goh Keng Swee’ (at 24) and Kwok Kian-Woon, ‘The Social Architect: Goh Keng Swee’ (at 45). 104 Goh Keng Swee and the Education Study Team, Report on the Ministry of Education (Ministry of Education 1979). 105 Ong Teng Cheong and the Moral Education Committee, Report on Moral Education (Ministry of Education 1979). 106 Goh et al (n 104) v. 107 DK Mauzy and RS Milne, Singapore Politics Under the People’s Action Party (Routledge 2002) 58.

110  Kelvin FK Low of ‘[r]eligious studies [to help] reinforce the teaching of moral values’.108 In January 1982, religious education was proposed, with the object of serving as a ‘cultural ballast’ against the corrupting influence of decadent Western values.109 At the time, ‘only five religious subjects were to be offered – Bible knowledge, Buddhist studies, Hindu studies, Islamic religious knowledge and World religions’.110 ‘Confucian Ethics’ was only added two weeks later, in early February at the suggestion of Lee,111 who believed, together with Goh, ‘that for most Chinese students, Confucianism not Buddhism will be what parents would prefer their children to study’.112 ‘[S]upport for the Confucian curriculum attracted a disproportionate share of the resources devoted to the moral education programme’.113 The Institute of East Asian Philosophies, now the prestigious East Asian Institute, was set up in 1983 for the study of Confucianism.114 The Institute was generously funded, and Goh served as chairman and Ong Teng Cheong as vice-chairman. The former had just retired from politics whilst the latter was the then Deputy Prime Minister who would subsequently take on the role of Singapore’s first elected President. Nor was the promotion of Confucianism limited to the classroom. According to Goh, ‘Confucianism in Singapore will not be merely for the classroom. It will be reinterpreted as a code of personal conduct for modern Singapore and promoted in the form of public debate and discussion over the media’.115 Despite the religious courses being rationalised to serve as useful vehicles for the transmission of ‘desirable national values’,116 the courses proved controversial in the face of religious revivalism and they were soon discontinued and replaced by ‘Civics and Moral Education’ in 1989.117 Data collected then also suggested that Lee’s and Goh’s optimism for ‘Confucian Ethics’ was misplaced, with only a minority of Chinese students opting for Confucian ethics in preference to Buddhist studies.118 It is perhaps notable that in the early 1970s, there was, as yet, no clear distinction drawn between Asian (Confucian) and Western (Victorian) values. Goh himself once wrote, ‘I think we can detect in contemporary Singapore a strange but striking similarity of intellectual climate and social values with Victorian England’.119 Later writers have also postulated that some of the Asian values sponsored by the Singapore government

108 Ong et al (n 105) 12. 109 Mohammad Alami Musa and Mohamed Imran Mohamed Taib, ‘Managing Religious Diversity in Singapore: Context and Challenges’ in B Desker and Ang Cheng Guan (eds), Perspectives on the Security Of Singapore: The First 50 Years (World Scientific 2016) 256–57. 110 M Hill and Lian Kwen Fee, The Politics of Nation Building and Citizenship in Singapore (Routledge 1995) 200. 111 ECY Kuo, ‘Confucianism As Political Discourse in Singapore: The Case of an Incomplete Revitalization Movement’ in Tu Wei-Ming (ed), Confucian Traditions in East Asian Modernity: Moral Education and Economic Culture in Japan and the Four Mini-Dragons (Harvard University Press 1996) 298. 112 Lee Kuan Yew, ‘To Each Family a Share of Singapore’ The Straits Times (Singapore, 8 February 1982). 113 Hill and Lian (n 110) 200. 114 Lim Tai Wai, ‘The Making of the East Asian Institute’ in East Asian Institute, The East Asian Institute: A Goh Keng Swee Legacy (World Scientific 2016) 3. 115 ‘Confucian code by October, Says Goh’ The Straits Times (Singapore, 13 June 1982). 116 Hill and Lian (n 110) 204–05. 117 Mohammad and Mohamed (n 109) 257–60. 118 J Wong, ‘Promoting Confucianism for Socioeconomic Development: The Singapore Experience’ in Tu Wei-Ming (ed), Confucian Traditions in East Asian Modernity: Moral Education and Economic Culture in Japan and the Four Mini-Dragons (Harvard University Press 1996 edn) 288. 119 Goh Keng Swee, The Economics of Modernization and Other Essays (Asia Pacific Press 1972) 176.

Singapore  111 were, in fact, Victorian in origin, absorbed and internalised by the Peranakan Straits Chinese who admired the British.120 Notably, both Goh and Lee were Peranakan.121

C.  Family as the Basic Unit of Society: Implications for the Common Intention Constructive Trust Even prior to the abandonment of religious education in 1989, the government began to lay the groundwork for the formulation of a national ideology in October 1988.122 First, Deputy Prime Minister Goh Chok Tong proposed the White Paper on Shared Values,123 which he then presented to Parliament on 2 January 1991 as Prime Minister, having succeeded Lee Kuan Yew on 28 November 1990. The five shared values comprised: i. ii. iii. iv. v.

Nation before community and society before self. Family as the basic unit of society. Community support and respect for the individual. Consensus, not conflict. Racial and religious harmony.

The shared values were avowedly secular and non-ethnocultural. According to the White Paper: All communities can share these values, although each will interpret and convey the same ideas in terms of their own cultural and religious traditions. The Malays will do so in Malay and Muslim terms, the Christians in terms of Bible stories and Christian traditions, many Chinese by reference to Confucian, Buddhist or Taoist teachings, the Hindus in terms of the Ramayana and Mahabharata, and so forth for other groups.124

Although it explicitly disavows its basis in Confucianism, it praises the Confucian ideal of government by 君子 (honourable men),125 and its resonance with Confucian values is ‘generally accepted by scholars’.126 The idea of the family as the basic unit of society has also been explicitly analysed in Confucian terms by no less than Lee himself. As he explained in an interview, ‘there is grave disquiet when we break away from tested norms, and the tested norm is the family unit. It is the building brick of society’.127 Quoting a Chinese aphorism which encapsulates this idea, ‘修身、齐家、治国、平天下’, Lee explained: [修身] means look after yourself, cultivate yourself, do everything to make yourself useful; [齐家], look after the family, [治国], look after your country; [平天下], all is peaceful under heaven.128 120 M Blackman, ‘Asian and Victorian Values’ Far Eastern Economic Review (Hong Kong, 30 March 2000). 121 A Chong (ed), Great Peranakans: Fifty Remarkable Lives (Asian Civilisations Museum 2015). See also Lee, The Singapore Story (n 47) 26–28, referring to his paternal grandfather, whom Lee admired more than his father, as being ‘very Westernised’. 122 Hill and Lian (n 110) 211. 123 Shared Values (White Paper Cmd 1, 1991). 124 ibid [9]. 125 ibid [39]–[44]. 126 C Tan, ‘“Our Shared Values” in Singapore: A Confucian Perspective’ (2012) 62 Educational Theory 449, 455. 127 F Zakaria, ‘Culture is Destiny: A Conversation with Lee Kuan Yew’ (1994) 73 Foreign Affairs 109, 113. 128 ibid 113–14.

112  Kelvin FK Low This aphorism is derived from the first chapter of arguably the most important of the Four Books and Five Classics (四书五经) that comprise the authoritative Confucian texts, The Great Learning (大学), which provides:129 古之欲明明德于天下者、先治其国。

The ancients who wanted to manifest their bright virtue to all in the world first governed well their own countries.

欲治其国者先齐其家。

Wanting to govern well their countries, they first put their own family in order.

欲齐其家者先修其身。

Wanting to put their own family in order, they first cultivated themselves.

欲修其身者先正其心。

Wanting to cultivate themselves, they first set their hearts right.

欲正其心者先诚其意。

Wanting to set their hearts right, they first made their wills sincere.

欲诚其意者先致其知。

Wanting to make their wills sincere, they first extended their knowledge.

致知在格物。

Extension of knowledge consists of the investigation of things.

物格而后知至。

When things are investigated, knowledge is extended.

知至而后意诚。

When knowledge is extended, the will becomes sincere.

意诚而后心正。

When the will is sincere, the heart is set right.

心正而后身修。

When the heart is set right, the self is cultivated.

身修而后家齐。

When the self is cultivated, the family is put in order.

家齐而后国治。

When the family is put in order, the country is well governed.

国治而后天下平。

When the country is well governed, there will be peace under heaven.

The government’s commitment to the family as a basic unit of society, whether Confucian, Victorian, or otherwise, accordingly leaves no room for the Singaporean courts, famously deferential towards the executive,130 to judicially cultivate a regime for the division of family assets via the common intention constructive trust that would be regarded as undermining the traditional state-endorsed family.

129 The English translation is adapted by the present author, in part to ensure consistency with the Lee Kuan Yew quotation, from the translation by Charles Muller (4 July 1992): www.acmuller.net/con-dao/ greatlearning.html. 130 See, eg, Thio Li-ann, ‘An “i” for an “I”? Singapore’s Communitarian Model of Constitutional Adjudication’ (1997) 27 Hong Kong Law Journal 152; M Hor, ‘The Independence of the Criminal Justice System in Singapore’ [2002] Singapore Journal of Legal Studies 497; Jack Tsen-Ta Lee, ‘Constraint or Restraint?:

Singapore  113

D.  Family as the Basic Unit of Society: Maintaining the Presumption of Advancement The influence of the state-recognised traditional family is perhaps even clearer in relation to the presumption of advancement. As we have seen, the traditionally chauvinistic presumption of advancement that Singapore inherited as part of its common law heritage has been partially updated to reflect more modern views on gender equality. The presumption of advancement from father to child has been extended to transfers between mother and child.131 However, the presumption of advancement from husband to wife has not yet been extended to transfers in reverse.132 This in turn reflects the state of the law relating to maintenance within the Women’s Charter. The obligation of both parents to maintain children in Singapore is ancient, predating the Women’s Charter and traceable to the Straits Settlements Summary Criminal Jurisdiction Ordinance of 1872.133 As the leading family lawyer in Singapore observed, ‘[i]t is worthy of note that from the beginning the duty has been squarely placed on both father and mother’.134 Taken together with section 46(1) of the Women’s Charter,135 the modernisation of the presumption of advancement between parent and child was predictable, if somewhat belated.136 Spousal maintenance, like child maintenance, predates the Women’s Charter but suffers from a more convoluted history, a more troubled existence, and a murkier future. Originating in the common law duty of a husband to maintain his wife following from consortium, principally through the wife’s right to pledge her husband’s credit for necessities, a statutory obligation of maintenance was provided in the same Straits Settlements Summary Criminal Jurisdiction Ordinance of 1872. When the Women’s Charter was enacted in 1961, it introduced a new duty of maintenance conceptually distinct from either the common law duty or its statutory predecessors, in the form of the then section 62. The obligation of maintenance was fault-based but did not provide for any defences. The courts construed it in light of previous common law authorities.137 This statutory duty was substantially amended in 1981 via the Women’s Charter (Amendment) Act138 to its current form, whereby fault was excised as a prerequisite for maintenance and the Singaporean courts decisively broke away from common law concepts of consortium in its interpretation.139 However, despite numerous appeals for

Singapore’s Constitution at 50’ in J Lim and T Lee (eds), Singapore: Negotiating State and Society, 1965–2015 (Routledge 2016). 131 Chong Siew Kum (n 36). 132 Yeo Guan Chye Terence v Lau Siew Kim (n 39) [71]. 133 Ord No XIII of 1872. 134 Leong Wai Kum, ‘The Duty to Maintain Spouse and Children during Marriage’ (1987) 29 Malaya Law Review 56, 74. 135 See text accompanying (n 49). 136 The belatedness of the decision is likely the result of the vagaries of litigation, no suitable case having been litigated before Chong Siew Kum (n 36). 137 cf Quek Ah Chuan v Ng Guan Chng [1968] 1 MLJ 255. 138 Act 26 of 1980, taking effect on 1 June 1981. 139 Palvit Singh v Sawaran Kaur [1990] 1 MLJ lvii.

114  Kelvin FK Low gender neutrality through the years, including as early as 1961, at the Women’s Charter’s inception,140 Singapore’s maintenance provision remains gender-biased, though the first nanoscopic steps towards gender neutrality were finally taken in the most recent amendments in 2016.141 With effect from 1 July 2016, husbands can finally claim maintenance from their wives, but with an important proviso – they may only do so if they are ­incapacitated.142 This timid and haltering step towards gender neutrality answered an appeal that dated back to 1979, when the Lawyers’ Christian Fellowship143 and Mr  Michael Hwang144 suggested that husbands should be allowed to claim maintenance in exceptional circumstances. Needless to say, appeals in 1996 for full gender neutrality from the Association of Women for Action and Research (AWARE),145 then Associate Professor Leong Wai Kum,146 the Singapore Association for Women Lawyers,147 and the Council of the Law Society of Singapore,148 remain unheeded more than 20 years hence. Rather disappointingly, Mr Tan Chuan Jin, the Minister for Social and Family Development, explained at the second reading of the 2016 amendment, after citing two responses from the public against gender neutrality: [A]fter extensive discussions with stakeholders and internal deliberations, we have concluded that our society is not quite ready for gender neutrality on the spousal maintenance front. We will not rename the Women’s Charter as a Family Charter at this time, despite some calls to do so in line with the philosophy of gender-neutrality.149

No authoritative survey of opinions appear to have been taken and the timidity with which the government has tackled this issue is substantially different from the bold progressive approach of its forebears in 1961. There are at least, however, two improvements over previous rejections of appeals for gender neutrality. The first improvement is that the Minister at least did not take pride in c­ hauvinism, unlike his predecessor Mr Abdullah Tarmugi, the Minister for Community Development, who proclaimed in 1996: As for allowing maintenance for husbands, I am of the view that the existing provisions of allowing only women to claim maintenance from men should be maintained, at least for the present. Call me old-fashioned if you will; call me a male chauvinist if you must, but my

140 Report of the Select Committee on the Women’s Charter Bill, Legislative Assembly 16 of 1960 (20 May 1960) A10 (Mr MA Majid). 141 Siew Jey Ren, ‘First Step Towards a Gender-Neutral Maintenance Obligation’ (2016/17) 8 Juris Illuminae 1. 142 Women’s Charter (Cap 353, 2009 rev edn), s 69(1A). 143 Report of the Select Committee on the Women’s Charter (Amendment) Bill 1979 (Bill No 23/79) (25 February 1980) A29. 144 ibid A38. 145 Report of the Select Committee on the Women’s Charter (Amendment) Bill 1996 (Bill No 5/96) (15 August 1996) B20, C13–C15. 146 ibid B37, C5–C8. 147 ibid B44–B45. 148 ibid C25–C27. 149 Singapore Parliamentary Debates (29 February 2016).

Singapore  115 upbringing and my background tells me that it is the duty of the husband to maintain his wife. And I think I speak for most, if not all, the husbands in this House.150

No elected Member of Parliament was recorded as having objected to this view in 1996.151 Second, the illogical objection based on a socio-economic gap between the genders is now likewise omitted. In 2010, the Ministry of Community Development, Youth and Sports responded to appeals for gender neutral maintenance provisions thus: On the suggestions to make the Women’s Charter less gender biased and maintenance more needs-based, MCYS would like to clarify that with regard to the maintenance of children, the provision in the Charter is already gender-neutral and applicable to the father and the mother. The bias is confined to maintenance of spouse or ex-spouse, where a man is required to maintain his wife or ex-wife, and not vice versa. MCYS notes that notwithstanding the progress made by women, a gap still exists between men and women on the socio-economic front. The female labour force participation rate is lower than the male’s. Women are usually the main caregivers for families and for the children post-divorce. Such situations are likely to affect the future employability of the women, putting them at a disadvantage when they need to re-enter the workforce after a divorce. Though society will continue to evolve, for now, women in general are still more vulnerable and in need of protection under the Women’s Charter.152

As Leong Wai Kum explained as early as 1987: Whether or not women in Singapore earn as much as men is not the issue. Neither is it relevant to ask how often it might be, if the law permitted it, that a wife may be ordered to maintain her husband. The issue is whether it is permissible now, when in nearly every important way a wife is treated on an equal footing with her husband, she should have the privilege never to be required by law to support a husband who is proven to be in need and who can prove that she is able to maintain him. As long as this one-sidedness continues, the law falls a little short of its expectation that ‘[u]pon the solemnization of marriage, the husband and the wife shall be mutually bound to co-operate with each other in safeguarding the interests of the union’.153

Perfect socio-economic equality between the genders will likely never be achieved given the odds. Furthermore, it is arguable that women are held back in the workplace because of this inequality in the home. No man, however enlightened, could rationally decide to take on the role of homemaker in the knowledge that should the marriage fail, he would have no claim for maintenance against his wife unless he were incapacitated. If the slogan of the feminist movements of the 1960s and 1970s that ‘behind every great man there’s a great woman’ is true, then such reticence could be holding back some, among our women, from greatness. Perhaps more relevantly, for our purposes, the reticence of the Singapore courts in extending the presumption of advancement to transfers from wife to husband154 150 Singapore Parliamentary Debates (2 May 1996) col 95. 151 Nominated Member of Parliament Dr Kanwaljit Soin was the sole dissentient: Singapore Parliamentary Debates (2 May 1996) cols 96–97. 152 Letter quoted in Leong Wai Kum, ‘The Next Fifty Years of the Women’s Charter: Ripples of Change’ [2011] Singapore Journal of Legal Studies 152, 170. 153 Leong, ‘The Duty to Maintain Spouse and Children during Marriage’ (n 134) 78. 154 Yeo Guan Chye Terence v Lau Siew Kim (n 39) [71].

116  Kelvin FK Low likely reflects the conservatism of the Women’s Charter. There is, in the near term, little prospect for change, especially when the bigger picture is borne in mind. It was previously thought that although article 12(2) of the Constitution of the Republic of Singapore made no explicit reference to gender equality, gender equality was assured under the general provision of article 12(1), and a trio of naive law students presumed to suggest that the spousal maintenance provision in the Women’s Charter might be constitutionally challenged on that basis.155 With the decision of the Court of Appeal in Lim Meng Suang v Attorney-General,156 it is now clear that this prospect for reform is now dead. Lim Meng Suang v Attorney-General concerned the constitutionality of the controversial section 377A of the Penal Code, which is believed to criminalise gay (ie, male–male) penetrative sex.157 As gay activists shifted from pragmatic resistance through to strategic adaptation,158 and to direct legal confrontation through collective litigation,159 it is perhaps ironic that their legal action to secure rights against discrimination on the basis of sexual orientation spelt the death of gender equality under the Singaporean Constitution. The case is much criticised160 but is likely to be the final word on the subject for some time yet.

V.  Values and Viability Families in Singapore, as elsewhere, are changing. In line with much of East Asia, Singaporeans are either marrying later in life or choosing not to marry at all,161 but this trend does not raise significant concerns for implied trusts. The increase in inter-ethnic and cross-border marriages also do not raise any great concerns as they all occur under the auspices of traditional marriages.162 Even increases in numbers of non-traditional

155 KFK Low et al, ‘Towards a Maintenance of Equality (Part I): A Study of the Constitutionality of Maintenance Provisions that Sexually Discriminate’ (1998) 19 Singapore Law Review 45, drawing upon in particular the US Supreme Court decision of Orr v Orr 440 US 268 (1979). 156 Lim Meng Suang v Attorney-General [2015] 1 SLR 26. 157 Contra Chan Sek Keong SC, ‘Equal Justice Under the Constitution and Section 377A of the Penal Code: The Roads Not Taken’ (2019) 31 Singapore Academy of Law Journal 773. The publication of this paper has triggered yet more challenges to the constitutionality of s 377A of the Penal Code, but it is doubtful that these will succeed so soon after Lim Meng Suang v Attorney-General [2015] 1 SLR 26. 158 LJ Chua, ‘Pragmatic Resistance, Law, and Social Movements in Authoritarian States: The Case of Gay Collective Action in Singapore’ (2012) 46 Law & Society Review 713. 159 LJ Chua, ‘Collective Litigation and the Constitutional Challenges to Decriminalizing Homosexuality in Singapore’ (2017) 44 Journal of Law and Society 433. 160 See, eg, Jack Tsen-ta Lee, ‘Equality and Singapore’s First Constitutional Challenges to the Criminalization of Male Homosexual Conduct’ (2015) 16 Asia-Pacific Journal on Human Rights and the Law 150; Jack Tsen-ta Lee, ‘The Limits of Liberty: The Crime of Male Same-Sex Conduct and the Rights to Life and Personal Liberty in Singapore’ (2016) 46 Hong Kong Law Journal 47; S Chang, ‘Legacies of Exceptionalism and the Future of Gay Rights in Singapore’ (2016) 46 Hong Kong Law Journal 71; JL Neo, ‘Equal Protection and the Reasonable Classification Test in Singapore: After Lim Meng Suang v Attorney General’ [2016] Singapore Journal of Legal Studies 95. 161 Wei-Jun Jean Yeung and Shu Hu, ‘Continuity and Change in Singapore’s Population and Families’ in Wei-Jun Jean Yeung and Shu Hu (eds), Family and Population Changes in Singapore: A Unique Case in the Global Family Change (Routledge 2018) 9–11. See also GW Jones, Zhang Yanxia, and P Chia Pei Zhi, ‘Understanding High Levels of Singlehood in Singapore’ (2012) 43 Journal of Comparative Family Studies 731. 162 Yeung and Hu (n 161) 15–16.

Singapore  117 families arising out of divorce and remarriages are arguably adequately attended to by the Women’s Charter rather than implied trusts. There is no sociological data on incidences of cohabitation although there is evidence that cohabitation is increasingly accepted among younger Singaporeans.163 However, this is tempered somewhat by a strong general desire to marry,164 so that cohabitation seems to be seen less as an alternative to marriage, but rather, a precursor. Although single-parent households exist, they remain a minority and have actually declined since the 1990s, with the majority of such households formed not through childbearing out of wedlock, but rather, through widowhood, divorce or separation.165 The majority of such cases can therefore be dealt with under the existing family law regime. The numbers of gay and lesbian families are unknown and untracked,166 to say nothing of other non-traditional family structures such as polyamory, which is even more deprecated than same-sex households.167 A majority of Singaporeans continue to disapprove of same-sex relations,168 so that any prospect for reform in this regard is highly improbable. It is rightly regarded that gender-neutral maintenance obligations, so recently rejected, are a more likely development than the recognition of non-traditional family forms,169 and even that has been left for ‘the medium term’.170 When that is achieved, we may finally see true gender parity in Singapore’s presumption of advancement. Perhaps the greatest concern which may call for some limited reform of the law relating to implied trusts in the meantime relates instead to the rapidly ageing ­ ­population.171 A combination of declining fertility and rising life expectancies have resulted in this trend. Although once tempered somewhat by immigration, dissatisfaction among Singaporeans over the rate of immigration has curtailed the government’s immigration policy.172 Two issues stand out in the face of this trend. First, should the presumption of advancement from parent to child also be recognised in reverse? Although the Singapore High Court in Ang Hai San Henry v Ang Bee Lin Elizabeth173

163 Jones, Zhang and Chia (n 161) 740–41. 164 ibid 741. 165 Yeung and Hu (n 161) 20. 166 S Tang, ‘Same-Sex Parenting and Same-Sex Parented Families in Singapore’ in Wei-Jun Jean Yeung and Shu Hu (eds), Family and Population Changes in Singapore: A Unique Case in the Global Family Change (Routledge 2018). 167 In UKM v Attorney-General [2019] 3 SLR 874, although the Family Division of the High Court, in a rare bench of three which included the Chief Justice, allowed a gay man in a stable relationship to adopt his biological son conceived abroad in the United States through a surrogate, a five-parent polyamorous household was repeatedly raised by the court as an instance of a family structure contrary to Singapore’s prevailing morality: see [47], [98], [157]–[158]. 168 LJ Chua et al, ‘Decriminalisation of Same-Sex Relations and Social Attitudes in Singapore: An Empirical Study’ (2017) 47 Hong Kong Law Journal 793. cf M Mathews, L Lim and S Selvarajan, ‘Religion, Morality and Conservatism in Singapore’ (2019) IPS Working Papers No 34, which although noting a shift in attitudes from 2013 to 2018 among younger respondents, finds that the majority of Singaporeans as a whole continue to disapprove of same-sex relations. 169 Leong, ‘The Next Fifty Years of the Women’s Charter’ (n 152). 170 ibid 155. If the 37-year gap between proposal and implementation of the limited maintenance right for incapacitated men is used as a gauge, we should see fully gender-neutral maintenance laws sometime between 2024 and 2033. 171 Yeung and Hu (n 161) 4–9. 172 ibid 13–14. 173 Ang Hai San Henry v Ang Bee Lin Elizabeth [2010] SGHC 353 [8].

118  Kelvin FK Low rejected such a presumption, the reasoning in the case was practically non-existent and amounted to a bare assertion. Bearing in mind that Singapore pioneered the legal obligation to provide maintenance to elderly parents in the form of the Maintenance of Parents Act,174 and taking into account the evidence of a significant proportion of the elderly receiving financial support,175 it may be desirable for the reverse presumption of advancement to be judicially recognised, at least where the parent is elderly and retired. Such recognition does not undermine the Confucian norms supposedly pursued by the government. It in fact supports them and is further consistent with government’s policy on social welfare, where ‘the family and the community … comprise the first and second lines of support for individuals’.176 Where residential property is concerned, it seems preferable that such a presumption of advancement, if recognised, should be limited to a life interest177 so as to avoid subsequent disputes between siblings on the death of the elderly parent. Second, the presumption of advancement from parent to child, so recently endorsed in respect of adult children,178 may also require some adjustments to take into account rising incidents of elder abuse, particularly in the form of financial exploitation.179 Although there is no reason to abolish the presumption entirely in respect of adult children, two adjustments may be necessary. It is perhaps appropriate to shift the burden of proving a gift to an adult child where the parent is especially elderly.180 Furthermore, it may be necessary to prefer a presumption of a resulting trust of a life interest in favour of such an elderly parent in order to secure his or her financial security, except in clear cases where a gift is intended.

VI. Conclusion Although many foreign scholars may find the role of implied trusts in Singapore distinctively primordial, frozen in their Victorian forms, careful study reveals the important role of the socio-political setting in which the English doctrines found themselves transplanted. From the moment Singapore began to extricate itself from British rule, initially

174 Cap 167B, 1996 rev edn. 175 B Gubhaju, A Chan and T Østbye, ‘Intergenerational Support to and from Older Singaporeans’ in Wei-Jun Jean Yeung and Shu Hu (eds), Family and Population Changes in Singapore: A Unique Case in the Global Family Change (Routledge 2018). 176 Leng Leng Thang and Johan Suen, ‘Singapore’s Approach to Ageing Policies: Tackling the Limits of the Family in Supporting Seniors’ in Wei-Jun Jean Yeung and Shu Hu (eds), Family and Population Changes in Singapore: A Unique Case in the Global Family Change (Routledge 2018) 142. 177 cf Lau Siew Kim (n 18); Pecore (n 34). 178 Lau Siew Kim (n 18). 179 See, eg, Loy Zhi Hao and P Soh Yu Xian, ‘Reforming the Law: Protecting the Elderly in Singapore’ (2013) 31 Singapore Law Review 253. See also Cheow Sue-Ann and Goh Ruoxu, ‘Elder Abuse Cases More Than Doubled in Two Years: Social and Family Development Ministry’ The New Paper (Singapore, 25 July 2019). A particularly egregious case which gripped the nation involved the Chinese tour guide, Yang Yin, who ingratiated himself with an elderly Singaporean widow and proceeded to misappropriate her assets as her ‘grandson’: see Chung Khin Chun K (by her deputy Mok Chiu Ling Hedy) v Yang Yin [2015] 5 SLR 467. 180 Research has shown that incidents of elder abuse among older seniors (aged 75 years and above) are significantly higher than among younger seniors (aged between 60 and 74 years): Wing-Cheong Chan, ‘Victims of Elder Abuse in Singapore: A Study of Cases at TRANS SAFE Centre’ in Wing-Cheong Chan (ed), Singapore’s Ageing Population: Managing Healthcare and End-of-Life Decisions (Routledge 2011).

Singapore  119 through self-governance in 1959, followed by union with Malaysia in 1963, before having full independence imposed upon it in 1965, the ruling party, the People’s Action Party, has, with the exception of promoting women’s rights, inculcated a policy of familial conservatism among its populace. So fertilised, particularly by the renaissance of Confucian ideals in the 1980s and 1990s, it is unsurprising that modern Commonwealth developments fail to take root in such hostile soil, and both the common intention constructive trust and the presumed resulting trust remain petrified in their historic Victorian forms.

120

part ii

122

7 The Transplantation of Trusts Law in India* STELIOS TOFARIS**

I. Introduction Frederic Maitland described the trust as ‘perhaps … the most distinctive achievement of English lawyers’;1 ‘almost essential to [English] civilization’, and yet ‘there is nothing quite like it in foreign law’.2 Nevertheless, over the last two centuries the trust has travelled across the world and found fertile soil on many foreign lands, including Asia.3 The trust’s journey to the East was inevitably complex: the ports of call were of a mixed description, the obstacles many and varied and the results diverse. The chapter charts the earliest phases of the journey, focusing on the transplantation of trusts law into British India in the late nineteenth century. Transplantation went hand in hand with transformation: the reasons for the transplantation and the problems encountered in practice gave rise to a particular form of transplanted law. The Indian Trusts Act (ITA) 1882 was a code that embraced a purportedly distinct model of the trust, one that was ‘obligatory’ in nature and had no division between legal and equitable ownership. This chapter has two principal aims. The first is to provide a historical analysis of the reception of trusts law in India throughout the nineteenth century, culminating in the genesis of the ITA. The second is to deconstruct the substance of the ITA with a view to determining what model of trust it embraced and how distinctive that was. In addition to these, the chapter seeks to explore the relevance of the ITA to modern academic debates about the nature of the trust.

* A longer version of this chapter appeared as S Tofaris, ‘Trust Law Goes East: The Transplantation of Trust Law in India and Beyond’ (2015) 36 Journal of Legal History 299. I am grateful to Taylor & Francis for permission to use this material. ** Fellow in Law, Girton College, Cambridge, and University Senior Lecturer in Private Law, Faculty of Law, University of Cambridge. 1 FW Maitland, Equity; and also The Forms of Actions at Common Law (Cambridge University Press 1910) 23. 2 ibid 23. 3 C Gothard (ed), The World Trust Survey (Oxford University Press 2010); L Ho and R Lee (eds), Trust Law in Asian Civil Law Jurisdictions: A Comparative Analysis (Cambridge University Press 2013).

124  Stelios Tofaris

II.  The Reception of Trusts Law in India A.  Trusts and ‘Trust-Like’ Devices in British India: Origins and Regulation British India had a rich tapestry of trusts and ‘trust-like’ devices,4 the regulation of which produced a complex body of law. First, there were the practices of European settlers. In the early years of colonial rule, these were few and usually had links to the East India Company. Most lived in the presidency towns of Calcutta, Bombay and Madras, with only a small number infiltrating the mofussil.5 However, the abolition of the Company’s trade monopoly by the East India Company Act 1813 and the Government of India Act 1833 led to an influx of European capitalists into India. As the number and wealth of Europeans expanded, so did the use of private and charitable trusts among them. These invariably took the form of English trusts and were regulated by English law. Judicial effort in such cases was directed at discovering and applying the principles set out by the English chancery courts. Second, there were several ‘trust-like’ devices used by the native population for different purposes, such as the Islamic waqf, the Hindu religious and charitable endowment and the benami transaction. For the most part, these operated in ­society without interference from the colonial courts. In some cases, however, disputants chose to litigate in those courts. This made it necessary for Anglo-Indian judges to confront the native ‘trust-like’ devices. The outline of the applicable law was found in statute. Seeking to follow a policy of non-intervention with native religions, the East India Company’s officials had long ago identified particular areas of law that were to remain exclusively the domain of native law.6 The courts in the mofussil were directed to decide ‘all Suits regarding Inheritance, Marriage, Cast, and other religious Usages or Institutions’ according to Islamic and Hindu laws,7 and other disputes on the basis of ‘justice, equity and good conscience’.8 In the presidency towns, all matters arising out of inheritance and succession to land and goods and all matters of ‘contract and dealing between party and party’ were to be decided by Islamic and Hindu laws and usages.9 Native ‘trust-like’ devices fell to be regulated primarily by native laws. Nonetheless, this did not stop Anglo-Indian judges from approaching them through the lens of Anglicised concepts. The judges made use of their own vocabulary and categories, relating many of those devices to the several types of English trust. This produced linguistic and

4 On this term, see WF Fratcher, ‘Trust’ in FH Lawson (ed), International Encyclopedia of Comparative Law: Property and Trust, vol 6 (Mohr Siebeck 1973). 5 Anglo-Indian term meaning provinces or country districts. 6 JDM Derrett, Religion, Law and the State in India (Oxford University Press 1999) 233–35. 7 ‘A Plan for the Administration of Justice, 15 August 1772, Art 23’ in Seventh Report from the Committee of Secrecy Appointed to Enquire into the State of the East India Company, 6 May 1773, Appendix II, 350, House of Commons Papers, Reports from the Committees of the House of Commons 1715–1801, vol 4: East Indies 1772–1773. It was officially enacted by Bengal Judicial Regulation I of 1780, s 17, and, in a modified form, by Regulation IV of 1793, s 15. 8 Bengal Judicial Regulation VI of 1781, ss 60, 93. 9 Act of Settlement 1781 (21 Geo III, c 70) s 17.

India  125 conceptual distortion, but it also invited the importation of English principles in respect of the native ‘trust-like’ devices and more broadly. The judicial treatment of the Islamic waqf provides an example. The waqf refers to the ‘stopping’ of ‘property’ in the sense that it cannot change hands by inheritance, sale or exchange. The waqif divests himself of the formal rights of possession while retaining the power to appoint a custodian to manage the property. Profits can be distributed for any purpose as long as it is acceptable by Islamic standards. Therefore, a waqf can be instituted for a religious or charitable purpose, or purely for a private one, such as the benefit of the founder’s family.10 While purporting to follow the Islamic law on the subject, Anglo-Indian judges erroneously equated the waqf with the English charitable trust. As a result, waqfs set up solely for the benefit of the founder’s family were invalidated and the endowment was only held valid where there was a ‘religious’, ‘charitable’ or ‘public’ purpose.11 Customary Hindu endowments for religious and social welfare purposes, such as the support of a family idol or the erection of temples, were approached with a similar frame of mind. The courts recognised that those endowments had distinctive characteristics and ought to be regulated by reference to Hindu rules and practices, yet over time they drew analogies with the English trust, including the charitable trust. This led to the introduction of foreign ideas and distorted the nature of the native institutions.12 Benami transactions, which amounted to purchases or holding of property in the name of another, were treated likewise. The key feature of a benami transaction was that there was no intention to benefit the person in whose name the transaction was made, that name being merely an alias for the real owner. The transaction was instead for the benefit of the person providing the money. The courts enforced benami transactions, but in the process of doing so they drew analogies with the English resulting trust. Thus, a leading Anglo-Indian textbook on native law stated: [T]he law of Benami is in no sense a branch of Hindu law. It is merely a deduction from the well-known principle of equity, that where there is a purchase by A in the name of B, there is a resulting trust of the whole to A.13

The result was that English concepts were gradually engrafted onto the native institution.14

10 GC Kozlowski, Muslim Endowments and Society in British India (Cambridge University Press 1985) 1; P Stibbard, D Russell and B Bromley, ‘Understanding the Waqf in the World of the Trust’ (2012) 18 Trust & Trustees 785. 11 Abul Fata Mahomed Ishak v Russomoy Dhur Chowdhry (1894) LR 22 IA 76. This was subsequently reversed by the Mussalman Wakf Validating Acts of 1913 and 1930. For details, see Kozlowski (n 10) 131–51; EL Beverley, ‘Property, Authority and Personal Law: Waqf in Colonial South Asia’ (2011) 11 South Asia Research 155. 12 R Birla, Stages of Capital (Duke University Press 2009) 67–102; J Mansfield, ‘Religious and Charitable Endowments and a Uniform Civil Code’ in GJ Larson (ed), Religion and Personal Law in Secular India (Indiana University Press 2001). The legislature also played a role by enacting the Religious Endowments Act of 1863, which made references to ‘trust’ and ‘trustees’ in this context. 13 JD Mayne, A Treatise on the Hindu Law and Usage, 2nd edn (Higginbotham 1880) 374. See also Goopeekrist Gosain v Gungapersaud Gosain (1854) 6 Moore Indian Appeals 53; Jatindra Mohan Tagore v Jatindra Mohan Tagore (1872) 9 Bengal Law Reports 377, 401. 14 For details, see WF Agnew, The Law of Trusts in British India (Thacker, Spink and Co 1882) 97–107; Law Commission of India, Fifty-Seventh Report: Benami Transactions (1973); Law Commission of India, One Hundred Thirtieth Report on Benami Transaction: A Continuum (1988).

126  Stelios Tofaris Third, there were attempts by natives to settle their property on the basis of Englishform private trusts, or trusts that were different in form and substance from the native ‘trust-like’ devices.15 This was most frequently done in a will.16 The practice was primarily used by wealthy individuals,17 like Prasanna Kumar Tagore,18 for a variety of reasons, for example as an attempt to evade inheritance according to native rules.19 It was inspired by the practices of Europeans in India and was made possible with the aid of Anglo-Indian lawyers. As one of them wrote: [T]he Hindus (at all events, all within reach or influence, socially, of the British or Presidency Court of Justice and its habitués) [have] been taught familiarity with the unbending, the nothing-less-than-plastic notions, forms, and moulds into which we and our ancestors … have cast and shapen property-dispositions. Our notaries and practisers in law have been, in such matters, dictators and manipulators to the Bengal Rothschild … the Bengal analogues of Westminster’s Marquis and Bedford’s Duke …. Have any of us … any doubt that, families, partnerships, dealings social and commercial, arrangements and unions innumerable, among Hindus around us, are, at this present, tied, governed … by (so-called) deeds, indentures, settlements, covenants, powers, provisoes, uses, trusts?20

The judicial response to these trusts was initially lukewarm. In Kumara Asima Krishna Deb v Kumara Kumara Krishna Deb,21 Peacock CJ expressed the view that ‘the Hindu law … makes no provision for trusts. There is nothing in the Hindu law at all analogous either to trusts of the English law or to the fidei commissa of the Roman law’. In Krishnaramani Dasi v Ananda Krishna Bose,22 Markby J held that a Hindu could not create a trust by will or otherwise. He thought that if the same facts arose in England, it would have been a simple case of giving the legal estate to a trustee and the equitable interest to the family; however, the very foundation of the English trust, ie, the duality of estate, did not exist in Hindu law23 and was therefore not open to a Hindu to establish. 15 In Krishnaramani Dasi v Ananda Krishna Bose (1869) 4 Bengal Law Reports (Original Jurisdiction) 231, 243, the court described the device used as ‘a regular settlement of the testator’s property through trustees in the English form’. 16 After some doubt the Privy Council recognised the capacity of Hindus to make wills: Nagalutchmee v Gopoo (1856) 6 Moore’s Indian Appeals 309, 344; Beer Pertab v Rajender Pertab (1867) 12 Moore’s Indian Appeals 37, 38; Hindu Wills Act 1870. 17 The practice appears to have been rare outside the presidency towns: ‘[c]omments by DG Barkley, Judge, Lahore, 1 November 1878’, British Library (BL) IOR/L/PJ/5/32; cf ‘Extract from the Abstract of the Proceedings of the Legislative Council of the Governor General of India, 12 January 1882’, National Archives of India (NAI) Legislative Department, A February 1882, No 146. 18 Tagore was the first native to be appointed to the Viceroy’s Legislative Council: HEA Cotton, Calcutta Old and New (Newman 1907) 421–22. In Krishnaramani Dasi v Ananda Krishna Bose (n 15) 262–63, Tagore’s will was used as evidence that eminent Hindus thought they had the power to set up trusts. 19 Tagore sought to disinherit his son who had become a Christian. See generally The Great Tagore Will Case (Indian Mirror Press 1872). 20 WA Montriou, Some Precedents and Records to Aid Enquiry as to the Hindu Will of Bengal (D’Rozario 1870) xxxv–xxxvii. In Krishnaramani Dasi v Ananda Krishna Bose (n 15) 284, Macpherson J said: ‘with seventeen years’ personal experience of the Courts here, I can say not only that I have, when at the bar, drawn wills and deeds creating trusts among Hindus, but that I have repeatedly had such instruments before me since I have been on the bench’. 21 Kumara Asima Krishna Deb v Kumara Kumara Krishna Deb (1868) 2 Bengal Law Reports (Original Jurisdiction) 11, 36. 22 Krishnaramani Dasi v Ananda Krishna Bose (n 15) 251–52. 23 See also Doe Dem Molloy v Sookmoye Dossee (1856) 1 Boulnois 607, 613 (The Indian Decisions (Old Series), vol 3, 371).

India  127 Nevertheless, the appeal court soon signalled a change of course. In Krishnaramani Dasi v Ananda Krishna Bose, Macpherson J stated that, because there is nothing in Hindu law which is repugnant to, or inconsistent with, the idea of trusts, because trusts are not unknown to the Hindu law, and because trusts, as among Hindus, have been recognized and administered for the last century almost by this Court and the late Supreme Court, we are bound so to recognize trusts and to give effect to them.24

He concluded that a Hindu may legally deal with his property so as to create a trust, a relation in many respects similar to, although not necessarily identical with, that known in English law as the relation of trustee and cestui qui trust.

This position was cemented in subsequent cases. In Ganendra Mohan Tagore v Upendra Mohan Tagore, Phear J expressed surprise at ‘the broad assertion that trusts are unknown to Hindu law’.25 On appeal the Privy Council put the matter beyond doubt. Willes J held that the anomalous law which has grown up in England of a legal estate which is paramount in one set of Courts, and an equitable ownership which is paramount in Courts of Equity, does not exist in, and ought not to be introduced into, Hindu law. But it is obvious that property, whether moveable or immoveable, must, for many purposes, be vested, more or less absolutely, in some person or persons for the benefit of other persons, and trusts of various kinds have been recognized and acted on in India in many cases.26

Consequently, it was affirmed that a Hindu could create a trust for the purpose of carrying out his lawful intentions. In this way, Anglo-Indian courts facilitated the use of trusts by natives. The regulation of those trusts was an open question. The fact that this type of trust did not conform to the normal devices provided for under native law made that law of limited assistance. The courts applied English principles but modified them to remove any perceived peculiarities, such as dual ownership. West J summed up the position in In the Matter of the Petition of Kahandas Narrandas, when he said that ‘taking Hindu law as one of its data [the court] applies “English law” also in the form of equity to all or nearly all the questions that arise’. He added that the substantive Hindu law fails to furnish the detailed rules by which effect is to be given to its principles in cases of trust … If the Court is called on to give effect to a trust in any given case, it looks, indeed, to the Hindu law of property to determine the estate of the trustee; but in many of the duties it annexes to that estate, the rights it recognizes as arising from the position of the beneficiaries, the means by which those rights are made effectual, it is governed by the rules of English equity. There are no others that it can apply. It has to take care, in applying them, not to violate the ‘laws, manners, customs and usages’ of the native community.27

24 Krishnaramani Dasi v Ananda Krishna Bose (n 15) 284. 25 Ganendra Mohan Tagore v Upendra Mohan Tagore (1869) 4 Bengal Law Reports (Original Jurisdiction) 103, 134. 26 Jatindra Mohan Tagore v Jatindra Mohan Tagore (n 13) 401. 27 In the Matter of the Petition of Kahandas Narrandas (1881) 5 ILR Bom 154, 174–75.

128  Stelios Tofaris Overall, the reception of English-based trusts law in India had its origins in two related developments. The first was the conceptualisation of native ‘trust-like’ devices. Anglo-Indian judges frequently viewed them as analogous to the different types of English trust. The manner in which the analogy was drawn was misleading. Perceiving the native devices as ‘trust-like’, or thinking of them as sharing some of the functional characteristics of English trusts, was not necessarily inappropriate. What was inappropriate was to stress the perceived analogy too far and to fail to respect the significant differences between the two sets of devices. This led to the use of foreign English principles in the resolution of disputes concerning native ‘trust-like’ devices and eventually to the distortion of the true character of those devices. The way in which native ‘trust-like’ devices were conceptualised had another less perceptible but equally important consequence. Anglo-Indian judges formed the opinion that behind those devices one could find a notion of ‘trust’ that was broader than the technical meaning that a trust had in English law. It centred on fiduciary relations and possession over property coupled with an obligation to use it for the benefit of a person other than the possessor.28 From this they drew the conclusion that the native laws were not unfamiliar with trusts. This belief proved instrumental when the second key development took place, ie, when natives tried to set up trusts that went beyond the normal ‘trust-like’ devices. Acting on that belief, the courts validated those efforts, thereby allowing natives to create trusts in an Anglicised form, which were governed in theory by native law,29 but in practice by English law stripped of some of its most peculiar features. The reception of English-based trusts law in India was not merely the result of legal theorising. An important factor was that natives were attempting to distribute their property among their families by creating trusts of an Anglicised form in their wills, a practice which was copied from Europeans. Pressure was exerted from outside the law, forcing the courts to react. Yet, the answer they gave was not inevitable. The process of reception had an ideological dimension, which is largely concealed by a purely legal analysis. For some judges, like Markby J, the introduction of English-type trusts and trusts law among the natives ought to be resisted because it ‘would in reality be a violation of the oft-declared intention of the Legislature’,30 which was to preserve the natives’ personal laws. For most, however, the advancement of civilisation and attainment of economic prosperity in India required the recognition of English-type trusts among natives and the availability of English law to them. Behind this lay presuppositions of cultural and moral superiority, which were commonplace among the colonial judiciary. Nowhere is this clearer than in John Mayne’s comments that, it is merely mock modesty to ignore in legislation a fact which is palpable and admitted. If the conquerors are a superior race, their social condition is probably higher, and their laws

28 Ganendra Mohan Tagore v Upendra Mohan Tagore (n 25) 134. 29 cf AS Hofri-Winogradow, ‘Zionist Settlers and the English Private Trust in Mandate Palestine’ (2012) 30 Law and History Review 813, 835. 30 Krishnaramani Dasi v Ananda Krishna Bose (n 15) 247. Note, however, Markby J’s gloss in ibid 247: ‘there is something to be said, if that were a question now open, in favour of replacing so faulty a legal system as that of the Hindus by our own’.

India  129 are probably wiser. Now to confine the subject population to their own laws, is simply to deny them the benefits of a better code.31

The reception described above was judicial in nature. Parallel to this, there were references to the trust in statutes passed by the colonial government of India. Those with the most detailed provisions on trusts were of limited application. For example, the Indian Trustee Act 1866 and the Trustees’ and Mortgagees’ Powers Act 1866 extended only to cases in which English law applied. By contrast, those binding the entire population contained only a ‘few isolated’ provisions.32 For example, the Penal Code punished the criminal breach of trust,33 the Specific Relief Act gave the trustee the right to sue for possession of property subject to a beneficial interest,34 the Code of Civil Procedure prescribed the procedure for suits by and against trustees,35 and the Limitation Act regulated the periods of limitation for actions against a trustee.36 It is doubtful that behind these statutes lay a conscious plan to introduce English-based trusts law into India. Instead, it seems that the colonial government was attempting to regulate various incidents concerning the trust where that was recognised as existing, notably by the courts. Even so, the references in colonial legislation further cemented the existence of English notions of the trust in India, aiding in this way the process of reception.

B.  The Codification of Trusts Law Anglo-Indian codification was a complex legal project with multiple facets. At core, it was undemocratic37 and imperialistic.38 At the same time, it was a battleground of contrasting political ideologies, administrative orientations, jurisprudential frameworks and individual personalities.39 The configuration of these factors and their interplay varied at different times. Although much of the groundwork of Anglo-Indian codification had already been done by the time trusts law was considered for codification,40 there was still room for disagreement. This centred on the nature of trusts law and its suitability for transplantation into India. In turn, this affected the substance of the code. Codification became a centralised policy of colonial law-making in India in the 1830s. The Government of India Act 1833 provided for the creation of a uniform body

31 JD Mayne, ‘Native Law as Administered in the Courts of the Madras Presidency’ (1863) 1 Madras Journal of Literature and Science, 3rd series 1, 2. Mayne held various positions in India, including that of the AdvocateGeneral of Madras (CE Buckland, Dictionary of Indian Biography (Sonnenschein 1906) 280). 32 W Stokes, The Anglo-Indian Codes, vol 1 (Clarendon Press 1887) 822. 33 Act XLV of 1860, ss 405–09. 34 Act I of 1877, s 10, expl 1. 35 Act X of 1877, ss 437, 439. 36 Act XV of 1877, s 10. 37 See, eg, ‘A Speech Delivered in the House of Commons on the 10th of July 1833’ in Lady Trevelyan (ed), The Works of Lord Macaulay, vol 8 (Longmans, Green and Co 1875). 38 N Hussain, The Jurisprudence of Emergency (University of Michigan Press 2003). 39 A Rodger, ‘The Codification of Commercial Law in Victorian Britain’ (1992) 108 Law Quarterly Review 570. 40 For details, see MP Jain, Outlines of Indian Legal and Constitutional History, 6th edn (Lexis Nexis 2009) 417–89; GC Rankin, Background to Indian Law (Cambridge University Press 1946) 22–160.

130  Stelios Tofaris of codified law throughout India.41 An early result was the draft Penal Code prepared in 1837 by a law commission under Thomas Macaulay, the first law member of the Indian government. This, however, did not make it into the statute book until 1860, around the same time that Codes of Civil and Criminal Procedure were also enacted. By that time, the framework of prospective Anglo-Indian codification had become firmly established. The codes were to be as far as possible universal, based on English law, but adapted to suit the local conditions.42 In pursuance of this, more codes followed between 1862 and 1872, when Henry Maine and James Fitzjames Stephen were respectively law members of the Indian government. Nonetheless, the rapid pace of legislation during those years raised concerns among some sections of the colonial administration, contributing to a period of limited activity under their successor, Arthur Hobhouse.43 Renewed pressure from the Secretary of State for India in London and the appointment of Whitley Stokes as law member in 187744 returned codification to the forefront of the government’s legislative activity.45 Stokes took steps to implement the codification of the remaining chapters of the Civil Code on the basis of English law and, as part of this, prepared a Trusts Bill in 1878. The codification of trusts law proved contentious.46 The main opponent was James Fitzjames Stephen. This may appear paradoxical given that Stephen was a staunch supporter of codification. During his tenure as law member of the Indian government between 1869 and 1872, Stephen oversaw the enactment of the Evidence Act, the Contract Act and a revised Code of Criminal Procedure. After his return to England, he pursued ardently the codification of English law, preparing draft codes on criminal and evidence law.47 That this was so helps to explain the nature of the disagreement.48 Stephen’s criticism concerned neither the desirability of Anglo-Indian codification in general, nor its ideological justification as an important part of the colonial enterprise. Both Stephen and Stokes broadly believed that codification on the basis of English law was a ‘blessing’ conferred on India.49 Rather, Stephen’s objection pertained to the codification of trusts law: it was specific to the subject matter. His central argument was that

41 3 & 4 Will IV, c 85, s 53. 42 ‘Second Report of Commissioners’, House of Commons, Parliamentary Papers (1856) vol 25, 206. 43 A Collection of Certain Notes and Minutes by Sir Arthur Hobhouse (Government Press 1906) BL IOR/V/27/100/7. 44 Stokes had already served as secretary in the legal department and the legislative council and was involved in the drafting of several Anglo-Indian codes. See NÓ Muraíle, ‘Stokes, Whitley (1830–1909)’ Oxford Dictionary of National Biography, available at: www.oxforddnb.com/view/article/36315. 45 ‘Minute on Indian Codification, 21 July 1882, by Sir Courtenay Ilbert’ in A Collection of Certain Notes and Minutes by the Hon’ble Mr Whitley Stokes and Sir Courtenay Ilbert (Government Press 1906) 94, BL Mss Eur F 111/714. 46 For the main archival material, see Government of India Bills & Acts 1882, BL IOR/L/PJ/5/32; NAI Legislative Department, A February 1882, Nos 1–148. 47 KJ Smith, James Fitzjames Stephen: Portrait of a Victorian Rationalist (Cambridge University Press 1988) 73–84, 123–32. 48 Stephen and Stokes did not enjoy a friendly relationship. Stephen privately described Stokes as ‘one of the most thick skinned and irritable of human beings’ (letter from JF Stephen to A Lyall, 17 September 1874, Lyall Papers, BL Mss Eur F 132/55). 49 Stokes (n 32) ix–x; JF Stephen, ‘Legislation under Lord Mayo’ in HW Wilson, A Life of the Earl of Mayo, vol 2, 2nd edn (Smith, Elder and Co 1876) 143.

India  131 English trusts law was unsuitable for transplantation into India. In a memorandum to the Indian government, Stephen wrote: I am of the opinion that the process of codification in India ought to consist of the reduction into a positive and systematic form of such branches of English law as are capable of being advantageously introduced into India, with greater or less modifications … different parts of the law of England are of very different degree of merit … the law relating to land, though it has, no doubt, been gradually adapted to the wants of English society, is founded upon a system in the highest degree technical, artificial, and unfit for transplantation to any other country. Hence I think that there is a strong prima facie objection to the introduction into Indian law of any branch of English real property law. For this reason I look with great suspicion … on the Act relating to trusts … and I am much disposed to think that [it] would do more harm than good.50

Stephen objected particularly to the introduction of the notion of dual ownership of property into India. He regarded this as peculiar to English law and as responsible for the creation of an intricate system that ought not to be reproduced. Furthermore, Stephen questioned the feasibility of having a trusts law that avoided dual ownership and the division between law and equity. Discussing whether the Bill was intended to introduce into India trusts in the strict sense in which English lawyers understood them, Stephen observed: If it does, it must of necessity introduce into India the very distinction between law and equity of which we in England are struggling to rid ourselves and this can hardly be intended. If it does not, what does it mean, for how can the rules administered by English Courts of Equity be introduced without introducing the fundamental conception which gives them unity and coherence?51

Stokes and a new law commission, set up under him in 1879 to review the state of codification, refuted Stephen’s criticisms.52 The codification of trusts law was justified on several grounds. First, it was claimed that the Bill did not introduce a foreign concept into India, but built upon an existing one. This was based on the notion that trusts, in the strict sense in which the term is used by English lawyers, that is to say, confidences to the existence of which a ‘legal’ and an ‘equitable’ estate are necessary, are unknown to Hindu and Mohammadan law. But trusts, in the wider sense of the word, that is to say, obligations relating to property, which arise out of a confidence reposed in and accepted by one person for the benefit of another, are constantly created by the Natives of India and are frequently enforced by the Courts.53

The assertion was not new; it was clearly derived from the Anglo-Indian case law. As a general observation, it was not necessarily wrong. The native devices could be viewed as ‘trust-like’, assuming the differences with the English notion of trust were acknowledged 50 ‘Memorandum on Codification in India by the Honourable Mr Justice Stephen, 2 July 1879’, BL IOR/C/142 ff 418. 51 ibid. 52 The first Statement of Objects and Reasons for the Trusts Bill did not expand on the reasons for the ­enactment of the Bill: ‘Statement of Objects and Reasons by W Stokes, 16 August 1878’, BL IOR/L/PJ/5/32. 53 ‘Statement of Objects and Reasons by W Stokes, 22 January 1879’, BL IOR/L/PJ/5/32.

132  Stelios Tofaris and respected as much as the similarities. The problem with the Law Commission’s view was not that it did not leave space for differences. It did, hence why the Trusts Bill did not cover the Islamic waqf and the Hindu endowments for religious and social welfare purposes. The problem was rather that it pointed to some very general similarities as a justification for the imposition of a full set of foreign technical rules. In that form, the argument was conceptually fallacious. Stephen’s comments had another dimension, which the Law Commission did not explicitly answer. Stephen thought that trusts were part of English real property law and that that was not suitable for transplantation.54 A possible response was to accept the latter, but challenge the former. For example, William Rattigan argued that notwithstanding the strange diversity of laws relating to succession, property and marriage which strike one in this country, and which render a general codification in those branches impracticable, it has nevertheless been found quite possible to enact a general Contract Law for India, which has now been worked for nearly ten years without in any way interfering with the prejudices of the natives … In like manner an Act defining the general principles which regulate the powers and obligations of trustees – constituting as they do but another branch of Contract Law – may usefully engage the attention of the Legislature.55

The Law Commission’s description of ‘trusts’ as ‘obligations relating to property’ shared some elements with Rattigan’s view, but it did not embrace a contractual understanding of trusts to the same extent. In any case, the argument about the familiarity of ‘trusts’ in native law addressed in their minds the criticism about the unsuitability of the subject for transplantation. Second, it was stated that the English-based rules in the Bill were already administered by Anglo-Indian courts under ‘justice, equity and good conscience’.56 This further downplayed the innovatory character of the code, but it also invited a comparison between the introduction of English law into India by legislation and case law. Codification was portrayed as a corrective to Anglo-Indian judicial law-making, and as a check to Anglicisation through it. This was described as piecemeal, chaotic and the cause of uncertainty. It was subjected to the complexity of English case law, but also to limitations in the proficiency of sections of the Anglo-Indian bench and bar and in the available library resources.57 By contrast, legislation was seen as based on the pursuance of simplicity, clarity and rational appreciation of the principles that ought to and could be adopted.58 The fact that the courts were already deciding cases on trusts between natives gave rise to a danger that they would apply to them the intricacies and peculiarities of English law when it was thought ‘desirable to keep them free from the complication of double estates in which, without the intervention of the legislature, they are certain to become entangled’.59

54 See similarly, Krishnaramani Dasi v Ananda Krishna Bose (n 15) 248 (Markby J). 55 ‘Opinion by WH Rattigan, 6 January 1879’, BL IOR/L/PJ/5/32. 56 ‘Statement of Objects’ (n 53). 57 ‘Extract from the Abstract of the Proceedings of the Legislative Council of the Governor General of India, 15 June 1881’, NAI Legislative Department, A February 1882, No 113. 58 ‘Report of the Indian Law Commission, 15 November 1879’, BL, IOR/V/26/100/12. 59 ‘Statement of Objects and Reasons by W Stokes, 6 November 1880’, BL IOR/L/PJ/5/32.

India  133 Third, it was asserted that the growth in number and wealth of European settlers in India made it imperative that they should enjoy a clear body of law on the subject.60 Although other opposing voices were subsequently heard,61 the codification of trusts law went ahead. The Trusts Bill drawn by Stokes in 1878 was revised by the Law Commission in 1879 and, in line with the standard legislative process, was published in the official gazette and circulated to the local governments for comments. It was then introduced into the Legislative Council and referred to a select committee under Stokes. The Act was eventually passed in January 1882. With some exceptions, the Act presented a systematic and synthetic arrangement of the rules of English trusts law.62 Had it been the first effort to identify and present the substantive principles of English trusts law in an orderly manner, the Act would have constituted a watershed for the subject. However, both the belief that this was possible and the process of formulation had already started. By the late nineteenth century, there were several English treatises that treated trusts as a conceptually unified and autonomous legal category.63 It was on these and Dudley Field’s draft New York Civil Code (NYCC) of 186564 that Stokes relied in the preparation of the ITA.65

III.  Theory and Doctrine in the Indian Trusts Act A.  The Nature of the Trust in the ITA A salient feature of the ITA is the definition of the ‘trust’ in section 3 as ‘an obligation annexed to the ownership of property, and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him, for the benefit of another, or of another and the owner’. The conceptualisation of the ‘trust’ as an obligation may at first glance appear innovative.66 However, the nature of the trust and particularly of the beneficiary’s interest has a long history of being variously understood. The ITA did not break new ground on this; nonetheless, its contribution was an important one. 60 ibid. 61 ‘Extract from the Abstract of the Proceedings’ (n 57); ‘Extract from the Abstract of the Proceedings’ (n 17). 62 ‘Statement of Objects’ (n 53). 63 JH Baker, An Introduction to English Legal History, 4th edn (Butterworths 2002) 310–11; S Anderson, ‘Trusts and Trustees’ in W Cornish et al (eds), The Oxford History of the Laws of England, Vol. XII, 1820–1914: Private Law (Oxford University Press 2010) 238–40. 64 Field’s code was never enacted in New York but was adopted in other US states. See generally AT von Mehren and PL Murray, Law in the United States, 2nd edn (Cambridge University Press 2007) 16–18; LM Friedman, A History of American Law (Simon & Schuster 1973) 340–46, 351–55. F Pollock and DF Mulla, The Indian Contract Act, 2nd edn (Sweet & Maxwell 1909) vii, described the code as the ‘worst piece of codification ever produced’. 65 Stokes had previously relied on the NYCC in the preparation of other Anglo-Indian legislation, eg the Indian Contract Act 1872 and the Specific Relief Act 1877. 66 Most modern English lawyers emphasise the proprietary dimension of the trust and regard the beneficiary’s interest as proprietary. See, eg, Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669, 705 (Lord Browne-Wilkinson); Foskett v McKeown [2001] 1 AC 102, 108 (Lord Browne-Wilkinson); Akers v Samba Financial Group [2017] UKSC 6, [2017] AC 424 [82] (Lord Sumption). For a similar view,

134  Stelios Tofaris

i.  Tracing the ITA’s Intellectual Origins and Innovations The origins of the definition in the ITA can be traced to the draft NYCC. This defined a ‘voluntary trust’ as ‘an obligation arising out of a personal confidence reposed in, and voluntarily accepted by one, for the benefit of another’.67 Stokes reworked the definition with a view to improving it in two ways. First, the addition of the phrase ‘annexed to the ownership of the property’ made clear that it did not cover bailments, thereby avoiding any confusion between the two.68 Second, the insertion of the words ‘or declared and accepted by him’, and ‘or of another and the owner’, ensured that the settlor could also act as a trustee or a beneficiary.69 Notwithstanding these changes, the ITA’s intellectual debt to the draft NYCC regarding the obligation-based understanding of the trust is indubitable. This is particularly so in light of the fact that this went against the grain of contemporary thinking. The conceptual nature of the trust at the time of the ITA’s drafting was not settled. To the extent that seventeenth- and eighteenth-century writers took a view on this, they did not agree, with some explaining the trust in proprietary terms and others in ­contractual terms.70 Similarly, the nineteenth-century sources available to Stokes for guidance from both sides of the Atlantic lacked unanimity. Nonetheless, the balance of professional writing tilted towards a proprietary approach. General works on equity emphasised the division between the trustee’s legal ownership of the property under the trust and the beneficiary’s interest in it, which they habitually described as ‘equitable or beneficial ownership’. In 1845, Josiah Smith defined the trust as ‘the equitable or beneficial interest or ownership of or in real or personal estate, existing apart from and collateral to the legal interest or ownership’.71 A year later, George Spence’s treatise explained that ‘when the Court of Chancery had assumed jurisdiction over trusts, and established that the equitable ownership might be in one person, and the legal ownership in another, the court necessarily interfered to protect the equitable ownership’.72 A few decades on, Edmund Snell described the trust as ‘a beneficial interest in, or a beneficial ownership of, real or personal property, unattended with the legal ownership thereof ’.73 In the United States, Joseph Story’s celebrated work on equity, which first appeared in 1836, stated that

see G Virgo, The Principles of Equity and Trusts (Oxford University Press 2012) 45, 51–57; C Webb and T Akkouh, Trusts Law, 3rd edn (Palgrave 2013) 21–27; JE Penner, The Law of Trusts, 9th edn (Oxford University Press 2014) 57–62; G Thomas and A Hudson, The Law of Trusts, 2nd edn (Oxford University Press 2010) 159–61. For a more open-ended discussion, see J McGhee (ed), Snell’s Equity, 32nd edn (Sweet & Maxwell 2010) 25–27; JE Martin, Hanbury and Martin’s Modern Equity, 19th edn (Sweet & Maxwell 2012) 18–22; PH Pettit, Equity and the Law of Trusts, 12th edn (Oxford University Press 2012) 84–86. 67 The Civil Code of the State of New York (Weed, Parsons and Co 1865) 347 (s 1168). 68 Stokes (n 32) 823. 69 The draft NYCC was vague on this: WG Hart, ‘What is a Trust?’ (1899) 15 Law Quarterly Review 294, 296. 70 M MacNair, ‘The Conceptual Basis of Trusts in the Later 17th and Early 18th Centuries’ in R Helmholz and R Zimmermann (eds), Itinera Fiduciae (Duncker & Humblot 1998); DJ Ibbetson, A Historical Introduction to the Law of Obligations (Oxford University Press 1999) 206, argues that during this period ‘the proprietary dimension was uppermost’. 71 JW Smith, A Manual of Equity Jurisprudence as Administered in England Founded on the Commentaries of Joseph Story (Stevens and Norton 1845) 90. 72 G Spence, The Equitable Jurisdiction of the Court of Chancery, vol 2 (Stevens and Norton 1846) 39. 73 EHT Snell, The Principles of Equity: Intended for the Use of Students and the Profession (Stevens and Norton 1868) 48.

India  135 ‘a trust in the most enlarged sense, in which that term is used in English Jurisprudence, may be defined to be an equitable right, title or interest in property, real or personal, distinct from the legal ownership thereof ’.74 Analysing the trust in these terms emphasised its proprietary dimension. Treatises devoted exclusively to trusts law aligned themselves with this proposition, although the analysis was not identical. Thomas Lewin’s leading treatise on the subject, published in 1837, adopted Lord Coke’s definition of the trust as a confidence reposed in some other, not issuing out of the land, but as a thing collateral, annexed in privity to the estate of the land, and to the person touching the land, for which cestui que use has no remedy but by subpoena in Chancery.75

Lewin added that ‘a trust is a confidence, as distinguished from jus in re and jus ad rem, for it is neither a legal property, nor is it a legal right to property’.76 This suggests a rejection of a proprietary understanding of the trust, yet Lewin’s discussion of the more detailed rules of trusts law conveys the opposite impression. According to a modern commentator, ‘the law of express private trusts Lewin portrayed was unequivocally a branch of property law … Lewin conceived of the relation between beneficiary and trustee as proprietary’.77 The other major work on trusts, written by James Hill in 1845,78 did not provide a definition of the trust, but its analysis of the express and constructive trusts treated the beneficiary’s claim as proprietary in nature.79 Other nineteenth-century writers endorsed more openly an obligation-based definition of the trust. A decisive step in this direction was taken by the NYCC’s drafters in 1865. New treatise writers followed course, although they did not always mention the NYCC. In 1873, William Watson explained in his general work on equity that a trust may be described generally, as an obligation affecting property, legally vested in one or more … which obligation he is, or they are, bound to perform, wholly or partially, for the benefit of another or others … in whom the equitable interest is vested.80

In 1879, Arthur Underhill’s treatise on trusts law defined the trust as an obligation, under which some person is bound … to deal with the beneficial interest in real or personal property which is vested in him, in a particular manner and for a particular purpose, either wholly [or partially] in favour of another or others.81

A few cautionary points are appropriate. First, it would be wrong to think that the conceptualisation of the trust underwent a decisive shift from proprietary to

74 J Story, Commentaries on Equity Jurisprudence, as Administered in England and America, vol 2, 3rd edn (Little, Brown and Co 1843) 275. 75 T Lewin, A Practical Treatise on the Law of Trusts and Trustees (Maxwell 1837) 15. For Coke’s definition, see E Coke, The First Part of the Institutes of the Lawes of England, or, A Commentarie Upon Littleton (Societie of Stationers 1628) 272 b. 76 ibid 15. 77 Anderson (n 63) 240. 78 J Hill, A Practical Treatise on the Law Relating to Trustees (Stevens and Norton 1845). 79 Ibbetson (n 70) 283. 80 WW Watson, A Practical Compendium of Equity, vol 2, 2nd edn (Sweet and Sons 1886) 959. The first edition was published in 1873. 81 A Underhill, A Concise Manual of the Law Relating to Trusts and Trustees (Butterworths 1878) 3.

136  Stelios Tofaris obligational in the closing decades of the nineteenth century. The latter was a more recent ­development,82 but it never gained complete ascendancy. The two coexisted in professional literature with the majority of works continuing to follow the former model. Second, speaking about opposing conceptions of the nature of the trust makes too strong a point. It gives the impression that nineteenth-century writers thought long and hard about the issue, subscribing fully to one or the other view. However, this was probably not the case. On one hand, emphasising the division between the trustee’s legal interest and the beneficiary’s equitable interest and characterising the latter as equitable ownership did not necessarily translate into a well-thought-out view of the trust as exclusively property-based. Most authors adhering to this viewpoint recognised that the trustee had obligations to the beneficiary and used the language of equitable ownership to explain what those obligations meant in practice. On the other hand, those adopting an obligation-based definition by no means adhered to a purely contractual understanding of the trust. Writers such as Underhill recognised the complexity of the trust and the limitations of viewing it simply as a contract.83 Overall, there was no exposition of thoroughly developed theoretical models of the trust. The issue was not at the forefront of the treatise writers’ minds; instead, they focused on the rules in the case law, which remained largely divorced from such expository matters.84 It is against this background that Stokes’ decision to define the trust as an obligation in the ITA must be understood. The inspiration was clearly the draft NYCC, but this was no blind copying. Rather it appears that Stokes wished to analyse the trust as an obligation and used the draft NYCC as a convenient starting point. The question is therefore why Stokes opted for this analysis. The answer lies in reasons specific to India. Stokes was in essence trying to avoid the introduction of the conceptual division between legal and equitable ownership into India and especially the mofussil. The division was regarded as a unique characteristic of English law and the peculiar conditions of landholding in England, and as alien to Indian thinking and practices. It is for the same reason that the ‘beneficial interest’ was defined in section 3 of the ITA as a ‘right against the trustee as owner of the trust property’. This meant that the beneficiary had ‘no estate or interest in the subject-matter of the trust’.85 Analysing the trust in obligational terms also served a closely related objective, which was to use the term ‘trust’ broadly so as to encompass, or approximate the meaning of, native institutions. Whether Stokes’ reasoning was right is far from certain. Nonetheless, it was decisive in implanting an obligation-based concept of the trust in Indian law. On the whole, the ITA went further than most treatises of its time. The trust was already viewed as an obligation in some of them, yet the ITA bestowed that view with legislative authority and fixity. Moreover, it did so by explaining the beneficiary’s interest merely as a right against the trustee as owner of the trust property and by avoiding the use of terms such as equitable estate, title or ownership. 82 It was also an older definition adopted, for example, by Lord Coke in the seventeenth century. For the earlier history, see Baker, An Introduction to English Legal History (n 63) 309–10. 83 A Underhill, A Practical and Concise Manual of the Law Relating to Private Trusts and Trustees, 2nd edn (Butterworths 1884) 2. 84 Anderson (n 63) 240. 85 ‘Report of the Indian Law Commission’ (n 58); ‘Statement of Objects’ (n 59).

India  137

ii.  Digging Deeper: An Examination of the ITA’s Substantive Rules The extent to which the ITA implemented a holistic view of the trust as an obligation can be assessed by examining its substantive rules. Particularly instructive is the treatment of those rules that are frequently cited as illustrations of the proprietary nature of the beneficiary’s rights. First, and least importantly, it has been observed that the beneficiary’s rights resemble other proprietary rights in that they can be bought, sold, mortgaged and bequeathed.86 A similar use of the beneficiary’s interest is permitted under section 58 of the ITA. Second, it has been argued that the beneficiary’s rights should be treated as proprietary because of the rule in Saunders v Vautier,87 that a beneficiary with an absolute and indefeasible interest has the power to instruct the trustee to terminate the trust and transfer the property to him.88 An analogous rule is found in the ITA. Section 56 enacts that, where there is only one beneficiary and he is competent to contract, or where there are several beneficiaries and they are competent to contract and all of one mind, he or they may require the trustee to transfer the trust-property to him or them, or to such person as he or they may direct.

Third, it has been pointed out that the beneficiary’s rights bind third parties even though the third parties may not be aware of those rights, hence they must be seen as ­proprietary.89 The position in the ITA is comparable. According to section 63, ‘where trust property comes into the hands of a third person inconsistently with the trust, the beneficiary may require him to admit formally, or may institute a suit for a declaration, that the property is comprised in the trust’, and where the trustee has disposed of trust-property and the money or other property which he has received therefore can be traced in his hands, or the hands of his legal representative or legatee, the beneficiary had, in respect thereof, rights as nearly as may be the same as his rights in respect of the original trust-property.

Fourth, the rule that the beneficiary’s rights take priority over those of the trustee’s ­creditors in cases where the trustee has become bankrupt has been cited as proof that the beneficiary has a proprietary interest.90 This rule is in line with section 64 of the ITA, which states that, nothing in section 63 entitles the beneficiary to any right in respect of property in the hands of – (a) the transferee in good faith for consideration without having notice of the trust, either when the purchase-money was paid, or when the conveyance was executed, or – (b) a transferee for consideration from such a transferee

making clear that ‘a judgment-creditor of the trustee attaching and purchasing trust-property is not a transferee for consideration within the meaning of this section’. One could conclude from this that the obligation-based understanding of the trust in the ITA does not apply in any real sense beyond the definitions in section 3.

86 Martin

(n 66) 20. v Vautier (1841) 4 Beav 115, affirmed in (1841) Cr & Ph 240. 88 Thomas and Hudson (n 66) 161. 89 Virgo (n 66) 52. 90 ibid; P Jaffey, ‘Explaining the Trust’ (2015) 131 Law Quarterly Review 377, 379. 87 Saunders

138  Stelios Tofaris However, this would have the effect of validating, without a careful analysis, the view that the existence of the aforementioned rules makes the trust a proprietary institution. This does not necessarily follow; several authors have sought to explain those rules within an obligational model of the trust,91 and the same could be attempted in respect of the ITA. In addition, one could point to other rules in English trusts law found in the ITA, which do not appear to fit well with a proprietary understanding of the beneficiary’s rights, such as the rule in section 64 that the beneficiary’s rights are defeated by a third party who has obtained the trust property in good faith and for value.92 On the whole, the point that emerges from the historical account is that the substantive law was to a significant extent disconnected from theory. The conceptual understanding of the trust in the ITA did not have a wholesale impact on doctrine, with the result that many of the fundamental rules of English trusts law, widely considered as evidence of the proprietary nature of the trust, were reproduced within the Act’s very different framework with no apparent difficulty. In the end, whether conceived as proprietary or personal, the beneficiaries’ rights in England and India were not dissimilar. Despite any innovation, the theoretical analysis of the trust in the ITA had limited practical importance, affecting little of the actual working of the trust. Nonetheless, the theoretical model of the trust in the ITA was important in a different way. It demonstrated, at least superficially, that it was possible to encompass and explain the standard rules of English trusts law without drawing a distinction between ‘legal’ and ‘equitable’ ownership. In other words, there could be a recognisable trusts law without the notion of dual ownership. This affected the transferability of the Act’s model of the trust, making it more exportable across the British Empire and beyond.93

B.  Judicial Discussion of the Nature of the Trust The ITA has over the years escaped major legislative revision.94 This has left the doctrinal development of Indian trusts law for the most part to the courts. In this connection, English law has continued to play a role. The Indian courts have regularly resorted to English case law where the Act offers no solution. In DH Vahalia v VP Bhatt,95 Vimadalal J

91 eg, T Honore, ‘Trusts: The Inessentials’ in J Getzler (ed), Rationalizing Property, Equity and Trusts: Essays in Honour of Edward Burn (Lexis Nexis 2003) 17–20. 92 Pettit (n 66) 84. 93 For details, see S Tofaris, ‘Trust Law Goes East: The Transplantation of Trust Law in India and Beyond’ (2015) 36 Journal of Legal History 299. 94 Law Commission of India, Seventeenth Report: Trusts Act, 1882 (1961) 2–3. For amending legislation, see, eg, Indian Trusts (Amendment) Act 1908; Indian Trusts (Amendment) Act 1917; Indian Trusts (Amendment) Bill 2014. In addition, separate legislation has been enacted to deal with specific areas of trusts. 95 AIR 1972 Bom 103, 107. See also Shivramdas v BV Nerurkar AIR 1937 Bom 374, 379–80; Phulchand v Hukumchand AIR 1960 Bom 438, 441; Kishore Joo v Guman Behari Joo Deo AIR 1978 All 1, 5–6; Immani Appa Rao v Gollapalli Ramalingamurthi AIR 1962 SC 370, 378.

India  139 held that the ITA is ‘exhaustive in any matter specifically provided for in it’, but ‘it is not exhaustive of all matters relating to private trusts’; accordingly, in any case not covered by the Act, the Court is entitled to apply rules of English law, as laid down by judicial decisions in that country, which are not inconsistent with the Act, as the rules of justice, equity and good conscience.

Furthermore, the courts have at times sought to interpret the ITA in light of English law. For example, in Tirathdas Dharamdas v Parmeshwaribai,96 Davis CJ said that, bearing in mind the caution always required in interpreting an Indian Statute in the light of the English authority and practice, it does appear that in the case of the Indian Trusts Act, it would be proper to interpret the scope and purpose of the Indian Act in light of the English authority and practice.

The references to English law have the potential to distort the analysis of the nature of the trust and of the beneficiary’s interest in the ITA. In fact, such distortion has sometimes occurred. In most cases the Indian courts have faithfully adhered to the ITA’s conceptual framework, maintaining that the trust is an obligation and rejecting the existence of the distinction between legal and equitable ownership in Indian law.97 However, in some cases the language of dual ownership has crept into judicial ­analysis.98 For example, in Baba Badri Dass v Dharma,99 a case not dealing with the ITA, Punchhi J explained that, it is well understood in legal annals that a trustee is the legal owner of the property … the equitable ownership in the trust property vests in the beneficiaries. The trust is thus an incidence of dual ownership in which the creator of the trust no longer figures.

Moreover, when applying the ITA the courts have occasionally described the beneficiary’s position as proprietary.100 The analytical ambiguity surrounding the nature of the trust in the Indian case law is connected to the continuing resort to English law, but it also has its roots in the ITA, which, despite defining the trust as an obligation, provides the beneficiary with rights that could be thought of as proprietary. Whether this matters in practice

96 AIR 1943 Sind 223, 225. See also, Manuel Kunha v Juana Coelho (1908) 18 Madras Law Journal 158, 163–64, 170–71; Nethiri Menon v Gopalan Nair AIR 1916 Mad 692, 694. 97 eg, Manuel Kunha v Juana Coelho (n 96) 171; Richard Taylor v Sri Krishna Chandra (1909) ILR 32 Mad 443, 455; Chattra Kumari Devi v Mohan Bikram Shah AIR 1931 PC 196, 202; Official Assignee v ME Moolla Sons AIR 1935 Rang 84, 87; WO Holdsworth v The State of Uttar Pradesh AIR 1957 SC 887, 891; Bai Dosabai v Mathurdas Govinddas AIR 1980 SC 1334, 1338. 98 Indian textbooks similarly note that the English distinction between legal and equitable ownership is not recognised in India, yet refer to it when explaining the nature of the trust: eg, SK Sarvaria and S Gupta, S Krishnamurthi Aiyar’s Commentary on the Indian Trusts Act, 7th edn (Universal Law Publishing 2012) 97–99, 112. 99 AIR 1982 P & H 255, 259. See also Himansu Kumar Roy v Moulvi Hasem Ali Khan AIR 1938 Cal 818; Suleman Isubji Dadabhai v Naranbhai Dahyabhai Patel AIR 1980 Guj 165; Govardhandhari Devasthan v Collector of Ahmednagar AIR 1982 Bom 332; Yasmin Properties (P) Ltd v Assistant Commissioner of Income Tax (1993) 46 ITD 331. 100 Sunita Gandhi v Leena Gandhi Tewari (1998) (1) Bom CR 715.

140  Stelios Tofaris remains unclear. In Punjab Province v Daulat Singh,101 Varadachariar J took the view that once the definitional and theoretical language is stripped away, ‘it will be found that for all practical purposes there is little or no difference between a beneficiary under the English law and a beneficiary under the Indian Trusts Act, so far as the substance is concerned’.

IV.  The Indian Trusts Act in Modern Debates: A Word of Caution Fifoot long ago warned that historical studies must not be undertaken for an ulterior purpose,102 but it does not follow that lessons cannot be learned from them.103 With this in mind, it is possible to examine the relevance of the material in this study to modern debates about the trust, especially those involving the ITA.104 In recent years, the Act has received attention outside India in connection with two different, albeit related, developments. The first is a serious re-engagement by common law scholars with the theoretical characterisation of the nature of the trust and the beneficiary’s interest. Although this has been the subject of a long-standing academic debate,105 the conventional wisdom in English textbooks and cases has been that the beneficiary has a proprietary interest.106 This has lately been challenged by a number of scholars, who have instead put forward an obligational understanding of the trust.107 In doing so, some of them have noted the ITA’s definition of the trust in complimentary terms.108 The second development concerns a growing effort to understand the trust from a European and international perspective.109 Several commentators have sought to encourage a more productive dialogue between common and civil lawyers on the subject and facilitate, where possible and desirable, the use or recognition of the trust in 101 AIR 1942 FC 38, 43. 102 CHS Fifoot, Law and History in the Nineteenth Century (Quaritch 1956) 21. 103 J Baker, ‘Why Should Undergraduates Study Legal History?’ in J Baker (ed), Collected Papers on English Legal History, vol 3 (Cambridge University Press 2013). 104 The ITA of course continues to be a living instrument, governing the financial arrangements of a vast number of people. 105 For overview, see MW Lau, ‘The Nature of the Beneficial Interest: Historical and Economic Perspectives’, available at: papers.ssrn.com/sol3/papers.cfm?abstract_id=2213055. 106 See above (n 66). 107 LD Smith, ‘Trust and Patrimony’ (2008) 38 Revue Générale de Droit 379; B McFarlane and R Stevens, ‘The Nature of Equitable Property’ (2010) 4 Journal of Equity 1; J Edelman, ‘Two Fundamental Questions for the Law of Trusts’ (2013) 129 Law Quarterly Review 66; S Agnew and B McFarlane, ‘The Paradox of the Equitable Proprietary Claim’ in B McFarlane and S Agnew (eds), Modern Studies in Property Law, vol 10 (Hart Publishing 2019). For criticism, see JE Penner, ‘The (True) Nature of a Beneficiary’s Equitable Proprietary Interest under a Trust’ (2014) 27 Canadian Journal of Law & Jurisprudence 473; EC Zaccaria, ‘The Nature of the Beneficiary’s Right Under a Trust: Proprietary Right, Purely Personal Right or Right Against a Right?’ (2019) 135 Law Quarterly Review 460. 108 L Smith, ‘Introduction’ in L Smith (ed), Re-Imagining the Trust: Trusts in Civil Law (Cambridge University Press 2012) 2; Edelman (n 107) 72; Commissioner of Taxation v ElecNet (Aust) Pty Ltd (Trustee) [2015] FCAFC 178 [85] (Pagone and Edelman JJ). 109 MJ de Waal, ‘Trust Law’ in JM Smits (ed), Elgar Encyclopedia of Comparative Law (Elgar 2012).

India  141 civilian jurisdictions.110 This has led to an effort to remove from the analytical description of the trust features which clash with civilian concepts,111 and in some cases, to the promotion of an obligation-based model instead.112 As part of this, the ITA has been cited for support.113 The study of the debates surrounding the enactment of the ITA and the subsequent judicial discussion invites caution. It would be wrong for analytical purposes to separate the ITA’s definition of the trust from the substantive rules encompassed in it. To appreciate the model of the trust in the ITA, one must follow a holistic approach. This may end up indicating that the model in the ITA is not perfectly transportable into a civilian system, even if it may be easier to transport than the orthodox English model.114

V. Conclusion The trust has today become ‘a prominent figure in world activities among the most diversified civilizations’,115 including those in the East. The story of how this has occurred is a rich tapestry of complex and sometimes interwoven themes. The chapter has sought to unravel some of those themes, focusing on the transplantation of trusts law in India. By way of a conclusion two points are worth reiterating. The first concerns the nature of the trust in the ITA. On the face of it, the Act was innovatory, adopting an obligational model of the trust. A closer inspection reveals the limited nature of the innovation; not only did intellectual precursors exist, many of which were utilised in the drafting of the Act, but rules in the Act itself may not have been entirely harmonious with the model. At the same time, the particular model was part of a concerted effort to tailor trusts law to the conditions in India as understood by colonial administrators. The second point concerns the relevance of the ITA and its model of the trust in modern debates about the nature of the beneficiary’s right and the transferability of the trust into civilian legal systems. The chapter has sounded a word of caution in respect of these, illustrating the need for the definitions and the rules in the ITA to be analysed in the round.

110 eg, M Lupoi, Trusts: A Comparative Study (Cambridge University Press 2000); DJ Hayton et al (eds), Principles of European Trust Law (Kluwer 1999); C von Bar and E Clive (eds), Principles, Definitions and Model Rules of European Private Law: Draft Common Frame of Reference, Book X (Oxford University Press 2010); and the Hague Convention on the Law Applicable to Trusts and on their Recognition, 1 July 1985. 111 eg, D Hayton, ‘The Irreducible Core Content of Trusteeship’ in AJ Oakley (ed), Trends in Contemporary Trust Law (Oxford University Press 1996) 47; Honore (n 91) 7. 112 R Valsan, ‘Rights against Rights and Real Obligations’ in L Smith (ed), The Worlds of the Trust (Cambridge University Press 2013) 487. 113 Honore (n 91) 16; Lupoi (n 110) 183; Smith, ‘Introduction’ (n 108) 2–3. 114 Tofaris (n 93). 115 P LePaulle, ‘The Strange Destiny of Trusts’ in R Pound et al (eds), Perspectives of Law: Essays for Austin Wakeman Scott (Little, Brown and Co 1964) 239.

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8 Constructive Trusts under Muslim Family Law in Pakistan: Protecting Women’s Rights to Matrimonial Property MUHAMMAD ZUBAIR ABBASI*

I. Introduction Women’s rights to matrimonial property are not recognised under conventional principles of Muslim family law in Pakistan. Each spouse owns separate properties in their own name. This means that upon divorce, wives are not entitled to claim any right in the property accumulated by their husbands during wedlock. This ‘separate property rights regime’ fails to protect the property rights of wives because it does not recognise the value of their contribution as homemakers. In this way, divorced and widowed women become economically dependent and vulnerable to exploitation and abuse. As divorcees, they receive limited rights to maintenance during the waiting period (iddat) of about three months after divorce and no other financial support or alimony; and as widows, they receive a limited inheritance right in the estate of their husbands, one-fourth share (if there are no children) or one-eighth share (if there are children).1 In contrast with the ‘separate property rights regime’, the ‘matrimonial property/community property rights regime’ recognises the economic value of housewives’ work as homemakers. Under this regime, which is not recognised under the legal system in Pakistan, divorced women receive an equal share in the property accumulated by their husbands during marriage. This chapter explores legal principles, under Muslim family law in Pakistan, for the recognition of women’s contributions within the institution of the family. The chapter is divided into three sections. In section I, I describe the diverse sources of Muslim family law under the legal system of Pakistan. These sources include uncodified principles

* Associate Professor, Shaikh Ahmad Hassan School of Law, Lahore University of Management Sciences. 1 A childless widow of a husband who professes Shia Islam does not receive any share in the immovable property owned by her husband: SA Cheema, ‘Shia and Sunni Laws of Inheritance: A Comparative Analysis’ (2012) 10 Pakistan Journal of Islamic Research 69.

144  Muhammad Zubair Abbasi of Islamic law (sharia/fiqh) and case law based on judicial precedents of the superior courts (High Courts, Federal Shariat Court and Supreme Court). This section shows that women have resorted to private ordering through contracts to protect their proprietary rights because the existing law provides limited recognition of their contribution as homemakers. In section II, I explore the trusts law regime in Pakistan and identify constructive trusts as a tool to recognise the financial contributions of married women in matrimonial property. In section III, I examine the application of constructive trusts in various common law jurisdictions and propose that Pakistani judges should similarly rely on constructive trusts to protect women’s rights to matrimonial property under Muslim personal law.

II.  Women’s Rights to Matrimonial Property The legal system of Pakistan is based on common law tradition supplemented with Islamic legal tradition. The British introduced the common law in the Indian subcontinent during the colonial period (circa 1757 to 1947). During this period, English law gradually replaced Islamic law which was confined to personal matters relating to marriage, divorce, guardianship and personal property. The application of Islamic family law in colonial courts, which operated under the doctrine of precedent, resulted in the formation of Anglo-Muhammadan law (later called Muslim personal law). This historical context reveals the hybrid nature of the Pakistani legal system. The issue of recognition of women’s rights to matrimonial property could therefore be analysed under two sets of principles: classical and modern Islam law (sharia/fiqh); and the mixed Muslim personal law that applies in Pakistan because of its colonial history. A third set of principles of ‘private ordering’ based on contractual arrangements could also be added. In the following part of the chapter, each set of principles is explored.

A.  Classical and Modern Islamic Law Classical Islamic law recognises a separate property regime where neither spouse has a claim over the property of the other spouse. Both parties maintain a separate financial status and hold property in their individual names throughout the course of their marriage. Therefore, Muslim jurists argue against a community property regime. This means that, under classical Islamic law, a wife does not have a claim over her husband’s assets accumulated during marriage before or after dissolution of their marriage. She may use such property during the subsistence of the marriage, but she does not have propriety interest in matrimonial property. While the concept of a joint property regime is not expressly mentioned by traditional jurists, it is found in juristic discussions on household items (mata’ al-bayt) or married couple’s property (mal al-zaujayn). Against this backdrop, the founder of one of the schools of Sunni Islam, Imam al-Shafi‘i opined that when there is a dispute over household items between spouses, they are entitled

Pakistan  145 to equal shares.2 Muslim jurists argue that a wife is not legally obliged to perform any household chores, including the responsibility to take care of children; hence, she should be remunerated for any work she performs during the subsistence of her marriage.3 This position is further bolstered by the fact that there is no mention of matrimonial property in the Qur’an or Sunnah, the primary sources of Islamic law. It is a general principle of Islamic law that if anything is not prohibited, it is permitted.4 In several Muslim countries, a community property regime has been introduced through modern reforms based on the contractual nature of marriage under Islamic law.5 For instance, in Indonesia and Malaysia, community property has been legitimised on the basis of Islamic customary law. In Malaysia, section 58 of the Islamic Family Law (Federal Territory) Act 1984 gives courts the power to order a division of assets between parties keeping in view their contributions towards acquiring the assets, debts owed by either party that were contracted for their joint benefit, and the needs of their minor children. This section also recognises unpaid domestic work of either party that has contributed to the welfare of the family. In Malaysia, spouses often cultivate land together and the distribution of property among them is strongly influenced by matrilineal custom. Upon divorce, the wife is granted the share of land acquired during marriage which she assisted to cultivate. The division of property does not depend on who caused marital breakdown. This custom was later translated into law and the judiciary recognised it as partnership in property (harta sharikat). The proportions in which property is divided depend on the parties’ contributions and circumstances of each case.6 In Indonesia, article 35 of the Marriage Law 1974 deals with joint ownership of property. It stipulates that, other than property acquired through gift or inheritance, the goods acquired during marriage will become the joint property of a husband and wife. Both the husband and wife can dispose of their joint property by mutual agreement under article 36 of the Law.7 The doctrine of marital property has also been spelled out in the Compilation of Islamic Law, a code binding on Islamic courts. Marital property is referred to as ‘harta bersama’, derived from the words ‘syirka’ or ‘syarikat’ (partnership). This doctrine has its roots in Southeast Asian custom or ‘adat’ which was absorbed into

2 MNM Hussin, ‘Distribution Practice of Harta Sepencarian in Malaysia: A Literature Review’ (2016) 1 Journal of Shariah Law Research 75, 88. 3 The Lahore High Court in Pakistan held that an ex-wife was entitled to a maintenance allowance for breastfeeding her baby for two years after her husband divorced her. Muhammad Aslam v Muhammad Usman PLJ 2004 Lahore 1075. Art 201 of the Moroccan Family Code (Mudawana) 2004 gives mothers additional maintenance for breastfeeding children. 4 The Federal Shariat Court of Pakistan held, ‘[w]hat is not prohibited by the Holy Qur’an and Sunnah is permitted and the burden of proof about anything being prohibited is on the person who claims it to be so’: Ansar Burney v Federation of Pakistan PLD 1983 FSC 73, 93. 5 SM Sait ‘Our marriage, your property? Renegotiating Islamic Matrimonial Property Regimes’ in N Yassari (ed) Changing God’s Law: The Dynamics of Middle Eastern Family Law (Routledge 2016). 6 N Ibrahim and N Abdul Hak, ‘Division of Matrimonial Property in Malaysia: The Legal Historical Perspective’ (2007) 15 SEJARAH 143, 146–48. 7 N Soewondo, ‘The Indonesian Marriage Law and its Implementing Regulation’ (1977) 13 Archipel 283, 288.

146  Muhammad Zubair Abbasi Islamic law which recognised various forms of partnerships (sharikah). From the 1950s, the Supreme Court of Indonesia issued a number of decisions that gradually formulated a single standard doctrine through the convergence of various customary practices. On the question of spousal shares in matrimonial property, courts appealed to changing social conditions and evolving notions of justice to protect the rights of women.8 Indonesian law empowers spouses to execute a pre-marital agreement to create their own marital property regime. In the landmark case of Roberts alias Kamarulzaman v Ummi Kalthom,9 the court decided to divide property equally among the parties even though the husband’s initial contribution in purchasing that property was far greater than that of the wife. In another leading case, Rokiah bte Haji Abdul Jalil v Mohamed Idris bin Shamsudin,10 the court awarded the housewife one-third of the matrimonial home and other assets acquired by the husband, based on her indirect contribution in looking after the household and family. Unlike Indonesia, Iran does not have a post-marriage community of assets regime. The management of marital property is undertaken through private contracts. After the 1979 revolution, the Family Protection Act 1967, which gave limited rights to women, was abolished. The new private ordering of contracts was a result of appeals and struggles initiated after the grievances and stories of affected women flooded media platforms. The Iranian government recognised the problem and modified the standard form of the marriage contract. The 1982 amendment introduced a new marriage contract. Under this contract, the husband has to pay half of his wealth to his wife, provided that the divorce is not initiated by the wife and that she is not the one at fault.11 Moreover, under the wages for housework laws introduced in 1991, a court can order a husband to pay for his wife’s labour during the subsistence of marriage.12 This law protects women married before the introduction of the standard marriage contract in 1982, and women in cases where the division of property clause in the standard marriage contract is crossed out. The recognition of community property by the above-mentioned Muslim states should pave the way for a similar recognition of marital property rights by lawmakers in Pakistan. Pakistani judges have reformed Islamic divorce law by recognising women’s unilateral right to no-fault judicial divorce (khula). Continuing the same trend, they should acknowledge the indirect contribution of women in homemaking.

B.  Muslim Personal Law Since the beginning of this century, an important legal development has taken place in Pakistan regarding women’s financial rights in cases of no-fault judicial divorce (khula).

8 ME Cammack, ‘Marital Property in California and Indonesia: Community Property and Harta Bersama’ (2007) 64 Washington and Lee Law Review 1417. 9 Roberts alias Kamarulzaman v Ummi Kalthom (1966) 1 MLJ 163 (High Court). 10 Rokiah bte Haji Abdul Jalil v Mohamed Idris bin Shamsudin [1989] 3 MLJ ix. 11 Z Mir-Hosseini, Marriage on Trial: A Study of Islamic Family Law in Iran and Morocco (IB Tauris 2000) 57. 12 M Kar and H Hoodfar, ‘Women and Personal Status Law in Iran: An Interview with Mehranguiz Kar’ (1996) Middle East Report 36, 37, 38.

Pakistan  147 Initially, courts, when adjudicating divorce cases, did not take into account the ‘reciprocal benefits’ gained by husbands during the subsistence of marriage. Therefore, irrespective of the time spent by wives with their husbands and/or children, courts held that in cases of khula, wives have to return their entire dowers to their husbands. Recently, courts have started to take into account the ‘reciprocal benefits’ acquired by husbands during marriage. As a result, in many recent cases of khula, courts have reduced, at least partially if not entirely, the amount of dower to be returned to husbands.13 This has reduced the financial cost for women when they end a marriage. In the seminal case of Balqis Fatima v Najm ul-Ikram Qureshi, Justice Kaikaus held that if a wife sought the dissolution of marriage because of the fault of her husband then the court should not require her to return the dower to her husband. Kaikaus J emphasised that even in cases where the dissolution of marriage was not due to the husband’s fault, judges should take into account the ‘reciprocal benefits’ received by the husband when determining the amount of dower that a wife has to return to her husband.14 For many decades, however, judges ignored the ‘reciprocal benefits received by the husband’ while issuing decrees for the dissolution of marriage on the ground of khula. Then, at the beginning of the twenty-first century, three provincial High Courts endorsed the principle of ‘reciprocal benefits’. In 2006, the Sindh High Court held that a wife living with her husband for one and half years amounted to a ‘reciprocal benefit’ received by the husband.15 Similarly, the Peshawar High Court held that the life spent by a wife with her husband could be considered as consideration for khula.16 The Lahore High Court also regarded a wife’s living with her husband for a number of years as ‘a benefit received’ by the husband, thereby disentitling him from seeking the return of dower when the wife dissolved the marriage on the basis of khula.17 The development of the principle that recognises reciprocal benefits received by husbands during the subsistence of a marriage is a positive development. It, however, provides only limited recognition of the contribution of women as homemakers. This principle is not comparable to the concept of matrimonial property because reciprocal benefits are recognised only to reduce the amount of dower payable by a wife to her husband upon her dissolving the marriage on the basis of khula. It is primarily used as a defence; a wife cannot claim a positive right in the property of her husband acquired during the marriage. Such a claim has not yet been adjudicated in any reported judgment. It may be argued that the development of such a right is a logical step forward especially since more women are now entering the workforce.18

13 Zohra Bi v Muhammad Saleem [2005] YLR 896; Mst Sarwat Begam v Farmanullah PLD 2012 Peshawar 164; Dr Fakhr-Ud-Din v Mst Kausar Takreem PLD 2009 Pesh 92; Nasir v Mst Rubina 2012 MLD 1576. 14 PLD 1959 Lah 566. 15 Aurangzeb v Ms Gulnaz PLD 2006 Karachi 563. 16 Abdul Rashid v Shahida Parveen 2013 YLR 2616 (Pesh). 17 Shams Ali v Add District Judge, Sambrial PLD 2012 Lah 183. 18 Women’s workforce participation increased from 19% in 2003 to 26% in 2014. Of the female labour force 26% are married and 27% are widows or divorced: ‘Key Findings Report of Women’s Economic and Social Wellbeing Survey in Punjab 2017–18’ (The Punjab Commission on the Status of Women 2018) 4, available at: pcsw.punjab.gov.pk/system/files/Pages.pdf; H Majid, ‘Female Labour Supply in Pakistan: Mapping the Last Three Decades’ (2016) Forman Christian College Pakistan: The Long View, 2047 Workshop 3.

148  Muhammad Zubair Abbasi

C.  Private Ordering The increasing participation of women in the workforce in Pakistan should result in wider recognition of their rights in matrimonial property. The law as it stands today, however, provides limited recognition of women’s financial rights within the institution of marriage under the principle of ‘reciprocal benefits’ acquired by the husband while determining the amount of dower that a wife has to return or forego upon exercising her unilateral right to no-fault judicial divorce (khula). Due to this limited recognition, women are left with no option but to protect their financial rights during marriage through private contracts. The judgment in the following case provides an interesting example of a wife’s instrumental use of a contract to secure her rights in her husband’s property. The presiding judge described the controversy in Awal Zaman v Nasreen Bibi as ‘unique’.19 Awal Zaman and Nasrin Begum were married for over 40 years and had five children. In 1994, the husband desired to enter into a second marriage. The law required Awal Zaman to get the consent of his first wife before doing so.20 Nasrin Begum consented to the second marriage of her husband upon the condition that if he abandoned her in future, she would be entitled to receive 50 per cent of his salary for the maintenance and educational expenses of their children, a 50 per cent share in his pension and a 50 per cent share in his agricultural property and houses. Her husband accepted this condition in an agreement executed by both parties. Thirteen years after entering into a second marriage, relations between Nasrin Begum and her husband became strained and he refused to honour the agreement. Therefore, she filed a suit for declaration and recovery of a half share in his salary and pension emoluments and recovery of Rs70,000 that she expended on the marriage of her daughters. Awal Zaman challenged the authenticity of the agreement and contested that it was a ‘fictitious and manipulated document’. The trial court and the first appellate court found the contract valid and decided in favour of Nasrin Begum. Awal Zaman challenged these decisions before the Peshawar High Court which also dismissed his petition. In this way, Nasrin Begum was able to secure her financial rights in the property of her husband. The discussion in this part of the chapter has shown that women have limited financial security within the institution of marriage under Muslim family law. They cannot claim financial rights in their capacity as homemakers, and their contributions as caregivers and homemakers remain unappreciated and unquantified in economic terms. The following section examines the trusts law regime in Pakistan to explore the possibility of the application of the concept of the constructive trust to enable the recognition and protection of women’s rights to matrimonial property.

19 ibid. 20 Section 6 of the Muslim Family Laws Ordinance 1961 regulates polygamy. It requires a husband to submit an application to the Chairman of the Union Council for securing permission to enter into another marriage. In his application, he is required to ‘state the reasons for the proposed marriage and whether the consent of existing wife or wives had been obtained thereto’ (Rule 14, Muslim Family Laws Rules 1961).

Pakistan  149

III.  Trusts Law in Pakistan The common law of trusts was codified in the form of the Trusts Act 1882 in British India during the colonial period.21 This Act is limited to private trusts and excludes public, charitable or religious trusts from its application.22 The Act codified the rules devised by the Court of Chancery in England. Concepts similar to the trust were prevalent in India before the advent of the British. Benami (name lending) is one such concept under which property is placed in the name of a person other than its actual owner.23 Benami received legislative sanction under section 82 of the Trusts Act 1882. This section embodies the principle of equity underlying resulting trusts that the contributor to the purchase price enjoys a beneficial interest in the property proportionate to that contribution, from the time of the transfer of the legal title.24 Courts take into account various factors to determine whether a particular transaction falls under section 82. Such factors include: (i) the source of the purchase money; (ii) the motive behind the transaction; and (iii) the relationship of the parties.25 Just like trusts, benami transactions can be used for tax evasion and fraud. Therefore, the legislature introduced the Benami Transactions (Prohibition) Act 2017 to prohibit any person from entering into a transaction in which the property is transferred to someone (benamidar) but the consideration for such property is paid by another person and the property is held for the immediate or future benefit of the person who has provided the consideration (beneficial owner). The Act, however, exempts benami transactions in the name of a spouse or children when the transaction is made out of known resources of income.26 Based on the Trusts Act 1882, specifically its section 94, which provides for constructive trusts, courts in Pakistan have employed the concept of constructive trusts in various areas of law such as property law, family law and commercial law.27 A brief review of 21 Before the enactment of the Trusts Act 1882, several statutes regulated various aspects of trusts. The Indian Trustees Act 1866 and the Trustees and Mortgagees Powers Act 1866 were expressly made applicable to cases governed under English law. The Statute of Frauds (20 Car II, cl 3), requiring trusts relating to immovable property to be evidenced in writing, was in force in the Presidency Towns. The Indian Penal Code 1860 dealt with the offences relating to trusts and provided punishments for such offences. The Code of Civil Procedure 1877 prescribed the procedure for actions relating to trusts. The Specific Relief Act 1877 contained provisions enabling recovery of possession of movable property by a trustee from a third person and by a beneficiary from the trustee. The Limitation Act 1877 prescribed periods of limitation for recovery of property conveyed by trustees in breach of trust. 22 The objective of the Trusts Act 1882 was to codify the law relating to trusts. The Act exempted Muslim endowments and trusts (awqaf) and joint families, which were governed under personal law, and religious and charitable endowments, which were regulated under the Religious Endowments Act 1863. 23 The same principle relating to purchase in another’s name is recognised as the principle of ‘fictitious name’ (Ism Furjee) under Muslim law: Badur-ul-Hassan Khan, The Law of Benami Transaction in Pakistan (Khyber Law Publishers 1980) 11. 24 Section 82 of the Trusts Act 1882 reads, ‘where property is transferred to one person for a consideration paid or provided by another person, and it appears that such other person did not intend to pay or provide such consideration for the benefit of the transferee, the transferee must hold the property for the benefit of the person paying or providing the consideration’: M Ghulam Hussain, The Trusts Act 1882 (Kausar Brothers 1991) 89. 25 ibid 90. 26 The Benami Transactions (Prohibition) Act 2017, s 2 (8)(A)(b). 27 Section 94 of the Trusts Act 1882 reads, ‘[c]onstructive trusts in cases not expressly provided for. In any case not coming within the scope of any of the preceding sections, where there is no trust, but the person

150  Muhammad Zubair Abbasi the case law shows that constructive trusts have functioned as a mediational device, provides judges with the means to mitigate the unfairness caused by the strict application of law.28 This review also illustrates that the courts in Pakistan have employed the term ‘constructive’ quite loosely instead of adopting the strict technical sense used in English law.29 The following cases illustrate the application of the doctrines of trusts and benami.

A.  Women’s Inheritance Rights In Ghulam Ali v Ghulam Sarwar Naqvi,30 the disputed property was in the possession of the petitioners, brothers who had deprived their sister (the respondent) of her share in their father’s estate. The main contention of the brothers was that since their sister had not challenged the mutation of property in their favour for a long period of time, she lost her right to claim share in the inheritance. The Supreme Court ruled that the brothers were in constructive possession of the property on behalf of all the heirs in spite of the fact that their possession was exclusive. Unless there was an express repudiation of the claim, the possession of the brothers would be considered the possession of their sisters. Therefore, the Court ruled that the brothers held the property upon trust for the benefit of their sister. In another judgment, the Supreme Court treated a brother, who inherited property from his father to the exclusion of his sister, as a constructive trustee under section 94 of the Trusts Act 1882.31

B.  Benami Transactions In Wasi ud Din v Fakhra Akhtar,32 the disputed properties were registered in the name of Razia Khatoon, the wife of Dr Minhas. After the death of both husband and wife, brothers of Razia Khatoon claimed properties as legal heirs. Fakhar Akhtar, who was the daughter of Dr Minhas, claimed that her father was the actual owner of the disputed properties and her mother was a mere name-lender (benamindar). The court accepted this argument on the ground that the wife of Dr Minhas did not have an independent source of income to purchase such properties. The court rejected the contention that

having possession of property has not the whole beneficial interest there in, he must hold the property for the benefit of the persons having such interest, or the residue thereof (as the case may be), to the extent necessary to satisfy their just demands’. 28 Hussain Bakhsh v Muhammad Alam PLD 1960 Lahore 869. (If the person who purchased property in his own name, with joint funds which were contributed on the understanding that the property was to be joint, was not acting honestly at the time when he actually made the purchase, he would be a trustee to the extent of their shares and the beneficial interest to the extent of the shares would belong to the others.) 29 KN Khalilor Rahman v Bijoy Ranjan Kanungoe PLD 1963 Dacca 269. (The benefits accrued by the defendant as a result of his fraud or in violation of his duty to inform the lessor were held to be in constructive trust in favour of the plaintiff.) 30 Ghulam Ali v Ghulam Sarwar Naqvi PLD 1990 SC 1. 31 Ms Gohar Khanum v Mst Jamila Jan 2014 SCMR 801. The court accepted the ownership claim of the sister in the estate of her father after 50 years of the mutation of the land. 32 Wasi ud Din v Fakhra Akhtar 2011 SCMR 1550.

Pakistan  151 Razia Khatoon was herself qualified to practise medicine and worked as a doctor for five years. An important factor that led the court to reach this conclusion was the behaviour of the brothers of Razia Khatoon, who harassed their own niece, Fakhar Akhtar, to grab the disputed properties. In another case of a benami transaction, Razia Begum v National Accountability Bureau (NAB),33 the NAB filed a reference against Sheikh Afzal and his son Haris Afzal. A court passed an order to freeze the assets of Mr Afzal. A property which was in name of the petitioner, Razia Begum, the sister of Mr Afzal, was in the list of properties that had to be surrendered. The petitioner filed an application to have the property in question removed from the list. However, the NAB prosecutors contended that the accused misappropriated large sums of money from the Bank of Punjab and used the funds to purchase the property which was held in the names of their close relatives. The court accepted this argument and observed that the petitioner failed to produce evidence to show that she had sufficient funds to purchase the disputed property. The court also noted that the petitioner took contradictory positions regarding the mode, manner and place of payment for the purchase of the property. Therefore, the petition was dismissed. The discussion in this part leads to the conclusion that, although the courts employ the concept of the constructive trust to protect the inheritance rights of women, they are reluctant to extend proprietary rights in favour of wives and/or children under the doctrine of benami (name lending). This is evident from the legal principle which provides that where any property is purchased by a husband in the name of his wife or by a father in the name of his son/daughter, law presumes that the beneficiaries were name-lenders (benamidars) and if they claimed it to be their own by alleging that the husband or the father intended to make a gift of property to them, the onus would be upon them to establish such a gift. Relying upon this presumption in one judgment, the Lahore High Court dismissed a wife’s claim to the matrimonial home and commercial properties. She claimed that she had provided the consideration for the purchase of the properties but could not substantiate her claims with evidence.34 The following section examines the concept of the constructive trust, specifically in the context of matrimonial homes, to explore the possibility of its application to facilitate women’s rights to matrimonial property under Muslim family law.

IV.  Constructive Trusts, Matrimonial Property and Muslim Family Law The separate property regime in Pakistan remains unchanged despite the fact that Pakistani judges have formulated the principle of ‘reciprocal benefits’ in cases where a wife initiates no-fault judicial divorce (khula). In this section, I suggest that Pakistani judges should rely on the concept of the constructive trust to acknowledge women’s rights in matrimonial property.



33 Razia 34 Jane

Begum v National Accountability Bureau (NAB) PLD 2017 SC 665. Margrete William v Abdul Hamid Mian [1994] CLC 1437.

152  Muhammad Zubair Abbasi The constructive trust is based on an equitable maxim, ‘Equity considers as done which ought to have been done’.35 It is a creation by the court to prevent injustice. In Selangor United Rubber Estates v Craddock (No 3), Ungoed-Thomas J described the language of constructive trust as nothing more than a formula for equitable relief.36 The court of equity treats the defendant to be liable in equity, as though he were a trustee. It is based on the principle of unjust enrichment; the court provides relief because otherwise the defendant would be unjustly enriched.37 For the purposes of this chapter, a relevant example of acquiring an equitable interest, under a constructive trust, in the property of another based on relationship or past dealings would be the trust of a family home. Traditionally, husbands were the sole legal owners of matrimonial homes. However, in equity, courts have the jurisdiction to vary the property rights of spouses, typically after the breakdown of a relationship. Courts apply various tests to determine the property rights of spouses in different jurisdictions. In England, in a series of Court of Appeal judgments in 1970s and 1980s, Lord Denning formulated a ‘new model of constructive trusts’ based on justice and good conscience.38 He acknowledged a woman’s beneficial interest in the matrimonial home by imposing a constructive trust based on her contributions relieving her husband from ‘expenditure which he would otherwise have had to bear’.39 According to Lord Denning, the contribution of a wife may be in the form of ‘keeping up the house and, if there are children, in looking after them’.40 A constructive trust is also formed if the claimant relies on the common intention or understanding of the parties and acts to his/her detriment through such reliance. In Midland Bank PLC v Dobson, the court found a common intention between the parties who treated the house as ‘our house’ and had a ‘principle of sharing everything’.41 However, in this case, a constructive trust could not be established because mere common intention is not enough to establish equitable interest in property; the claimant had to act detrimentally in reliance on the common intention to establish such an interest. This approach changed afterwards. The extent and quality of such detrimental reliance was unclear and not easy to ascertain. In some cases, acts such as setting up the house together, taking care of a baby, or contributing towards household expenditure also constituted as sufficient detriment to qualify.42 In Lloyds Bank plc v Rossett,43 the court examined two situations in which a constructive trust could arise. In the first situation, if there is an express agreement, arrangement or understanding reached between the parties, no matter how imprecise the terms and no matter how imperfectly the

35 Generally, to create a valid trust, these requirements must be met: (i) there should be an intention to create a trust; (ii) the property to be the subject the matter of trust must be identified; (iii) the parties and their duties must be identified; and (iv) the object(s) must be ascertained: A-G for Hong Kong v Reid [1993] AC 713. 36 Selangor United Rubber Estates v Craddock (No 3) [1968] 1 WLR 1555, 1582. 37 AW Scott, ‘Constructive Trusts’ (1955) 71 Law Quarterly Review 39, 40–41. 38 Heseltine v Heseltine [1971] 1 WLR 342; Hussey v Palmer [1972] 3 All ER 744; Cooke v Head [1972] 2 All ER 38; Eves v Eves [1975] 3 All ER 768. 39 Hazell v Hazell [1972] 1 WLR 301, 304. 40 Hall v Hall (1982) 3 FLR 379. 41 Midland Bank PLC v Dobson CA 12 July 1985. 42 Grant v Edwards [1986] Ch 638. 43 Lloyds Bank plc v Rossett [1991] 1 AC 107.

Pakistan  153 parties remember those terms, a constructive trust might arise if the claimant can show evidence that she or he acted detrimentally in reliance on the agreement or significantly altered her or his position based on the agreement. In the second situation, there is no evidence of any agreement or arrangement between the parties, yet courts look to see whether the conduct of the parties gives rise to a constructive trust on the basis of the common intention that parties would have formed had they applied their mind reasonably to the matter. For instance, if a party with no legal title to the home contributes to the purchase price for the home, this may be sufficient to draw an inference of common intention necessary for the creation of a constructive trust.44 Hence, courts look at the intention of parties of different beneficial shares than those otherwise indicated by the legal title. Lady Hale, in Stack v Dowden,45 differentiated the domestic context from the commercial context. In determining the intention of parties, other factors, such as any advice or discussion during the time of transfer; the reason why a home was acquired in joint names; the purpose of acquiring a home; the nature of the parties’ relationship, and whether they had any children; and how the purchase of property was financed, are relevant, as well as the non-financial contributions of the parties.46 Constructive trusts essentially relate to the ability of courts to create exceptions to established legal principles. As mentioned above, under English law there was a separate property regime, but judges used their discretionary powers to decide on distributions of assets to achieve fairness. These decisions were based on a holistic view considering the needs of children, compensation (for disadvantage suffered during the relationship), and the importance of sharing fruits of joint labour.47 Courts used the lack of statutory regime to develop their own guiding principles based on equity and fairness. In White v White,48 the court developed a standard based on equality to achieve a fair outcome between spouses. In this case, one spouse worked outside, while the other stayed at home to look after their children. The House of Lords observed that as a general guide, equality should be departed from only if, and to the extent that, there is good reason for doing so. The need to consider and articulate reasons for departing from equality would help the parties and the court to focus on the need to ensure the absence of discrimination.49

The use of fairness as a guiding post was also illustrated in the exceptional case of Charman v Charman.50 The Court departed from the general equal sharing principle to acknowledge the extraordinary contribution of one partner. Common law jurisdictions have relied upon different theoretical approaches to justify equitable property rights in matrimonial assets. For example, in New Zealand, the courts have relied upon the reasonable expectations of the party that claims an equitable share in property. Thus, a wife, who has reasonably expected a share in the family

44 ibid 16, 120. 45 Stack v Dowden [2007] UKHL 17. 46 ibid 16, 69. 47 L Ruggeri, I Kunda and S Winkler, Family Property and Succession in EU Member States (University of Rijeka 2019) 693. 48 White v White [2000] UKHL 54. 49 ibid. 50 Charman v Charman [2006] UKHL 24.

154  Muhammad Zubair Abbasi home and who has relied upon this expectation, will be successful in gaining a share in the property.51 In Canada, courts have referred to the doctrine of unjust enrichment of the defendant in awarding a claimant a share in matrimonial property. A husband, who is enriched throughout the marriage from the services of his wife in raising children and performing domestic work, will hold the legal title upon constructive trust for himself and his wife in appropriate shares.52 In Australia, the remedial constructive trust is founded on the basis of unconscionable retention or assertion of legal title against a claimant, rather than unjust enrichment.53 An analysis of the historical context of the equitable principles governing the distribution of matrimonial property reveals that these were developed to protect the interest of housewives who took care of households. The aim of these principles is to protect the financially weaker party (generally a wife and children) once a marriage is dissolved.54 Pakistani courts recognise such principles as principles of equity, fairness and justice, unjust enrichment, detrimental reliance, common intentions, and reasonable expectations in cases other than of matrimonial property. They should now extend these principles to protect the rights of wives within the institution of marriage by recognising their rights to matrimonial property.

V. Conclusion Women constitute 50 per cent of the population in Pakistan. Their labour force participation rate has increased significantly over the past few years. This increased economic participation, however, has not been complemented by any development in women’s rights to family property. The application of the principles of constructive trusts, along with the principle of ‘reciprocal benefits’, paves the way for the development of women’s rights to matrimonial property. If a wife undertakes the responsibility of performing household chores and taking care of children throughout the years of marriage, a husband will be unjustly enriched if the wife does not receive any share in the property acquired by him through her contribution. Constructive trusts do not require a prior express arrangement between parties; rather, they place an equitable obligation on a husband to acknowledge his wife’s contribution and share with his wife the property acquired by him during the subsistence of marriage. The application of various legal principles consistently applied by the Pakistani courts can pave the way for the protection of women’s rights to matrimonial property under Muslim family law. The crucial question here is whether Pakistani judges will recognise and apply these principles without legislative intervention. The development of these principles under English law shows that legislation can be supportive but not necessary for this purpose. 51 Gillies v Keogh [1989] 2 NZLR 327. 52 Pettkus v Becker [1980] 2 SCR 834; Sorochan v Sorochan [1986] 2 SCR 38; Peter v Beblow [1993] 1 SCR 980. 53 Muschinski v Dodds [1985] HCA 78, (1985) 160 CLR 583. 54 K Boele-Woelki, Matrimonial Property Law from a Comparative Law Perspective (Stichting ter Bevordering der Notariële Wetenschap 2000) 56–57.

9 The Law of Trusts in Bangladesh: Theory and Practice OMAR H KHAN*

I.  Definition of the Trust in Bangladeshi Law ‘Trust’ literally means confidence, but as a legal device for transferring property, it means transferring property to someone with the confidence that he will hold the property for the use or benefit of others as nominated by the transferor. A trust can also be formed without reposing any reliance or confidence by one person in another, where an owner creates a trust by declaring himself as a trustee of his property. Trusts may exist in different aspects of our lives; they are relationships between parties, not legal entities. The simplest example of the trust may be A conveys property to B for the use or benefit of C. Here, A is the author or settlor of the trust, B is the trustee and C is the beneficiary. However, with the use and development of trust systems for different purposes and in different manners, it has become increasingly difficult to give an exhaustive definition of the trust.

II. Jurisdiction Trusts law has existed since Roman times and gradually it has become one of the most important innovations in property law. Trusts law has evolved through court rulings differently in different states and even when no law regarding ‘trusts’ had been enacted in Greater India, before the eighteenth century, there had been in existence public religious trusts and charitable endowments. In 1810, the British government found it necessary to make regulations for controlling the management and administration of trusts and to provide remedies for the prevention and redress of abuses in their management. The first regulation was passed in 1810 in respect of the province of Bengal, under which the general superintendence of all public religious and charitable endowments was vested in the Board of Revenue.1 * Head of Chambers, Legal Counsel, Bangladesh. 1 Justice Subhro Kamal Mukherjee, Indian Trusts Act, 1882, 5th edn (Kamal Law House 2015).

156  Omar H Khan The current Trusts Act 1882 represents a colonial era statute covering Indian, Bangladeshi and Pakistani trust practices. In Bangladesh, the Trusts Act extends to the whole of Bangladesh. Particular acts also contain specific provisions regarding trusts law which are not specifically referred to in the Trusts Act. In the Penal Code (PC) 1860, the term ‘breach of trust’ has been described. Additionally, in the Specific Relief Act (SRA) 1877, provision for a trustee to sue for possession of trust property is included. Moreover, provision for the administration of trusts created for public purposes of a charitable character is also found in the Civil Procedure Code (CPC) 1908. The Trusts Act also applies to the use of trusts in employment settings (ie, Provident Funds, Gratuity Funds, Pension Funds, Workers Participation Funds, Workers Welfare Funds) and deals with matters of company law (ie, a director’s fiduciary duties towards a company). However, the Act does not affect the principles of Muslim law in relation to waqf, or the mutual relations of the members of an undivided family as determined by any customary or personal law; and the Act does not apply to public or private religious or charitable endowments.

III.  Analysis of the Trusts Act 1882 in Bangladesh According to the Trusts Act 1882, the definition of a trust is given in section 3, which states: A Trust is an obligation annexed to the ownership of property and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him, for the benefit of another, or by another and the owner.

The Act gives us a general understanding of how to constitute a trust, but does not give any guidelines about the practical application of trusts. Since the Act only applies to private secular trusts, its definition of the trust does not include charitable trusts, public religious trusts, private religious trusts, etc. Moreover, the words ‘confidence reposed in and accepted by the Owner’ indicate that the definition refers to express trusts only. Resulting and constructive trusts are not within the purview of the definition and are discussed separately in Chapter IX of the Act under the heading ‘Obligations in the nature of trusts’. In fact, no enactment has given an exhaustive definition of ‘trust’ in Bangladeshi law. However, both private and public trusts are in operation in Bangladesh. A private trust is one where beneficiaries are identified, while in a public trust, beneficiaries are not identifiable.2 Generally, trusts to promote public welfare activities or education are public trusts; they can be charitable or religious trusts. An example is as follows: A transfers his land to B for building a hospital for the public at large. Prior to the enactment of the Act, there were various provisions under different enactments dealing with trusts law. For instance, PC 1860 contains provisions for the punishment of criminal breaches of trust; SRA 1877 contains provisions for suits for the possession of property by a trustee; and CPC 1908 makes provisions for suits by and

2 Deokinandan

v Murlidhar AIR 1957 SC 133.

Bangladesh  157 against trustees, executors and administrators and suits relating to public charity. In civil law, the Limitation Act 1877 provides the time limit for recovering property transferred in breach of trust. Therefore, the Trusts Act 1882 was passed to define and amend laws relating to private trusts and trustees. However, the Act does not cover some areas of practice, such as: (i) the rules of Muslim law as to waqf; (ii) the mutual relations of the members of an undivided family as determined by any customary or personal law; (iii) public or private religious or charitable endowments; and (iv) trusts to distribute prizes taken in war among captors. It is said that the English rulers, at the time of British India, did not want to injure the religious feelings of local people. Therefore, they decided to leave Muslim and Hindu religious and charitable trusts untouched. The Act comprises 96 sections and is divided into nine chapters. Section 3 defines relevant terms such as ‘trust’, ‘author of trust’, ‘trustee’, ‘beneficiary’, ‘trust property’, ‘breach of trust’ etc. The Act does not use English concepts such as ‘express trust’, ‘implied trust’, ‘resulting trust’, ‘constructive trust’, etc. Nonetheless, the provisions of the Act show that sections 4–9 deal with what in English law are styled express trusts and sections 80–96 deal with what in English law are styled implied, resulting or constructive trusts. Under section 4, a trust can be made only for lawful purposes. In order to comply with section 4 of the Act, a private trust in Bangladesh must not be against the rules of valid disposition of property (ie, the rule against perpetuities under sections 13 and 14 of Transfer of Property Act (TPA) 1882; sections 113 and 114 of the Succession Act (SA) 1925; relating to gifts in favour of unborn persons; and the rule against accumulation under section 17 TPA 1882 and section 117 SA 1925). Under section 113 SA 1925, as interpreted in Tagore v Tagore, any trust which is directed to alter the ordinary law of descent or succession is void.3 Under the Trusts Act 1882, a trust can be declared both by way of a gift and by way of a will and can be of movable or immovable property. In the case of a trust of immovable property, it must be in writing and signed by the testator or the trustee and registered under the Registration Act 1908. If a trust is declared by way of a will, it must comply with the provisions of SA 1925, except where the testator is a Muslim.4 Trusts of movable property can be declared as just described or by transferring the ownership of the property to the trustee.5 For movable property, registration is not compulsory. The property must be transferred to the trustee, unless the trust is declared by a will or the author of the trust is himself to be the trustee.6 However, the absence of the above-mentioned formalities in the creation of a trust cannot be pleaded as a means of effectuating a fraud.7 In Ramchandra v Anandbai,8 the Bombay High Court also held that the acquisition of title by adverse possession will not be affected by the requirements of the Trusts Act. Thus, where a trust is void ab initio for want of registration, uncertainty, etc, the trustee acquires title by 12 years’ adverse possession, and a suit by the settlor to repudiate the trust and recover possession from the trustee would be barred.



3 Tagore

v Tagore [1872] BLR 377. Act (SA) 1925, s 58. 5 Trusts Act 1882, s 5. 6 ibid s 6. 7 ibid ss 5, 6. 8 Ramchandra v Anandbai AIR 1932 BOM 188. 4 Succession

158  Omar H Khan Section 6 of the Trusts Act 1882 embodies the English rule of three certainties, that is for a trust to be valid, it must be characterised by certainty of intention, certainty of subject matter and certainty of objects (ie, beneficiaries). Apart from these three requirements, section 6 adds two further essentials: certainty of the trust’s purpose, and the transfer of the trust property to the trustee. Sections 11–22 set out the duties of a trustee and sections 23–30 provide for the liability of a trustee for breach of trust. Sections 31–45 deal with the rights and powers of a trustee; sections 46–54 deal with the disabilities of a trustee; sections 55–69 deal with the rights and liabilities of beneficiaries; sections 70–76 provide for the vacation of the office of trustee and appointment of trustees; sections 77–79 provide for the extinction or extinguishment (ie, when a trust comes to an end or ceases to exist) and revocation of a trust; and sections 80–96 provide for certain implied, resulting and constructive trusts. In recent years, there have been major changes in the field of private trusts, notably the annulment of Benami transactions. In a Benami transaction, an apparent owner is not the real owner. Purchased land is registered in the name of a third person, not in the name of a person who pays the purchase price. One of the legal characteristics of such a transaction is that it does not create any title or interest in favour of the apparent owner, known as the Benamdar. Benami transactions were often used to resort to furthering illegal or questionable objects, including the evasion of taxes. Benami transactions were also done to defeat creditors. In some instances, persons with black money took advantage of Benami transactions by purchasing properties in the names of their nearest relatives and such transactions increased corruption in society. To prevent such fraudulent transactions and protect creditors, courts historically had to consider the following points in respect of Benami transactions:9 (i) the source of consideration; (ii) the relationship of the parties, if any; (iii) the motive of purchase; (iv) who was in possession and enjoying profits; (v) who had the custody of title deeds; and (vi) the subsequent conduct of the parties relating to the property in question. However, this consideration took a lot of time and caused complexities. Moreover, such transactions encouraged frauds and malpractices in society. Therefore, with a view to preventing such illegality and providing protection to the creditors, Benami transactions were prohibited by section 5 of the Law Reforms Ordinance 1984. Having said that, unfortunately, in Bangladesh, people are still active in making Benami transactions in indirect ways. For example, section 19E(2) of the Income Tax Ordinance (ITO) 1984 permits illegal transactions for the purchase and sale of properties by providing for penalty tax of 10 per cent, without asking for the source of the funds subject to the tax. Therefore, in light of the aforementioned analysis of the Act and considering its operation in practice, some major limitations of the Trusts Act have been observed. Additionally, there has been a rapid increase in the use of trusts in Bangladesh, demanding that the Trusts Act be upgraded and appropriately designed to overcome its current problems.



9 Trusts

Act 1882, s 82.

Bangladesh  159

IV.  How Far is English Trusts Law Applicable in Bangladesh? In his lectures on equity, FW Maitland explained that he did not himself ‘believe that the “use” or “trust” came to India as a foreign concept’.10 The English law of charity is not applicable in Bangladesh and India. In Trustees of the Tribune Press v Commissioner of Income Tax, Sir George Rankin, delivering the ­judgment of the Privy Council, remarked that [u]nder the Income Tax Act, the test of general public utility is applicable not only to trusts in the English sense, but is to be applied to property held under trust ‘or other legal obligation’ a phrase which would include Muslim Waqf and Hindu endowment.11

Furthermore, the Privy Council examined the fundamental differences between conceptions arising from Muslim and Hindu legal systems and the English juridical conception of the trust. In an English trust, the legal title is given to the trustee, but an equitable interest is given to the beneficiary. However, under Muslim law and Hindu law, the legal title is not given to the Mutwalli (ie, the trustee of a waqf) nor to a Shebait (ie, who serves the deity or the manager). Although they have certain obligations and duties as does a trustee, a Mutwalli is not a trustee in the legal sense. In the case of waqf, the ownership of the wakif (the person who creates the waqf) in respect of the trust property is extinguished and transferred to the Almighty. Subba Rao J, in the Supreme Court case Laxman Balwant Bhopatkar v Charity Commissioner, observed that, ‘English law decisions are conflicting and starting from the preamble to the Statute of Elizabeth, and apparently relying upon the fourfold classification of Lord Macnaghten, English Courts from time to time decided cases which should not be sustained’.12 In English law, the Statute of Charitable Uses 1601 (ie, The Statute of Elizabeth) gives guidance as to what purposes are charitable and gives, in its preamble, an non-exhaustive list (ie, the relief of aged, impotent and poor people; the maintenance of sick and maimed soldiers and mariners; schools of learning; free schools and scholars in universities; the repair of bridges, ports, havens, causeways, churches, sea banks and highways; the education and preferment of orphans; the relief, stock, or maintenance of houses of correction; marriages of poor maids; support, aid and help of young tradesmen, handicrafts men and persons decayed; the relief or redemption or prisoners or captives; and the aid or ease of any poor inhabitants covering payments of fifteens, setting out of soldiers, and other taxes). Although there is no set definition provided for charitable purposes, before any institution can be accepted it must meet the three requirements: first, the purpose of the institution must be within the spirit and intendment of the preamble to the Statute of Elizabeth; second, the institution must exist for the benefit of the public; and third, the institution must be exclusively charitable. More recently, the Charities Act 1993 was enacted, though this statute did not significantly clarify ‘charitable purposes’, and the Charities Act 2006 was enacted. 10 FW Maitland, Equity: A Course of Lectures (first published in 1936, Cambridge University Press 1969) 44–45. 11 Trustees of the Tribune Press v Commissioner of Income Tax [1939] 41 BOMLR 1150. 12 Laxman Balwant Bhopatkar v Charity Commissioner AIR 1589; [1963] SCR (2) 625.

160  Omar H Khan Viscount Simmonds in Inland Revenue Commissioners v Baddeley stated, ‘[t]here is no limit to the number and diversity of ways in which a man will seek to benefit his fellow men’.13 This shows that English courts have interpreted lists of charitable purposes as non-exhaustive.

V.  Similarities between Bangladeshi and Indian Trusts Law As mentioned earlier, the Trusts Act 1882 was enacted during British colonial rule and the law was enacted with a view to covering private trusts, leaving out waqfs, mutual relations of the members of undivided family and religious charitable endowments. The Act was later adopted by Bangladesh, India and Pakistan after independence and hence, the Trusts Act 1882 in the three jurisdictions is the same, containing the same provisions, requirements in relation to forming trusts, rights and obligations of the trustee, etc. With regard to liability for breach of trust, the penal laws of Bangladesh and India also contain similar provisions. A person dishonestly misappropriating or converting property for his own use is said to have committed ‘criminal breach of trust’, which is construed as punishable under both the Penal Code (PC) 1860 of Bangladesh and the Indian Penal Code (IPC) 1860. The details are explained later in this chapter. In addition, the SRA 1877 provides for the possession of movable property.14 A trustee may sue for the possession of property the beneficial interest in which the person for whom he is a trustee is entitled. The Specific Relief Act 1963 in India provides for an identical relief.15 Further, in Bangladesh, suits can be brought by persons for the immediate possession of movable property against persons who hold such property as a trustee of the claimant.16 Likewise, in India, the same provision is found in section 8 of the Indian SRA 1963. In India, laws such as the Bombay Public Trusts Act (BPTA) 1950 have been enacted, which applies only to trusts which are for public, religious or charitable purposes. The BPTA covers matters such as registration of public trusts, charitable purposes and validity of certain public trusts. In accordance with section 9 BPTA 1950, charitable purposes include: (1) relief of poverty or distress; (2) education; (3) medical relief; and (4) the advancement of any other object of general public utility, but does not include a purpose which relates: (a) exclusively to sports, or (b) exclusively to religious teaching or worship. By contrast, Bangladesh has its Charitable and Religious Trusts Act (CRTA) 1920, which was enacted with a view to obtaining information regarding trusts created for public purposes of a charitable or religious nature. However, the CRTA only enables trustees to obtain directions of the court on certain matters and to make special provisions for the payment of the expenditure incurred in certain suits against them. In India, different Acts apply to the management of religious endowments, such as the Waqf Act 1995 and the Hindu Religious and Charitable Endowments Act 1959. Laws and rules



13 Inland

Revenue Commissioners v Baddeley [1955] AC 572. Specific Relief Act 1877, s 10. 15 ibid s 7. 16 ibid s 11. 14 The

Bangladesh  161 regarding the administration and management of religious endowments in Bangladesh are discussed briefly later in this chapter. Notwithstanding that Bangladesh and India have the same Trusts Act, and similar Specific Relief Acts, differences may be spotted in how the courts interpret and apply the provisions of the Acts in practice. As the Trusts Act 1882 of Bangladesh dates back to the colonial era, when deciding cases relating to trusts Bangladeshi courts have made reference to Indian case law on various occasions, as can be seen in the cases of Halid Hamidul Huq v Nafisa Chowdhury,17 Abul Hossain and Abul Md v Amatu Md18 and Nurun Nabi Mondal and others v Joynal Abedin Khondkar.19 Therefore, it is evident that decisions of the Indian courts on the application of the Indian Trust Law are persuasive and have been referred to by advocates in the Bangladeshi courts on a frequent basis.

VI.  Benefits of the Trusts Act 1882 The Trusts Act 1882 has brought in changes to the system of regulation of trusts in Bangladesh. The Act was primarily enacted with a view to defining and amending private trusts, leaving out other matters such as religious endowments. If we look into the benefits of the Act, we can see that enactment of the Act has led to the codification and simplification of the law. It includes the scope of the Act, a definition of what may be regarded as lawful purposes for the creation of a trust, who may be trustees/­ beneficiaries, the nature of trust property, and duties and liabilities arising out of trusts. The Act has provided a way for various types of express trusts to be created for particular causes and for the administration and maintenance of properties. Thus, the Trusts Act 1882 has created a wide platform for all forms of lawful objectives to be achieved. In addition, the Act requires that, for express trusts, a trust deed has to be drawn up and executed which, among other things, must include specification of the trust property, and the particulars of the trustees and beneficiaries. Section 4 of the Act further requires the trustee to give consent to act as a trustee. In practice, trustees are usually made signatories to a trust instrument to reflect their consent to act as trustees. If we attempt to analyse the legal obligation placed upon the creator or author of the trust to draw up a deed of trust, as specified above, it can be submitted that drawing up such an instrument generates clarity and specifies the trust property, duties and obligations, rights, powers and liabilities of the trustees and beneficiaries. Moreover, under section 5 of the Act and the provisions of the Registration Act 1908, it is mandatory for trusts of immovable property (ie, land) to be registered. On the other hand, if the trust property is movable, for example money, there is no legal requirement for the registration of the trust instrument. However, irrespective of the nature of the trust property, it has to be transferred to the trustees following the appropriate legal formalities annexed to the transfer of that type of property. These requirements, provided for in the Act, create a uniform process which the creator or author of a trust must follow in order to create a trust.

17 Halid 18 Abul

Hamidul Huq v Nafisa Chowdhury [1995] 24 CLC (AD). Hossain and Abul Md v Amatu Md [1972] 1 CLC (HCD). Nabi Mondal and others v Joynal Abedin Khondkar [1977] 6 CLC (AD).

19 Nurun

162  Omar H Khan

VII.  Drawbacks of the Trusts Act 1882 The Trusts Act 1882 is one of the oldest statutes which Bangladesh has inherited, representing colonial era rules and regulations that covered trust practices in the Indian subcontinent back in the days of British rule. It sets out the basics of forming a trust, the declaration of a trust’s purpose, the rights and liabilities of trustees and beneficiaries. Over the course of time, trusts practice has evolved in Bangladesh, however, trusts law has not developed accordingly. Nowadays, formations of trusts are not limited to individuals declaring trusts for the benefit of another individual or a group of other individuals. We also find trusts in company settings, for employees and for other purposes. The Act needs to be amended to cover modern trust practice, thereby widening its ambit. It is pertinent to mention that although India has an identical Trusts Act to Bangladesh, over time India has made necessary changes to its trusts law to adapt to modern-day changes. For example, in 2003, the Indian government established the Pension Fund Regulatory and Development Authority to develop and regulate its retirement management sector. The Pension Fund Regulatory and Development Authority Act was enacted in 2013 to regulate the National Pension System, subscribed by employees of the government of India, state governments, and by employees of private institutions as well as self-employed professionals and others in the unorganised sector (ie, small and marginal farmers, sharecroppers, fishermen, weavers, etc) on a voluntary basis.20 By contrast, Bangladesh is yet to adopt a National Pension System. Had such a system been implemented, it would surely have provided a reasonable retirement income to beneficiaries while being financially sustainable and aiding investments in infrastructure for the government by accumulating long-term savings.21

VIII.  Practical Application of Trusts in Bangladesh A.  Company Law The directors of a company are generally responsible for fostering the success of the company and balancing the interests of its members. They owe a fiduciary duty towards the company and are responsible for performing fiduciary duties within the ambit of the Articles of Association of the company. In addition, section 2(m) of Bangladesh’s Companies Act (CA) 1994 specifically defines ‘managing director’ as any person who, by virtue of an agreement with the company or of a resolution passed by the company in its general meeting or by its directors or by virtue of its memorandum or articles of association, is entrusted with substantial powers of management which would not otherwise be exercisable by him. 20 MS Siddiqui, ‘The Trusts Act, 1882 and Economic Development-II’ Asian Age (30 August 2016), available at: dailyasianage.com/news/29544/the-trusts-act-1882-and-economic-development-ii. 21 Mamun Rashid, ‘Can We Develop a National Pension System?’ Dhaka Tribune (13 June 2019), available at: www.dhakatribune.com/opinion/longform/2019/06/13/can-we-develop-a-national-pension-system.

Bangladesh  163 As company directors have a duty towards the company and its members as a whole, they are expected to act in good faith and exercise due diligence. Furthermore, they are responsible for ensuring that good corporate governance is followed within the company. This entire scenario creates a relationship of trust, whereby the director is entrusted with powers and responsibilities to act for the benefit of the company and its shareholders. A director is expected to create a balance between acting in the best interests of the shareholders and the interests of other stakeholders. Where the director abuses the power, he is said to have acted in breach of trust and fiduciary duties. CA 1994 provides for various penalties which may be imposed where directors act in breach of their duties. For example, according to section 332 of CA 1994, if any director, manager, officer or contributory of any company being wound up destroys, mutilates, alters, falsifies or fraudulently secrets any books, papers or securities or makes or is privy to the making of any false or fraudulent entry in any register book of account or document belonging to the company with intent to defraud or deceive any person, he shall be liable to a maximum prison term of seven years, and shall also be liable to fine.

Furthermore, any provision of the articles of a company, or any contract with the company or otherwise, which tends to exempt or indemnify a director from liability for negligence, breach of trust, etc, is void.22 Additionally, minority shareholders may also bring actions where directors exercise their powers in a manner prejudicial to a company’s members.23

B.  Funds Management in the Banking Sector ‘Escrow’ entails the use of a third party for holding assets on behalf of two parties who are in the process of completing a transaction. The asset may be money, stocks, funds, etc. The third party, often called the ‘Escrow Agent’, holds the assets until instructions regarding disbursement are received, or according to a predefined timeline. Banks in Bangladesh provide escrow account services, providing assistance to account holders by safekeeping and managing their assets, such as cash or securities. This again creates a fiduciary relationship of trust, whereby the account holder’s deposits are kept and managed until instructions regarding disbursements are received by the bank in question. According to general trusts law principles, a trust imposes strict rules and obligations on a trustee for the management of trust property in the best interests of the beneficiaries. Therefore, the trustee must act in compliance with their fiduciary duties and must not derive any advantage, either directly or indirectly, from the trust, unless it is expressly allowed by the trust. In escrow account services, a trustee is expressly allowed to benefit from the trust. Specifically, banks providing escrow account services may receive consideration in the form of escrow account charges. Nonetheless, it should be noted that as there is in existence a trust relationship, even though the trustee is



22 Companies 23 ibid

s 233.

Act 1994, s 102.

164  Omar H Khan remunerated they are obliged to act prudently in managing the trust property and will still be liable for breach of trust if they act in breach of their fiduciary duties. Two further examples of practical applications of trust may be offered: first, Deposit Pension Scheme (DPS) services are provided by banks, which provide monthly savings deposit services, and providing interest and other benefits for the beneficiaries on such deposits after a period of maturity; second, Fixed Deposit Receipt (FDR) services are provided by banks and are run in a similar manner to DPS services. A certain amount of money is deposited and benefits and interest can be obtained after a period of maturity.

C.  Employment Law i.  Provident Funds By definition, a provident fund is a form of savings scheme constituted by a private company for the benefit of its employees. It is a type of pension scheme for private companies, whereby employees are provided with a lump sum payment at the time of their separation or retirement. A provident fund is constituted in the manner provided in the Bangladesh Labour Act (BLA) 2006 and the Bangladesh Labour Rules (BLR) 2015. Nonetheless, companies may make their own rules and regulations for the management of a provident fund, provided that such rules are not, in any manner, less than the benefits provided under the BLA. The establishment of a provident fund is not mandatory; however, where three-fourths of the total number of employees demand to establish a provident fund through an application in writing, a company is bound to establish the provident fund. Employees become eligible to become members of the provident fund where they have worked in an organisation for a minimum of one year, irrespective of their ranks in the same. However, an owner, partner or member of the board of directors is not eligible to be a member of a provident fund. Having said that, trusts law comes into play in this area of employment law as a provident fund is a trust fund which is administered by a board of trustees. Such a board of trustees consists of an equal number of representatives of the employer and of employees employed in the organisation and although the BLA requires the chairman of the board be nominated by the government, in reality this does not happen as it is a lengthy process. Therefore, organisations rather have the board of trustees nominate a chairman among themselves. Where a provident fund is constituted in an organisation, permanent employees, after completing one year of service in the organisation, must contribute to the fund every month. The amount must not be less than 7 per cent and not more than 8 per cent of his monthly basic salary and the employer has to contribute an equal amount as well. The cost of maintenance of the provident fund is borne by the employer. An employee is required to nominate a person to whom deposited amounts will go in the event of the employee’s death. If, during the time of the nomination, the member has a family, the nominee shall be one or more members of the family. Where a member leaves the organisation after completing two years of service, he will receive the amount of money he has deposited in the provident fund, along with the amount of money deposited by the organisation to match the amount deposited by

Bangladesh  165 the member and the interest thereon. Where a member leaves the organisation, having completed less than two years of service, he will only receive the amount he has deposited in the fund. In the event of a member’s death or the dissolution of the organisation, the member (or nominee of the member, as applicable) shall receive both the deposited amount of the member and that of the organisation, with the interest thereon. Where the employee wishes to withdraw from the membership of the provident fund, he may apply in writing to the board and if such withdrawal happens after completion of two years of service in the organisation, he shall receive his deposited money, along with the amount deposited by the organisation in the fund. Employers may also invest the fund in particular sectors including, but not limited to, government unconditionally guaranteed profit-based savings and bonds and scheduled bank’s term deposits. The mechanism of the provident fund gives a well-articulated picture of the operation of trusts in the area of employment law, where employees deposit a fraction of their salaries and such deposits are held on trust for the long-term benefit of employees, particularly in the event of retirement or separation. Employers also benefit from such a scheme as they are able to invest a provident fund in particular sectors, as provided in the BLR.

ii.  Gratuity Funds In literal terms, a gratuity is a part of salary an employee receives in gratitude for the work the employee does for his organisation. Under section 2(10) BLA 2006, a gratuity is a salary for at least 30 days given by an employer to an employee during his termination of employment on specified grounds, where he has completed one year of service or for a period exceeding six months of service. Where the employee is in service for more than 10 years, he receives a salary for 45 days at the rate of the salary he received last. Under the BLA 2006, a gratuity scheme is not mandatory. However, where an employer decides to have a gratuity scheme, it must have an approved gratuity fund. According to section 2(5A) ITO 1984, an approved gratuity fund is one which has been and continues to be approved by the National Board of Revenue (NBR) in accordance with the provisions of Part C of the First Schedule of ITO 1984. The provisions contained in the Schedule require the NBR to approve a gratuity fund if it satisfies the following conditions: (a) the fund must be established under an irrevocable trust and not less than 90 per cent of the employees of the organisation must be employed in Bangladesh; (b) the fund must have the sole purpose of providing gratuities to employees due to retirement, discharge, or termination of employment after a minimum period of service or to their widows/dependants after their death; (c) the employer must be a contributor to the fund; and (d) all benefits granted by the fund must be payable only in Bangladesh. First, the organisation setting up a gratuity fund has to form a trust and an application has to be made in writing by the trustees to the NBR, along with the copy of the trust instrument and other necessary documents, as specified in the Schedule. The NBR, where conditions specified are fulfilled, approves the gratuity fund within four months of the receipt of such an application. In accordance with the provisions of the Schedule, income derived from investments or deposits of an approved gratuity fund and any capital gains arising from the transfer of capital assets of such a fund are exempt

166  Omar H Khan from payment of tax. It is pertinent to mention that organisations must not formulate any rule regarding the amount to be paid as a gratuity which is less than the amount provided under the BLA 2006. Thus, the gratuity fund also operates as a trust, administering and maintaining assets for the benefit of employees and having the prime objective of providing employees with a lump sum when they retire or are separated from employment after a minimum period of service in an organisation.

iii.  Pension Funds In Bangladesh, pension systems are primarily observed in government sectors, where the government provides a pension to an official who has been in government service for at least 10 years. A government servant or members of his family are entitled to different types of pension, depending on the circumstance, for example a compensation pension, invalid pension, superannuation pension, retiring pension or family pension. The official has to submit his application for a pension in the prescribed form to the approved authority, accompanied by all other relevant documents as required by the rules. With regard to non-gazette officers, the head of the office will examine the service book and, before sanctioning the pension, will ensure that the entire period of service is verified. Bangladesh follows an unfunded pension scheme, whereby the government pays its former/retired employees from its budgetary revenue. Current workers contribute by paying relevant taxes with the promise that future generations will contribute in a similar manner and they will be benefited through obtaining pensions after retirement.24 Thus, through this system, we can identify the existence of a relationship of trust in an indirect manner, in a non-legal sense, according to which current income earners pay applicable taxes to the government and this process assists in providing retirement income to beneficiaries (ie, retired officials).

iv.  Workers’ Profit Participation Funds Workers’ Profit Participation Funds (WPPF) are another practical application of trusts in the area of employment law. Under section 232(1) BLA 2006, it is mandatory for every organisation to establish workers’ participation in the organisation’s profits and accordingly constitute a WPPF if the organisation fulfils any of the following conditions: (a) the paid up capital of the organisation is Taka 10 million or more at the end of the accounting year; or (b) the value of the fixed assets at cost on the last day of the accounting year is not less than Taka 20 million or more. The fund is administered and managed after forming a trust and constituting a board of trustees within 30 days. The board of trustees has a duty to manage and administer the funds in accordance with the provisions of the labour laws of Bangladesh. Under s 233(1)(i) of BLA 2006, the beneficiary of WPPF refers to any person including a probationer who has been employed in a company for not less than nine months

24 ibid

no 20.

Bangladesh  167 irrespective of any rank and status, except the employer, a partner or a member of the management board.

v.  Workers’ Welfare Funds Workers’ Welfare Funds are constituted in a similar manner to the WPPF, by forming a trust and constituting a board of trustees under Chapter XV of BLA 2006. The establishment of a Workers’ Welfare Fund, eligibility criteria and management of the fund, operate in a manner similar to the WPPF. The amount deposited in a Workers’ Welfare Fund may be utilised for such purposes and in such manner as the board of trustees may decide, and the board must inform the government accordingly. Whether the beneficiaries are entitled to the full benefits of both the funds (ie, Participation and Welfare Fund) depends on the way they are separated from the organisation.

vi.  Workers’ Welfare Foundation Under the Bangladesh Workers’ Welfare Foundation Act 2006, the government has created a central Welfare Foundation for workers in Bangladesh, which provides a further example of the practical application of trusts law. The fund under the Foundation is collected from the sources as stated in the Act and is maintained by a board of trustees and utilised for the welfare of the workers of Bangladesh as a whole.

D.  Criminal Law (Criminal Breach of Trust) Criminal breach of trust is dealt with in section 405 PC 1860, which begins with the phrase whoever, being in any manner entrusted with property or with any dominion over the property, dishonestly misappropriated or converts to his own use that property, or dishonestly uses or disposes of that property in violation of any direction of law prescribing the mode in which such trust is to be discharged, or of any legal contract, express or implied, which he has made touching the discharge of such trust, or willfully suffers any other person so to do, commits ‘criminal breach of trust’.

For example, A, a revenue officer, is entrusted with public money and is either directed by law, or bound by an express or implied contract with the government to pay into a certain treasury all the public money which he holds. A dishonestly appropriates the money. A has committed criminal breach of trust. The punishment for criminal breach of trust is set out in section 406 PC 1860. That provision states that ‘[w]hoever commits criminal breach of trust shall be punished with imprisonment of either description for a term which may extend to 3 (three) years, or with fine, or with both’. This is quite simple and unambiguous: that there should be an ‘entrustment’ of the property (along with other components) between the parties. In practice, in many cases under section 406 PC 1860, the accused is alleged to have taken money as by way of loan from the complainant for some purpose and then has subsequently refused to repay the loan. Often in order to persuade the lender to effect

168  Omar H Khan the transaction, the accused makes an undertaking on stamp-paper along with the loan agreement that he will repay the loan on time. Although the offence of breach of trust is cognisable and a warrant should, ordinarily, be issued in the first instance, in a few instances, the court takes cognisance of the offence directly or on the basis of the police investigation report. The following elements are necessary to constitute the offence of criminal breach of trust: (a) entrustment of property or dominion over the property (mere dominion does not suffice, such dominion must emanate from entrustment: for example, A, a carrier, is entrusted by Z with property to be carried by land or by water. A dishonestly misappropriates the property. A has committed a criminal breach of trust); (b) dishonest misappropriation or conversion to one’s own use; (c) dishonest use or disposal of that property violating any direction of law or the terms of any legal contract’ and (d) wilful suffering caused to any person. The foremost ingredient of the offence of criminal breach of trust is ‘entrustment’, which signifies that there should be a fiduciary relationship between the accused and the complainant. In criminal breach of trust, the beneficial interest of the property rests with the owner of the property or with someone other than the accused and the accused is entrusted with the mere possession of or dominion over the property against which the offence is committed. As a loan is distinct from entrustment, the illustrations appended to section 405 do not contain any provisions regarding transactions of loan or violations of a loan agreement. Hence, violation of a loan agreement does not constitute an offence of criminal breach of trust. In Shafiuddin Khan v State,25 the complainant lent money to the accused-petitioner induced by a representation to repay. The High Court Division opined that, in the absence of any entrustment, the allegations disclosed no offence of criminal breach of trust. A similar approach was taken in Ayub Ali alias Mukul v State.26 As the offence of criminal breach of trust is non-bailable, the Court, while granting a bail petition, exercising its inherent power, requires an undertaking from the accused that he will repay loan-money within the stipulated time. However, the criminal court is not endowed with the power to release money in a case under section 406 PC1860, as in order to recover the money, the litigant has to file a money suit in the Civil Court. Thus, due to the lengthy procedure for the recovery of money, the litigant may face additional procedural hurdles and accordingly, their access to justice may be delayed.

E.  Islamic Trusts Law (Waqf) A major portion of public religious and charitable trusts in Bangladesh relate to waqf estate operation. The term ‘waqf’ literally means detention or stoppage. In Bangladesh, waqf estate operation is provided for by the Waqf Ordinance 1962. Under s 2(10) of the Ordinance, ‘waqf’ means the permanent dedication by a person professing Islam of any movable or immovable property for any purpose recognised by Muslim law as pious, religious or charitable.27 Regardless of their distinctive purposes, administration and governing laws, trust and waqf are similar concepts.

25 Shafiuddin

Khan v State 45 DLR 102. Ali alias Mukul v State 61 DLR 52. 27 Waqf Ordinance 1962, s 2(10). 26 Ayub

Bangladesh  169 The term waqf in Islamic law is not restricted to an appropriation of a pious or charitable nature but includes settlements on a person’s self and children. The definition of waqf given by the Waqf Ordinance 1962 seems to cover waqfs of a public nature, that is waqfs conferring benefit to the public at large. It is not an exhaustive definition since it does not include the waqf-al-aulad, which is a waqf in favour of family, children or descendants. The latter kind of waqf is dealt with under the Mussalman Waqf Validating Act 1913 and the Bengal Waqf Act 1934. In fact, there is no officially recognised, exhaustive, comprehensive or conclusive definition of waqf. Some notable points in relation to waqfs under Islamic law are as follows: • A Muslim as well as a non-Muslim can make a valid waqf (Waqf Ordinance 1962). • A waqf may be made for any good purpose that is not prohibited by Islam. The lawful purposes of waqf mentioned in Islamic law are the maintenance of mosques, including the remuneration of imams and muazzins, the maintenance of educational institutions, including salaries of their staff, the giving of alms (ie, money or food given to the poor and the needy), financing the Haj pilgrimage for the poor and the construction or maintenance of bridges or aqueducts, among others. • A waqf may be made either orally or in writing. In the latter case, the Registration Act 1908 will apply. A waqf can be created either by an inter vivos act, in non-­ testamentary form (ie, gift), or by testamentary instrument, for example by a will, taking effect after the death of the wakif. In the former form (ie gift), a Muslim can create a waqf of his entire property. In the latter form (ie, will), he can generally create a waqf only to the extent of one-third of his property. Any property which has value, whether movable or immovable, may be the subject of a waqf. Hanafi law28 does not insist on a transfer of property to Mutwalli, thus musha (ie, the undivided share of a property which is capable of being separated) can be the subject of a waqf. However, musha, whether it is capable of division or not, is not a valid subject for making a waqf for a mosque or burial ground. The wakif must be the actual owner or must have permanent dominion over the property; a temporary interest will not do. • A waqf for a limited period of time is void.29 According to the Hanafi school, the ownership of property even after dedication continues to be with the wakif and as such the wakif is at liberty to resume the waqf, while according to the other schools, the wakif ceases to be an owner and hence the waqf cannot be revoked. An important characteristic of waqf is perpetuity and irrevocability. When a waqf is created through a will, it can be revoked like any other will before the death of the testator, but after the death of the testator, as soon as it becomes operative, it cannot be revoked, being perpetual. All the schools of Muslim law are in agreement that a contingent waqf is invalid. • A waqf created during death or illness (maraz-ul-maut) is a gift and regarded as a testamentary waqf. Since there is no freedom of testation in Sunnī Islam, the family

28 Hanafi is one of the four schools of thought of religious jurisprudence (fiqh) within Sunni Islam. Named for its founder, the Hanafi school of Imam Abu Hanifa, it is the major school of Iraqi Sunni Arabs. Most people in Bangladesh follow Hanafi thoughts. 29 Mst Peeran v Hafiz Mahd (66) AAll 201.

170  Omar H Khan waqf has been a common means of preventing the fragmentation of agnatic property by the Qurʾānic rules of inheritance. Waqfs can broadly be divided into two types: (a) a waqf benefiting the public at large (for example, for mosques, graveyards, dargahs, takias etc); (b) a waqf benefiting the family, children or descendants of the wakif. In Bangladesh, waqfs for family are recognised by Muslim law. The view is expressed in Bikani Mia v Shuk Lai,30 where it was held that a waqf even exclusively for the benefit of the wakif ’s family (without any provision for charity) is a valid one. However, in Abul Fata Mohammad v Rasamaya, the Privy Council provided contrasting views on this question and held that a waqf exclusively for the wakif ’s family was not a waqf for charitable purposes and was therefore invalid.31 It was also held that a waqf both for charity and for the benefit of the wakif ’s family was valid, but only if there was a substantial dedication of the property to charitable uses.32 Under the Mussalman Waqf Validating Act 1913, a waqf substantially for family is recognised, the only condition being an ultimate dedication to charity. This Act is intended to expand the law relating to waqfs and not to restrict it. Such waqfs have thus always been valid and are valid even now without invoking the provisions of the Waqf Act 1913. Thus, we see that the law relating to waqfs in Bangladesh is guided and governed partially by statutes and judicial decisions and partially by the Muslim personal law and there are certain enactments on the law on waqfs in Bangladesh.33 In a waqf, the Mutwalli is like a trustee and is held liable for breach of his duties and may be liable to be removed for similar grounds to those of removal for breach of trust. However, a trustee usually has wider powers than a Mutwalli, who acts like a manager. Moreover, a waqf is perpetual, irrevocable and inalienable but it is not necessary that a trust be perpetual, irrevocable or inalienable.

F.  Hindu Trusts Law (Endowment) Religious and charitable endowments under Hindu law, like Debottar (property dedicated to the ownership of a Deity) and Maths (an abode or residence of ascetics or a monastic institution), can be created both orally and in writing. They can take the form of both gifts and wills (in case of a will the Succession Act will apply). Endowments for charitable purposes can be created, for example, for feeding the poor or Brahmans etc. Formal deeds of endowments for religious or charitable purposes must comply with the provisions of the TPA 1882 and the Registration Act 1908. Dedication of property is essential for the creation of an endowment. Religious dedication for an endowment may be complete or partial. In the case of a complete dedication, the owner loses title 30 Bikani Mia v Shuk Lai ILR 20 Cal 116. 31 Abul Fata Mohammad v Rasamaya ILR 22 Cal 619 (PC). 32 ibid. 33 Mussalman Waqf Validating Act 1913; Mussalman Waqf Validating Act 1930; The Mussalman Waqfs Act, 1923; Bengal Waqf Act 1934; Official Trustees Act of 1913; Charitable Endowments Act, 1890, ss 2–8; Religious Endowments Act 1863, s 14; Charitable and Religious Trusts Act 1920; Civil Procedure Code 1908, ss 92–93; East Bengal Non-Agricultural Tenancy Act 1949, s 85; Waqf Ordinance of 1962.

Bangladesh  171 completely and a deity becomes the absolute owner and in case of a partial dedication, the ownership is retained by the owner and only a charge is created in favour of the object. Where the dedication is of absolute nature, any surplus money can be utilised by applying the doctrine of cy-pres.34 In Hindu law, the property vests in the idol itself as a juristic person or entity which has the capacity to receive a gift and hold property. When a gift is made directly to an idol or a temple, the Shebait (ie a manager) completes the gift to the extent that it is necessarily effected by human agency. Called by whatever name, the Shebait is only the manager and custodian of the idol or the institution. A Hindu enjoys the legal power to create a public or a private Debottar. In the case of Deokinandan v Murlidhar, the Supreme Court of India observed: The distinction between public and private trust is that whereas in the former the beneficiaries are specific individuals, in the latter case they constitute a body which is incapable of ascertainment. Apart from the restrictions laid down for ensuring good order and decency of worship, to regulate the time of public visits and to prevent overcrowding, the right of worship in the public temples is a free right. In simple words, if the public is allowed freely to enter the temple and has been worshipping there for a long period of time, it may be a good evidence to indicate that temple is a public temple, but it is not conclusive. Similarly, the feeding of Sadhus and giving hospitality to wayfarers is not by itself indicative of the public character of the temple.35

In terms of creation of a Hindu religious or charitable endowment, no formalities are generally required. However, authorities suggest the following: • The subject matter of the trust must be specified. • The object or purpose of the trust must be definite and valid religious or charitable purpose according to the rules of Hindu law. • The founder or settlor must have the capacity to settle the endowment under Hindu law of creating a trust in respect of the particular property. • The founder or settlor should indicate with sufficient precision the purpose of the trust and the property in question. • The trust must not be opposed to the provisions of law for the time being in force. In Bangladesh, the government cannot take possession of Debottar property as ‘enemy property’ merely because the Shebait has left the country.36 ‘Enemy property’ refers to property or assets held or managed on behalf of those individuals who have migrated to another country and left behind the property or assets in question. Thus, for example, if the Shebait left the country during the time of the liberation war of Bangladesh, the government cannot take possession of the Debottar property as enemy property.

34 Pillayan v Commrs, HRE Board, AIR 1948 P025; The cy-près doctrine is a legal doctrine which allows a court to amend a legal document to enforce it ‘as near as possible’ to the original intent of the instrument, in situations where it becomes impossible, impracticable, or illegal to enforce it under its original terms. 35 Deokinandan v Murlidhar AIR 1957 SC 133. 36 Shuk Deb v Province of East Pakistan 22 DLR, 245.

172  Omar H Khan Apart from the Hindu religious rules and judicial decisions, various enactments apply to Hindu public or private religious and charitable endowments.37

G.  Special Purpose Religious Trusts for Hindus, Christians and Buddhists, and Non-Religious Trusts In Bangladesh, trusts have been statutorily created with the aims and objectives of pursing the religious welfare of the followers of Hinduism, Christianity and Buddhism, for the overall welfare, communal harmony and establishment of a peaceful happy society. Such trusts have been given the status of statutory bodies and are headed by the incumbent minister responsible for the Ministry of Religious Affairs. Previously, the laws in this regard were contained in three separate ordinances promulgated in 1983. Those ordinances were subsequently repealed in 2018 by the Hindu Religious Welfare Trusts Act 2018, the Christian Religious Welfare Trusts Act 2018 and the Buddhists Religious Welfare Trusts Act 2018. All three Acts of 2018 provide for special purpose trusts. Under the Acts, trust boards are formed, which are responsible for the administration and management of the respective trusts. Funds are deposited by the government or by any person as donations, including through foreign donations. Special purpose trusts have also been used to create a range of statutory trust funds most of which have been conferred with legal personalities. Such trusts are provided for by the following statutes: Private Primary Teacher Welfare Trusts Act 2000; Bangladesh Artist Welfare Trusts Act 2001; Imam and Muazzin Welfare Trusts Act 2001; Climate Change Trusts Act 2010; Science and Technology Development Trusts Act 2011; ­Neuro-Developmental Disability Protection Trusts Act 2013; Bangladesh Journalist Welfare Trusts Act 2014; and Bangladesh Freedom Fighters Welfare Trusts Act 2018.

H.  Other Forms of Trust Several charitable hospitals in Bangladesh operate as trusts for the provision of medical facilities to the general public. Schools, colleges and private universities also operate as trusts for the provision of quality education to the public. Trusts are also created for benevolent and philanthropic activities, such as trusts to provide safe drinking water, or to tackle issues during the Rohingya crisis. In Bangladesh, Development Organisations/NGOs also create trusts and afterwards obtain an appropriate entity registration, as a society, foundation NGO, etc. Thus, for Development Organisations/NGOs, a common practice is to execute a deed of trust at first, specifying the settlor(s)/author(s), trustees, beneficiaries, trust property, rights, obligations and liabilities. After that, such organisations usually obtain registration with the NGO Affairs Bureau, regulated through the Foreign Donations (Voluntary Activities) 37 Religious Endowments Act 1863; Charitable and Religious Trusts Act 1920; Code of Civil Procedure 1908, s 92; Transfer of Property Act 1882; Registration Act 1908; Succession Act 1925.

Bangladesh  173 Regulations Act (FDRA) 2016. It is pertinent to mention that the FDRA 2016 only applies to NGOs receiving foreign donations.38 Otherwise, organisations may execute a trust deed and later obtain entity registration by creating and registering a society with the Registrar of Joint Stock of Companies under the Societies Registration Act 1860. The application of the trust can also be seen in the government’s National Savings Scheme. One example takes the form of Sanchayapatras (savings certificates/savings instruments), which allow people to deposit money through bank accounts and receive interest on the deposited money when the same reaches maturity after a certain amount of time. Moreover, to encourage savings, the government has also introduced the concept of ‘Prize Bonds’. Anyone, including children, can buy Prize Bonds and later claim the Prize (ie liquid money) in accordance with the Prize list in the Prize Bond Draw Result published by the Bangladesh Bank. Such bonds can readily be sold and purchased at banks and post offices. After a minimum period of three months, the Prize Bonds can be cashed in at any time without losing their value. The practical application of trusts can further be seen in the Postal Life Insurance (ie Whole Life Insurance and Fixed Term Insurance) schemes of the government. These schemes apply to all classes of people, and entail people making a monthly payment and in return, getting interest at certain percentages.

IX. Conclusion In Bangladesh, trusts law itself and other laws related to it require developments and modifications to keep up with trust practice and measures taken by neighbouring jurisdictions. Nonetheless, as this chapter has shown, the practical application of the trust in Bangladesh is still very wide and covers various areas, such as company law, employment law, banking, etc, along with religious and charitable practices. Various government schemes create relationships of trust, under which eligible members of the public may subscribe and, in return, enjoy benefits derived from the schemes. Perhaps, if appropriate changes to Bangladesh’s laws are made to respond to modern-day applications of trust, the trust will run even more smoothly in Bangladesh.



38 Foreign

Donations (Voluntary Activities) Regulations Act 2016, s 3.

174

10 Implied Trusts in Sri Lanka as a Creature of Legislation: The Way Forward ANTON COORAY*

I. Introduction The reception of the English law of trusts into Sri Lanka, known as Ceylon until 1972, provides a fascinating study of how an alien system of legal thinking may find a comfortable place in an already well-established mixed jurisdiction. By the time the Trusts Ordinance was enacted in 1917, Roman-Dutch law had firmly established itself as Sri Lanka’s common law. After a brief account of the development of the legal system of Sri Lanka, this chapter outlines the main differences between the relevant Roman-Dutch and English law principles showing how Sri Lankan judges allowed themselves to be influenced by English common law and equity to veer away from any Roman-Dutch law concepts, which were not fully aligned with the concept of English trusts law. Further, this chapter will show that the idea of equity as a gloss on strict interpretations of the law was known to Roman-Dutch law, and as a result, local courts found it easier to seek guidance from English equity. While the concept of trusts is uniquely English, it is not difficult to find trust-like devices in other legal systems. Case law indicates that in the early years of British rule, Sri Lankan judges found solace in the belief that Roman-Dutch law, and even indigenous laws, shared some basic concepts of trusts law. In a context where the creation of trusts had become common, and piecemeal legislation governing some aspects of trusts law were already in place, the Trusts Ordinance was enacted to set out in one place the main principles of trusts law. Being an almost verbatim reproduction of the Indian Trusts Act of 1882, the Trusts Ordinance states the law as it was understood at that time. It will be shown that in interpreting provisions of the Trusts Ordinance judges did not hesitate to draw upon the English experience to make them meaningful in a changing society. With particular emphasis on implied trusts, this chapter argues that courts must continue to adopt a purposive, and not a literal, interpretation of the provisions of the Trusts Ordinance. * Professor, The City Law School, City University of London.

176  Anton Cooray

A.  Historical Setting of the Sri Lankan Legal System Legend has it that around 500 BC an Indian Prince arrived in Ceylon with several hundred followers, displaced the original inhabitants and established his kingdom, becoming the first king of the island. This new community, the Sinhalese, developed their own language and culture. Their laws and customs, which have an Indian origin, were also greatly influenced by Buddhism. By the time of the British conquest in 1796, Sinhalese customary laws had become applicable only in the Kandyan provinces and are therefore popularly known as Kandyan law. Around the third century BC, the settlement of South Indian Tamils began mainly in the north of the island. Today, ‘Tamil inhabitants of the Jaffna Province’ are governed by Thesawalamai, their customary law. Just like Kandyan law, Tamil customary law is a personal law, subject to the qualification that certain rules of Thesawalamai apply to all land in the province. The reception of Islamic law into Sri Lanka began around the ninth century with the arrival of Arab traders, followed in later years by Muslims from India and Malaya. The Muslim community is principally located in the North Eastern Province, but as with Tamils, they are also resident throughout the island. However, unlike Thesawalamai and Kandyan law which have a territorial qualification, Muslim law applies to all followers of Islam, wherever in Sri Lanka they may be resident.1

B.  Western Rule 1505–1948 The arrival of the Portuguese in 1505 brought about a gradual decline of indigenous laws. During their occupation of the coastal areas of the island, the Portuguese, motivated more by trade than empire building, did little to govern the natives according to Portuguese law or to enthusiastically administer indigenous laws. Portuguese missionaries, on the other hand, were quite successful in converting Sinhalese Buddhists, but not many Tamil Hindus, because the Portuguese were able to control Jaffna only for about 40 years, and quite inadequately. In 1656, the Portuguese were displaced by the Dutch who ruled the coastal areas until 1796. The Dutch established a well-structured system of administration of justice, with a hierarchy of courts modelled on their own courts, manned by military officers and civil servants. Roman-Dutch law and government regulations became prominent sources of law. Justice was administered among natives according to their own laws, and resort was made to Roman-Dutch law where a local law was silent or deficient. In that sense, Roman-Dutch law became the ‘residuary’ or ‘common law’ of Sri Lanka. The Dutch succeeded in compiling codes of Muslim law and Thesawalamai but not of the customary law of the Sinhalese for the reason that Sinhalese residents

1 For Islamic law in Sri Lanka, see A Cooray, ‘The Reception of Islamic Law in Sri Lanka and its Interplay with Western Legal Traditions’ in V Palmer, MY Mattar and A Koppel (eds), Mixed Legal Systems, East and West (Routledge 2017); A Cooray, ‘Access to Non-Judicial Justice through Islamic Courts in Sri Lanka: Palm Tree Justice or Accessible Justice?’ (2012) 20 Asia-Pacific Law Review 113.

Sri Lanka  177 in the coastal areas had embraced Western values and ceased to follow their customary law. The arrival of the British in 1796, displacing the Dutch, marks a significant landmark in the history of Sri Lanka’s legal system. In 1801, after a short period of temporary arrangements for the administration of justice, the British government introduced a system of courts based on the colonial model. The Charter of Justice of 1801 introduced a system of criminal and civil courts, with the Supreme Court at the apex. The guiding principle was that laws in force at the time of the British occupation would continue to apply, English law being the residuary law. Importantly for our purposes, the Supreme Court was also ‘a court of equity’, authorised to act ‘according to the rules and proceedings of the High Court of Chancery in Great Britain’, a jurisdiction which gradually also came to be exercised by courts of original civil jurisdiction.2 The island became a British Crown colony in 1802 and gained independence in 1948. The Queen ceased to be the head of state in 1972 with the creation of the Democratic Republic of Sri Lanka. The right of appeal to the Privy Council, which was introduced in 1801, was abolished in 1971.3 Today, indigenous or customary laws operate as ‘special laws’ meaning that the Sinhalese, Tamils and Muslims are governed by their special laws, and where their laws are silent the common law – that is, the Roman-Dutch law as greatly modified by the application of English law – applies as the ‘residuary law’.4

II.  Reception of Trusts The English law of trusts was codified by the Trusts Ordinance of 1917, modelled on the Indian Trusts Act of 1888.5 It was enacted in Sri Lanka in a context where local legislation had introduced or assumed the application of some aspects of trusts law; Roman-Dutch law, customary laws and religious laws knew trusts or trust-like devices; and courts relied on the English law of trusts to fill gaps in the law. It will be useful here to look at the Roman-Dutch law, customary laws and ­religious laws to see to what extent trusts or trust-like devices were already established in Sri Lanka by 1917.

2 For an outline of the sources of law in Sri Lanka in their historical context, see CG Weeramantry, The Law of Contracts, vol I (HW Cave & Co 1967) ch 2; for the development of the legal system of Sri Lanka, see T Nadaraja, The Legal System of Ceylon in its Historical Setting (Brill 1972). 3 For the constitutional history of Sri Lanka, see A Cooray, Judicial Role under the Constitutions of Ceylon/Sri Lanka: An Historical and Comparative Study (Lake House Publishers 1982). 4 For an account of how indigenous laws were influenced by received law, see A Cooray, ‘Asian Customary Laws through Western Eyes: A Comparison of Sri Lankan and Hong Kong Colonial Experience’ in LA Knafla and SWS Binnie (eds) Law, Society and the State (University of Toronto Press 1995); A Cooray, ‘Comparative Law in a Small State: The Mixing of Indigenous Laws in Sri Lanka’ (2011) II Interdisciplinary Studies of Comparative and International Law 211; A Cooray, ‘Sri Lanka: Oriental and Occidental Laws in Harmony’ in E Orucu, E Attwooll and S Coyle (eds), Studies in Legal Systems: Mixed and Mixing (Kluwer Law International 1996). 5 For a thorough account of the introduction of trusts law into Sri Lanka, see LJM Cooray, The Reception in Ceylon of the English Trust (Lake House Publishers 1971).

178  Anton Cooray

A.  Equity in Roman-Dutch Law The idea of equity which underlies the concept of the trust was known to Roman law, which is said to have greatly influenced the development of equity in England. In its early years, Roman law was a rigid system, which came to be softened by the application of the concept of equity. A number of equitable principles evolved and came to be embodied in Roman-Dutch law, such as the introduction of a requirement of good faith in contractual obligations; a change in emphasis in the interpretation of legal documents (so that greater regard was to be given to intention rather than form); and the rules that no one should be enriched at the expense of another, no one may act in fraud of legislation, no one may deny his own act, and no one may improve his position by his own wrong or obtain an advantage through bad faith. Justinian’s Corpus Juris suggests that courts were courts of conscience which could disapply a rule of law if its application would lead to an inequity.6 In Dodwell v John, the Privy Council recognised that, whether derived from Roman-Dutch law or English law, an equitable jurisdiction was inherent in the courts of Sri Lanka. Considering the right of a principal to claim a fraudulent payment of its funds by its agent, Lord Haldane characterised the money in the hands of the thirdparty recipient as ‘what may properly be called trust money, consistently with principles of jurisprudence based in part, though not wholly, on a foundation of Roman law’.7 The essential nature of a trust is illustrated by the Roman fideicommissum. In early Roman law a Roman citizen could not appoint an alien as his heir. It became the practice, therefore, to appoint a citizen as the heir, with directions to pass on the estate to the alien. The citizen was the fiduciary, who had no right to enjoy what he received, but was under an obligation to pass it on to the alien fideicommissary (beneficiary). When what was a moral obligation of the fiduciary became in time an enforceable obligation, fideicommissum was not significantly different from a trust, separating title and benefit. This relationship between fiduciary and the fideicommissary became more refined in Roman-Dutch law such that, in the early years of British rule, courts relied on it as a justification for receiving the English concept of trust into Sri Lanka.8

B.  Reception of Trusts in the Early Years of the Colonial Administration in Sri Lanka From the early years of British rule, it became common for European settlers and the more affluent natives to set up trusts, especially family trusts. Among the natives, the idea of some family property being subject to a trust-like obligation was well established, as illustrated by Muslim law and Thesawalamai. 6 For an excellent account of the development of the Roman-Dutch law, see HH Hahlo and E Khan, The South African Legal System and its Background (Juta 1968). 7 Dodwell v John (1918) 20 NLR 206, 210 (Ceylon New Law Reports). 8 Honore observes that the two institutions are different. ‘Nevertheless, the powers of trustees and interests of trust beneficiaries are in certain ways analogous to those of fiduciaries and fideicommissaries’: Honore’s South African Law of Trusts, 6th edn (Juta 2018) 65.

Sri Lanka  179 Muslim law considered Kaikuli (a dowry or gift from the bride’s parents to the bridegroom) not to be for the benefit of the husband but to be held by him for the benefit of the wife, so that the wife could demand it either during the marriage or after its termination. Courts came to recognise this as creating a trustee–beneficiary ­relationship.9 Thesawalamai regards property acquired by the husband and wife during their marriage as property held in community. While as the manager of the community property the husband could deal with the community property, such as by sale or mortgage, he could not dispose of such property, such as by donation, depriving the wife of her equal share.10 In Seelachchi v Visuanathan Chetty, the Supreme Court relied on the idea of a constructive trust to protect the equitable proprietary interest of the wife.11 It was common for the natives to establish, or make donations to, religious institutions and places of religious worship. These institutions were managed by priests or managers. In order to control the misuse of funds of such institutions, managers were guided by established principles and in time they came to be no different from a ­trustee.12 Property donated to a Buddhist temple had to be administered for the benefit of the temple and its priests, which was done on the lines of an arrangement similar to a trust. In view of the irregularity of such arrangements, the Buddhist Temporalities Ordinance No 3 of 1889 made provision to regularise the management of such properties by trustees.13 It is particularly in this context that statutes were passed to regulate trusts in general. Preeminent among them is the Property and Trustees Ordinance 1871, which dealt with several issues such as vesting of trust property in trustees, judicial appointment of trustees and trustees’ power to apply to court for directions. By the time the Trusts Ordinance was enacted in 1917, no legislation similar to the Buddhist Temporalities Ordinance No 3 of 1889 had been enacted in relation to Hindu and Muslim religious trusts, several attempts at passing regulatory legislation having failed. It was therefore considered that it would be advisable to pass legislation setting out the general principles of trusts law, including provisions dealing with religious and charitable trusts, subsequently to be followed by legislation specific to Muslim and Hindu religious trusts.14

9 In Pathumma v Cassim (1919) 21 NLR 221, 222, it was said: ‘[d]owry or kaikuli is held in trust by the husband for the wife and cannot be withheld on the ground that it has been spent for the sustenance of the marriage’. Zainabu Natchia v Usuf Mohamadu (1936) 38 NLR 38, 45, seems to suggest that the husband is more a constructive trustee than an express trustee. 10 Parasatty Ammah v Setupulle (1872) 3 NLR 271. 11 Seelachchi v Visuanathan Chetty (1922) 23 NLR 97. Bertram CJ held that where a spouse purchased any property it had to be held as part of the community of property and as such the husband and wife would have an equal equitable interest in the property. Bertram CJ held that where the husband acquired a property it would be held ‘subject to a constructive trust in favour of his wife, and his wife was entitled to sue him for a formal conveyance of her interest’ (at 116). 12 Wendt J said in Government Agent, Northern Province v Pararajasingham (1902) 6 NLR 54, 56: ‘[t]here is no magic in the term “trustee”. I believe the word “manager” is used in connection with the administration of the temporal affairs of Hindu temples as describing an officer who, in the eye of the law, would be a trustee for the temple’. For a useful historical account of the regulation of managers of Hindu religious institutions, see Shanmugalingam v Vaitheswara Kurukkal [1987] 1 Sri LR 94 (Sri Lanka Law Reports). 13 See Somaloka Terunnanse v Somalankara Terunnanse (1889) 3 NLR 380. 14 ‘Statement of Objects and Reasons’ as appended to the Trusts Bill, Ceylon Legislature, Council Debates (15 November 1916) 252.

180  Anton Cooray Legislation on formalities for land registration, prescription and partition let in the application of equitable principles and the concept of trust. For instance, equity intervened to prevent a transferee of land from unconscionably relying on the absence of formalities prescribed by the Prevention of Frauds Ordinance No 7 of 1834 to claim absolute ownership. In several pre-Trusts Ordinance cases, parol evidence was admitted to establish the true nature of a property transaction, resulting in the imposition of an implied trust on the legal owner.

C.  The Trusts Ordinance of 1917 The Trusts Ordinance, an almost verbatim reproduction of the Indian Trusts Act,15 was enacted principally to address the ‘unsatisfactory condition of the law relating to religious trusts’, regulation of which was a matter for courts.16 While several statutes had already been passed on the assumption that trusts law was applicable in Sri Lanka, there was a dearth of reported cases setting out the principles of trusts law as they applied in Sri Lanka.17 The Trusts Ordinance makes provision for the creation of express trusts (Chapter II); trustees’ duties, liabilities, rights, powers and disabilities (Chapters III, IV and V); vacation of the office of trustee and appointment of replacement/succeeding trustees (Chapter VII); termination of trusts (Chapter VIII); constructive trusts (Chapter IX); charitable trusts (Chapter X); and miscellaneous matters such as rule against perpetuity, limitation of time and devolution of trust property (Chapter XI). The Trusts Ordinance was not intended to be a comprehensive code, in view of the ever-evolving general powers of the courts in the administration of principles of equity.18 For this reason, a casus omissus provision (section 2) was inserted to enable the reception of ‘principles of equity for the time being in force in the High Court of Justice in England’.19 It is instructive to note that the absence of a casus omissus provision in the Indian Trusts Act has not deterred Indian courts from resorting to primary and secondary sources of English equity and trusts to expand the scope of the law of trusts in India.20 In relation to implied trusts set out in ‘Chapter IX: Constructive Trusts,’ section 96 of the Trusts Ordinance enables courts to impose an implied trust in a situation which is not specified in any of the provisions of that chapter. 15 The Indian Trusts Act dealt only with private trusts. The Trusts Ordinance dealt with private trusts and charitable trusts. It relied on the Indian Trusts Act for private trusts and on other relevant Indian legislation for religious and charitable trusts: ‘Statement of Objects and Reasons’ (n 14) 252. For the reception of trusts into India with some Sri Lankan comparisons, see S Tofaris, ‘Trust Law Goes East: The Transplantation of Trust Law in India and Beyond’ (2015) 36 Journal of Legal History 299. 16 For instance in Nuku Lebbe v Thamby (1913) 16 NLR 84, a case concerning the unfair dismissal of the manager of a Muslim mosque, the Supreme Court observed that the Courts of law have the right to interfere with the proceedings of ecclesiastical bodies where claims to property or to civil rights are involved. 17 ‘Statement of Objects and Reasons’ (n 14) 251. 18 ibid 253. 19 ‘As every statute must necessarily repose upon a general basis of unwritten law, provision must at the same time be made as to the principles to be applied in cases where the Code is silent’: ‘Statement of Objects and Reasons’ (n 14) 251–52. 20 For instance, in Devlakshmi Harisukh Vahalia v Vishwakanth P Bhatt AIR 1972 Bom 103 [6], it was said: ‘the [Indian Trusts] Act … is not exhaustive of all matters relating to private trusts … in any case not covered

Sri Lanka  181

III.  Implied Trusts in Sri Lanka Chapter IX of the Trusts Ordinance is entitled ‘Constructive Trusts,’ unlike the corresponding Chapter IX of the Indian Trusts Act which is entitled ‘Of Obligations in the Nature of Trusts’. The opening provision of the chapter, section 82, defines a constructive trust as ‘an obligation in the nature of a trust’. In other words, Chapter IX deals with trusts arising by operation of law or implied trusts – resulting and constructive trusts, which were known to the judges before the enactment of the Trusts Ordinance.21 An implied trust is imposed on the legal owner of a property to protect the rights of a person who has an equitable interest in the property. How is it that implied trusts could operate in Sri Lanka where Roman-Dutch law or indigenous laws did not recognise a separation of equitable ownership from legal ownership of property?22

A.  Legal and Equitable Ownership Historically, the separation of equitable ownership from legal ownership is at the core of the English concept of the trust. When the Charter of Justice 1801 declared the Supreme Court to be a court of law and equity, the way was paved for the reception of concepts of equity, including the distinction between legal and equitable proprietary interests. The influence of equity became more pronounced when courts of original civil jurisdiction also came to be regarded as courts of law and equity.23 Indian and Sri Lankan judges have repeatedly said that the distinction between equitable and legal ownership forms no part of their legal system, because (unlike in England) there are no separate courts of law and equity in India or Sri Lanka.24 Nevertheless, they recognised several aspects of equitable ownership. An illustration of how Sri Lankan law protects the beneficiary’s equitable interest is found in the area of property law. Partition law enables co-owners to have their land divided among themselves in proportion to each owner’s interest. Section 9(a) of the Partition Ordinance of 1863 provided that ‘the decree … shall be good and conclusive against all persons whomsoever, whatever right or title they have or claim to have in

by the Act, the Court is entitled to apply rules of English law … which are not inconsistent with the Act, as the rules of justice, equity and good conscience’. 21 For instance, in Ibrahim Saibo v The Oriental Bank Corporation (1874) 3 NLR 148, 150, Berwick DJ said that ‘there is a well-known distinction between the meaning of the technical terms “resulting” and “constructive” trusts, but both are “trusts created by operation of law”, not trusts created by parties’. 22 See A Cooray, ‘Oriental and Occidental Laws in Harmony: The Case of Trusts in Sri Lanka’ (2008) 3 Journal of Comparative Law 133. 23 As Lord Haldane observed in Dodwell v John: ‘under principles which have always obtained in Ceylon, law and equity have been administered by the same Courts as aspects of a single system’ (1918) 20 NLR 206, 211 (PC). See also Gavin v Hadden (Ceylon) [1871] UKPC 48. 24 As the Privy Council explained in the Indian case of A Krishna v Kumara K Deb (1869) 4 Bombay LR Oudh Cases 270, trusts law could operate without relying on the distinction between legal and equitable ownership of property because the Supreme Court of India was a court of law and equity. For instance, in a series of cases the Supreme Court of Sri Lanka has recognised that an equitable lease would prevail over a forfeiture clause in a legal lease. See, for instance, Perera v Thaliff (1904) 8 NLR 118; Perera v Perera (1907) 10 NLR 230; and Sanoon v Theyvendera-Rajah (1963) 65 NLR 574.

182  Anton Cooray the said property’. In Marikar v Marikar25 Bertram CJ held that a partition decree wipes out legal rights that are not expressly preserved in the decree but does not ‘extinguish equitable interests’. This is a clear indication that where a part of a previously co-owned property is awarded to a co-owner, who is bound by an existing trust, he holds it as the mere legal owner for the benefit of the beneficiary.26 Another illustration may be drawn from the area of partnership law. Where some of the partners buy a property in their names using partnership money, it must be held on an implied trust for the benefit of the partnership. As was said in Beebee Ammal v Ibrahim Saibo, ‘while the legal estate was vested in the … purchasers, the beneficial estate would be in the partnership’.27 The Trusts Ordinance contains two specific provisions that appear to suggest that a beneficiary has no equitable interest in the trust property. Section 3, the interpretation section, defines ‘the beneficial interest’ or ‘interest’ of the beneficiary as his right against the owner of the trust property. Section 8 provides that ‘the subject matter of a trust must be property transferable to the beneficiary. It must not be a merely beneficial interest under a subsisting trust’. These two sections appear to indicate that a beneficiary does not have an equitable interest, as known to English trusts law. However, Indian courts have succeeded in evading the seemingly narrow meaning of beneficial interest. For instance, it has been said that what section 8 of the Indian Trusts Act (which is similar to section 8 of the Trusts Ordinance) prohibits is the creation of a trust over the beneficiary’s right to proceed against the trustee: a beneficiary may create a trust of his beneficial interest, meaning the benefit he receives as beneficiary under an existing trust.28 In other words, a beneficiary has a proprietary interest in what he is entitled to receive under a trust. In Udumma Lebbe v Kiribanda, Canekeratne J clearly had in mind the centrality of beneficial interest to a trust. Having held that the plaintiff intended to make the defendant the absolute owner of the property, Canekeratne J said: [I]t seems that both the beneficial and the legal interest in the property passed to the defendant. If both the legal and beneficial interest were intended to pass and did pass it is difficult to see how any question of trust, as known to English Law, could arise.29

Section 60 of the Trusts Ordinance provides that ‘the beneficiary, if competent to contract, may transfer his interest’. Indian case law provides guidance on how provisions of the Indian Trusts Act corresponding to section 60 and section 8 of the Trusts Ordinance may be given a harmonious interpretation. In Commissioner of Income Tax v Gopldas T Agrawal one of the beneficiaries of a family trust declared that he was giving up his right to receive his share of income from the trust and authorised the trustee to direct it to their family’s joint and undivided income. It was held that just as a beneficiary is free to assign his beneficial interest to another under section 58 (equivalent of

25 Marikar v Marikar (1920) 22 NLR 137. 26 This reasoning followed the decision of the Supreme Court in Babey Nona v Silva (1906) 9 NLR 251 that a partition degree does not wipe out the rights of the fideicommissaries (beneficiaries), a view confirmed by the Privy Council in Nadesan v Ramasamy (1961) 63 NLR 49 (PC). 27 Beebee Ammal v Ibrahim Saibo (1938) 40 NLR 396, 408. 28 Pestonji Chichgar v Jalbhoy Chichgar 1934 AIR Bombay 64. 29 Udumma Lebbe v Kiribanda (1947) NLR 220, 222.

Sri Lanka  183 section 60 of the Trustee Ordinance) he is equally free to direct the trustee to henceforth replace him with some other person as the beneficiary.30 Section 65(1) provides that where trust property comes into the hands of a third person inconsistently with the trust, the beneficiary may institute a suit for a declaration that the property is comprised in the trust. In other words, the beneficiary may follow the trust property and assert his equitable proprietary interest against third-party ­recipients.31 Section 58 incorporates the rule in Saunders v Vautier, the best illustration of the beneficiary’s proprietary interest in the trust property. Sections 58 and 60 illustrate that the beneficiary’s right is not a mere right against the trustee for due performance of his trust duties. The pivotal significance of the beneficial interest as distinguished from legal interest appears from section 96 which provides that ‘where … the person having possession of property has not the whole beneficial interest therein, he must hold the property for the benefit of the persons having such interest’.

B.  An Overview of Chapter IX In the early years of British administration, courts justified the recognition of implied trusts on the ground that a trust was similar to a fideicommissum.32 In Ibrahim Saibo v Oriental Bank Corporation, the Supreme Court affirmed the decision of the District Court, where Berwick DJ had said: [I]t is to be remembered that English trusts are the very offspring of the Roman Law, enlarged and developed from the Roman fidei commissa … so as to embrace trusts created by parties inter vivos and ultimately embracing trusts created by implication of law … Though in the Roman-Dutch Law there are no technical terms corresponding to implied or resulting or constructive trusts … yet the doctrine of implied trusts is in substance part of that law.

Berwick DJ found no difference between English law and Roman-Dutch law in a situation where the legal owner of a property fraudulently keeps the property for himself contrary to their informal agreement that he would reconvey the property to the provider of purchase money.33 Any lingering doubts whether implied trusts are part of the law of Sri Lanka were laid to rest by Chapter IX of the Trusts Ordinance which provides for both resulting and constructive trusts. Sections 83, 84 and 85 are the main sections that deal with resulting trusts. Sections 86 and 87 deal with transfers or bequests for illegal purposes. Sections 88–95 deal with miscellaneous circumstances where an implied trust may be said to arise. Section 96 enables the extension of implied trusts to situations which are

30 Commissioner of Income Tax v Gopldas T Agrawal (1978) 1979 116 ITR 613 Bom. See also The Commissioner of Income Tax v Smt Kasturbai Walchand Trust 1967 AIR 844 (SC). 31 Seelachchy v Visuanathan (1922) 23 NLR 97 recognised the equitable interest of a wife in relation to community property which she could enforce in rem, except against a bona fide purchaser for value. On the beneficiary’s right to follow trust property, see Somawathie de Zoysa v Jayasena Fernando (2005) 1 SLR 10, 14. 32 This analogy did not survive the Trusts Ordinance. s 3(b) of the Ordinance states that a trust does not include a fideicommissum. Fideicommissum was abolished by Ordinance 20 of 1972. 33 Ibrahim Saibo v The Oriental Bank Corporation (n 21) 150–51.

184  Anton Cooray not specifically dealt with in sections 83–95. Section 97 describes the duties and liability of an implied trustee and section 98 protects the rights of bona fide purchasers of trust property.34

C.  Resulting Trusts Sections 83 and 84 cover situations where a rebuttable presumption of a resulting trust is said to arise, while section 85 deals with automatic resulting trusts.

i.  Presumed Resulting Trusts Section 83 deals with situations where the owner of property transfers it to another person and it cannot be reasonably inferred consistently with the attendant circumstances that he intended to dispose of the beneficial interest therein. Section 84 deals with situations where property is transferred to one person for a consideration paid or provided by another person, and it appears that such other person did not intend to provide such consideration for the benefit of the transferee. Under these two sections, the transferee must hold the property for the benefit of the transferor of the property or the provider of purchase money. The transferee who in common law is the absolute owner becomes in equity a mere legal owner, leaving equitable ownership in the transferor or the payer of purchase money. A presumption of trust arises in favour of the transferor/provider of purchase money, which may be rebutted by proving that the transfer was for the benefit of the transferee. Where the transferor or provider of purchase money stands in the position of a parent to the transferee, there arises a counter-presumption of advancement, which may be rebutted by evidence to the contrary. Sections 83 and 84 do not lay down the relevant principles with specific reference to the presumption and the counter-presumption but leave it to the court to decide whether or not, in the attendant circumstances of the case, the transferee has received the beneficial interest. Our discussion of some select cases shows that there is always a reason why a gratuitous transfer is made. As such, in all those cases, the court enquired into the attendant circumstances to discover parties’ intentions, but the judges did not hesitate to make use of the presumption and the ­counter-presumption to determine the nature and degree of the evidential burden placed on the parties. Usually, it is the transferor or provider of purchase money who institutes an action to recover the transferred property.35 There are cases where the transferee was the

34 What is attempted in this chapter is a survey of Sri Lankan cases to see in what sort of factual situations implied trusts were held to have arisen. For an excellent doctrinal discussion, see Ying Khai Liew, ‘Constructive Trusts in Sri Lanka: The Case for an Expansive Approach’ (2020) 20 Australian Journal of Asian Law 1. 35 In Mohamadu Marikar v Ibrahim Naina (1910) 13 NLR 187, a pre-1917 case, the plaintiff, who had transferred a property with a view to defrauding creditors, succeeded in recovering the property as no creditor was defrauded. The transferee held the property on trust for the transferor. cf Saurmma v Mohamadu Lebbe (1943) NLR 397, where the effect of the transfer was to delay the payment of his debts. It was held that even if the debts were eventually settled the illegal purpose, delaying payment, had been achieved.

Sri Lanka  185 litigant, asserting that the beneficial ownership of the property in question had passed to him.36 In the pre-1917 case of Sangarapillai v Kandiah,37 the plaintiff, fearing litigation if he were to buy a property, provided the purchase money for its purchase in the name of the defendant, subject to an informal agreement that the property would be transferred to the plaintiff when called upon. When the defendant refused to reconvey the property at the plaintiff ’s request, the Supreme Court held that the defendant had acted fraudulently and relied on the English concept of a presumed resulting trust to declare that the plaintiff was entitled to have the property transferred to him. In Emee Nona v Winson,38 the deceased, who had obtained a mortgage decree against a defaulting debtor, fraudulently purchased the mortgaged property below the appraised value in evasion of an order of court (which had held that the property must not be bought by him below the appraised value) by taking the conveyance in the name of the defendant. It was held that the defendant was not bound to hold the property on a resulting trust. Dalton ACJ said: The remedy she [the deceased’s administratrix] seeks to obtain under the provisions of section 83 of the Trusts Ordinance is governed by the principles of equity as in force in England, and she cannot obtain that relief in equity by setting up and proving [her husband’s] illegality and fraud.39

While sections 83 and 84 are mainly directed at gratuitous transfers, a transferee who has provided some consideration may yet be bound by a resulting trust.40 In Fernando v Thamel,41 the plaintiff owed Rs 650.00 to a creditor and being unable to settle the debt he transferred a property worth about Rs 2,000.00 to the defendant for Rs 650. The debt was settled. The defendant informally agreed to reconvey the property to the plaintiff on the payment of Rs 671.00 within three years. When the plaintiff offered the money in time, the defendant refused to honour his promise on the ground that their agreement was of no legal effect for failure to comply with formalities. The court decided in the plaintiff ’s favour in order not to permit the defendant to hide behind the lack of formalities and thus commit a fraud on the statute, indicating that section 83 might also be a ground of relief. The relevance of the counter-presumption of advancement is supported by illustration (c) of section 83, which provides as follows: A makes a gift of certain property to his wife. She takes the beneficial interest in the land free from any trust in favour of A, for it may reasonably be inferred from the circumstances that the gift was for B’s benefit. 36 In Perera v Perera (1897) 2 NLR 370, a pre-1917 case, a man gifted land to his daughter on the occasion of her marriage but remained in possession. On her death, the widowed husband was successful in his action to recover possession. The court determined that the circumstances of the case clearly established the father’s intention to occupy the property for his daughter’s benefit: he occupied the land as her trustee. See also Andris v Punchihamy (1922) 24 NLR 203, discussed below in section III.D. 37 Sangarapillai v Kandiah (1916) 19 NLR 344. 38 Emee Nona v Winson (1933) 35 NLR 221. 39 ibid 223. 40 Obviously, where a property is bought with money contributed by two persons, but the purchase is made in the name of one them, the legal owner must hold it on trust for both: Wijetilaka v Ranasinghe [1931] 32 UKPC 64 (PC). 41 Fernando v Thamel (1946) 47 NLR 297.

186  Anton Cooray The relevant circumstance must be that the donor is in loco parentis to his wife. In DA Perera v Scholastica Perera,42 a father having become invalid, his sons assumed responsibility to look after their younger sister. They deposited a sum of money in a savings account which they opened in her name but retained the passbook. The money was intended to be her dowry when she entered into a marriage with parental consent. When she married against her parents’ wishes, the brothers claimed that the beneficial interest in the money was intended to pass not when the money was deposited, but when she married with parental consent – a condition she failed to meet. Having observed that the sister could avail herself of the counter-presumption of advancement for the reason that the brothers had placed themselves in loco parentis towards her, Graetian J set out the applicable law as follows: Sections 83 and 84 of our Trusts Ordinance have introduced the English law on this subject. … Where a man purchases property in the name of (or transfers property to) a stranger, a resulting trust is presumed in favour of the purchaser (or transferor); on the other hand, if the transfer is in the name of a child or one to whom the purchaser or transferor then stood in loco parentis, there is no such resulting trust but a presumption of advancement. The presumption may, however, be rebutted, but ‘it should not give way to slight circumstances’.43

Daniel Appuhamy v Arnolis Appu44 is a case where the court was not satisfied that the plaintiff was in loco parentis to the defendant. There the plaintiff had provided the purchase money for a transfer of property to the defendant, his brother in law. A resulting trust having arisen in favour of the plaintiff, it could not be said that the purchase money was provided ‘in advancement of ’ the defendant: ‘there was no reason from a financial point of view why the plaintiff should have adopted the position of benefactor to the defendant’.45

ii.  Automatic Resulting Trusts Section 85 states that where a trust is incapable of execution or has been executed without exhausting trust property, the trust property, or whatever remains of it, must be held for the benefit of the settlor. There has been little litigation involving section 85, Hashim v Mohideen being a rare exception.46 There, a private trust had been set up for the benefit of the settlor’s children during their minority. In the absence of any intention that the property must remain for the benefit of the children upon attaining the age of majority, it was held that the property must be held on a resulting trust for the settlor.

42 DA Perera v Scholastica Perera (1955) 57 NLR 265. 43 ibid 266. In Muttalibu v Hameed (1950) 52 NLR 97, 102, Dias SPJ said that ‘the doctrine of advancement is and always has been part of the law of Ceylon … and that the doctrine … is part of our law is placed beyond all question by section 2 [the casus omissus section]’. 44 Daniel Appuhamy v Arnolis Appu (1928) 30 NLR 247. 45 ibid 248–49. 46 Hashim v Mohideen (1932) 34 NLR 1.

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D.  Transfer of Property for an Illegal Purpose Section 86 provides as follows: Where the owner of property transfers it to another for an illegal purpose, and such purpose is not carried out into execution, or the transferor is not as guilty as the transferee, or the effect of permitting the transferee to retain the property might be to defeat the provisions of any law, the transferee must hold the property for the benefit of the transferor.

Illustrative of the application of this principle is Andris v Punchihamy, where with the intention of defrauding his creditors, A transferred a property to B who provided no consideration. Alleging that he was all the time in possession of the land and was ejected from possession by A’s widow, B sued for restoration of possession. The trial judge found that A never in fact parted with the possession of land. Affirming the judge’s findings, the Supreme Court held that B, being a party to the ‘semi-fraudulent transaction’, could not be permitted to be unjustly enriched.47 Ennis J said: The case of Mohamadu Marikar v. Ibrahim Naina48 is remarkable in that it gives at length the reasons for applying the English equitable doctrine to soften the rigour of the Roman-Dutch law. The case held in effect that, strictly under the Roman-Dutch law, a person who conveys with an intention to defraud is not entitled to any relief; but that in Roman-Dutch law no person can enrich himself at the expense of another, and by mingling the two doctrines, the English equitable doctrine was applied in that case.49

Section 87 deals with bequests for an illegal purpose. Section 87(1) states that where a bequest has been made for an illegal purpose, the legatee must hold it for the benefit of the deceased’s estate. Section 87(2) states that where a testator was prevented by duress from revoking a legacy, the legatee must hold it for the benefit of the estate. There are no decided cases dealing with section 87, which is self-explanatory.

E.  Transfer of Property under a Rescindable Contract Section 88 provides that where the transferee of a property receives notice of fraud or mistake that makes the contract rescindable he must hold the property on trust for the transferor, subject to ‘any other relief to which the transferee may be by law entitled’.50 The real significance of this section is that where the transferee is aware that the contract is rescindable he must not put the property beyond the reach of the transferor by a gratuitous transfer. In Punchi Hamine v Ukku Menika, it was held that where a court decree is entered in pursuance of an agreement induced by fraud, the party obtaining property under the decree must hold the property on a constructive

47 Andris v Punchihamy (1922) 24 NLR 203. 48 (1910) 13 NLR 187. This case is discussed at (n 35). 49 Andris v Punchihamy (n 47) 203. See Liew (n 34) 6–7, where he argues that a resulting trust responding to unjust enrichment, rather than a constructive trust, is a better solution for situations of this type. 50 The quoted words perhaps reflect the position in English equity that rescission is a discretionary remedy.

188  Anton Cooray trust for the party defrauded. Dalton J held that ‘this liability is imposed not only on the transferee but also any persons ‘claiming from him as volunteers’.51

F.  Strong v Bird not Applicable in Sri Lanka? Section 89 provides that ‘where a debtor becomes the executor or other legal representative of his creditor, it follows that the debtor must hold the debt for the benefit of the persons interested therein’. This section then perhaps aims to prevent the application of the principle in Strong v Bird.52 There are no decided cases in Sri Lanka dealing with this section.

G.  Advantages Gained by a Fiduciary Section 90 provides as follows: Where a … person bound in a fiduciary character to protect the interests of another person, by availing himself of his character, gains for himself any pecuniary advantage, or where any person so bound enters into any dealings under circumstances in which his own interests are, or may be, adverse to those of such other person and thereby gains for himself a pecuniary advantage, he must hold for the benefit of such other person the advantage so gained.

The phrase ‘pecuniary advantage’ seems to suggest that the principal has only a personal remedy to recover the value of advantage the fiduciary has gained. However, two of the seven illustrations to the section clearly establish that the principal has a proprietary interest in any undue advantage gained by his fiduciary: ‘(c) A, a partner, buys land in his own name with funds belonging to the partnership. A holds such land for the benefit of the partnership’; ‘(f) A, an agent employed to obtain a lease for B, obtains the lease for himself. A holds the lease for the benefit of B’.

H.  Advantage Gained by Undue Influence Section 91 is as follows: Where, by the exercise of undue influence, any advantage is gained in derogation of the interests of another, the person gaining such advantage without consideration, or with notice that such influence has been exercised, must hold the advantage for the benefit of the person whose interests have been so prejudiced.

English law governs undue influence in Sri Lanka and, as such, disputes regarding advantages gained by undue influence have been resolved in Sri Lanka without reference to section 91.53

51 Punchi Hamine v Ukku Menika (1926) 28 NLR 97, 111. 52 See Cooray, The Reception in Ceylon of the English Trust (n 5) 141. 53 Bridget Antony v Imelda Weerasekera (1953) 54 NLR 553 (PC); AMM Fuard v AR Weerasuriya (1954) 56 NLR 12; Abdul Cader v Sittinisa (1951) 51 NLR 536.

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I.  Advantage Gained by a Qualified Owner Section 92 refers to a situation where a person who has only a qualified interest in property, such as a mortgagee or a co-owner, gains an advantage in derogation of the rights of the others interested in the property. The advantage so received must be held for the benefit of the others, thereby subjecting him to a constructive trust.54 In Appuhamy v Marihamy55 a co-heir fraudulently obtained a Crown grant in his sole name while the other co-heirs too had contributed towards the purchase money. It was held to be ‘perfectly clear’ that he held the property in trust for the benefit of all the co-heirs in proportion to their interest in the property. Similarly, in Appu Naide v Dingiri Naide,56 certain co-owners of a property obtained a Crown grant in their favour, without disclosing the interests of the other co-owners. Applying section 92, the court found the purchasers’ title to be subject to a trust for the benefit of the other co-owners.

J.  Property Acquired with Notice of Existing Contract Section 93 provides as follows: Where a person acquires property with notice that another person has entered into an existing contract affecting that property, of which specific performance could be enforced, the former must hold the property for the benefit of the latter to the extent necessary to give effect to the contract: Provided that in the case of a contract affecting immovable property, such contract shall have been duly registered before such acquisition.

The effect of this section is that where the conditions set out in the section are satisfied, the subsequent transferee could be compelled to convey the property to the person entitled to purchase the property under such existing contract, turning the subsequent transferee into a constructive trustee.57 In Silva v Salo Nona,58 in breach of agreement, the owner of the property sold it to a third party who had no actual knowledge of the existing contract. When sued for the transfer of the property to the plaintiff, the question was whether the third party had ‘notice’ of the existing contract. The court reasoned that registered deeds being open to public inspection, a person who purchases land without a thorough search in the land

54 See, for instance, the Indian case of Babani Sairoo Patel v Dulba Govind Bhandari AIR 1932 Bom 240, where the government had restored land to one of the previous owners from whom it had been acquired. The Bombay High Court held that he held the property as a constructive trustee for the benefit of all the previous owners, because he had only a qualified interest in the land. The judge said: ‘the rule in section 90 [equivalent of s 92 of the Trustee Ordinance] is taken from English law, and I think I ought to guide myself by the decisions of the English Courts with reference to the principle that must govern me’. 55 Appuhamy v Marihamy (1923) 25 NLR 421. 56 Naide v Dingiri Naide (1952) 54 NLR 484. 57 As was said in an Indian case, ‘[a] careful reading of [s 91 of the Indian Act, the equivalent of s 93 of the Trusts Ordinance] makes it abundantly clear that the subsequent transferee with notice stands in a fiduciary capacity and holds the property in trust to the prior agreement holder’: Kodapalli Satyanarayana v Kondapalli Mavullu 1999 (2) ALD 175 (Andra High Court). 58 Silva v Salo Nona (1930) 32 NLR 81. See also Sumangala Thero v Caledonian Tea and Rubber Estates Co Ltd (1931) 33 NLR 49.

190  Anton Cooray registry, buys it at his own risk: the fact of registration of the agreement was sufficient to satisfy the requirement of notice in section 93.

K.  Purchase by a Person Contracting to Buy Property to be Held on Trust Section 94 is as follows: Where a person contracts to buy property to be held on trust for certain beneficiaries and buys the property accordingly, he must hold the property for their benefit to the extent necessary to give effect to the contract.

This seems to suggest that a person who agrees to buy property to be held in trust for the benefit of certain persons should honour such agreement. There are no Sri Lankan cases on this section.

L.  Advantage Secretly Gained by One of Several Compounding Creditors Section 95 provides that ‘where creditors compound the debts due to them, and one of such creditors, by a secret arrangement with the debtor, gains an undue advantage over his co-creditors, he must hold for the benefit of such creditors the advantage so gained’. This is self-explanatory and there are no decided cases.

IV.  Implied Trusts: Life Beyond the Trusts Ordinance The Trusts Ordinance was not intended to be a comprehensive code, and incorporates two sections that facilitate further reception of English law: section 2, the casus ­omissus section and section 96. If they are given a liberal interpretation, these two sections would enable courts to be guided by English law to expand the reach of the Ordinance. We will briefly look at how these sections have been interpreted and conclude that they have to be given an expansive interpretation in order to keep up to speed with trusts law developments in England. We will begin with section 96, as this would follow logically from our discussion in section III.

A.  Section 96: Constructive Trusts in Cases not Expressly Provided for Constructive trusts may arise in many different fact situations and it is not possible to list them all in a definitive way. The purpose of section 96 is to provide for such unenumerated situations: In any case not coming within the scope of any of the preceding sections where there is no trust, but the person having possession of property has not the whole beneficial interest

Sri Lanka  191 therein, he must hold the property for the benefit of the persons having such interest, or the residue thereof (as the case may be), to the extent necessary to satisfy their just demands.

The reference to the person in possession not having ‘the whole beneficial interest therein’ seems to suggest that the section is applicable only to a situation where the legal owner retains some beneficial interest. Fernando J said in Kariapperuma v Kotelawala: ‘What is contemplated in s 96 is a case in which the legal title of the apparent owner of property is in law subject to some beneficial interest held by other persons’.59 However, this section also may apply in a situation where the person in possession has no beneficial interest at all. In Jonga v Nanduwa,60 the plaintiff had sold his land to the defendant, reserving the right to repurchase the land within eight years at a stated price. The defendant refused to reconvey the land at the timely request of the plaintiff, on the ground that the deed of transfer was of no legal effect for the reason that he had not signed it as required by the Prevention of Frauds Ordinance. It was held that equity regards not the form (such as an agreement to reconvey, which would be ineffective)61 but the substance (for example, where the purchaser received the property subject to an obligation in the nature of a constructive trust, which is enforceable).62 Keuneman J said that this situation was covered by section 96: during the eight-year period the whole beneficial interest remained with the vendor with the result that the purchaser was a constructive trustee. It is only at the expiry of the eight-year period that the purchaser would become the absolute owner, if the property remained unredeemed by the vendor. In Fernando v Rosa Maria,63 it was held that where the heirs of a deceased person take possession of his estate, they hold the property in trust for the legal representative, as representing the creditors, to the extent necessary for the payment of the debts of the estate. Jeyewardene AJ said: ‘In such cases, a creditor or the legal representative may be said to have an equitable interest in the property of the intestate while the legal estate is in the legatees or heirs’.64 We have seen above that under Thesawalamai, any property acquired after marriage belongs collectively to the husband and wife but it is the husband who has the right to manage such property for their benefit. In order to prevent any mismanagement or misuse of the property it has been held that any property that the husband may purchase must be held by him not solely for his benefit but for the benefit of both spouses. We noted how, in order to protect the interest of the wife, the court considered the husband to be a constructive trustee relying on section 96.65 Weerasooriya v Weerasooriya concerned the Roman-Dutch concept of common property of the husband and wife. There the husband had given away all the property to his illegitimate children, thereby depriving his wife of half the property. It was held that while the husband may donate part of common property, he could not do so to defraud his wife. It would have been possible for the court to have relied on constructive trust as in the Seelachchi case, but



59 Kariapperuma

v Kotelawala (1971) 77 NLR 195, 198. v Nanduwa (1944) 45 NLR 128. 61 See Sanmugampillai v Anjappa Kone (1944) 45 NLR 465. 62 Carthelis v Perera (1930) 32 NLR 19. 63 Fernando v Rosa Maria (1926) 28 NLR 234. 64 ibid 238. 65 Seelachchi v Visuanathan Chetty (1922) 23 NLR 97. See the discussion indicated in (n 11). 60 Jonga

192  Anton Cooray the court applied Roman-Dutch law. However, the proprietary nature of the wife’s interest is clear from the judgment of Hutchinson CJ: [B]ut if the object of the gift is to deprive his wife of the right which she would otherwise have on his death to a half of the common property, it is a fraud on her rights, and she or her heirs can claim to have it revoked so far as she has been thereby defrauded.66

Indian cases provide further illustrations of situations which are not covered by specific provisions of Chapter IX. In Commissioner of Income Tax v Tanubai D Desai, the High Court of Bombay considered that a solicitor who receives client money may be regarded as falling within section 94, the equivalent of section 96 of the Trusts Ordinance.67 The Indian case of ED Sassoon Co Ltd v KA Patch68 provides another example of a situation which would be covered by section 96. In that case, directors of a private company refused to register the purchaser of its shares as the new shareholder. The purchaser sought a mandatory injunction requiring the seller to vote according to his wishes and sign a proxy form in his favour. Granting the injunction, the High Court observed: 13. Under section 94 of the Indian Trusts Act [the equivalent of s 96 of the Trusts Ordinance] the transferor holds the shares for the benefit of the transferee to the extent necessary to satisfy his demands. Accordingly, as the transferee holds the whole beneficial interest and the transferor has none, the transferor must comply with all reasonable directions that the transferee may give. The reason for this is plain, for the equitable interest of the beneficiary is brought into existence by the Court of Chancery for the purpose of promoting fair dealing. It would be most unconscionable for the seller of the shares to take advantage of non-registration and to deal with the shares as his own after taking the price from the purchaser. Equity therefore treats the purchaser as if he was the real owner and compels the registered holder to act as the agent of the beneficiary. For this reason, the beneficiary has a right to control the exercise by the trustee of the right to vote.69

B. The Casus Omissus Section Section 2 of the Trusts Ordinance provides as follows: All matters with reference to any trust, or with reference to any obligation in the nature of a trust arising or resulting by the implication or construction of law for which no specific provision is made in this or any other enactment, shall be determined by the principles of equity for the time being in force in the High Court of Justice in England.

66 Weerasooriya v Weerasooriya (1910) 13 NLR 376, 380. 67 Commissioner of Income Tax v Tanubai D Desai 1972 84 ITR 713 Bom. See also Transocean Shipping Agency v Commissioner of Income Tax (1993) 1994 207 ITR 469; Mob and Commissioner of Income Tax v Andra General Finance (1984) 1985 156 ITR 386 AP. 68 ED Sassoon Co Ltd v KA Patch (1943) 45 BOMBLR 46, a case decided by Bombay High Court in 1922. 69 See also Vasudev Rmachandra Shelat v Pranlal Jayanand Thakar (1975) Comp Cas 43 (SC), where there is a detailed discussion of Milroy v Lord, Re Fry and the two Re Rose cases. The court referred to R Mathalone v Bombay Life Assurance Co 1953 AIR 385, where the Supreme Court considered that a constructive trust arose in such situations under s 94 of the Indian Trusts Act.

Sri Lanka  193 Theevanapillai v Sinnapillai70 provides a good example of the use of section 2. It was held there that the owner of a property who transfers it to his creditor (who agrees to reconvey it after the debt has been settled), may be able to assert his equitable ownership. The Supreme Court considered that the transferor would be allowed to lead parol evidence when the transferee fraudulently relies on the formal transfer to claim full ownership, a situation which was not covered by any of the specific provisions in Chapter IX, thus permitting reference to English law through the casus omissus section. In Abeysundera v Ceylon Exports,71 a father transferred land to his five-year old son, the plaintiff, but did not register the transfer. Seven years later he sold land to the defendant, the transfer was registered, and the transferee moved into possession of the land. Registration Ordinance No 14 of 1891 made an unregistered deed void as against a subsequent registered deed of transfer for valuable consideration: such priority could be defeated by fraud or collusion. The son successfully claimed that the second deed of transfer was tainted by fraud or collusion because the purchaser was aware of his interest. Lord Maugham said: [T]he [defendant] became a constructive trustee of the estate … since that estate was obtained by him … from a person in a fiduciary position and by concealment of the fact that the beneficial owner … was the [minor child].

In deciding this legal principle, Lord Maugham relied on English law and said: section 2 ‘makes the English law applicable to trusts or obligations in the nature of a trust arising or resulting by the implication or construction of law which has not been provided for by the Ordinance’.72

C.  Making the Trusts Ordinance a Living Instrument Unlike the Penal Code of Sri Lanka, the Trusts Ordinance is not a complete code and therefore it would be wrong to argue that section 2 should be used only where there is no provision at all on a particular aspect of law.73 The preferable approach would be to make reference to trusts law developments in England and elsewhere in the common law world when interpreting a section ‘even if they appear to go further than the language of the section’, as Lord Devlin observed in relation to interpreting section 116 of the Evidence Ordinance in Terunnanse v Terunnanse,74 or as Bertram CJ said, in relation to the same Ordinance, in Attorney-General v Rawther: In construing any provision of our Ordinance it is, in my opinion, not only legitimate but necessary to have regard to the presumed intention of the legislature [to codify

70 Theevanapillai v Sinnapillai (1921) 22 NLR 316. In Ehiya Lebbe v Majeed (1947) 48 NLR 357, a similar factual situation was considered to fall within s 83, enabling the transferor to lead parol evidence. 71 Abeysundera v Ceylon Exports (1936) 38 NLR 117 (PC). 72 ibid 124. 73 ‘Our [Penal] Code is intended to be an exhaustive code. We cannot, therefore, import into this chapter any principle of English law, except in so far as it is expressed or implied in these words. In other words, the formula can neither be extended nor limited by reference to the principles of English law’: Weerakoon v Ranhamy (1921) 23 NLR 33, 44 (Bertram CJ). 74 Terunnanse v Terunnanse [1968] AC 1086, 1092.

194  Anton Cooray principles of English law subject to certain particular modifications supposed to be necessitated by local circumstances], and in particular to the history of the principle embodied in the provision.75

We have seen that section 96 makes it abundantly clear that the specific situations enumerated in Chapter IX are only illustrative and not exclusive. If liberal use is not made of that provision as well as section 2, the Trusts Ordinance will be in danger of standing in the way of significant developments in respect of implied trusts taking place elsewhere in the common law world.76

75 Attorney-General v Rawther (1924) 25 NLR 385, 389. s 99 of the Trusts Ordinance recognises as charitable a trust for religious rites and practices, which may be performed in private, inconsistent with the English requirement of public benefit. The local statute prevails over English law. It is impermissible to bring in English law to frustrate the legislative intention. See Fernando v Sivasubramaniam (1959) 61 NLR 241, 244. 76 See Liew (n 34). cf Cooray The Reception in Ceylon of the English Trust (n 5) 43–56, which takes a restrictive view and advocates repealing s 2.

11 Philippine Trusts: Legal and Practical Considerations HECTOR M DE LEON JR*

I. Introduction The concept of the trust is not new in the Philippines. While the Philippine Civil Code of 1898 contained no provision on trusts, the Philippine Legislature enacted legislation in 1901 on procedural rules for a court’s exercise of jurisdiction over trustees.1 In 1909, the Philippine Supreme Court issued a ruling that dealt with the liability of a trustee. However, as the then Civil Code contained no provision on trusts, the Philippine Supreme Court relied heavily on American jurisprudence to support its rulings.2 It was not until 1950, when the Philippines revised the Civil Code, that several chapters on trusts were enacted into legislation. With legislation on trusts in place for almost 70 years, trust arrangements are common in the Philippines. However, while the concept of the trust is well recognised in the Philippines, the trust provisions in the Civil Code are relatively scarce and do not contain enough details on the regulation of trust arrangements. Consequently, trust arrangements have required greater specificity in its terms and the state has had to issue special rules on the use of trusts in specific circumstances. With trust arrangements being used in a variety of settings, complexity has arisen in the use of trusts, particularly in the corporate or business setting. This chapter gives an overview of the Philippine law on trusts and discusses certain legal and practical considerations that parties (and their counsel) must consider when making use of trusts in the Philippine corporate or business setting.

* Managing Partner, SyCip Salazar Hernandez & Gatmaitan; Professorial Lecturer, University of the Philippines College of Law. 1 Act No 190, ss 582–95 (1901). 2 Government v Abadilla 46 Phil 42 (1924); De Leon v Molo-Peckson 116 Phil 1267 (1962).

196  Hector M de Leon Jr

II.  Philippine Law of Trusts: An Overview A trust has been defined as a fiduciary relationship with respect to property that involves the existence of equitable duties imposed upon property title holders to deal with property for the benefit of another.3 A trust arrangement involves: a. The trustor, who establishes the trust. b. The trustee, who is the person in whom the trustor reposes confidence as regards property to benefit another. c. The beneficiary or the cestui que trust, who is the person for whose benefit the trustor creates the trust.4 Trusts are express or implied. Express trusts are created by the intention of the trustor or the parties. Implied trusts come into being by operation of law.5

A.  Express Trusts Express trusts are created by the direct and positive acts of the parties, by a written instrument, or by words either expressly or impliedly evincing an intention to create a trust.6 Unless required by a statutory provision, such as the Statute of Frauds, a written instrument is not required to create a trust.7 To create an express trust, the parties need not use any particular words; it is sufficient that the parties clearly intended a trust.8 The parties may create a trust without using the word ‘trust’ or ‘trustee’. Conversely, the use of the word ‘trust’ or ‘trustee’ does not conclusively indicate or prove an intention to create a trust.9 Clear and unequivocal language is necessary to create a trust; mere precatory language and statements of an ambiguous nature are insufficient.10 The party alleging the existence of a trust has the burden of proving the existence of a trust. A party must prove the existence of a trust by clear, satisfactory and convincing evidence.11 An express trust exists if there is a competent trustor and trustee, an ascertainable trust res and sufficiently certain beneficiaries.12 No trust shall fail because the appointed trustee declines the appointment, unless the contrary appears in the instrument creating

3 Quevada v Court of Appeals 533 Phil 527 (2006); Spouses Huang v Court of Appeals 306 Phil 429 (1994). 4 Civil Code, art 1440. 5 ibid art 1441. 6 Salao v Salao 162 Phil 89 (1976); Rizal Surety & Insurance Co v Court of Appeals 329 Phil 786 (1996). 7 Ringor v Ringor 480 Phil 141 (2004). 8 Civil Code, art 1444. See also Spouses Gomez v Duyan 493 Phil 819 (2005). 9 Heirs of Labanon v Heirs of Labanon 556 Phil 750, 750–64 (2007); Julio v Dalandan 128 Phil 578, 578–90 (1967). 10 Mindanao Development Authority v Court of Appeals 198 Phil 809 (1982). See also Philippine National Bank v Aznar 664 Phil 461 (2011); Heirs of Medina v Court of Appeals GR No L-26107 (27 November 1981). 11 Ramos v Ramos 158 Phil 935 (1974). An express trust over personal property or any interest therein may be proved by parol evidence. However, an express trust concerning an immovable or any interest therein may not be proved by parol evidence: Civil Code, art 1443. See also Salao (n 6); Ong Ching Po v Court of Appeals 309 Phil 313 (1994). 12 Mindanao Development Authority (n 10); Rizal Surety & Insurance Co (n 6).

The Philippines  197 the trust.13 If the trustee declines the appointment, the court may appoint another ­trustee to fill the office. The beneficiary must also accept the trust. However, if the trust imposes no onerous condition upon the beneficiary, his acceptance is presumed, provided there is no proof to the contrary.14 A trustee cannot acquire, by prescription, ownership over property entrusted to him unless the trustee repudiates the trust.15 If the trustee repudiates the trust, the beneficiary must bring an action against the trustee within 10 years from the trustee’s repudiation of the trust.16 Acquisitive prescription may bar the action of the beneficiary against the trustee in an express trust to recover the property held in trust where the trustee has performed unequivocal acts of repudiation amounting to an ouster of the beneficiary, where such positive acts of repudiation have been made known to the beneficiary, and the evidence thereon is clear and conclusive.17

B.  Implied Trusts The Civil Code provides that an implied trust exists in these cases: (1) When property is sold, and the legal estate is granted to one party, but the price is paid by another to have the beneficial interest of the property. The former is the trustee, while the latter is the beneficiary. However, if the person to whom the title is conveyed is a legitimate or illegitimate child of the payor, no trust is implied by law, it being disputably presumed that there is a gift in favour of the child.18 (2) When a donation is made to a person, but it appears that although the legal estate is transmitted to the donee, he nevertheless is either to have no beneficial interest or only a part thereof.19 (3) Where the price of a sale of property is loaned or paid by one person to benefit another and the conveyance is made to the lender or payor to secure the payment of the debt. Here, a resulting trust arises in favour of the person to whom the money is loaned or for whom it is paid. The latter may redeem the property and compel a conveyance thereof to him.20 (4) When land passes by succession to any person and he causes the legal title to be put in the name of another, a trust arises for the benefit of the true owner.21 (5) Where two or more persons agree to purchase property and by common consent the legal title is taken in the name of one of them to benefit all, a trust arises in favour of the others in proportion to the interest of each.22

13 Civil

Code, art 1445. art 1446. 15 Torbela v Spouses Rosario 678 Phil 1 (2011); Heirs of Labanon v Heirs of Labanon 556 Phil 750 (2007). 16 Torbela (n 15); Heirs of Labanon (n 15). 17 Ramos (n 11); Heirs of Labanon (n 15). 18 Civil Code, art 1448. 19 ibid art 1449. 20 ibid art 1450. 21 ibid art 1451. 22 ibid art 1452. 14 ibid

198  Hector M de Leon Jr (6) When property is conveyed to a person in reliance upon his declared intention to hold it for, or transfer it to, another or the grantor, a trust arises in favour of the person whose benefit is contemplated.23 (7) Where an absolute conveyance of property is made to secure the performance of an obligation of the grantor toward the grantee. If the fulfilment of the obligation is offered by the grantor when it becomes due, he may demand the reconveyance of the property to him.24 (8) When any trustee, guardian or other person holding a fiduciary relationship uses trust funds for the purchase of property and causes the conveyance to be made to him or to a third person, a trust arises in favour of the person to whom the funds belong.25 (9) If a person acquires property through mistake or fraud, the acquiror is, by operation of law, considered a trustee of an implied trust for the benefit of the person from whom the property comes.26 Under Philippine case law, an implied trust may be a resulting trust or a constructive trust. A resulting trust can broadly be defined as a trust raised or created by the act or construction of law; but in its more restricted sense, it is a trust raised by implication of law and presumed always to have been contemplated by the parties, the intention as to which is found in the nature of their transaction, but not expressed in the deed or instrument of conveyance.27 A resulting trust arises where a person makes or causes to be disposed property under circumstances which raise an inference that he does not intend that the person taking or holding the property should have the beneficial interest in the property. It is based on the presumed intention of the parties. As a rule, it arises where such may be reasonably presumed to be the intention of the parties, as determined from the facts and circumstances existing at the time of the transaction.28 A constructive trust is a trust ‘raised by construction of law, or arising by operation of law’.29 In a more restricted sense, and in contradistinction to a resulting trust, a constructive trust is ‘a trust not created by any words, either expressly or impliedly evincing a direct intention to create a trust, but by the construction of equity in order to satisfy the demands of justice’.30 A constructive trust arises where a person holding title to property is subject to an equitable duty to convey it to another because he would be unjustly enriched if he were permitted to retain it. The duty to convey the property arises because the person acquired it through fraud, duress, undue influence or mistake, or through breach of a fiduciary duty, or through the wrongful disposition of another’s property.31 If a person

23 ibid

art 1453. art 1454. 25 ibid art 1455. 26 ibid art 1456. 27 Salao (n 6). 28 Spouses Huang (n 3). 29 Salao (n 6). 30 ibid. 31 Spouses Huang (n 3). 24 ibid

The Philippines  199 acquires property through mistake or fraud, the person obtaining it is, by force of law, considered a trustee for the benefit of the person from whom the property came.32 Similarly, if a person obtains legal title to property by fraud or concealment, courts of equity will impress upon the title a constructive trust in favour of the defrauded party.33 While a party may present oral evidence to prove the existence of an implied trust, such evidence must be trustworthy because oral evidence can easily be fabricated. Further, courts must receive the evidence with extreme caution. A court must not base the existence of an implied trust on loose, equivocal and indefinite declarations.34

III.  Considerations in Using Philippine Trusts A.  Creating and Documenting the Trust i.  Form of the Trust Agreement Philippine law does not generally require compliance with any particular form for the creation of an express trust. An express trust may be created by a direct and positive act of the parties, by some writing or deed, or will, or by words either expressly or impliedly evincing an intention to create a trust.35 The rule that an express trust may be created orally or in writing is consistent with the rule in the Civil Code that contracts are obligatory in whatever form they may have been entered into, provided all the essential requirements for validity are present (ie, consent of the contracting parties, certainty of objects and cause).36 While the parties may create the trust orally or by some act (for example, delivery of the property to the trustee), in practice it is advisable for the parties to enter into a written trust agreement for several reasons. First, the Civil Code provisions on trusts are sparse and may not provide answers to issues that often arise under a trust arrangement. Thus, it is important to address those issues explicitly. The written trust agreement should include provisions (among others) on the powers of the trustees, the custody and distribution of the trust assets, the inclusion of beneficiaries, trustee’s remuneration and liabilities, the termination and substitution of trustees, and the termination of the trust. Second, a party alleging the existence of a trust must provide clear, satisfactory and convincing evidence.37 A written trust agreement provides clear evidence of the ­existence of the trust.

32 Civil Code, art 1456. See Pajarillo v Intermediate Appellate Court 257 Phil 348 (1989). 33 Salao (n 6). 34 Duran v Court of Appeals 522 Phil 399, 399–410 (2006). See Jarantilla, Jr v Jarantilla 651 Phil 13 (2010); Ong Ching Po (n 11). 35 Salao (n 6); Rizal Surety & Insurance Co (n 6). 36 Civil Code, arts 1356, 1318. 37 Ramos (n 11) 935–60. An express trust over personal property or any interest therein may be proved by parol evidence. However, an express trust concerning an immovable or any interest therein may not be proved by parol evidence: Civil Code, art 1443. See also Salao (n 6); Ong Ching Po (n 11).

200  Hector M de Leon Jr Third, written evidence of which properties constitute trust assets is important if the trustee becomes insolvent. Under the Civil Code, assets held by the insolvent debtor as a trustee of an express or implied trust are excluded from insolvency proceedings.38

ii.  Notarisation of the Trust Agreement Philippine law does not generally require that the trust agreement be notarised or appear in a public instrument. However, if the trust assets involve real rights over immovable property, the parties are encouraged to have the trust agreement appear in a public instrument.39 Even absent a requirement that the trust agreement must appear in a public instrument, the parties should notarise the trust agreement for several reasons. First, the notarisation of the trust agreement provides a presumption that the parties duly executed the trust agreement. Notarisation converts a private document into a public document, making it admissible as evidence without further proof of its authenticity.40 Second, notarisation provides reasonable proof of when the trust was created and minimises questions that may arise in relation to the taxation of trust assets (including taxation of transfers of trust assets). For example, in transactions involving trust assets, the Bureau of Internal Revenue would typically require the submission of a notarised deed of trust which would provide evidence of when the person became the trustee of the trust assets. This is intended to minimise situations where parties to a taxable transfer are able to make it appear that that the transferor merely holds the asset in trust for the transferee, and claim income tax exemption on the transfer of the asset from the transferor to the transferee. For parties who may not wish to have the trust agreement notarised, an alternative arrangement is to have the trustee execute a notarised deed of trust separate from the trust agreement. The deed of trust lists the trust assets and the trustee acknowledges that he holds the assets for the beneficiary. Another alternative arrangement is to have the transfer of assets to the trust documented through a notarised deed of assignment (or similar document).

iii.  Licence to Act as Trustee Due consideration must be given to who will be appointed as trustee, as certain persons acting as trustee must obtain a trust licence from the Monetary Board of the Bangko Sentral ng Pilipinas (Central Bank).

38 Civil Code, art 2240. 39 ibid art 1358. The Philippine Supreme Court has ruled that failure to observe the proper form prescribed by art 1358 does not render the acts or contracts enumerated therein invalid. The form required under art 1358 is not essential to the validity or enforceability of the transaction, but merely for convenience. Hence, although a conveyance of land is not made in a public document, it does not affect the validity of such conveyance. Art 1358 does not require the accomplishment of the acts or contracts in a public instrument in order to validate the act or contract but only to insure its efficacy: Estate of Gonzales v Heirs of Perez 620 Phil 47 (2009). 40 Taday v Apoya, Jr AC No 11981 (3 July 2018).

The Philippines  201 Under the General Banking Law, only a stock corporation or a person duly authorized by the Monetary Board to engage in trust business shall act as a trustee or administer any trust or hold property in trust or on deposit for the use, benefit, or behoof of others.41

There are no clear guidelines on this point; however, it is suggested that the requirement for a trust licence would apply only to persons regularly engaged in the trust business and not to those who accept a one-off appointment as a trustee.

iv.  Tax Issues Relating to the Creation of the Trust Under the Philippine National Internal Revenue Code (Tax Code), a trust is a taxable person: it is taxed like an individual.42 Thus, after a trust is created, the trustee must ensure that the trust complies with all tax requirements applicable to individuals. These include registration of the trust as a taxpayer,43 the keeping of books of account,44 the issuance of receipts or sales/commercial invoices,45 the filing of returns46 and the payment of taxes.47 Failure to comply with these requirements may result in the assessment of deficiency taxes, surcharges, penalties and interests. Certain violations may also be punishable by imprisonment.48 The irrevocable transfer of assets to the trust will generally be subject to a donor’s tax of 6 per cent based on the fair market value of the asset transferred.49 If a revocable transfer is made, the transfer to the trust is not subject to the donor’s tax but to a 6 per cent estate tax based on the fair market value of the assets as at the time of death of the trustor.50 Transfer of certain assets may also be subject to documentary stamp tax.51 In addition, a deed of trust executed to secure the payment of a sum of money will be subject to documentary stamp tax.52 In estate planning, it is not unusual to create a trust administered outside the Philippines. In these cases, the trust will be treated as a non-resident individual for Philippine income tax purposes. Here, trust income from Philippine sources will generally be subject to a 25 per cent final withholding tax based on gross amount received.53 This is without prejudice to tax treaties entered into by the Philippines and the country of which the trust is a resident.



41 The

General Banking Law of 2000, Republic Act No 8791, s 79 [2000]. Code, s 60(A). 43 ibid s 236. 44 ibid s 232(A). 45 ibid s 237. 46 ibid s 51. 47 ibid s 46. 48 See Tax Code, Title X. 49 Tax Code, ss 84, 102. 50 ibid s 88(B). 51 ibid ss 175, 196. 52 ibid s 195. 53 ibid s 61(A). The 25% rate assumes that the trust is not engaged in trade or business in the Philippines. 42 Tax

202  Hector M de Leon Jr On the other hand, a trust administered within the Philippines is treated as a resident individual for Philippine income tax purposes; it will be subject to a 35 per cent tax based on worldwide taxable income (ie, gross income less allowable deductions).54

B.  Trust Arrangements in the Corporate Setting i.  Anti-Dummy Law The Philippine Constitution and various laws limit certain areas of business activities to Philippine citizens or to entities with a minimum percentage of Philippine ownership. The Philippines has a ‘Foreign Investment Negative List’, which lists areas of activities that are nationalised or partly nationalised. Examples of these areas are:55 No Foreign Equity (a) Mass media, except recording and internet business.56 (b) Retail trade enterprises with paid-up capital of less than US$2,500,000.57 (c) Small-scale mining.58 Up to 30 Per Cent Foreign Equity Advertising.59 Up to 40 Per Cent Foreign Equity (a) Exploration, development and utilisation of natural resources.60 (b) Ownership of private lands.61 (c) Operation of public utilities,62 except power generation and the supply of electricity to the contestable market63 and such other like businesses or services not covered by the definition of public utilities. To circumvent the nationality requirement, some non-Philippine investors (and their Philippine partners) use a trust arrangement wherein the Filipino partner holds the

54 Tax Code, s 24(A). 55 Eleventh Regular Foreign Investment Negative List, Executive Order No 65 (29 October 2018). 56 1987 Constitution, art XVI, s 11; Presidential Memorandum dated 5 May 1994; DOJ Opinion No 40, s 1998. 57 Republic Act No 8762, s 5. 58 Republic Act No 7076, s 3. 59 Constitution, art XVI, s 11. 60 ibid art XII, s 2. 61 ibid art XII, s 7; Commonwealth Act No 141, s 22; Republic Act No 9182, s 4. 62 Constitution, art XII, s 11 of the Constitution; Commonwealth Act No 146, s 16; Republic Act No 7718, s 2(a). 63 Republic Act No 9136, ss 6, 29.

The Philippines  203 shares in trust for the non-Philippine investor. For example, the non-Philippine investor will fund the equity needed for issuing shares in the Philippine company engaged in a nationalised or partly nationalised activity. The parties will then make it appear that the Filipino partner is the owner of the shares (through, among others, the issuance of stock certificates in the name of the Philippine partner). The Philippine partner (who is the registered owner) holds the shares in trust for the non-Philippine investor, who is the beneficial owner of the shares. Unlike other countries where this arrangement may be permissible, this arrangement is illegal in the Philippines. From as early as 1936, the Philippines enacted the ‘Anti-Dummy Law’,64 which seeks to punish acts of evasion of the laws on­ nationalisation of rights, franchises or privileges.65 Several pitfalls result from a dummy arrangement. First, a person who violates the Anti-Dummy Law may be punished by a penalty of imprisonment of not fewer than five but not over 15 years and by a fine of not less than the value of the right, franchise or privilege enjoyed or acquired in violation of the Anti-Dummy Law, but in no case less than five thousand pesos (PhP5,000.00). After proper proceedings, a court may also order the dissolution of a corporation or association violating any provision of the law. Second, because the violation of the Anti-Dummy Law involves a criminal offence, the Filipino partner will probably claim he is not a dummy but the true registered and beneficial owner of the shares. This means he will assert ownership over the shares and will refuse to convey the shares to the non-Philippine principal (or its assignee) without adequate consideration, thereby depriving the other party of those shares. Third, should the Filipino partner admit that he is a dummy, he can be relieved from criminal liability and get a reward if he informs the government of the dummy arrangement. The Anti-Dummy Law provides: If the informer is a dummy who shall voluntarily take the initiative of reporting to the proper authorities any violation of the provisions of this Act and assist in the prosecution, resulting in the conviction of any person or corporation profiting thereby or involved therein, he shall be entitled to the reward hereof in the sum equivalent to twenty-five per centum of the fine actually paid to or received by the Government, and shall be exempted from the penal liabilities provided for in this Act.66

Given these reasons, a non-Filipino investor should not enter into a dummy arrangement with a Philippine partner.

ii.  Nationality of a Trust Certain areas of business activities require minimum Philippine ownership. This leads to the issue of when a trust is considered a Philippine national for the purpose of investing in a company engaged in a nationalised or partly nationalised activity.

64 Commonwealth

Act No 108, as amended. v Hernaez 114 Phil 730 (1962). 66 Commonwealth Act No 108, as amended, s 3-A (emphasis added). 65 King

204  Hector M de Leon Jr The Foreign Investments Act 1991 (FIA) allows a trustee of a pension or employment retirement fund to hold shares in a Philippine corporation and specifies when these funds may be considered a ‘Philippine national’. Under the FIA, the term ‘Philippine national’ includes ‘a trustee of funds for pension or other employee retirement fund or separation benefits where the trustee is a Philippine national and at least sixty percent (60%) of the fund will accrue to the benefit of Philippine nationals’. Based on the definition, the retirement fund will not be considered a Philippine national if the trustee is a non-Philippine national, or if less than 60% of the fund will accrue to the benefit of Philippine nationals. The Department of Justice and the Securities and Exchange Commission have issued opinions that set out guidelines and conditions for determining when a retirement or pension trust fund will be considered a Philippine national: (a) The trustee of the fund must be a Philippine national. (b) At least sixty per cent (60%) of the fund will accrue to the benefit of Philippine nationals. (c) The control of the trust fund must be with the trustee or with the beneficiaries (provided they are Philippine nationals) and should not reside with the company trustor. These guidelines follow what is set out in Bangko Sentral ng Pilipinas Manual of Regulations on the Supervision of Financial Intermediaries regarding the citizenship of pension funds or similar trust funds in bank equity: C.1 Determination of citizenship For purposes of the increased capitalization program, the citizenship of a pension fund or a similar trust fund invested in bank shares shall be determined by the citizenship of the trustee and of the beneficiaries of the fund. If the trustee is foreign, the equity investment shall be considered foreign regardless of the citizenship of the beneficiaries. If the trustee is Filipino, or a majority of the board of trustees is Filipino, the citizenship of the beneficiaries of the fund shall be the basis for determining the extent of Filipino citizenship.

The FIA, the Department of Justice and the Securities and Exchange Commission guidelines, and the Manual of Regulations pertain only to retirement or pension trust funds. Philippine statutes and jurisprudence have also not categorically settled nor provided guidelines to determine the nationality of a general trust fund or properties held in trust. However, the Securities and Exchange Commission has opined that pertinent laws and regulations applicable to retirement or pension funds may be applied by analogy to other types of trust fund. In SEC-OGC Opinion No 12–13, the Securities and Exchange Commission determined the nationality of a general trust (the shares of stock held in trust) by applying the FIA and the Department of Justice and Securities and Exchange Commission guidelines on the nationality of pension or trust funds. The Securities and Exchange Commission held that in determining the citizenship of shares of stock held in trust, the nationality of the trustee and the beneficiary will be considered. Thus, applying the standards for retirement or pension funds considered as Philippine nationals by analogy, there is a basis to say that a trustee that is a Philippine national may lawfully hold all the shares of a company engaged in a partly nationalised activity.

The Philippines  205

iii.  Qualifying Shares Under the Revised Corporation Code, stockholders may elect an individual as a director of the corporation if the individual holds at least one share of the corporation. A director who ceases to own at least one share of the corporation ceases to be a director.67 For compliance with the share ownership requirement under the Revised Corporation Code, the Securities and Exchange Commission has opined that ‘beneficial ownership’ is not necessary and that a person who holds the ‘legal title’ to the stock, on the books of the Corporation is qualified, although the beneficial ownership may be in another. In other words, it is sufficient that the title to the stock, as it appears on the books of the corporation, is in the director, since the legal title is what counts and it is the person whose name appears as owner in the books of the company who is the stockholder and eligible as director. For instance, a director may hold his stock as ‘trustee’ and yet be legally qualified. So a person to whom one share of stock has been transferred for the express purpose of ­qualifying him as director is eligible.68

If a corporation owns the shares (the Corporate Stockholder), the Corporate Stockholder will usually transfer one share (the Qualifying Share) to the individual who will be elected as director, so that the individual will qualify to be elected as director (the Director). In transferring the Qualifying Share to the Director, the Corporate Stockholder usually intends that the Director will hold the Qualifying Share in trust for the Corporate Stockholder. It is important that the parties properly document the trust relationship between the Corporate Stockholder and the Director to ensure that the Corporate Stockholder can exercise rights of ownership over the Qualifying Share without questions being raised as to its authority and ability to do so. For this purpose, the Corporate Stockholder must ask the Director to execute a deed of trust or declaration of trust covering the Qualifying Share. The deed of trust should state (among others) that: (a) The Director holds on trust for the benefit of the Corporate Stockholder the Qualifying Share and all additional shares and other securities of the corporation from time to time received by the Director for holding the Qualifying Share. (b) The Director must duly account for and pay to the Corporate Stockholder all dividends and other moneys or rights paid or accruing for holding the Qualifying Share, or dispose of any such dividends, moneys or rights as the Corporate Stockholder shall direct or instruct the Director from time to time. (c) The Director shall exercise voting rights in respect of the Qualifying Share and otherwise deal with the Qualifying Share as the Corporate Stockholder shall request or instruct, or, failing such request or instruction, as the Director shall deem to be to the best interest of the Corporate Stockholder.



67 Revised 68 SEC

Corporation Code, s 22. Opinion addressed to Mayor Vicente B Bermejo (2 September 1997).

206  Hector M de Leon Jr (d) The Director shall not sell, transfer, assign or pledge the Qualifying Share or any interest, except that the Director irrevocably constitutes the Corporate Stockholder or its designee or representative as the Director’s attorney-in-fact, with power to assign, transfer and convey the Qualifying Share in favour of the Corporate Stockholder or any other person or persons designated by the Corporate Stockholder, with no valuable consideration therefor. It is also important that the parties properly document the trust relationship between the Corporate Stockholder and the Director to ensure that tax issues relating to the transfer of the Qualifying Share are minimised. The return of the Qualifying Share by the Director to the Corporate Stockholder is not subject to income tax. Absent a deed of trust proving that the Director holds the Qualifying Share on trust for the Corporate Stockholder, the Bureau of Internal Revenue may take the position that the return of the Qualifying Share to the Corporate Stockholder is a transaction subject to income tax.

iv.  Sale of Shares The sale of shares is generally subject to income tax. Thus, the sale of shares not listed in the Philippine Stock Exchange is subject to capital gains and documentary stamp tax. Stock corporations must keep a stock and transfer book which records all stocks in the names of the stockholders.69 For unlisted shares, the corporate secretary cannot record the transfer of shares from the seller to the buyer in the books of the corporation until the proper party has paid the relevant taxes and the Bureau of Internal Revenue has issued a Certificate Authorising Registration (CAR). The parties will then present the CAR to the corporate secretary, who will cancel the stock certificate in the seller’s name and issue a new stock certificate in the buyer’s name and record the transfer of shares in the stock and transfer book of the corporation. Because there is a time lag between the execution of the sale document and the registration of the sale of shares in the books of the corporation, the seller becomes a trustee of the buyer for the shares sold. This arises because the seller has already sold the shares to the buyer, but the stock certificates remain in the seller’s name (who is still registered as the owner of the shares in the books of the corporation). It is prudent for the parties to advise the corporate secretary regarding the sale transaction and that the parties are obtaining the CAR. The buyer would also usually request the seller to notify the corporate secretary that from the date of the sale, the buyer is entitled to receive the dividends declared by the corporation and vote upon presentation of a proxy issued by the seller in favour of the buyer. If the parties do not give notice to the corporate secretary, the corporation will consider the seller as the owner of the shares notwithstanding the sale of the shares to the buyer.



69 Revised

Corporation Code, s 73.

The Philippines  207

v.  Voting Trusts Philippine law recognises the creation of a voting trust among stockholders. One or more stockholders of a stock corporation may create a voting trust to confer upon a trustee or trustees the right to vote and other rights pertaining to the shares. However, the Revised Corporation Code provides certain restrictions on voting trusts. (a) The duration of the voting trust cannot be for a period exceeding five years at any time. In the case of a voting trust specifically required as a condition in a loan agreement, the voting trust may be for a period exceeding five years, but it will automatically expire upon full payment of the loan. (b) A voting trust agreement must be in writing, notarised and must specify the terms and conditions thereof. (c) A certified copy of the voting trust agreement must be filed with the corporation and with the Securities and Exchange Commission; otherwise, the agreement is ineffective and unenforceable. (d) The certificate or certificates of stock covered by the voting trust agreement must be cancelled and new ones issued in the name of the trustee or trustees, stating that they are issued pursuant to the voting trust agreement. The books of the corporation must state that the transfer in the name of the trustee or trustees is made pursuant to the voting trust agreement. (e) The trustee or trustees must execute and deliver to the transferors the voting trust certificates, which will be transferable in the same manner and with the same effect as certificates of stock. (f) The voting trust agreement filed with the corporation is subject to examination by any stockholder of the corporation in the same manner as any other corporate book or record. Both the trustor and the trustee or trustees may exercise the right of inspection of all corporate books and records under the Revised Corporation Code. (g) No voting trust agreement may be entered into to circumvent the laws against anti-competitive agreements, abuse of dominant position, anti-competitive mergers and acquisitions, violation of nationality and capital requirements, or for the perpetuation of fraud. (h) Unless expressly renewed, all rights granted in a voting trust agreement automatically expire at the end of the agreed period. The voting trust certificates and the certificates of stock in the name of the trustee or trustees are deemed cancelled and new certificates of stock must be reissued in the name of the trustors. (i) The voting trustee or trustees may vote by proxy or in any manner authorised under the by-laws unless the agreement provides otherwise.70

vi.  Trustee in Liquidation Every corporation whose charter expires pursuant to its articles of incorporation, is annulled by forfeiture, or whose corporate existence is terminated in any other manner,

70 Republic

Act No 11232, s 58.

208  Hector M de Leon Jr remains a body corporate for three years after the effective date of dissolution. However, its continued existence is only for the purpose of prosecuting and defending suits by or against it and enabling it to settle and close its affairs, dispose of and convey its property, and distribute its assets; its continued existence is not for the purpose of continuing the business for which it was established.71 During the three-year period, the corporation is authorised and empowered to convey all its properties to trustees for the benefit of stockholders, members, creditors and other persons in interest. After any such conveyance by the corporation of its property in trust for the benefit of its stockholders, members, creditors and others in interest, all interest which the corporation had in the property terminates and the legal interest vests in the trustees.72 The trustee, having legal title over the property of the corporation and acting as a liquidator, has the duty to possess and dispose of the properties of the defunct corporation to benefit the stockholders, creditors or other persons in interest, in accordance with the liquidation plan.73 If the three-year extended life has expired without a trustee or receiver having been expressly designated by the corporation within that period, the board of directors itself may be permitted to continue as ‘trustees’ by legal implication to complete the corporate liquidation.74

vii.  One-Person Corporation A one-person corporation (OPC) is a corporation with a single stockholder, who can be a natural person, trust or estate. If the single stockholder is a trustee, administrator, executor, guardian, conservator, custodian, or other person exercising fiduciary duties, proof of authority to act on behalf of the trust or estate must be submitted to the Securities and Exchange Commission at the time of incorporation. The OPC under the name of the trustee may be dissolved upon proof of termination of the trust.75

C.  Trusts in Other Commercial Settings i.  Trust Receipts In 1973, the Philippines enacted the Trust Receipts Law,76 which regulates trust receipts transactions.

71 Revised Corporation Code, s 139. 72 ibid. 73 SEC-OGC Opinion No 07–15 (21 July 2015). 74 SEC-OGC Opinion No 02–14 (21 February 2014). 75 Guidelines on the Establishment of a One-Person Corporation (OPC), SEC Memorandum Circular No 07–19 (25 April 2019). 76 Presidential Decree No 115.

The Philippines  209 Under the Trust Receipts Law, a trust receipt transaction refers to a transaction between the entruster and the entrustee, whereby the entruster, who owns or holds absolute title or security interests over certain specified goods, documents or instruments, releases the same to the possession of the entrustee upon the latter’s execution and delivery to the entruster of a ‘trust receipt’ wherein the entrustee binds himself to hold the designated goods, documents or instruments in trust for the entruster and to sell or otherwise dispose of the goods, documents or instruments with the obligation to turn over to the entruster the proceeds thereof to the extent of the amount owing to the entruster.77 The following matters should be noted in relation to a trust receipt transaction: (a) A trust receipt need not be in any particular form, but every such receipt must substantially contain: (1) a description of the goods, documents or instruments subject of the trust receipt; (2) the total invoice value of the goods and the amount of the draft to be paid by the entrustee; (3) an undertaking or a commitment of the entrustee to hold in trust for the entruster the goods, documents or instruments therein described; to dispose of them in the manner provided for in the trust receipt; and to turn over the proceeds of the sale of the goods, documents or instruments to the entruster to the extent of the amount owing to the entruster or as appears in the trust receipt or to return the goods, documents or instruments in the event of their non-sale within the period specified therein.78 (b) The failure of an entrustee to turn over the proceeds of the sale of the goods, documents or instruments covered by a trust receipt to the extent of the amount owing to the entruster or as appears in the trust receipt or to return said goods, documents or instruments if they were not sold or disposed of in accordance with the terms of the trust receipt constitutes the crime of estafa (or swindling), which is punishable under the Revised Penal Code.79 (c) A trust receipts transaction secures the payment of a debt. With the recent enactment of a new Personal Property Security Act, it is not clear what priority a trust receipt will have as a security device as compared to the security interest created under the Personal Property Security Act. Until there is clarity regarding the matter, it is prudent for the entruster to also register the transaction under the Personal Property Security Act.

ii.  Money Laundering Persons covered by the Anti-Money Laundering Act must require clients that are: (a) Trustees of any express trust to obtain and hold adequate, accurate, and current information on the identity of the trustors/grantors/settlors, the trustee, the beneficiaries or class of beneficiaries, and any other natural person exercising ultimate effective control over the trust. For beneficiaries of trusts designated by characteristics or by class, financial institutions should obtain sufficient information

77 ibid 78 ibid 79 ibid

s 4. s 5. s 13; Act No 3815, s 315.

210  Hector M de Leon Jr concerning the beneficiary to satisfy the financial institution that it can establish the identity of the beneficiary at the time of the payout or when the beneficiary intends to exercise vested rights. (b) Trustees of any trust to hold basic information on other regulated agents of, and service providers to, the trust, including investment advisors or managers, accountants, and tax advisors. (c) Professional trustees to maintain this information for at least five years after their involvement with the trust ceases.80 The Securities and Exchange Commission provides similar guidelines: SECTION 5.H.1. Covered institutions shall establish whether the applicant for the business relationship is acting on behalf of another person as a trustee, nominee or agent. Covered institutions should obtain competent evidence of the identity of such agents and authorized signatories, and the nature of their trustee or nominee capacity and duties. SECTION 5.H.2. Where the covered institution entertains doubts as to whether the trustee, nominee or agent is being used as a dummy in circumvention of existing laws, it shall immediately make further inquiries to verify the status of the business relationship between the parties. If satisfactory evidence of the beneficial owners cannot be obtained, covered institutions shall consider whether to proceed with the business, bearing in mind the ‘Know-Your-Customer’ principle. If the covered institutions decide to proceed, they are to record any misgivings and give extra attention to monitoring the account in question.81

iii.  Securitisation of Assets Under the Securitization Act 2004, assets may be securitised, that is, the assets can be sold on a without recourse basis by the seller to a Special Purpose Entity (SPE) and asset-backed securities may be issued by the SPE which depend, for their payment, on the cash flow from the assets sold and in accordance with the securitisation plan.82 The SPE can be a special purpose trust, which is a trust administered by an entity duly licensed to perform trust functions and created solely for securitisation and to which the seller makes a true and absolute sale of assets.83 Unlike an SPE in the form of a stock corporation (which must be registered with the Securities and Exchange Commission), an SPE constituted as a special purpose trust need not be registered as such with the Securities and Exchange Commission.84 However, the special purpose trust will fall under the jurisdiction of the Central Bank.85 Similarly, unlike an SPE in the form of a stock corporation, an SPE constituted as a special purpose trust is subject to income tax in the same manner as individuals, in accordance with Section 61, Chapter X of the Tax Code.86 80 Anti-Money Laundering Act 2001, IRR of RA 9160, r 24, s 1 (22 November 2018). 81 2018 Guidelines on Anti-Money Laundering and Combating the Financing of Terrorism for SEC Covered Institutions, SEC Memorandum Circular No 16–18 (7 November 2018). 82 Republic Act No 9267, s 3(a). 83 ibid s 3(n). 84 ibid s 5. 85 ibid ss 9, 11. 86 ibid s 27.

The Philippines  211

iv.  Trust Certificates Trust certificates, voting trust certificates or similar instruments are ‘securities’ under the Securities Regulations Code.87 Thus, requirements for the registration of securities with the Securities and Exchange Commission (among others) may apply to trust certificates.88 On the other hand, certificates issued by a receiver or by a trustee in bankruptcy duly approved by the proper adjudicatory body are exempt securities.89 Similarly, the sale of any security at any judicial sale, or sale by an executor, administrator, guardian or receiver or trustee in insolvency or bankruptcy is an exempt transaction.90

v.  Gift Checks (Cheques) A gift check (also called gift certificate or gift card) is any instrument issued to any person, natural or juridical, for monetary consideration, honoured upon presentation at a single merchant or an affiliated group of merchants as payment for consumer goods or services. The instrument may be in the form of paper, card, code, or other device, and remains valid until the issuer’s business ceases.91 A gift check represents value held in trust by the issuer on behalf of its beneficiary or bearer.92 Hence, under Philippine law, these acts are unlawful: (a) Issuing a gift check that bears an expiry date. (b) Imposing an expiry date on the stored value, credit, or balance of the gift check. (c) Except in cases allowed by law, refusing to honour the unused value, credit, or balance stored in the instrument.93 Any person, natural or juridical, who violates the law is obliged to return the unused balance of the gift check within 90 days from the declaration of the violation by the DTI and shall be subject to a fine to be imposed by the Secretary of Trade and Industry, which shall in no case be less than five hundred thousand pesos (P500,000.00) nor more than one million pesos (P1,000,000.00). For the second offence, in addition to the fine, the issuance of gift checks by the offending issuer shall be suspended for three months; for the third offence, in addition to the fine, the issuance of gift checks by the offending issuer shall be cancelled.94

vi.  Real Estate Investment Trusts In 2009, the Philippines enacted the Real Estate Investment Trust (REIT) Act.95 The law provides for the creation of real estate investment trusts, which are stock corporations

87 Republic

Act No 8799, s 3.1. s 8. 89 ibid s 9.1(c). 90 ibid s 10.1(a). 91 Republic Act No 10962, s 4(a). 92 ibid s 2. 93 ibid ss 5, 7. 94 ibid s 11. 95 Republic Act No 9856. 88 ibid

212  Hector M de Leon Jr established principally to own income-generating real estate assets. However, it should be noted that an REIT, although designated as a ‘trust’, does not have the same technical meaning as ‘trust’ under existing Philippine laws and regulations but is used solely to adopt the internationally accepted description of these types of companies.96

vii.  Monopolies and Combinations in Restraint of Trade The Revised Penal Code imposes criminal penalties on any person who enters into any contract or agreement or takes part in any conspiracy or combination in the form of a trust or otherwise, in restraint of trade or commerce or to prevent by artificial means free competition in the market.97

IV. Conclusion Modern commercial transactions have found many uses for trust arrangements in the Philippines. As can be seen from this chapter, there can be many complexities in the use of trusts. Since the provisions on trusts are sparse, there is a great need for parties to think carefully about the terms of the trust agreement, particularly in circumstances where the law does not provide specific regulation. Failure to do so may have dire consequences.



96 ibid

s 3(cc). Penal Code, art 186.

97 Revised

part iii

214

12 The Transformation of Japanese Trusts Law and Practice: Historical Contexts and Future Challenges MASAYUKI TAMARUYA*

Introduction Japan is one of the earliest civil law jurisdictions that introduced the common law trust by statute.1 The Trust Act of 1922 was enacted as Japan’s first comprehensive trust legislation. Since then, the trust has been used mostly for commercial purposes. Today, commercial trusts constitute a zillion-yen industry, with assets worth 1,201.9 trillion yen held by trust banks as of March 2019.2 In 2006, the new Trust Act was introduced to replace the 1922 Act.3 The reform was primarily motivated by the desire to increase the flexibility of trusts law to meet the needs of increasingly complex commercial trust practices. The 2006 Act contains several provisions that expressly authorise the use of trusts for succession planning. With the rapid ageing of Japanese society, the past decade has seen a growing interest in what is commonly known as the ‘family trust’, where the settlor looks to his family or friends to serve as trustees to manage his or her family’s assets or to oversee succession. This chapter will proceed as follows. Section I will provide a historical overview of Japanese trust practices and introduce some of the major commercial uses of trusts. Section II will discuss the recent rise in family trusts and some of the issues that they have brought about. Against this historical background, section III will present an

* Professor, Faculty of Law and Graduate School of Law and Politics, the University of Tokyo. 1 In the 1920s, Liechtenstein, Mexico and Panama also introduced trusts law through legislation. KW Ryan, ‘The Reception of the Trust’ (1961) 10 International & Comparative Law Quarterly 265, 265. 2 Trust Companies Association of Japan (TCAJ), ‘The Overview of Trusteeship as of March 2019’ (2019) 279 Trusts 94, 94. 3 M Arai, ‘Japan’ in A Kaplan (ed), Trusts in Prime Jurisdictions, 4th edn (Globe Law and Business 2016) 270. For a general overview of Japanese trusts law, see M Tamaruya, ‘Japanese Law and the Global Diffusion of Trust and Fiduciary Law’ (2018) 103 Iowa Law Review 2229; M Arai, ‘Trust Law in Japan: Inspiring Changes in Asia, 1922 and 2006’ in L Ho and R Lee (eds), Trust Law in Asian Civil Law Jurisdictions: A Comparative Analysis (Cambridge University Press 2013).

216  Masayuki Tamaruya exposition of some of the major doctrines of trusts law, with some speculation around the changes that may be visible on the horizon. Section IV will look at some of the challenges that Japanese trust practice faces in cross-border contexts.

I.  Historical Reception and Commercial Uses A.  Reception of the Trust and the Trust Act of 1922 The introduction of the trust in Japan goes back to the beginning of the twentieth century. The initial motive was to introduce foreign capital by adopting mortgage trusts as used in financial markets in the US and the UK. In 1905, the Secured Bond Trust Act4 was enacted to facilitate collateral bond issues by authorising trust companies to hold and manage certain corporate assets in trust as collateral. Between 1923 and 1931, Japanese electricity companies issued bonds in New York and London, with 16 issues of $US22.8 million and £GBP9.9 million in all.5 In 1922, comprehensive trust legislation was introduced. The Trust Act 1922 was drafted with reference to the Indian Trust Act and the California Civil Code, as well as the trusts law as was then found in English case law.6 At the time, there was no need to use trusts to manage family assets across generations. The primary motive of the Trust Act along with its regulatory counterpart, the Trust Business Act, was to regulate trust companies, many of which sprang up shortly after the 1905 Act but often engaged in the shadowy business of land speculation and loan sharking. Japanese commercial trust practice and industry regulation were imposed on Korea and Taiwan, which Japan ruled as colonies until its defeat in the Second World War. Although direct rule ended in 1945, similar patterns of commercial trusts and statutory provisions can be found in South Korea, Taiwan and to some extent, mainland China.7

B.  Post-Second World War Development and Commercial Trusts Commercial uses continued to dominate post-war trust practices in Japan. Trust banks were the exclusive providers of trust services until 1993, when the entry restrictions were lifted to allow other financial institutions to set up a subsidiary to enter the trust service market.8

4 Secured Bond Trust Act, Law No 52 of 1905. 5 T Kikkawa, The Development of the Japanese Electric Power Industry and Matsunaga Yasuzaemon (Nagoya University Press 1995) 104–35. 6 S Tofaris, ‘Trust Law Goes East: The Transplantation of Trust Law in India and Beyond’ (2015) 36 Journal of Legal History 299, 323–26. 7 L Ho and R Lee, ‘Reception of the Trust in Asia: An Historical Perspective’ in L Ho and R Lee (eds), Trust Law in Asian Civil Law Jurisdictions: A Comparative Analysis (Cambridge University Press 2013) 25–26. 8 Financial System and Securities Transaction System Reform Related Law Revision etc Act, Law No 87 of 1992.

Japan  217

i.  Money Trusts and Loan Trusts In the early post-war years, the main services of trust banks were money trusts, where trust banks accepted funds from a large number of investors and administered them by making long-term loans to heavy industries. The dominant form of money trust was known as a loan trust, a Treasury-supervised form of collective investment authorised under legislation in 1952.9 The loan trust worked like a bank deposit, where trust contracts routinely guaranteed the return of capital and the expected dividend.10 Both policymakers and trust bankers were aware that loan trusts were not the proper form of trusts and were intended as temporary crisis-avoidance measures. Loan trusts were popular among the middle class, accumulating funds worth 50.7 trillion yen at their peak in 1993.11 As the trusts industry began to engage in more complex trust transactions in the 1980s, the share of loan trusts declined. By the 2000s, trust companies stopped managing loan trusts altogether. Nevertheless, the loan trust set the tone for Japanese commercial trust practices in that it served the broad cohort of the middle class in the form of collective investment. Even today, tailor-made money trusts are used as a means for collective investment, with 125.2 trillion yen held in money trusts in 2019.12

ii.  Investment Trusts Although initially dwarfed by loan trusts, investment trusts became increasingly important in the trusts industry. Modelled after unit trusts in England, investment trusts are a collective investment mechanism that allow relatively small-scale investors to access a broad range of securities under the management of investment specialists. The first investment trust certificate was issued in 1941.13 Securities investment trusts were created based on the Trust Act until 1951, when special legislation was enacted to provide a regulatory framework.14 The assets held in investment trusts grew steadily, and while they dwindled for some time following the crash of the stock market in 1990, they have grown more than five times since 1997, reaching 209.9 trillion yen in 2019.15

iii.  Pension and Employee Benefit Trusts By the 1960s, Japanese business corporations had begun to offer pension payments to employees upon retirement. Tax law was amended to provide favourable treatment to qualified pension plans.16 Trust banks serving pension plans offer a range of services that 9 Loan Trust Act, Law No 195 of 1952. 10 T Kamibayashi, ‘The Rise and Fall of Loan Trusts and the Future of Trust Banks’ (2000) 68 Keizai Shirin 247, 253. 11 ibid 258–60. 12 TCAJ, ‘The Overview of Trusteeship as of March 2019’ (n 2) 95. 13 Nomura Securities Research Department, Empirical Studies of Investment Trust (1942). 14 Securities Invest Trust Act, Law No 198 of 1951, renamed by Law No 97 of 2000 as Investment Trust and Investment Corporation Act. 15 TCAJ, ‘The Overview of Trusteeship as of March 2019’ (n 2) 95. 16 Qualified retirement pensions received favourable tax treatment in 1962, and welfare pension funds in 1966.

218  Masayuki Tamaruya include the investment and management of the pension assets, the design of the pension structure and actuarial computation, ensuring compliance with regulatory rules, and distributing a range of benefits to employees and retirees. Although recent years have seen a series of reforms in the pension system, the total amount under administration in pension trusts has been stable over the past 15 years, with the latest figure being 82.0 trillion yen in 2019.17

iv.  Real Estate and Land Trusts In the late 1970s, trust banks began to accept greater varieties of property requiring complex management. One example is the real estate trust, in which the trust bank receives a transfer of real estate from the settlor, manages and administers it to distribute income during the duration of the trust, and returns the assets upon termination. Land trusts involve more extensive development of land, construction of facilities and administration of enterprises. They were introduced to explore the then rising property market in 1984, but were hit hard by the collapse of the economic bubble in 1990.18 One land trust reached the Supreme Court in Mitsubishi UFJ Trust Bank v Hyogo Prefecture.19 In 1987, Hyogo Prefecture, a local government in the western part of Japan, conveyed its real property to Toyo Trust Bank, so that the bank would hold the real property in trust for the benefit of the local government. Under the trust contract, the trust bank had to develop and maintain recreational facilities on land while financing the project by mortgaging the trust property. Unfortunately, property prices fell in the 1990s and the operation began to lose money and accumulated debts that far exceeded the value of the trust property. The trust bank paid off the debts and issued proceedings against the beneficiary to seek the reimbursement of expenses. The Supreme Court ruled in favour of the trustee, holding that the relevant contract provision did not specifically exclude the trustee’s right to compensation under the 1922 Trust Act.20 Following the 2006 reform, the trustee can be reimbursed from the beneficiary only upon agreement.21 In the meantime, trust banks have ceased to undertake trusteeship that involves the active management of an enterprise. The need for such services was taken over by securitisation involving real estate.

v. Securitisation In the 1980s, Japanese financial institutions and business corporations began to issue securities on the back of segregated assets held in trust. This mechanism is attractive for businesses wanting to obtain cashflow based on the value of their illiquid assets and to improve their financial position. Typical examples are securitisation of loan credits held by financial institutions and securitisation of sales credits held by business corporations. Securities backed by real property have also been sold to investors in the real

17 TCAJ,

‘The Overview of Trusteeship as of March 2019’ (n 2) 95. Basics of “Real Estate Trusts”’ (2012) 1940 Kin’yu Homu Jijo 56, 57. 19 Mitsubishi UFJ Trust Bank v Hyogo Prefecture 2136 Hanji 30 (Supreme Court, 17 November 2011). 20 Trust Act 1922, s 36(2). 21 Trust Act 2006, s 48(5). 18 ‘The

Japan  219 estate investment trust market. As of 2019, assets under securitisation amounted to 80.5 trillion yen, of which 36.5 trillion yen involved choses in action, and 40.3 trillion yen involved real estate.22 Although Japan followed the US model of mortgage-backed securities in the 1970s, creating a hospitable environment for securitisation was difficult well into the 1990s.23 Just to name a few legal impediments, perfecting the transfer of loans and receivables was a complex and costly process; establishing special purpose vehicles used for securitisation was also costly; and beneficial interests could not be recognised as securities under the securities legislation at the time. While special legislation was introduced to overcome each of these impediments, the discontent created an impetus to reform the trust legislation. The Trust Business Act was reformed in 200424 and the Trust Act was overhauled in 2006.25

C.  The 2006 Reform and its Implications The new Trust Act represented wide-ranging reforms. The Act sought to keep the law up to date with commercial trust practices by introducing limited liability trusts, authorising the securitisation of beneficial interests and introducing optional provisions on majority voting by multiple beneficiaries, as well as introducing trust-related offices such as trust enforcers and beneficiary representatives.

i.  Security Trust The Trust Act of 2006 also allowed a trustee to hold a security interest separately from a main debt.26 By holding securities for the benefit of multiple lenders, such as in syndicated loans, trust banks can expect to increase efficiency in managing collateral, and reduce paperwork when creditors transfer their choses in action.

ii.  Will Substitute and Successive Beneficiaries Trusts The 2006 Act contains provisions that expressly authorise uses of trusts commonly observed in common law jurisdictions. One can make a will substitute trust, where the settlor can receive benefits from the trust during his life, and upon his death, the benefit will shift to whomever he designates as beneficiaries.27 One can also create a trust with successive beneficiaries, where a particular beneficiary’s beneficial interest ceases upon his death and other beneficiaries’ interests arise as stated in the trust.28

22 TCAJ, ‘The Overview of Trusteeship as of March 2019’ (n 2) 95. 23 H Kanda, ‘Securitization in Japan’ (1998) 8 Duke Journal of Comparative & International Law 359. 24 Trust Business Act, Law No 154 of 2004. 25 Trust Act, Law No 208 of 2006. 26 Trust Act, s 3(i)(ii). 27 ibid s 90. Similar to the American revocable trust, the settlor has the right to modify the trust during his life. See Uniform Trust Code, ss 601–03. 28 ibid s 91.

220  Masayuki Tamaruya Trust banks began to accept such trusts in 2009. Will substitute trusts became popular quickly; 160,020 such trusts were created by 2019.29 In 2013, the g­ overnment began to provide tax incentives for certain categories of lifetime gift-giving, and trust banks began to offer qualifying trust products. Between 2013 and 2019, 220,598 qualifying trusts were created to fund education expenses, with assets amounting to 1.59 trillion yen.30 Between 2015 and 2018, 5,343 qualified trusts with assets amounting to 15.1 billion yen were created to prepare for marriage and childrearing.31 As tax exemption is limited to gifts up to 15 million yen (equivalent to $US 140,000) and 10 million yen respectively, the scale of these trusts is limited, making them more attractive for middle class senior citizens than for high net-worth individuals.

II.  Family Trusts and Charitable Trusts A.  The Rise of Family Trusts As the 2006 Act removed doubts about the legality of the transgenerational use of trusts, property owners began to look to trusts for management and succession in respect of their family assets. In many such trusts, someone from among the settlor’s family members serves as a trustee, with help from professional advisers.32 The rise of family trusts coincided with the rapid ageing of Japanese society, with a flurry of legislative reforms taking place in the area of guardianship and succession law. Reforms in the guardianship system had created a near-crisis situation, where family courts around the country experienced serious difficulty monitoring guardians and preventing abuse. The increase in the number of family trusts in the 2010s gave rise to disputes created by hastily prepared trusts. Only a decade ago, trusts were exclusively undertaken by trust banks under the financial regulator’s auspices and rarely made their way to court. The courts were suddenly asked to rule on some of the basic questions of trusts law. In Holographic Will Trustee v Ueno Department Store (2016),33 the Court made a strenuous effort to give effect to a holographic will that the deceased had created a few weeks before death to disinherit one of her heirs. The trust asset consisted of the shares of a family company that the deceased and her late husband inherited from her father. She appointed an attorney as the trustee and executor of her will and directed him to hold the shares in trust for the benefit of her younger son’s son until he came of age. The company was in the middle of a family feud, and things went wrong shortly after the settlor’s death. The company board refused to approve the share transfer, which was required under the articles of incorporation. The younger son, realising that his son’s entitlement under the trust invaded the deceased’s elder son’s daughter’s forced share, 29 TCAJ, ‘The Overview of Trusteeship as of March 2019’ (n 2) 96. 30 ibid 89. Taxation Special Measures Act, Law No 26 of 1957, s 70-2-2, inserted by Law No 5 of 2013. 31 TCAJ, ‘The Overview of Trusteeship as of March 2018’ (2019) 279 Trusts 89, 93; Taxation Special Measures Act, Law No 26 of 1957, s 70-2-3, inserted by Law No 5 of 2013. 32 The Prime Minister’s licence is required to undertake trusteeship in the course of business: Trust Business Act, ss 2(1), 3. 33 Holographic Will Trustee v Ueno Department Store 2325 Hanji 41 (Tokyo High Court, 19 October 2016).

Japan  221 acted as his guardian and agreed with the elder son, who was also acting as the guardian of his minor daughter, to divide the shares between the two grandchildren. The agreed share transfer was approved by the board, and a shareholders’ meeting was held, where the attorney-trustee-executor was removed from the position of the company’s statutory auditor which he had long held. In civil litigation filed by the humiliated trustee, the Court ruled that the purpose of the trust was frustrated when the share transfer was disapproved by the board. Rather than invalidating the trust, however, the Court held that the trust had been terminated and the shares had devolved to the younger son’s son, effectively approving the deal between the younger son’s son and elder son’s daughter brokered by their fathers as parent guardians. The Court justified the ruling based on the settlor’s implied intent, but ironically failed to achieve the settlor’s objective of vesting the attorney with the shareholder’s right to be exercised on behalf of her favoured grandson. The Court conceded this point but stated that the outcome was unavoidable in light of the forced heirship claim and parental capacity to act as the minor child’s natural guardian, which is not present in most common law jurisdictions. While the case serves as a reminder of the difficulty of transplanting the trust into civil law jurisdiction, one is left wondering whether any better outcome could have been achieved had the settlor planned this carefully in advance.

B.  Trusts and Forced Heirship One basic question that the 2006 reform has left ambiguous is how the trust can be reconciled with forced heirship. In Disinherited Eldest Son v Favoured Second Son (2018),34 the Tokyo District Court faced the issue for the first time. In this case, the settlor conveyed all the real estate property into trust so that ‘the entire family assets be managed and maintained, and ritual be conducted continuously by the second son and his descendants with the overriding objective of bringing prosperity to the family’.35 The settlor designated himself as the lifetime beneficiary and directed that the beneficial interest should shift to his children upon his death. The settlor had three children, and the second son was to receive four-sixths of the beneficial interest, while the eldest son and the daughter were to receive one-sixth each. Upon the death of all three children, the beneficial interest was to be distributed equally to the second son’s children. The beneficiaries were entitled to receive the financial benefits that arose from the sale, lease, or other disposition of the trust assets. The second son was designated the trustee and was also given the right to use the trust assets for himself for free. When the eldest son sued the second son, the Court invalidated part of the trust and upheld the other part. The Court divided the trust property into two groups. The first comprised assets that were unlikely to be sold or generate income, such as the family residential house which was valued at 352,415,200 yen. Finding that this part of the

34 Disinherited Eldest Son v Favoured Second Son 30 Kin’yu Houmu Jijo 78 (Tokyo District Court, 12 September 2018). 35 ibid 82.

222  Masayuki Tamaruya trust was a disguised attempt to evade forced heirship claims, the Court ruled that the trust was, to the extent that it concerned this group of assets, contrary to public order and was thus invalid. The defendant had to transfer the co-ownership interest to the extent of one-sixth of the property. The second part of the trust assets had a good prospect of generating income, mostly in the form of rent payment. As the eldest son was entitled to receive one-sixth of the beneficial interest, the Court upheld this portion of the trust, rejecting his argument that the entire trust be set aside. The Court’s ruling clarified that forced heirship constitutes the public order under the Japanese law of succession. At the same time, the Court refused to invalidate the entire trust, even if it was designed to and did infringe a particular form of forced heirship. However, one might question whether giving one-sixth ownership of the unsaleable assets and one-sixth entitlement to the income generated from the remaining property was sufficient to protect the eldest son’s forced heir entitlement. Given that he could leave none of the assets in the second category to his descendant, what he received was arguably much less than his entitlement to one-sixth of his father’s estate. We must await further development in the case law to see how the Japanese courts will meet the conceptual and practical challenges brought about by family trusts within the realm of succession law.

C.  Charitable Trusts The first charitable trust in Japan was created in 1977. Since then, charitable trusts have steadily increased both in number and in terms of the total assets held. The total assets hit their peak in 2001, with 73.7 billion yen held in 566 charitable trusts, although the scale of philanthropy has since declined. As of 2019, 438 charitable trusts held 57.1 billion yen.36 Like commercial trusts, trusteeship for virtually all charitable trusts has been undertaken by trust banks. Owing to the strict permission standard and tax law requirements, Japanese charitable trusts now hold only cash and engage only in grantmaking.37 This may change after the ongoing reforms of charitable trust legislation. In 2018, the Legislative Council for the Ministry of Justice published the General Outline of proposed reforms, laying the groundwork for a legislative bill to be presented before Parliament.38 The General Outline aims to broaden the trustee bases by enabling ordinary individuals or corporations to serve as trustees.39 It also proposes to facilitate the use of charitable trusts for more extensive work than the distribution of grants or scholarships, to which they have been effectively limited.40 To enhance accountability in

36 TCAJ, ‘The Overview of Trusteeship as of March 2019’ (n 2) 89. 37 Standing Committee on Guidance and Supervision of Public Interest Corporations, Standard for Permission to Undertake Public Interest Trusts (September 1994) (requiring among other things that trust assets be capable of objective evaluation and of generating sufficient income to sustain continuous giving pursuant to the trust purposes). 38 Ministry of Justice Legislative Council, General Outline for the Revision of Public Interest Trust Act (18 December 2018). For the drafter’s account, see Y Nakatsuji, ‘Outline of the Interim Proposal on the Revision of the Charitable Trust Act’ (2018) 273 Trust 152. 39 General Outline, s 4. 40 ibid s 9.

Japan  223 the management of trusts, the reform proposes the introduction of a mandatory trust supervisor (shintaku-kanrinin),41 which was introduced earlier in the non-charitable context following the offshore practice of a trust enforcer.42 To ensure the independent exercise of oversight powers, the General Outline provides that the supervisor cannot be related to the trustees or settlors or to their families or employees.43 The reform of charitable trusts is intended to integrate the reform of trusts law and that of non-profit organisation law, both of which took place in 2006. With the rise in family trusts, one hopes that the reforms will create a hospitable environment for charitable giving and civic activities. All this depends on how the charitable trust bill will be enacted and implemented.44

III.  Doctrinal Exposition Against the background of the long-standing use of commercial trusts and the recent rise in family trusts, a doctrinal exposition of Japanese trusts law is warranted. The discussion will also strive to put Japanese trusts law in a broader comparative context.

A.  Creation of a Trust A trust can be created by using one of the following methods.45 The first and prototypical method is the trust contract. The second is by will, which was not common while the trust was used for commercial purposes but is now becoming more common with the rise in the number of family trusts. The third method is by declaration, which was made available by the 2006 reforms. For fear of abuse, however, the Trust Act specifically requires that a declaration be made in writing with an ascertainable date that complies with the regulations of the Ministry of Justice.46 The fact that trust contracts are considered the prototype has meant that Japanese trusts law confers on the settlor relatively strong powers to control the trust. For instance, the settlor has the right to: request that the trustee produce accounting documents;47 petition the court to appoint a new trustee,48 remove a trustee,49 or issue a trust property administration order;50 or agree with the beneficiary to remove the trustee,51 or modify52 or terminate the trust.53 While giving the settlor control over 41 ibid s 5. 42 Trust Act, ss 258(4), 123–30. 43 General Outline, s 5-2(2). 44 M Tamaruya, ‘The Use of Trusts for Charitable Purposes: A Comparative Perspective’ (2019) 11 Trust Forum 11. 45 Trust Act, s 3(i)–(iii). 46 ibid ss 3(iii), 4(3). 47 ibid s 38(6). 48 ibid s 62(4). 49 ibid s 58(4). 50 ibid s 63(1). 51 ibid s 58(1). 52 ibid s 149(3). 53 ibid s 164(1).

224  Masayuki Tamaruya trust administration is often controversial in Anglo-Commonwealth jurisdictions,54 Japanese trusts lawyers, along with other lawyers in civil law jurisdictions, have been sanguine about it. Note that Japanese trust practitioners have never appeared ambitious in attracting offshore-style trust businesses.55 The strong settlor control similar to that enabled by offshore trust legislation is the product of trying to engraft trust onto the Japanese civil law tradition. The Japanese contractarian approach was further amplified by following John Langbein’s thesis that the trust can be seen as a business deal that allows flexible arrangements between the parties to the transaction.56 Note here, though, that in civil law jurisdictions the law of contract is not merely concerned with enforcement of the bargain struck by the parties to the contract. The courts in civil law jurisdictions are more willing to impose obligations beyond what is provided in the contract terms, both before and after the formation of the contract. The Trust Business Act does not allow an exemption of a trustee’s duty of care, and this is not considered a contradiction with the contractarian notion of the Japanese trust.57 If the trust assets comprise property subject to registration, such as real estate, an automobile, or a patent, registration is required for either the trustee or the beneficiary to assert a claim against a third party.58 In the case of real property, registration requires the publication of the name and address of the settlor, the trustee and the beneficiaries, the purpose of the trust, the method of administration of trust assets, the grounds for termination of the trust and other terms of the trust.59 Registration is necessary as a matter of the domestic property transfer regime; this predates recent cross-border initiatives to fight money laundering or tax evasion.60 The Trust Act does not provide for what are known in common law jurisdictions as constructive and resulting trusts. However, in Nakata Construction Co v East Japan Construction Guaranty Co (2002),61 the Japanese Supreme Court implied a trust in circumstances where none of the parties had expressed a wish to create one. The case concerned a construction company that had received advance payment from the local government for agreed service under a construction contract. When the company went into bankruptcy before completing its work, the bankruptcy administrator sought to collect the advance payment kept in a separate bank account as part of the bankrupt estate. The Japanese Supreme Court rejected the bankruptcy administrator’s claim and held that upon the construction company’s receipt of advance payment in the special account, a trust contract arose in which the recipient had held the fund for the benefit of the government. The Court considered it material that under the relevant legislation 54 L Smith, ‘Give the People What They Want? The Onshoring of the Offshore’ (2018) 103 Iowa Law Review 2155. 55 See nn 142–46 and accompanying text. 56 JH Langbein, ‘The Contractarian Basis of the Law of Trusts’ (1995) 105 Yale Law Journal 625; H Kanda, ‘Japanese Commercial Trusts: An Introduction’ in S Ochiai et al (eds), Festschrift for Professor Tsuneo Ootori: The Trajectory and the Future of Modern Corporate Legislation (Shoji-Homu 1995). 57 Trust Business Act, s 28(2). 58 ibid s 14. 59 Real Property Registration Act, Law No 123 of 2004, s 97(1). 60 Ho and Lee, ‘Reception of the Trust in Asia’ (n 7) 23. 61 Nakata Construction Co v East Japan Construction Guaranty Co 56(1) Minshu 20 (Supreme Court, 17 November 2002).

Japan  225 and contractual arrangements, the bankrupt company could withdraw the amount from the separate bank account only for the sake of the specific construction work and by following designated procedures subject to the guarantee company’s audit. In the absence of statutory recognition of resulting or constructive trusts, the Japanese Supreme Court justified the trust in terms of the parties’ intentions. Some commentators have compared this implied trust with the English Quistclose trust.62

B.  The Nature of a Trust and a Beneficial Interest The Trust Act defines a trust as an arrangement in which a specific person … administers or disposes of property in accordance with a certain purpose (excluding the purpose of exclusively promoting the person’s own interests …) and conducts any other acts that are necessary to achieve said purpose.63

This characterisation of a trust as a relationship between a trustee and either a beneficiary or a specified purpose resembles the definition in the Hague Trust Convention, which characterises the trust as ‘the legal relationships created … by a person, the settlor, when assets have been placed under the control of a trustee for the benefit of a beneficiary or for a specified purpose’.64 In Japan, while a charitable trust can be created,65 the Trust Act also authorises the creation of non-charitable purpose trusts.66 In practice, however, for fear of abuse, the trustee of a non-charitable purpose trust can only be the national or local government or other legal persons whose net assets exceed 50 million yen.67 At the time of writing, no non-charitable purpose trust has been created in Japan. The beneficial interest in a Japanese trust is a right in personam.68 This was a conscious choice made by Torajiro Ikeda, the drafter of the original 1922 Trust Act.69 He was aware that as at the time of his writing, the issue was yet to settle even in common law jurisdictions. On the one hand, supporters of the in personam theory sought to explain the rights of beneficiaries in conjunction with personal obligations that trustees owed them with a limited implication for third parties.70 On the other hand, those in the in rem theory camp emphasised the beneficiary’s ­proprietary ­entitlement that could be claimed against the world.71 In Ikeda’s view, the in rem theory was appropriate for passive trusts, where trustees nominally hold the assets and beneficiaries are 62 Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567 (HL). M Okino, ‘The Public Work Advance Payment Case Re-Considered’ in Y Nomi et al (eds), Law and Policy in the Study of Civil Law: In Celebration of 70th Birthday of Professor Yoshinobu Hirai (Yuhikaku 2007) 389–411. 63 Trust Act, s 2(1). 64 The Hague Convention on the Law Applicable to Trusts and on their Recognition, s 2. 65 Charitable Trust Act, Law No 62 of 1922. 66 Trust Act, ss 258–61. 67 Trust Act Enforcement Order, s 3. 68 Trust Act, s 2(7). 69 T Ikeda, On the Law of Trusts for Secured Bonds (1907) 144. 70 JW Salmond, Jurisprudence or, the Theory of the Law (1902) 278–84; John Norton Pomeroy, A Treatise on Equity Jurisprudence (Carter Pitkin Pomeroy and John Norton Pomeroy, Jr (eds), 2nd edn 1901) vol 1, ss 147–49. 71 F Pollock, Principles of Contract at Law and in Equity, 7th edn (1902) 208; T Lewin, A Practical Treatise on the Law of Trusts (Cecil CM Dale (ed), 10th edn 1898) 11–15.

226  Masayuki Tamaruya like owners. However, the in personam theory was more persuasive for active trusts where trustees play an active role in managing the assets.72 Ikeda’s conclusion was a practical one. He chose the in personam approach because he predicted that active trusts would dominate future trust practices. There have been alternative explanations. Henry T Terry, an American lawyer who taught at Tokyo Imperial University in the early twentieth century, subscribed to the in personam theory, but offered a more nuanced analysis. In his view, the beneficiary’s right could properly be explained as ‘a claim in favour of one person upon a right held by another’.73 The fact that he belonged to the analytical school and was a contemporary of Wesley Newcomb Hohfeld may explain the similarity between his thesis and that of the present-day English theoretical schools that argue that an equitable property right should be understood as a right against a right.74 Kazuo Shinomiya, a leading trusts law scholar in post-war Japan, proposed to treat trust assets as legal entities, thus recognising the beneficiaries’ direct entitlement to trust assets.75 Part of his inspiration came from the works of French scholar Pierre Lépaulle.76 Although he stopped short of recognising beneficiaries’ proprietary interests in trust assets, he argued that the in personam theory failed to fully explain some of the Trust Act’s provisions that carry certain proprietary effects. These provisions entitle beneficiaries to a remedy against third parties (as discussed in section III.E below), and ensure the independence of the trust assets from the trustee’s own property (as discussed in section III.C below). Although Shinomiya’s theory gained respect in academic quarters, the theory was ultimately seen as too ambitious and lacking sufficient statutory grounds. The drafter of the reformed 2006 trust legislation clearly took the in personam position.77 Some commentators, however, criticised the 2006 Act, saying that its contractarian approach and in personam view of the beneficial interest had left beneficiaries with insufficient protection of independent property.78 This argument may gain traction with the rise of family trusts.

C.  Independence of the Trust Property The Trust Act recognises that trust assets are legally separate and independent of the trustee’s assets.79 There are also provisions that provide proprietary protection for the

72 Ikeda (n 69) 144. 73 HT Terry, ‘Lectures on Equity’ (1907) 25 Hogaku Kyokai Zasshi 453, 457–60. 74 B McFarlane and R Stevens, ‘The Nature of Equitable Property’ (2010) 4 Journal of Equity 1, 2. 75 K Shinomiya, Trust Law, rev edn (Yuhikaku 1989) 76–77. 76 P Lépaulle, Traité Théorique et Pratique des Trusts en Droit Interne, en Droit Fiscal et en Droit International (Rousseau and Cie 1932). 77 M Teramoto, Commentary: New Trust Act, rev edn (Shoji-Homu 2007) 25. 78 Y Nomi, ‘Trust Law in Transition: For Greater Protection of the Beneficial Interests’ in Y Nomi et al (eds), The New Era of Trust Legislation: Modern Development and Future Perspective on Trusts (Kobundo 2017) 15–22; M Arai, Trust Act, 4th edn (Yuhikaku 2014) 60–75. 79 Trust Act, s 2(3) (trust property is ‘any and all property which belongs to the trustee and which is to be administered or disposed of through the trust’); s 2(8) (trustee’s own property is ‘any and all property which belongs to the trustee and which is not the property that comes under trust property’).

Japan  227 beneficiaries in the event of a breach of trust, or the death or bankruptcy of the trustee.80 Other Asian civil law jurisdictions have introduced similar provisions. Real subrogation is an important mechanism in this respect. According to this doctrine, the proceeds acquired by the trustee while the trust funds are managed, disposed of, destroyed and damaged form part of the trust fund.81 In other words, what comes into the hands of the trustee at the expense of the trust fund is substituted for the original trust assets and becomes part of the new trust fund and is kept separate from the non-trust fund held by the trustee.82 The beneficiary can thus make a claim on substitute assets regardless of whether they were acquired as part of proper trust administration or as a result of a breach of trust. The trust property carved out of the trustee’s personal assets is shielded from the reach of the trustee’s personal creditors. Those who became the trustee’s creditor by virtue of the trustee’s administration of trust can seize or execute on the trust assets, but otherwise, the trustee’s personal creditor cannot seize, attach, execute on, or foreclose on the trust property.83 If such judicial proceedings are initiated, the trustee and the beneficiary can file a third-party action against the executing creditor.84 When bankruptcy proceedings are commenced against the trustee, the trust assets do not become part of the bankruptcy estate and remain beyond the reach of the trustee’s personal creditors.85 In the event of the trustee’s bankruptcy, the trusteeship terminates, but the bankrupt trustee owes a duty to retain the trust property and ensure a proper transition to trusteeship by a successor trustee.86 The trust assets remain separate from the non-trust assets in the event of a trustee’s death. The trust assets do not become part of the estate and the heirs owe the duty to notify the beneficiaries and retain the trust property and carry out necessary action for the transition to trusteeship by a successor trustee.87 These consequences do not naturally flow from the trust if it is understood that the trustee has ownership over the trust assets and merely owes a personal obligation to the beneficiary. Some commentators have considered these statutory mechanisms as evidence that the trust creates a separate patrimony.88 Others are content with the positivist position that the trust is a legal arrangement that confers upon the beneficiary a proprietary remedy by ensuring the independence of ring-fenced assets from the trustee’s personal assets.89 Although the debate has largely been academic, this may change with the rise of the family trust, where a variety of individuals and corporate

80 L Ho and R Lee, ‘Emerging Principles of Asian Trust Law’ in L Ho and R Lee (eds), Trust Law in Asian Civil Law Jurisdictions: A Comparative Analysis (Cambridge University Press 2013) 263–67. 81 Trust Act, s 16. 82 Ying-Chieh Wu, ‘East Asian Trusts at the Crossroads’ (2015) 10 National Taiwan University Law Review 79, 114. 83 Trust Act, s 23(1). 84 ibid s 23(5), applying mutatis mutandis Civil Execution Act, Law No 4 of 1979, s 38, and Civil Preservation Act, Law No 91 of 1989, s 45. 85 ibid s 25. 86 ibid ss 56(1)(iii), 60(4)(5). 87 ibid ss 56(1)(i), 60(1)(2). 88 See Shinomiya (n 75) 67–68; Wu (n 82) 114–18. 89 See H Dogauchi, Trust Law (Yuhikaku 2017) 17; H Dogauchi, Trust Doctrines and the Structure of Private Law (Yuhikaku 1996) 217–18.

228  Masayuki Tamaruya entities serve as trustees. Unlike trust banks that have operated under the auspices of the ­financial regulators, they may die or go into bankruptcy at any time.

D.  Fiduciary Duty The trustee must follow the purposes of the trust and administer it with the due care of a faithful administrator.90 The trustee owes a range of fiduciary duties, including loyalty and impartiality, as well as the duty to provide information and accounts and to ­segregate the trust assets from his own. The duty of care of a faithful administrator is a familiar concept found in many private law codifications in civil law jurisdictions. The exact standard of care can vary based on specific aspects of trust administration or the level of the trustee’s specialisation. The drafters of the 2006 Act considered incorporating the prudent investor rules developed in the US that require trustees to assess the risk tolerance of a trust and to avoid risks by diversifying the trust investment portfolio.91 The reformers accepted that trust banks routinely used diversified portfolios in trust investment, but the rule was not adopted for fear that imposing such a duty might cause unintended consequences in small-scale trusts.92 The Trust Act introduced a generic duty of loyalty in 2006.93 The notion of a duty of loyalty, first introduced in corporate legislation in 1950, is somewhat unfamiliar to Japanese lawyers.94 The Supreme Court ruled that it merely elaborated on the traditional duty of care in the Civil Code that was applicable to corporate directors.95 Thus, whether this provision has more than symbolic significance is uncertain. The Trust Act contains a list of prohibited transactions constituting breaches of the duty of loyalty in common law jurisdictions. The trustee cannot engage in self-dealing or conflict of ­interest transactions,96 or compete with the trust.97 There is scope for exemption from the duties of loyalty and care. The Trust Act allows reducing the level of the duty of care by a specific provision in the trust instrument.98 However, trust instruments do not typically contain waivers of duty of care because the duty of care provisions of the Trust Business Act do not specifically permit such waivers.99 On the other hand, the Trust Act contains a range of exceptions to the prohibition of conflict of interest transactions. Such transactions can be allowed when the trustee is authorised in the trust instrument or receives approval from the beneficiary 90 Trust Act, s 29(2). 91 Uniform Prudent Investor Act, ss 2–3 (Uniform Law Commission 1994); Restatement (Third) of Trusts, s 90 (American Law Institute 2007). 92 M Teramoto, Commentary on New Trust Act, rev edn (Shoji-Homu 2008) 144; Y Kawaguchi, ‘Trustee’s Duty of Good Faith Administration’ (2007) 1261 Journal of Financial and Commercial Law 56. 93 Trust Act, s 30. 94 H Kanda and CJ Milhaupt, ‘Re-Examining Legal Transplants: The Director’s Fiduciary Duty in Japanese Corporate Law’ (2003) 51 American Journal of Comparative Law 887, 894. 95 Arita v Kojima 24(6) Minshu 625 (Supreme Court, 24 June 1970). 96 Trust Act, s 31. 97 ibid s 32. 98 ibid s 29(2). 99 Trust Business Act, s 28(2).

Japan  229 upon proper disclosure.100 A conflict of interest transaction that is considered reasonably necessary to achieve the purpose of the trust can be allowed either ‘if it is clear that the transaction will not harm the beneficiary’s interests’ or ‘if the transaction is justifiable in light of the relevant circumstances including the impact on the trust property, the purpose and manner of the transaction, and the substantial relationship between the trustee and the beneficiary’.101 Allowing exceptions to the duty of loyalty and mandating a certain level of the duty of care makes sense in the commercial context in which a trust bank serves as a trustee for numerous trusts, such as in collective investment trusts. However, the rise of the family trust may present an opportunity to reconsider the approach. One may reasonably want to exempt family members from the onerous duty of care or avoid unnecessary litigation, but there is good reason to narrow the exception to the duty of loyalty to minimise the temptation for the trustee to benefit by operating in a conflicted position.

E.  Breach of Trust and Remedies Designing remedies for breach of trust is a challenge for lawyers practising outside common law jurisdictions.102 Although broad proprietary remedies such as tracing are not available in Japan, the Trust Act provides for a remedy that is equivalent to a constructive trust. If the trustee enters into a transaction with a third party in breach of trust, the beneficiary can rescind the transaction to the extent that the third party transacted in bad faith.103 Once the transaction is rescinded, the property can be restored following the general provisions and unjust enrichment provisions under the Civil Code.104 This remedy was introduced as part of the 1922 Trust Act to emulate constructive trusts under common law, although the drafters made technical adjustments to ensure consistency with the underlying civil law principles.105 Similar provisions were adopted in South Korea, Taiwan and mainland China.106 If, as a result of a breach of trust, the trust asset suffers losses, the court can order the trustee to compensate for the loss or reinstate the lost property.107 Technically, the Trust Act does not authorise a disgorgement remedy.108 Nevertheless, under Japanese law, when trustees cause loss as a result of conflicts of interest, competing transactions, or disloyal conduct, the loss is presumed to be equivalent to the trustees’ profits.109 If the

100 Trust Act, s 31(2)(i)(ii). 101 ibid s 31(2)(iv). 102 L Ho, ‘Trusts: The Essentials’ in L Smith (ed), The Worlds of the Trust (Cambridge University Press 2013) 10–13. 103 Trust Act, ss 27, 31(7). 104 Civil Code, ss 121, 703–04. 105 M Tamaruya, ‘Transformation of Trust Ideas in Japan: Drafting of the Trust Act 1922’ (2013) 88 Rikkyo Law Review 97 (218), 104 (211). 106 Japanese Trust Act 1922, s 31; South Korean Trust Act 2011, s 75; Taiwanese Trust Act, s 18; Chinese Trust Act, s 22. 107 Trust Act, s 40(3). 108 Y Nomi, ‘Disgorgement of Profits in Japanese Law’ in E Hondius and A Janssen (eds), Disgorgement of Profits: Gain-Based Remedies throughout the World (Springer 2015) 437–38. 109 Trust Act, s 40(3).

230  Masayuki Tamaruya trustee enters into competing transactions, the beneficiary can deem that the transaction was entered into for the sake of the trust.110 Where the trustees cause loss to the trust property after failing to segregate the trust assets, they cannot escape liability for compensation or reinstatement unless they prove that the loss would have occurred even if they had earmarked the assets properly.111 The Japanese reform of 2006 is more conservative than the recent ones in South Korea, Taiwan and China, where a straightforward disgorgement remedy was introduced.112 Nevertheless, compared with common law counterparts, these East Asian provisions are limited in scope, and the scarcity of case law in these jurisdictions makes it difficult to make a precise ­comparative assessment.113

F.  Termination and Modification A trust can be terminated according to its terms when the purpose of the trust is achieved or becomes unattainable, or when the office of the trustee is vacant for more than a year.114 The court can terminate the trust when circumstances unknown at the time of the creation render termination in the best interests of the beneficiaries, or when the continuation of the trust is found impermissible from the perspective of public interest.115 A trust can also be terminated by an agreement between the settlor and all the beneficiaries.116 A similar rule applies to the modification of the trust.117 In this area of trusts law, where English and American approaches diverge,118 the 2006 reform of Japanese trusts law took a position closer to the American position, as defined in Claflin v Claflin.119 The English rule of Saunders v Vautier120 was not adopted. Even if all the beneficiaries are sui juris and agree among themselves, they cannot terminate or vary the trust if it is contrary to the purpose of the trust and the settlor does not agree.121 This apparent emphasis on the settlor’s freedom of disposition trumping the contrary wishes of the beneficiaries is consistent with the contractarian understanding of the trust. There is, however, a unique feature of Japanese trusts law that diverges from American thinking but is shared by East Asian civil law jurisdictions. When the settlor and the beneficiaries terminate the trust at a time when it is detrimental to the trustee, the trustee can sue them for damages.122 This is a simple mutatis mutandis application 110 ibid s 32(4). 111 ibid s 40(4). 112 Taiwanese Trust Act, ss 24, 35; South Korean Trust Act, s 43(3); Chinese Trust Act, s 26. 113 Ho and Lee, ‘Emerging Principles of Asian Trust Law’ (n 85) 272–74. 114 Trust Act, s 163. 115 ibid ss 165–66. 116 ibid s 164(1). 117 ibid s 149(3)(i). 118 RH Sitkoff, ‘Trust and Estates: Implementing Freedom of Disposition’ (2014) 58 St Louis Law Review 643; J Getzler, ‘Transplantation and Mutation in Anglo-American Trust Law’ (2009) 10 Theoretical Inquiries in Law 355. 119 Claflin v Claflin 20 NE 454 (Mass 1889); Restatement (Third) of Trusts, s 65. 120 Saunders v Vautier (1841) 4 Beav 115; Variation of Trusts Act 1958, c 62 (UK). 121 Trust Act, ss 164(1), 165, 149(3)(ii). 122 ibid s 164(4).

Japan  231 of the Civil Code provision on agency contract (mandate), where a party that terminates the contract is required to compensate the other party for the loss it incurs.123 Until recently, most Japanese trust contracts in the commercial context involved a situation in which the settlor and the beneficiary were identical, and the concerns of dead-hand control rarely arose. As family trusts become common and the trust is increasingly used for succession purposes, Japanese trusts lawyers may need to reconsider the position in light of the emerging pattern of dynastic trusts and dead-hand control.

G.  Spendthrift Trusts Despite the strong control that a settlor enjoys in the context of the termination and modification of the trust, the Japanese Trust Act has not given settlors any power to create what is known in the US as a spendthrift trust, in which the beneficiary cannot voluntarily alienate his or her interest in the trust.124 Historically, the US Supreme Court decision, in Nichols v Eaton,125 which sanctioned spendthrift trusts, was a precursor to the decision in Claflin, which departed from the English rule of Saunders v Vautier. Japanese trusts law has not followed the historical or logical connection drawn in the US. There are both policy and jurisprudential reasons for the Japanese departure from American jurisprudence. The policy reason is that the drafters of the 1922 Trust Act were keen to ensure that the trust could not be used to shield an asset from the reach of a beneficiary’s creditors.126 Under the 1922 Act, a beneficiary’s creditor could apply to the court and request the termination of a trust if the beneficiary could not pay his debts without liquidating his beneficial interests.127 Although this provision was removed after the 2006 reforms, it did not signal a policy choice to allow spendthrift trusts. It was, rather, in response to the call to ensure the stability of the trust structure in commercial contexts. The securitisation industry was worried that the old provision may allow the beneficiary’s creditor to terminate the trust under circumstances that cannot be controlled by either the settlor or the trustee.128 The current Trust Act provides for termination by agreement between the settlor and the beneficiary129 and defines a narrow scope for termination upon court approval.130 The jurisprudential reason is that for the purpose of regulating the assignment of beneficial interests, the Japanese Trust Act relied on the analogy with the assignment of choses in action.131 According to section 466(2) of the Civil Code, the creditor and the

123 The 1922 Trust Act expressly provided for mutatis mutandis application of Civil Code s 651(2). See also South Korean Trust Act 2011, s 99(3); Taiwanese Trust Act, s 63. 124 Restatement (Third) of Trusts, s 58. 125 Nichols v Eaton 91 US 716 (1875). 126 A Yamada, Study on the Process of Legislation on Trusts (Keisoshobo Publishing 1981) 124–25. 127 Trust Act 1922, s 58. 128 Standard and Poor’s, Japanese Structured Finance: The Bankruptcy Remoteness of Trusts (7 March 2008). 129 Trust Act, s 164(1). 130 ibid s 165(1). 131 Compare Trust Act, ss 93–95; Civil Code, ss 466–68.

232  Masayuki Tamaruya debtor can agree that a chose in action should be inalienable, but under established case law, such an agreement cannot preclude the attachment by the creditor’s creditor. The Supreme Court held that private parties cannot render any chose in action exempt from judicial attachment, for otherwise, general creditors could be unduly harmed by being deprived of the assets to which they otherwise have recourse.132 Similarly, Japanese trusts lawyers have reasoned that a private agreement purporting to insulate beneficial interests from judicial attachment is contrary to public policy and unenforceable.133 Some commentators have sought to exploit the limited scope of the exception to Japanese policy against inalienability. The current Trust Act recognises this exception where alienation is contrary to the inherent nature of beneficial interest.134 One possible example is the qualified trust for support of a person with a disability. This trust qualifies for a gift tax exemption if it specifically provides that the relevant beneficiary right cannot be transferred or pledged.135 Another possible example is the qualified retirement pension trust, which enjoys corporate tax exemption on account of serving the welfare of a particular beneficiary.136 It is not clear whether a similar argument can be made for other trusts that do not qualify for tax exemption but are similarly intended to further a particular beneficiary’s personal wellbeing. The views of commentators are twofold. It is entirely possible to argue that the extension of such an exemption cannot be allowed because of the public policy of prohibiting private parties from rendering any assets immune to a creditors’ reach. Only a few categories of chose in action, such as certain government benefits, wages and retirement benefits, which are intended to support the debtor’s basic livelihood, are exempt from judicial execution.137 Yet, some commentators argue that the broader protection of beneficial interest from the beneficiary’s creditors may be warranted for a trust created for the sole purpose of protecting a particular beneficiary (and not the settlor himself).138 According to this theory, a trust can be created to shield attachment of the beneficial interest to the extent that it actually supports the intended beneficiary’s welfare, but not beyond this. If the latter view is accepted, it would, in effect, authorise a limited scope of spendthrift protection. Although no case has been reported, this is another area where the rise of the family trust will test the continued validity of a conventional trust doctrine.

IV.  International Trust Practices Despite the scale of commercial trust operations, Japanese trust practices appear to have a very limited presence in the international sphere.139 This is particularly so 132 [party name unknown], 24(4) Minshu 240 (Supreme Court, 10 April 1970). 133 Shinomiya (n 75) 330. 134 Trust Act, s 93(1). This parallels the Civil Code, s 466(1) on alienability of choses in action. 135 Inheritance Tax Act, s 21-4(2); Inheritance Tax Act Enforcement Order, s 4-12. 136 M Arai, The Law of Trust in Japan, 3rd edn (Yuhikaku 2008) 335. 137 Civil Execution Act, Law No 4 of 1979, s 152. 138 Arai, The Law of Trust in Japan (n 136) 335. 139 The following section is taken from M Tamaruya, ‘Japanese Wealth Management and the Transformation of the Law of Trusts and Succession’ (2019) 33 Trusts Law International 147.

Japan  233 when compared with offshore trust services offered in Hong Kong and Singapore. With Japanese property owners moving their assets across national borders in increasingly large amounts and more frequently, Japanese courts are beginning to face trust and succession cases arising out of international settings.

A.  Recognition and Enforcement of International Trusts Japan has not signed the Hague Trust Convention thus far. When the statutory ­choice-of-law rules were overhauled in 2006,140 a proposal was made to introduce specific provisions applicable to trusts law. However, this was rejected as premature as trusts law was being reformed and the uniform treatment of commercial and family trusts needed further consideration based on case law development.141 As at the time of writing, no reported case has dealt with the recognition or enforcement of foreign trusts. However, a recent case involving a joint bank account in Hawaii shows how Japanese courts may treat trusts and other forms of will substitutes created overseas.142 The case involved a will where the deceased left his wife 40 per cent of his financial assets and the entirety of his real estate, and the remaining 60 per cent of the financial assets to the son he had with his previous wife. The wife was designated the executor, and when her husband died, she divided the estate with her stepson amicably according to the will. Two years later, a joint account at the Bank of Hawaii was found under the name of the deceased and his wife, with funds worth 38,957,000 yen in it. The son sued his stepmother to assert his 60 per cent stake in the joint account. The Japanese are not familiar with the joint account system. Japanese banks do not offer joint accounts and Japanese property law does not recognise joint tenancy with survivorship. The court declared that the deceased’s national law (in this case, Japanese law) applied when determining the types of property that could be included in the deceased’s estate. However, whether a particular property or right becomes the object of inheritance is determined by the law of the place chosen in the dispositive juridical act, or, in the absence of such choice, by the law of the place with which the juridical act is most closely connected. Whether the bank account was subject to inheritance depended on the latter, so the applicable law was the law of Hawaii, the governing law of the bank account. Under Hawaiian law, when one of the parties to the joint account dies, the funds held automatically shift to the surviving party without going through probate.143 The Court thus concluded that since the fund was not subject to probate under Hawaiian law, it did not constitute the deceased’s estate in this case. One may be tempted to deduce from this case that the Japanese court is likely to consider trusts created overseas as effective will substitutes that take trust property outside the scope of succession law. However, caution is warranted. In this case, the

140 General

Rules for Application of Laws Act, Law No 78 of 2006. on General Rules for Application of Laws Act, rev edn (Shoji-Homu 2014) 410–18. 142 1415 Hanrei Times 283 (Tokyo District Court, 8 July 2014). 143 Hawaii Revised Statutes Annotated, s 560:6-104(a). See also Uniform Probate Code, s 6-212. 141 K Koide, Commentaries

234  Masayuki Tamaruya issue of forced heirship was not raised and the deceased did not evince any intention to evade the restrictions imposed by the law of succession. The court specifically cautioned that issues related to forced heirship are governed by the deceased’s national law, leaving the possibility that disgruntled heirs can contest any will substitute if their forced shares are involved.144

B.  Prevention of Abuse Japanese law and trust practice are relatively transparent. Registrable trust property must be registered;145 trusts with non-charitable purposes have never been created;146 and the scope of spendthrift and protective trusts is limited.147 When the Panama Papers attracted attention worldwide in 2016, they revealed a number of Japanese nationals and entities,148 but Japan was absent from the list of major countries where money was hidden, where intermediaries operated from, or where hidden owners resided.149 As international attention on the shady aspect of wealth management intensifies, the Japanese government and wealth management practitioners are struggling to respond. In its 2008 report, the Financial Action Task Force stated that Japan had failed to provide sufficient measures to curtail money laundering and combat terror financing. The report cited the lack of measures to ensure transparency concerning beneficial ownership and control of trusts and other legal arrangements as part of serious deficiencies in customer due diligence.150 The timing was unfortunate because the audit was conducted right after the 2006 revision of the Trust Act, which provided practitioners with little time to digest the reforms. The Japanese government lost face again in 2014. The Task Force specifically called on Japan to enact adequate anti-money laundering and counter-terrorist financing legislation.151 Again, the timing may have been unfortunate. Japanese trust practices underwent further transformation after 2011. An increasing number of non-bank trustees began to operate under the radar of the financial regulators. Then, as part of the fourth round of mutual evaluation, the Task Force conducted an on-site visit to Japan in 2019 and, at the time of writing, the plenary discussion is scheduled for June 2021.

144 This position is consistent with the Hague Trust Convention, Art 15c. 145 See n 64 and the accompanying text. 146 See nn 71–72 and the accompanying text. 147 See nn 130–47 and the accompanying text. 148 ‘How Have Japanese Business Leaders Responded to the Panama Papers?’ Weekly Toyo Keizai (1 June 2016); Kirk Spitzer, ‘For Japan, Panama Papers Are Tool to Skewer China’ USA Today (8 April 2016). 149 See Luke Harding, ‘What Are the Panama Papers? A Guide to History’s Biggest Data Leak’ Guardian (5 April 2016), available at: www.theguardian.com/news/2016/apr/03/what-you-need-to-know-about-thepanama-papers. 150 FATF/GAFI Financial Action Task Force, Third Mutual Evaluation Report: Anti-Money Laundering and Combating the Financing of Terrorism: Japan (17 October 2008), Recommendation 33, at 189; Recommendation 34, at 190. 151 FATF calls on Japan to enact adequate anti-money laundering and counter-terrorist financing legislation (2014).

Japan  235

Conclusion Japanese trusts law is an amalgam of multiple legal traditions: the civil law tradition forms the basis of private law; elements of English trusts law were introduced by relying on the codified versions in California and India; and commercial practices were based on US mortgage trust practices. Both the common civil law background and colonisation led to Japanese trusts law and practices influencing other East Asian jurisdictions. Despite such a history, the Japanese trust practices were mostly concentrated on commercial trusts managed by trust banks, and the rise of the traditional common law trust has been seen only in the past decade. Japanese trust practitioners and courts have faced some of the basic trust questions only in the past five or six years. Japan has also struggled to keep up with international developments on various issues affecting trusts law. At the same time, the Japanese struggle can be situated in a broader Asia-Pacific or global perspective. Today, in both common law and civil law jurisdictions, trusts are used in both family and commercial settings. Many common law jurisdictions are interested in the commercial aspect of trust practices, while non-common law jurisdictions are warming up to the idea of exploiting the potential of trusts for wealth management and succession planning. The world is weighing the merits of trusts against their susceptibility to abuse within the global movement of wealth and capital. Japanese trusts law continues to evolve along with transnational developments in the law and practice of trusts.

236

13 Debtor Rehabilitation and the Asset-Partitioning Effect of Security Trusts: The Korean Supreme Court’s Position Revisited YING-CHIEH WU*

I. Prologue Once a trust is constituted, property held by the trustee no longer forms part of the settlor’s personal assets. This chapter examines whether this effect should be maintained under South Korean law if the settlor (ie, the debtor) of a security trust is given a rehabilitation order by a court. If a debtor, as the settlor of a security trust, transfers his land to the trustee as security for his creditor, the debtor’s personal creditors would not be capable of recouping their debts from the land held by the trustee when the debtor falls into default and becomes bankrupt. The question arises as to whether this remains true if, instead of a bankruptcy order, a debtor rehabilitation order is given to the debtor (ie, the settlor) by a court. The bankruptcy order and the debtor rehabilitation order are two distinct orders of the court designed to assist debtors in financial distress and to help them enjoy a fresh start. However, while the bankruptcy order aims to liquidate and distribute all the debtor’s assets to his creditors, the debtor rehabilitation order is designed to create a debt restructuring scheme that allows impecunious debtors to continue to operate their business so as to improve and restore their liquidity. The Supreme Court of the Republic of Korea (the Supreme Court) has recognised that the asset-partitioning effect of security trusts should be maintained when the debtor has received a debtor rehabilitation order. However, it could also be argued that the immunity effect of security trusts should be circumscribed when a debtor rehabilitation * Assistant Professor of Law, Seoul National University, School of Law. I thank Michael Bryan, Kelvin Low, Ying Khai Liew, Hitoshi Kimura, Masayuki Tamaruya, Lusina Ho, Rebecca Lee and Alex Yang for their comments on an earlier draft of this chapter. All remaining errors are mine. The article was funded by the 2019 Research Fund of the Seoul National University Asia-Pacific Law Institute, donated by the Seoul National University Law Foundation, for which I am grateful.

238  Ying-Chieh Wu order is made; otherwise, the functioning of an efficient and workable debt restructuring scheme would become very difficult or nearly impossible. This chapter disagrees with the Supreme Court’s position and argues that the subject matter of a security trust should be subject to the debtor rehabilitation order and form part of the debt restructuring scheme. Section II of the chapter briefly outlines some of the main characteristics of Korean trusts law as a precursor to the arguments that follow. Section III introduces the arguments and approach adopted by the Supreme Court. Section IV critiques and rejects the authoritative (or orthodox) position. Section V concludes.

II.  Civil Law Trusts and their Asset-Partitioning Effect A.  A Fine-Tuned Trust The trust is defined in Article 2 of the Trust Act of the Republic of Korea (KTA) as follows: The term ‘trust’ used in this Act means a legal relation that a person who creates a trust (hereinafter referred to as settlor) transfers specified property (including part of business or an intellectual property) to a person who accepts the trust (hereafter referred to as trustee), establishes a security right or makes any other disposition, and requires the trustee to manage, dispose of, operate, or develop such property or engage in other necessary conduct to fulfil the purpose of the trust, for the benefit of a specific person (hereinafter referred to as beneficiary) or for a specific purpose, based on a confidence relation between the settlor and the trustee.1

In short, the trust is a mechanism whereby the settlor transfers his property (both real or personal) to a trustee, requiring the latter to hold it on trust for the beneficiary (or for a purpose).2 On its face, this structure may seem identical to that of the common law trust. But a conceptual gulf exists between the two. They are different, inter alia, in the following respects. First, Korean trusts can be created by a will, a self-declaration, or a contract.3 The former two methods are also available in common law, but the last one differs in that trusts under a common law system are not contracts.4 For an inter vivos trust involving

1 The first Korean Trust Act was enacted in 1961 and revised in 2011. (Official Translation, Ministry of Government Legislation, National Law Information Center, Republic of Korea), available at: www.law.go.kr/ LSW/eng/engLsSc.do?menuId=2§ion=lawNm&query=Trust+Act&x=0&y=0#liBgcolor24. Note that the present author will not strictly quote from the official translation where it fails to convey to the English reader the nuances of the texts in the original language. Some minor modifications will thus be made if necessary. 2 For a general account of the reasons for the reform in 2011 and of the key features of the revised Act, see Ying-Chieh Wu, ‘Trust Law in South Korea: Development and Challenges’ in L Ho and R Lee (eds), Trust Law in Asian Civil Law Jurisdictions: A Comparative Analysis (Cambridge University Press 2013). 3 See KTA, Art 3(1). 4 cf JH Langbein, ‘The Contractarian Basis of the Law of Trusts’ (1995) 105 Yale Law Journal 625. For criticisms of Professor Langbein’s view, see H Hansmann and U Mattei, ‘The Functions of Trust Law: A Comparative Legal and Economic Analysis’ (1998) 73 New York University Law Review 434; J Getzler, ‘Legislative Incursions into Modern Trusts Doctrine in England: The Trustee Act 2000 and the Contracts (Rights of Third Parties) Act 1999’ (2002) 2 Global Jurist Topics 1, 13.

South Korea  239 a separate trustee, trusts in Korea are considered a contractual deal between a settlor and a trustee. This is possible because the Korean contract regime does not subscribe to the doctrine of consideration, and so an agreement comprising a settlor’s offer and a trustee’s acceptance would be sufficient to constitute a contract. A second difference can be found in the effect of a breach of the no-profit rule. The KTA prescribes that ‘[n]o trustee may enjoy any benefit of the trust in whosoever’s name’.5 Even if the trust fund suffers no loss, the trustee is obliged to disgorge any profits he obtains from a breach of the no-profit rule.6 Moreover, the beneficiary’s right to disgorged profits is personal in nature; unlike the common law trust, no proprietary constructive trust would be imposed over the illicit profits. The third, and probably the most distinctive, dissimilarity lies in the different nature of the beneficiary’s rights over trust funds. Both the KTA and the Supreme Court adopt a personal right approach.7 However, the beneficiary’s right under the common law system has proprietary features8 for his or her right persists against any third party who does not have a valid defence, and is protected in the event of the trustee’s insolvency.9 The question then follows: how does Korean trusts law respond to the bankruptcy effect and the third-party effect of the trust? This leads us to the fourth and the fifth differences: the doctrine of independence of the trust fund and the beneficiary’s right of rescission. The concept of ‘independence of the trust fund’ reflects three important rules: (1) the trust fund is ring-fenced from the trustee’s personal assets should he become bankrupt;10 (2) the trust fund does not form part of the trustee’s personal estate if he dies;11 and (3) except for the creditors of the trust, no compulsory execution can be made by the trustee’s ordinary creditors against the fund in order to satisfy their credit against the trustee personally.12 These three rules indicate that the trust fund is ring-fenced and separated from the trustee’s personal assets. Put another way, setting up a trust equates with establishing an independent bundle of assets for the beneficiary or other (charitable) purposes, rather than creating a proprietary right over trust funds for the beneficiary.13 This is why if the trustee disposes of trust property in breach of 5 KTA, Art 36. An exception to this is the trustee’s right to receive remuneration (KTA, Art 47). 6 KTA, Art 43(3). The trustee is ‘personally’ liable to return the profits to the trust fund. Thus the response under the Korean trusts law is different from that under the common law’s constructive trust model. 7 The term ‘beneficiary’s personal right’ is repeatedly used in the KTA: see arts 63, 66(4), 79(1)(i), 89(1)(ii). Furthermore, the personal right approach is also adopted by the Supreme Court: Supreme Court of Korea Case No 2002.4.12, 2000DA70460. But, some academics argue that a proprietary approach may well be possible, even under Korean trusts law, see KJ Lee, ‘A Study on the Nature of the Beneficiary’s Right’ (2016) 77 Korean Journal of Civil Law 103. 8 Shell UK Ltd v Total UK Ltd [2010] EWCA Civ 180; AW Scott, ‘The Nature of the Rights of the “Cestui Que Trust”’ (1917) 17 Colombia Law Review 269. cf HF Stone, ‘The Nature of the Rights of the Cestui Que Trust’ (1917) 17 Columbia Law Review 467. Nowadays, this view has fallen out of favour. 9 S Gardner, An Introduction to the Law of Trusts, 3rd edn (Oxford University Press 2011) 211–12. In English law, the insolvency effect is prescribed by the Insolvency Act 1986, s 283(1)(a). 10 KTA, Art 24: ‘[n]o trust property shall constitute the bankrupt estate for the trustee’. 11 KTA, Art 23: ‘[n]o trust property shall belong to the inherited property of a trustee, nor becomes an object of division of property following divorce of a trustee’. 12 KTA, Art 22: ‘[n]o compulsory execution … may be made against any trust property. But this shall not apply where it is based on any right arisen by a cause existing prior to the creation of a trust, or in the course of performing trust affairs’. 13 The end result is very much similar to the doctrine of separate patrimony, on which, see GL Gretton, ‘Trusts Without Equity’ (2000) 49 International & Comparative Law Quarterly 599; K Reid, ‘Patrimony Not Equity: The Trust in Scotland’ (2000) 3 European Review of Private Law 427; L Smith, ‘Trust and Patrimony’

240  Ying-Chieh Wu trust, the beneficiary does not have a proprietary claim against the third party, as is the case at common law. Instead, the beneficiary is given a right of rescission.14 In other words, the beneficiary can rescind the transaction between the breaching trustee and the third party unless the latter is a bona fide transferee. Thus, the common law proprietary response has been transmuted into a mechanism that is more acceptable for the civil lawyer – the rescission response. Finally, to be clear, there are no constructive and resulting trusts in Korean trusts law.15 These differences between the common law trust and the Korean civil law trust result mainly from the differing legal taxonomies, concepts and histories that both traditions have. Therefore, it is inevitable that there must be fine-tuning of the common law trust in order to fit it into the Korean civil law context.16

B. Bankruptcy As mentioned above, Article 24 KTA provides that ‘[t]rust property does not constitute the trustee’s personal estate in his bankruptcy or in his rehabilitation procedure where his estate is administered and disposed of by an administrator’. Furthermore, Article 407-2(1) of the Debtor Rehabilitation and Bankruptcy Act of the Republic of Korea (DRBA)17 provides that ‘[w]here a trustee is declared bankrupt after a trust has been established pursuant to the Trust Act, the right to repossess the trust property shall be exercised by the new trustee or the administrator of trust property’. Therefore, it is not the beneficiary but the newly appointed trustee or the administrator of trust property who is entitled to recover the trust property.18 Putting trust property out of the reach of personal creditors in the trustee’s personal bankruptcy and rehabilitation procedures therefore achieves the asset-partitioning effect of the trust. This is possible on the basis of the doctrine of independence of the trust fund. It is axiomatic that the asset-partitioning effect also applies where the settlor becomes bankrupt.19 According to Article 2 KTA, some property must vest in the trustee in a (2009) 28 Estates & Trusts Pensions Journal 332; R Valsan (ed), Trusts and Patrimonies (Edinburgh University Press 2015). 14 KTA, Art 75(1): ‘[w]here a trustee has, in breach of the terms of the trust, engaged in a juridical act in relation to the trust property, the beneficiary may rescind such act provided the transferee, or the subsequent transferee knew or did not know it by gross negligence the breach at the time the trustee did the juridical act’. The equivalent of the expression ‘did not know it by gross negligence’ under the common law system is ‘should have known’. 15 On the difficulties of transplanting constructive trusts into civilian systems, see Ying-Chieh Wu, ‘Constructive Trusts in the Civil Law Tradition’ (2018) 12 Journal of Equity 319. 16 The problems created by this transformation are discussed in Ying-Chieh Wu, ‘Trusts Re-Imagined: The Transplantation and Evolution of Trust Law in Northeast Asia’ (2020) 68 American Journal of Comparative Law 441. 17 The Debtor Rehabilitation and Bankruptcy Act (Official Translation, Ministry of Government Legislation, National Law Information Center, Republic of Korea), available at: www.law.go.kr/LSW/eng/engLsSc.do?men uId=2§ion=lawNm&query=Trust+Act&x=0&y=0#liBgcolor0. 18 Art 18(1) KTA provides: ‘[w]here a new trustee has not been appointed or no other trustee exists in any of the following cases, the court shall appoint an administrator of trust property to take custody of the trust property and engage in conduct necessary for handing over the trust affairs … (ii) Where the trustee has been declared bankrupt’. 19 Su-Jeorg Choi, Trust Law (Pakyoungsa 2019) 270.

South Korea  241 trust relationship. At law, trust property is considered the trustee’s, and the settlor and the trustee are considered two different legal entities. The settlor is therefore prohibited from taking the property back from the trustee at will.20 There might be two exceptions to this. First, in a system without the rule in Saunders v Vautier,21 beneficiaries are in principle not allowed to dissolve the trust at will. However, Article 99(2) KTA provides that ‘[a] trust, the benefits of which are wholly enjoyed by the settlor, may be terminated at any time by the settlor or his or her heir’. In other words, if the settlor is the only beneficiary who receives the whole benefit arising from the trust, he is free to terminate the trust at will and convert the trust property to himself. This is particularly important for an insolvent settlor’s personal creditors or administrator of his bankruptcy estate, who are able, in lieu of the settlor, to assert the settlor’s right of termination.22 The recovered trust property would then become part of the bankruptcy estate and be distributed to the settlor’s personal creditors. Another exception to this rule would be the case where the settlor creates a trust to prejudice his own personal creditors. Article 8 KTA prescribes that [i]f an obligor has created a trust knowing that it would be prejudicial to an obligee, the obligee may exercise the right of Actio Pauliana, as prescribed in Art 406(1) of the Civil Code, against the trustee or the beneficiary, even if the trustee has acted in good faith. However, the same shall not apply where the beneficiary has no knowledge of prejudicing the obligee as at the time he/she acquired the beneficial interest.

A fraudulently created trust can therefore be struck out by the settlor’s personal creditors. The upshot is that, unless Articles 99(2) KTA or 406(1) KCC apply, trust property belongs to a separate legal entity (ie, the trustee) and thus should not be included in the settlor’s personal bankruptcy estate, with the result that the trust property is deemed off limits to the settlor’s personal creditors. But the situation becomes more complicated when it is not a bankruptcy order but a rehabilitation procedure which is in question – a matter to which we now turn.

III.  Rehabilitation Orders and the Asset-Partitioning Effect of the Trust A.  The Archetypal Scenario Consider the following scenario: S borrows money from B. In order to provide security for the loan, S transfers his land to T requiring T to hold it for B. If S defaults, T, upon B’s request, is obliged to sell the property, distribute the proceeds to B, and then transfer any

20 Where the settlor is also a beneficiary, the beneficial interest can, of course, be included in the settlor/beneficiary’s bankruptcy estate. 21 Saunders v Vautier [1841] EWHC J82, (1841) 4 Beav 115. 22 This right is granted by the Civil Code of the Republic of Korea (KCC). Art 406(1) KCC provides that ‘[a]n obligee may, in order to preserve his claim, exercise the rights held by the obligor. This however shall not apply to such rights as are strictly personal to the obligor’.

242  Ying-Chieh Wu remainder to S. We are able to identify two legal relationships in the scenario: a loan and a trust. S is a borrower and B is a lender. At the same time, there is a trust under which B is the primary beneficiary and S is the secondary beneficiary. The trust is created in order to secure the debt S owes to B. This structure has traditionally been called the ‘security trust’. The security trust is different from the so-called ‘security-right trust’, where the trust property is itself a security right. This normally arises in the following scenario. S borrows money from B and creates a hypothec23 over A’s land to secure the loan. But the hypothec is not granted to B but to a trustee, who is obliged to hold the security right itself for B. Unlike in the case of a security trust, here the borrower remains owner of the land. This is because only a security right (ie, the hypothec) is granted to the trustee,24 rather than the ownership of the land itself. In both the security trust and the security-right trust, B is capable of fully enjoying the asset-partitioning effect of the trust. So, when S or A becomes bankrupt, B, as lender and beneficiary, can request T to liquidate the trust property25 and distribute the proceeds thereof to B. Any residual amount after B recoups his debt will vest in S as the secondary beneficiary. The upshot is that B’s position will be preferred over those of S’s personal creditors. Trusts lawyers generally understand this consequence as being one of the hallmarks of the trust mechanism, that is, to ring-fence trust property so as to put it beyond the reach of the settlor’s and trustee’s personal creditors. And, this is exactly the reason why the security trust and the security-right trust are so popular among creditors in the loan market in Korea. However, when it comes to the case of the security trust, problems arise when S is not declared bankrupt and a rehabilitation order is granted to him by a court. The question arises as to whether, if S’s land is subject to the rehabilitation procedure, B would still have the immediate right to require T to liquidate S’s land so as to recoup the debt owed. An affirmative argument might be made on the basis that, whether a bankruptcy order or a rehabilitation order is made, in both situations S is unable to pay off his debt. But a counter argument can equally be made that, while the bankruptcy order and the debtor rehabilitation order are two measures intended to help debtors out of their financial distress and enjoy a fresh start, they are significantly different in nature. While the bankruptcy order aims to liquidate and distribute all the debtor’s assets to his creditors, the debtor rehabilitation order is designed to create a debt restructuring scheme that allows impecunious debtors to continue to operate their business so as to improve it and restore liquidity.26 Under this reasoning, it might be justified to subject S’s land to the rehabilitation order so as to help S recover from his financial distress. The argument could go both ways, but the courts can only decide one way.

23 In Korean law, the hypothec denotes a security interest that can only be attached to land and does not require the transfer of ownership nor possession of land: see Art 356 KCC; Won Lim Jee, The Principles of Civil Law, 2nd edn (Hongmunsa 2019) 1195. This is similar to the mortgage by way of charge under English law. 24 This is what is provided for in Art 2 KTA, as mentioned above. 25 This will involve the disposition of the land in the case of the security trust and the execution of the hypothec in the case of the security-right trust. 26 Dae-kyu Jon, Debtor Rehabilitation and Bankruptcy Law, 3rd edn (Bobmunsa 2019) 5.

South Korea  243

B.  The Supreme Court’s Position: Taking the Form of the Trust Seriously At present, the Supreme Court takes the former view, which is that S’s land held under trust should not be subject to the rehabilitation procedure, and therefore that B is able to exercise his right to recover the debt out of S’s land ahead of S’s other personal creditors. The grounds on which the Supreme Court relies for this outcome are as follows. First, Article 141(1) DRBA provides that [a] rehabilitation claim … secured by any such lien, pledge, hypothec, mortgage,27 provisionally registered security right,28 and security right under the Act on Security over Movable Property29 … as exists on the debtor’s property at the time the rehabilitation procedure is commenced, shall be regarded as a rehabilitation security right.

The term ‘rehabilitation claim’ means those personal or contractual rights that are subject to the rehabilitation order, and ‘rehabilitation security right’ denotes those claims to which the aforementioned security interest is attached and that are subject to the rehabilitation order. So, once a debtor (S in our scenario) receives a rehabilitation order from a court, people having rehabilitation claims and rehabilitation security rights would no longer be able to execute their rights immediately and should follow the debt-restructuring scheme. The question is whether or not B’s beneficial interest under the trust should be subject to such a scheme since, as we have seen, the security trust is not listed as one of the rehabilitation security rights in Article 141(1). Unlike common law jurisdictions where legislation cannot in general be applied by analogy, judges under civil law jurisdictions are generally allowed to interpret statutes normatively and to apply statutory provisions by analogy to similar fact situations. Therefore, it would have been possible for the court to apply Article 141(1) by analogy to security trusts. But the Supreme Court has thus far denied such analogical application in this context. One reason it has given is that the trust, although used as a vehicle for securing debts and thus performing a function akin to that of a security interest, is not itself a kind of security right: B’s beneficial interest is a separate interest independent from the 27 Mortgage is used here to signify the security right which requires transfer of ownership to the lender. 28 According to KCC, Art 607: ‘[w]here the borrower has promised to transfer any of his/her property in lieu of the borrowed object, the value of the relevant property as at the time of promise shall not exceed the aggregate of the original amount borrowed plus the interest thereon’. Creditors in Korea, based on this article, often request their debtors to transfer ownership of their land in lieu of the debts owed should the latter default on their debts. This is generally framed as a sale contract and creditors often also make a provisional registration of their right to purchase the land so as to enjoy a preferred position. As this scheme helps creditors to secure their debts, it is recognised as a type of security right: see the Provisional Registration Security Act (Official Translation, Ministry of Government Legislation, National Law Information Center, Republic of Korea): www.law.go.kr/LSW/eng/engLsSc.do?menuId=2§ion=lawNm&query=Provisional+registration +security+Act&x=0&y=0#liBgcolor0. 29 This is an Act that provides creditors with an opportunity to register the chattels or personal rights offered as the subject matter of the debt their debtors owe them: see the Security over Movable Property Act (Official Translation, Ministry of Government Legislation, National Law Information Center, Republic of Korea): www. law.go.kr/LSW/eng/engLsSc.do?menuId=2§ion=lawNm&query=Provisional+registration+security+ Act&x=0&y=0#liBgcolor0.

244  Ying-Chieh Wu loan contract.30 This in turn implies that S’s rehabilitation order should not affect B’s interest in S’s land under the trust although it is labelled a ‘security’ trust. Second, it goes without saying that only those assets belonging to S should be involved in S’s rehabilitation procedure. Therefore, Article 250(2) DRBA prescribes that ‘[t]he rehabilitation scheme shall not affect the rights or security falling within either of the following subparagraphs’, with subparagraph (ii) including ‘[a]ssets offered by a person other than the debtor as security to those having rehabilitation claims or rehabilitation security rights’. Thus, if a creditor’s security is provided by a third party other than the debtor, the object of that security should not be part of the debtor’s rehabilitation scheme. The Supreme Court has argued that this is exactly what happens in the case of the security trust: even if B’s beneficial interest is considered a security interest over the land Article 250(2)(ii) would apply, since the land over which B’s debt is secured is in T’s name but T is not the debtor.31 Therefore, it follows that the land should be considered irrelevant to S’s debt-restructuring scheme. Third, following the second reasoning, the Supreme Court has further argued that it is not only impossible to recognise that B’s beneficial interest is engrafted onto S’s land (as the land is now held by T), it is also not possible to analyse B’s beneficial interest as having been transferred from S to B, because B’s beneficial interest is, unlike a mortgage, created for the first time by the security trust.32 Thus, B’s beneficial interest is also irrelevant to S’s rehabilitation procedure. In sum, despite the fact that a security trust has the de facto effect of securing a loan, the Supreme Court has attempted to sever the link between the trust and its security function, choosing instead to treat the trust as an independent mechanism irrelevant to the court’s rehabilitation order. By taking the form of the trust seriously in this way, the result is that B’s beneficial interest is free from S’s rehabilitation procedure. The Supreme Court’s position has received much support from many academics,33 and now represents the orthodox and authoritative view.

IV.  Form or Substance, that is the Question A.  Taking the Substance of Security Seriously It is submitted that both the Supreme Court’s conclusion and its reasoning may seem plausible at first sight, but are ultimately not convincing, for the following reasons. First, the security trust, though being an independent legal relationship, is intertwined with the loan it is intended to secure.34 The trust would not be created but for 30 Supreme Court of Korea Case No 2017.6.22.2014DA225809; ‘DA’ in Korean is ‘다’ which represents an appeal case adjudicated by the Supreme Court. 31 Supreme Court of Korea Case No 2001.7.13, 2001DA9267 (this is a case that applied Art 240(2) of the now abolished Company Reorganization Act and this article is the predecessor of Art 250(2) of DRBA). 32 Supreme Court of Korea Case No 2002.12.26, 2002DA49484. 33 Il-Kwang Ko, ‘Trust of Real Property under Corporate Rehabilitation Procedure’ (2009) 9 Judiciary 92; Chae Woong Lim, A Study on the Law of Trusts (Pakyoungsa 2009) 106; Young Jun Oh, ‘Independence of the Trust Fund’ (2008) 30 Private Case Law Studies 862. 34 Dae Young Ham, ‘A Study on the Transfer of Property in Trust-Based ABS’ (2010) 44 Business, Finance, Law 80.

South Korea  245 the existence of the underlying loan contract. The trust functions as collateral, and thus supports the debt S owes to B. It cannot be denied that the trust created in such context is in essence collateral – and thus, in substance, a security interest. Refusing to recognise the (obvious) link between the trust and its function as security leads to a bizarre state of affairs. For example, B would be able to transfer his beneficial interest to another person, X, or to use his beneficial interest to secure a debt B owes to X. In fact, this is precisely what happened in a Supreme Court case.35 B used his beneficial interest under a security trust to secure36 a loan B took out with X. In the meantime, B’s personal right under the loan contract was transferred to Y. The Supreme Court reasoned that since the security and the trust arise from two distinct relationships, B’s beneficial interest survived even though the debt owed by S to B had been transferred to Y. As a result, X’s security interest, whose subject matter is B’s beneficial interest, remained fully valid. The outcome is wrong for the following two reasons. On the one hand, there is a danger of double payment.37 In the beginning, S owes money to B and the debt is secured by the security trust; B can recoup his debt either from the loan contract or (in the case of default) the security trust. But, on the Supreme Court’s view, Y can satisfy his debt against S, and X can execute the trust if B fails to pay his debt to X. As a result, S may lose his money as well as his land. This obviously severely prejudices S. On the other hand, it would also follow from the Supreme Court’s logic that, even if the loan contract between S and B is void or rescinded, or if the personal right arising therefrom is extinguished due to a prescription period, it would not impact on B’s beneficial interest under the security trust. This result, too, contravenes the purpose of the security trust, which is to secure the debt S owes to B. These problems indicate that the loan and the trust must be regarded as strongly interlinked. One is meaningful only if the other exists and they cannot be severed: the security trust is collateral. Second, the Supreme Court’s reasoning that T is a third party to the loan contract made between S and B is flawed. T has simply never actively provided B with any security interest over the trust property. Rather, it is S who provided the land to B as security by way of a trust. In other words, S used the trust as a means to secure the debt: the land was provided by S, not T.38 Indeed, once B’s credit is fully satisfied by the proceeds arising from the disposition of the land, T is under an obligation to return any residual proceeds to S. If S were not the person who offered the land as the subject matter of the security trust, there would be no reason to designate S as the beneficiary of the remainder.39 Third, the security trust, being an indirect way of granting a security interest, can be contrasted with a mortgage. In the case of a mortgage, ownership of the relevant asset offered as security is directly vested in the creditor who, upon the debtor’s bankruptcy, 35 Supreme Court of Korea Case No 2017.6.22, 2014DA225809. 36 Intangible things can be the object of a pledge (Art 345 KCC) in Korea and its nature in this case is a quasi-proprietary right, as the original form of pledge only allows tangible things to be the subject matter of pledge (Art 329 KCC). 37 In Sung Na and Hyun Woo Nam, ‘The Legal Nature of the Beneficiary’s Right under a Security Trust: Departure from the Distinction between Property and Personal Rights’ (2019) 9 SNU Law Review 443. 38 Ham (n 34) 78. 39 Even if the trust instrument remains silent as to the identity of the remainder interest holder, the KTA prescribes that the settlor who is also a beneficiary is in principle entitled to it: see Arts 99(2), 101(1).

246  Ying-Chieh Wu enjoys a preferred position vis-a-vis other personal creditors of the debtor. Should the debtor receive a rehabilitation order from the court, the creditor will not be able to execute his mortgage immediately, as the asset would be subject to the debt-­restructuring scheme, as provided by Art 141(1) DRBA. It seems to the present author that, whether the object for security is transferred to the creditor (in the case of a mortgage) or the trustee (in the case of a security trust), these two types of interest should not be treated differently in a rehabilitation procedure.40 It is unfortunate that the Supreme Court has been too preoccupied with the form of the trust itself, thinking that the land is offered by T since it is vested in T. But, as we have seen, T is merely a conduit utilised by S in order to provide B with a security interest; moreover, S is the holder of the remainder interest. Therefore, the use of a trust, although indirect, should not become a red herring in the analysis. Fourth, the substance of the matter is taken more seriously when the security trust is approached from a comparative point of view. It is commonly recognised that the security trust in Korea was imported from US law’s deeds of trust.41 Deeds of trust involve transfers of legal title to property from the settlor to the trustee for the purpose of securing the performance of loan obligations.42 A deed of trust and a traditional trust are different in that the former is a trust only in form and not in substance.43 It is for this reason that section 5 of the Restatement (Third) of Trusts denies that the security trust is in substance a trust: Trusts and Other relationships The following are not trusts: (l) mortgages, deeds of trust, pledges, liens, and other security arrangements.

As can be seen above, the deed of trust, despite its name, is not considered to be a trust per se. Since it is not a trust, the asset-partitioning effect of the trust does not arise. Therefore, an automatic stay would apply to the creditor when the debtor becomes bankrupt.44 The creditor (who is also the beneficiary of the deed of trust) is subject both to the bankruptcy procedure as well as the rehabilitation process. No doubt, a recipient jurisdiction can always develop an imported legal mechanism differently from the source jurisdiction. However, any departure must be grounded on defensible reasons. Otherwise, the relevant transplant could trigger more problems and conflicts, as we have seen from the security trust in Korea. Furthermore, if we explore other civil law jurisdictions, mixed jurisdictions and some soft laws, security trusts are taken to be a security right, rather than a trust enjoying the full asset-partitioning effect.

40 It is for this reason that some academics argue that there are virtually no dissimilarities between a mortgage and a security trust, as long as they both are intended to secure a debt by way of transfer of a title to another: see, eg, Jinsu Yune, ‘Against the Bankruptcy Effect of the Trust for the Security Purpose’ (2018) 25 Journal of Comparative Private Law 723. 41 Jungjoon Ka, ‘“Deed of Trust” Is It a Trust or Not?’ (2016) 36 Chonnam University Law Review 553, 555; Yune (n 40) 712–16. 42 SL Schwarcz, ‘Commercial Trusts as Business Organizations: Unraveling the Mystery’ (2003) 58 Business Lawyer 559, 570. 43 ibid. 44 See Title 11 US Code §362.

South Korea  247 For example, the French fiducie also recognises the security trust,45 but it is conceptualised as a s­ecurity right, and its asset-partitioning effect is circumscribed at the commencement of the debtor’s rehabilitation plan if the debtor is using the relevant property.46 The Quebec Civil Code also treats security trusts as a security right, as they are governed by rules on hypothecary rights.47 Furthermore, the Draft Common Frame of Reference also states that, ‘[i]n relation to trusts for security purposes, this Book is subject to the application of the rules in Book IX (Proprietary security in movable assets)’.48 As these illustrations show, security trusts are not treated as trusts in these jurisdictions but as security i­ nterests: the security trust is collateral.

B.  Beyond the Form/Substance Dichotomy The conventional controversy between two scholarly camps revolves around the nature of security trusts. It has been argued that the security trust is a collateral interest despite being called a ‘trust’: it should be subject to the debtor rehabilitation order. The beneficiary of a security trust should be treated equally with other security interest holders as provided for in Article 141(1) DRBA. Otherwise, the rehabilitation of debtors would be significantly impaired: failing to include trust property in the ambit of the debt-­restructuring scheme would contravene the purpose of the rehabilitation order under the DRBA. Conversely, including the trust property within the rehabilitation scheme would contribute to the recovery of the debtor’s financial distress, which would ­ultimately serve the interests of the debtor’s creditors. Before we wrap up the discussion, it would be useful to explore further the Supreme Court’s position. This section argues that B would not still be able to recoup his debt even if we agree with the Supreme Court’s view and do not recognise the security trust as a security interest per se. There are two main reasons for this. First, we need to ask if there is a default on the part of S. If S is declared bankrupt, this indicates that it is no longer possible for S fully to honour the debt. Therefore, all his assets must be used to repay his creditors pro rata. On the contrary, if a rehabilitation order is made by a court, it implies that the debtor may yet be able to recover from 45 See Arts 2372-1, 2488-1 of the French Civil Code (Official Translation, Legifrance.gov.fr – le service public de la diffusion de droit): www.legifrance.gouv.fr/Traductions/en-English/Legifrance-translations. 46 Art L.622-23-1: ‘[w]here assets or rights present in a fiduciary estate are covered by an agreement in the performance of which the indebted settlor retains the use or enjoyment thereof, no assignment or transfer of these assets or rights can intervene in favour of the trustee or a third party owing solely to the fact of the commencement of the proceedings, the stay of the plan or a payment default for a claim that arose prior to the commencement order. This prohibition shall occur, failing which the assignment or transfer will not be valid’ (The French Commercial Code (Official Translation, Legifrance.gov.fr – le service public de la diffusion de droit): www.legifrance.gouv.fr/Traductions/en-English/Legifrance-translations. 47 Art 1263 of the Quebec Civil Code: ‘[a] trust established by onerous contract may have as its object the guarantee of the performance of an obligation. In that case, to be set up against third persons, the trust must be published in the register of personal and movable real rights or in the land register, according to the movable or immovable nature of the property transferred in trust’. Upon the default of the settlor, the trustee is governed by the rules regarding the exercise of hypothecary rights set out in the Book on Prior Claims and Hypothecs. 48 Art X-1:102: ‘[i]n relation to trusts for security purposes, this book is subject to the application of the rules in Book IX (Proprietary security in movable assets)’.

248  Ying-Chieh Wu the current financial distress and repay his debts. Thus, where the court only makes a rehabilitation order, it can be understood as having the effect of extending the due date of the debts owed by the debtor for the common good of all the creditors. Since the due date for the performance of all his debts is postponed, no default will have yet occurred. It follows that the trustee would not be able to execute the security trust since that would require S to have defaulted on the debt. Second, apart from B’s primary beneficial right and S’s secondary beneficial right to the remainder of the sale price of the land, there is another beneficial right held by S: the right to possession and enjoyment of the land. This is critical because S’s beneficial right to possession forms part of S’s property and cannot be ignored when defining the scope of his the rehabilitation order.49 Needless to say, the inclusion of S’s possessory interest in the debtor rehabilitation procedure would contribute to the recovery of his financial difficulty, as the physical use of land will be crucial for S to continue trading. Since the beneficial right of possession of trust property falls within the estate subject to the rehabilitation process, T should not be allowed to dispose of it in B’s favour, as this would in turn result in breaching the duty of impartiality that requires trustees to treat beneficiaries fairly and equally.50 Otherwise, T would be personally liable for any loss arising therefrom.51 To sum up, even if we accept the Supreme Court’s view, S would still be able to remain in possession of the trust property and use it to recover from his financial distress because S retains a beneficial right to possession of the trust property, this being part of his estate subject to the court’s rehabilitation order.

V. Epilogue This chapter has explored a controversial issue of trusts law in Korean practice. That is, whether or not the asset-partitioning effect of the trust should be maintained when a debtor rehabilitation order is made to the settlor/debtor of a security trust. We see two rival positions. The Supreme Court responds positively by stressing the independent nature of the trust and denying the link between the loan and the trust used to secure the loan. According to this position, the object of a security trust should not become part of the rehabilitation estate when a rehabilitation order is made for the settlor/debtor. The creditor/beneficiary would thus be able to recoup his debt despite

49 Art 90 DRBA prescribes that, ‘[e]very administrator shall appraise without delay the value of all of the properties that belong to the debtor at the time that rehabilitation procedures commence after he/she takes up his his/her post’. An administrator must be appointed when a rehabilitation procedure commences, as prescribed in Art 74(1) DRBA: ‘[t]he court shall appoint a person (or persons) who are fully qualified to perform duties as an administrator after hearing the opinions of the administrative committee and the creditors committee’. 50 KTA Art 35: ‘[u]nless otherwise provided, the trustee shall impartially perform the trust affairs for each beneficiary’. 51 KTA Art 43(1): ‘[w]here a trustee has violated his/her duties incurring any loss to the trust property, the settlor, beneficiary, or other trustees where a number of trustees exist, may request the relevant trustee to recover the trust property in specie. However, where it is impossible or substantially impracticable to recover the trust property in specie, or excessive ground exists making such recovery inappropriate, a claim for damages may arise’.

South Korea  249 the rehabilitation order. In other words, the Court takes the form of trust seriously. The contrary position, argued for in this chapter, recognises the strong bond between the trust and the loan, and argues that the property offered to secure the debt is not offered by the trustee but by the settlor/debtor by way of trust. There should be no difference in treatment between vesting the object of security in the creditor (in the case of a mortgage) or in the trustee (in the case of a security trust) in the rehabilitation procedure, since this procedure is intended to assist the debtor to overcome his financial distress. The incorporation of the object of the security trust would certainly contribute to the aim of rehabilitation. Furthermore, the settlor/debtor still owns a beneficial right to use and enjoy the object of a security trust, and he should not be deprived of it without justification. It is also questionable whether the settlor/debtor immediately defaults on the loan contract, since the rehabilitation order extends the due date of his debts – and this postpones the creditor’s right to the execution of the security trust. The author’s position therefore takes the substance of security seriously. Whether or not we regard security trusts as trusts, their asset-partitioning effect should be curtailed if a rehabilitation order is given to the settlor/debtor. The Supreme Court’s position needs revisiting.

250

14 Taiwan’s Trusts Law and Name-Borrowing Arrangements WEN-YEU (WALLACE) WANG* AND YUEH-PING (ALEX) YANG**

I. Introduction Taiwan is a civil law jurisdiction that has received the trust relatively well, albeit with a twist. The trust, a legal institution that permits a property owner to transfer her title to another to segregate her property so that the transferee can administer the property for the benefit of the property owner or a third party, is generally considered a common law product. Civil law jurisdictions, in contrast, emphasise the consistency between the titleholder and the actual owner of the property (‘the principle of title-ownership consistency’) and thus occasionally find it difficult to acknowledge the trust. This is, however, less a problem for Taiwan, which underwent less resistance when introducing trusts into its civil law system. Taiwan’s Trust Act was promulgated in 1996, and the acknowledgment of trusts by Taiwan’s Supreme Court can be further traced back to the 1970s.1 To illustrate the complexities surrounding Taiwan’s trusts law and name-­borrowing arrangements, it is apt to first provide a brief introduction to the legal system of Taiwan, which, as a civil law jurisdiction, largely looks to written law, customs and jurisprudence as its primary sources of law. Case law, or prior decisions made by the courts in Taiwan, are helpful but they serve as secondary sources of law. This is in stark contrast to common law legal systems which place a higher emphasis on case law due to their adherence to the legal doctrine of stare decisis. It is thus likely that Taiwan’s legal system, which adopts a dogmatic mindset due to its strict adherence to

* Professor at National Taiwan University. Stanford Law School, JSD (1996). The author can be reached at [email protected]. This paper was financially supported by the Center for Research in Econometric Theory and Applications (Grant No 108L900201) from the Featured Areas Research Center Program within the framework of the Higher Education Sprout Project by the Taiwan Ministry of Education (MOE) as well as Ministry of Science and Technology (MOST) 108-3017-F-002-003. ** Assistant Professor at National Taiwan University. Harvard Law School, SJD (2017). The author can be reached at [email protected]. 1 See, eg, Taiwan’s Supreme Court 62-Tai-Shang-No 2996 Civil Precedent (1973).

252  Wen-Yeu (Wallace) Wang and Yueh-Ping (Alex) Yang written law and legal principles, could face some issues, having incorporated the trust as a legal institution, due to the difficulty of reconciling key features of trusts with settled civil law principles. Indeed, Taiwan might have received the trust too well. This observation stems from the fact that Taiwan, in its transplantation of the trust, took in trusts law concepts and features completely which may prove problematic considering that Taiwan is a civil law jurisdiction. However, this impact is minimised by the implementation of the Trust Act, which attempts to reduce conflicts that the reception of trusts may generate with the legal principles ingrained in Taiwan’s legal system.2 In Taiwan, citizens of different classes widely adopt a local practice termed ‘nameborrowing arrangement’, under which a property owner borrows the name of another to hold title to her property. The purposes behind such arrangements vary, ranging from family asset planning to tax planning. They may also include nefarious purposes such as tax evasion and even circumvention of certain laws. The question of whether to acknowledge name-borrowing arrangements and, if so, to what extent, has plagued Taiwan’s Supreme Court and the nation’s legal scholars for a long while.3 Recently, by implicitly analogising name-borrowing arrangements to trusts, Taiwan’s Supreme Court has gradually settled this issue. Specifically, the Court largely recognises the validity and enforceability of name-borrowing arrangements and ingrains them into Taiwan’s legal system.4 To us, however, this development raises further questions, especially considering that it significantly contradicts the principle of title-ownership consistency that is highly valued in Taiwan’s traditional civil law system. In this chapter, we explore Taiwan’s reception of the trust by reviewing the evolution of name-borrowing arrangement laws in Taiwan. We structure our chapter as follows: in section II, we provide more information on name borrowing arrangements and their characterisation in Taiwan, discuss the evolution of trusts law in Taiwan, and consider whether name-borrowing arrangements are thought to be atypical contracts or bare trusts. In section III, we introduce the civil law tradition in Taiwan and focus on the general lack of public policy considerations in the legal system. We also introduce the influence of the dogmatic method and the usage of analogical thinking on the Taiwanese decisionmaking process, and we introduce in detail the principle of title-ownership consistency and consider whether name-borrowing arrangements go against this principle. In section IV, we provide our critique of the debate surrounding name-borrowing arrangements and whether they should be considered as trusts. We also raise the relevant legal issues that arise internally and externally when considering name-borrowing arrangements in Taiwan’s legal system.

2 See, eg, L Ho and R Lee (eds), Trust Law in Asian Civil Law Jurisdiction: A Comparative Analysis (Cambridge University Press 2013); Wen-Yeu Wang, Wang Chih-Cheng and Shieh Jer-Shenq, Trust Law in Taiwan: History, Current Features and Future Prospects (Cambridge University Press 2013) 70. 3 For a comprehensive summary of the different viewpoints in Taiwan, see Lin Cheng-Er (林誠二), ‘The Effect of the Change Registration of Real Property From the Perspective of Name-Borrowing Arrangements’ (由借名登記契約論不動產物權變動登記之效力) in The Practice and Innovation of Laws, vol I (2013) (法學的實踐與創新(上)) 419. 4 See Taiwan’s Supreme Court No 3 Civil Court Meeting Resolution (2017).

Taiwan  253 In section V, we consider whether it actually matters if name-borrowing arrangements are considered atypical contracts or bare trusts. We also analyse the interpretation of name-borrowing arrangements by Taiwan’s Supreme Court and we highlight the importance of title-ownership consistency as public order, the problems arising from analogizing name-borrowing arrangements to trusts, and the Court’s rigid understanding of the function of public notices. Lastly, in section VI, we conclude by summarising our key thoughts to provide an overarching perspective. Through the discussion in this chapter, we aim to use Taiwan and its treatment of name-borrowing arrangements as a comparative example to highlight the interaction between trusts law and the principle of title-ownership consistency in Taiwan.

II.  The Characterisation of Name-Borrowing Arrangements A.  The Practice of Name-Borrowing Arrangements Name-borrowing arrangements refer to a contract under which the name-borrower, with the name-lender’s consent, registers her property under the title of the name-lender but retains the capacity to administer, use and dispose of the property.5 Accordingly, while the name-lender is the nominal title holder of the property, she has no capacity with respect to the property. The name-borrower is in substance the actual owner of the property, even though she does not hold the title to it. Name-borrowing arrangements are employed by Taiwanese citizens to serve various purposes. Family asset planning is a common purpose. Parents, for instance, often use name-borrowing arrangements to allocate title to their property to their children even though the parents lack donative intention. Tax planning is another common purpose. For instance, the land value tax in Taiwan is progressive;6 thus, to avoid higher tax rates, name-borrowers might enter into a name-borrowing arrangement to reduce the value of the real property to which they hold title. Name-borrowers may also seek to hide their actual asset status, so that they can avoid being asked to provide loans to their friends or relatives.7 Thus far, Taiwanese courts have generally found these purposes legitimate. Some name-borrowing arrangements, in contrast, serve less than legitimate purposes. For instance, some laws, such as the former Land Act or the Public Housing Act, might require certain real property to be held only by people with certain qualifications. To circumvent these restrictions, unqualified buyers might borrow names from qualified name-lenders to obtain the restricted property. In other cases, name-borrowers may place their property under the title of the name-lender to avoid foreclosure from creditors.8



5 See,

eg, Taiwan’s Supreme Court 99-Tai-Shang-No 1662 Civil Decision (2010). Land Tax Act, Art 16 (Taiwan). 7 See Lin (n 3) 403–04. 8 ibid. 6 See

254  Wen-Yeu (Wallace) Wang and Yueh-Ping (Alex) Yang

B.  The Evolution of Trusts Laws in Taiwan Taiwan has received the trust relatively well. Taiwanese law has long accepted commercial trusts: acknowledgment of such trusts can be traced back to 1921.9 For civil trusts, although Taiwan’s Civil Code did not provide for these for a long while, Taiwan’s Supreme Court acknowledged them in the 1970s. This acknowledgement came in a series of cases in which the Court dealt with trust contracts under which the trustor transferred her property to the trustee to achieve certain purposes between the parties.10 The Court has consistently accepted the validity of trust contracts and emphasised that the trustee becomes the legal owner of the trust property and has full capacity in disposing of it.11 The Court later deemed these decisions as precedents, which has offered more solid case law support to civil trusts. In 1985, Taiwan’s government started to draft a Trust Act to lay out a more complete trust system.12 The motive behind this legislation was that, as case law acknowledged trust contracts as valid contracts, disputes relating to aspects of trust contracts had arisen, such as termination conditions, the legal status of trust property and the legal relations between trust contract parties. Lacking specific laws governing these legal issues, Taiwanese courts, abiding by the civil law tradition, had a hard time coping with them.13 In 1996, Taiwan’s Legislative Yuan passed the Trust Act, which dealt with such issues and brought Taiwanese trusts law into a new era.

C.  Atypical Contracts or Bare Trusts? Before we are able to apply the provisions in the Trust Act to name-borrowing arrangements, we first have to address the question of whether name-borrowing arrangements can be considered bare trusts as opposed to atypical contracts. Atypical contracts refer to contracts that do not qualify as one of the 27 contract types under the Civil Code. Scholars have argued that name-borrowing arrangements are atypical contracts despite the fact that, as name-borrowing arrangements are similar to mandate agreements, the rules of mandate agreements should apply to them as well. If name-borrowing arrangements are considered atypical contracts, the provisions of the Trust Act do not apply to them as they do not qualify as bare or passive trusts. In section IV of this chapter, we will go into greater detail to discuss whether nameborrowing arrangements constitute trusts, with reference to the work of Taiwanese legal scholars. For now, we would just like to highlight the two opposing views of what name-borrowing arrangements are.

9 Legislative Yuan, Meeting Document of the Second Term, Fifth Session, 30th Meeting (1995) 230. 10 See, eg, Taiwan’s Supreme Court 62-Tai-Shang-No 2996 Civil Precedent (1973); 66-Tai-Zai-No 42 Civil Precedent (1977); 67-Tai-Shang-No 507 Civil Precedent (1978). 11 ibid. 12 Legislative Yuan, Meeting Document of the Second Term, Fifth Session, 29th Meeting (1994) 90. 13 ibid 89–90.

Taiwan  255

III.  The Civil Law Tradition and Trusts Law in Taiwan A.  The Lack of Public Policy Considerations It could be said that there is a general lack of discussion regarding public policy considerations in the Taiwanese legal system. This could be because public policy arguments are rarely raised in court due to the high likelihood that they will not be given consideration or enjoy success. Taiwan’s legal system, which is strictly within the civil law tradition, leaves little room for public policy arguments to manoeuvre and succeed. Even when public policy arguments are raised and public policy considerations are taken into account by the court, they tend to be limited to public law matters and generally do not extend to civil matters such as contract. This lack of public policy consideration is problematic when it comes to name-borrowing arrangements; there is potential for name-borrowing arrangements to be abused in a way that is damaging to public order, and public policy considerations would be apt to address these concerns. However, the hurdle regarding public policy considerations is not easily crossed.

B.  The Influence of the Dogmatic Method: Analogical Thinking The Taiwanese legal system, being a civilian one, heavily relies on coded laws and settled legal principles. As a result of this reliance, certain normative behaviours and mindsets have formed over the years to facilitate the workings of the entire legal system. A common mindset among Taiwanese civilian lawyers would be a dogmatic one, one that is devoted and committed to the finality and efficacy of abiding by coded laws and settled legal principles. In this way of thinking, they prefer a system where legal forms and economic substance is consistent so that they can comfortably follow the legal form with less fear of going against the reality under such system. This preference for form-substance consistency manifests itself through many settled legal principles engrained in the Taiwanese legal system. The principle of titleownership consistency is one such principle. The principle serves a practical purpose, which is to ensure that the efficiency and security of property transactions in Taiwan are not compromised. Although the principle of title-ownership consistency is only one example, out of the numerous legal principles which captures the essence of Taiwan’s dogmatic thinking, it is undoubtedly of particular importance when we consider the topic of trusts and name-borrowing arrangements. In addition, the Taiwanese legal system often uses analogies to capture the unique circumstances of each case within Taiwan’s codified laws and settled legal principles. For example, when faced with a new type of agreement which has not been seen or examined, instead of coming up with new rules to apply to that specific type of agreement, the first step would be to attempt to analogise the new agreement with one of the accepted types of agreement. This allows for the new type of agreement to incorporate the rules and principles of the accepted type of agreement, allowing the system to be more efficient and systematic. This also reduces inconsistencies within the system as new principles are not constantly formulated and applied. To facilitate this analogical

256  Wen-Yeu (Wallace) Wang and Yueh-Ping (Alex) Yang method, Taiwan adheres to general legal principles and rules, such as the principle of title-ownership consistency.

C.  The Principle of Title-Ownership Consistency Taiwan, like many civil law jurisdictions, relies on public notices to identify property owners and ensure transaction certainty. For example, for personal property, Taiwan’s Civil Code stipulates that the possessor is presumed to have the capacity to dispose of the possessed property.14 For real property, registration plays a similar public notice function.15 Therefore, bona fide third parties can comfortably enter into a transaction with a possessor of personal property or a person registered as the owner of real property without fearing that these persons have no capacity to dispose of the property at issue. This, in turn, ensures transactional certainty and accelerates transactional efficiency. To ensure the credibility of public notices, consistency between titleholders and actual owners is essential. This is especially the case for registration of real property which is handled by government authorities, ie, land administration departments of municipalities. However, under certain circumstances, a person who in substance is the real property owner might not hold the registered title of her property. For example, in order to hide her property status to avoid creditors’ foreclosure, a real property owner might conspire with another person to register the former’s property under the latter’s title. This inevitably compromises the credibility of the registration system and thus jeopardises the legal order. To ensure the credibility of the registration system, Taiwanese laws contain several legal safeguards. Ex ante, Taiwan’s Land Registration Regulation requires applicants to provide numerous documents to evidence the authenticity of their registration applications.16 Ex post, Taiwan’s Criminal Code penalises the forgery of public documents, including acts that mislead public officials into documenting untrue matters in public documents.17 These laws together form an integral system that safeguards the principle of title-ownership consistency in Taiwan.

D.  Do Trusts Compromise the Principle of Title-Ownership Consistency? In a sense, trusts compromise the principle of title-ownership consistency. In Taiwan, trusts refer to the legal relationship in which the trustor transfers or disposes of a property right and causes the trustee to administer or dispose of the trust property according to the stated purposes of the trust for the benefit of a beneficiary or a specified purpose.18

14 Civil

Code, Art 948(1) (Taiwan). Art 759-1. 16 See, eg, Land Registration Regulation, Arts 34–44 (Taiwan). 17 See, eg, Criminal Code, Arts 210–15 (Taiwan). 18 Trust Act, Art 1 (Taiwan). 15 ibid

Taiwan  257 By this arrangement, the title of the trust property vests in the trustee. The trustee, however, merely becomes the nominal owner of the trust property. Her rights over the trust property remain bound by the trust contract; any of her acts with respect to the trust property that are inconsistent with the trust contract may lead to a breach of contract and thus contractual liabilities.19 Accordingly, although the trustee is the titleholder of the trust property, she cannot exercise full ownership over it. This leads to a certain level of deviation from the principle of title-ownership consistency. Faced with this deviation, Taiwanese case law chooses to honour the nominal title over actual ownership. Specifically, Taiwan’s Supreme Court formulates a consistent viewpoint that acknowledges the trustee’s capacity in disposing of the trust property to a third party. For one thing, this viewpoint makes it clear that the trustee, instead of the trustor,20 is the owner of the trust property in legal terms.21 On that basis, the Court further recognises that the trustee has full capacity in disposing of the trust property to a third party, regardless of whether the third party is bona fide or not. Even if such disposal jeopardises the trustor’s or the beneficiaries’ entitlement under the trust contract, it still remains valid, and the trustor or the beneficiary can only remedy their losses by raising a contractual claim against the trustee.22 This viewpoint ­necessarily heightens the risks incurred by the trustors and beneficiaries because of the title-­ownership inconsistency caused by the trust relationship. To mitigate this concern, Taiwan’s Trust Act limits the trustee’s capacity to dispose of the trust property to only transactions with bona fide third parties. In cases where the third party knows or should have known about the trust relationship attached to the trust property, the beneficiary may petition the court to revoke the trustee’s disposal.23 More than that, Taiwan’s Trust Act develops an innovative trust registration system. It provides that for a trust involving a property right that requires registration, for ­example, real property as mentioned above, the beneficiary may claim its interest under the trust against third parties if it completes registration of the trust property.24 Specifically, if the trust property is registered in this way, when the trustee disposes of the trust property in breach of the trust contract, the beneficiary may petition the court to revoke such disposal.25 By introducing this trust registration,26 Taiwanese laws have essentially developed a public notice system specifically for trusts, which allows for third parties to ascertain the trust relationship attached to the property at issue without being confused by the nominal title. This, to a certain degree, restores the principle of title-ownership consistency. That being said, problems may arise despite attempts to reconcile trusts with the principle of title-ownership consistency. For one, the question whether the person, whose name is on the register, is holding only a nominal title or full ownership of the property is not often taken into consideration by the average person on the

19 See

ibid Arts 22–23. under Taiwan’s Trust Act essentially refers to the settlor as understood under common law. 21 See, eg, Taiwan’s Supreme Court 70 Tai-Shang-No1097 Civil Decision (1981). 22 See, eg, Taiwan’s Supreme Court 72 Tai-Shang-No 3524 Civil Decision (1983). 23 Trust Act, Art 18(2)(c) (Taiwan). 24 ibid Art 4(1). 25 ibid Art 18(2)(a). 26 See, eg, Land Registration Regulation, Arts 124–133-1 (Taiwan). 20 ‘Trustor’

258  Wen-Yeu (Wallace) Wang and Yueh-Ping (Alex) Yang property market. It is likely that questions about title-ownership consistency are not considered or even known except where the interests of a transacting party are directly infringed upon as a result of inconsistency. Thus, despite the perceived importance of the principle of title–ownership consistency, it remains questionable whether deviation from the principle is indeed a cause for worry; the impacts of deviation are minimised as long as commercial interests (ie, certainty of transactions) are properly balanced with the interests of the transacting parties.27

IV.  The Debate Surrounding Name-Borrowing Arrangements in Taiwan Parallel to trusts, Taiwanese people have developed the practice of name-borrowing arrangements, arrangements that manifestly contradict the principle of title–ownership consistency. This practice, in our view, fundamentally challenges the limits of trusts law.

A.  Do Name-Borrowing Arrangements Constitute Trusts? Under Taiwanese law, name-borrowing arrangements are generally considered distinct from trusts. As mentioned above, Taiwan’s Trust Act defines trusts as the legal relationship in which the trustor transfers or disposes of a property right and causes the trustee to administer or dispose of the trust property according to the stated purposes of the trust for the benefit of a beneficiary or a specified purpose (emphasis added).

Therefore, to constitute a trust relationship, the trustee must at least possess the capacity to administer or dispose of the trust property. Name-borrowing arrangements do not satisfy this element because the name-lender merely lends her name to the nameborrower to hold the title of the subject property. The name-lender has no capacity to administer or dispose of the subject property.28 It may even be argued that there is a further requirement for a relationship to be considered a trust relationship, beyond that of having capacity to administer or dispose of the trust property. A literal reading of the statute seems to suggest that there may be a requirement that actions taken by the supposed trustee are in accordance with the stated purposes of the trust. Thus, our position is that arrangements such as nameborrowing are not considered trusts, at least within the parameters of Article 1 of the Trust Act. Considering that the Trust Act is the primary source of law regarding legal matters related to trusts in Taiwan, it is difficult to argue that name-borrowing arrangements should be considered trusts. 27 Ho and Lee (n 2) 71. 28 See, eg, Wu Chung-Jau (吳從周), ‘The Development Status of Taiwan’s Real Property Name-Borrowing Arrangements: Focusing on the Interaction between the Changes of Internal and External Effects’ (我國不 動產借名登記契約之發展現況──特別著重觀察內部效力與外部效力演變之互動) (2015) 61 Military Law Journal (軍法專刊) 47, 48–49.

Taiwan  259 However, despite these concerns and the fact that name-borrowing arrangements are not trusts contracts in Taiwanese law, these arrangements continue to exist in Taiwan’s society. The majority of Taiwanese legal scholars are of the opinion that nameborrowing arrangements are not trusts, but rather that they are atypical contracts. These scholars argue that although name-borrowing arrangements do not strictly fall under any one of the 27 contract types codified in Taiwanese law, it is nevertheless possible to apply the legal rules for a mandate agreement via analogical application as mandate agreements are the most closely related to name-borrowing arrangements.29

B.  How to Resolve Legal Problems Arising from Name-Borrowing Arrangements As name-borrowing arrangements have become more widely used, at least two fundamental legal issues call for answers. Internally, between name-borrowers and name-lenders, whether the name-borrowing arrangement is a valid and enforceable contract is questionable. Externally, whether the name-lender, which is the nominal titleholder of the property, has capacity in disposing of the subject property to a third party is also questionable. These two issues have plagued Taiwanese courts and academia for decades, but Taiwan’s Supreme Court has recently settled them.

i.  Internal Relationship For some time, Taiwan’s Supreme Court swayed between acknowledging and rejecting the validity of name-borrowing arrangements. As previously mentioned, initially, the Court compared name-borrowing arrangements to trust contracts and eventually found that the former is different from the latter in that name-borrowers only transfer the title to the subject property to name-lenders and do not entrust name-lenders with the obligation to administer or dispose of the property. Therefore, the Court tended to regard nameborrowing arrangements as ‘passive trusts’. On this basis, except in cases where there were legitimate grounds for the arrangement in question, the Court tended to consider nameborrowing arrangements as illegal, considering that passive trusts are often a fictitious expression of intent between the parties and are employed to circumvent existing laws.30 Even so, the Court took a relatively liberal stance when determining whether a nameborrowing arrangement was based on legitimate grounds in individual cases. Many name-borrowing arrangements, such as those for family asset planning, tax planning, managing parental relationships, etc, were regarded as based on legitimate grounds.31 29 Mandate agreements under Taiwan’s Civil Code refer to contracts ‘whereby the parties agree that one of them commissions the other party to deal with his affairs, and the latter agrees to do so’: Civil Code, Art 528 (Taiwan). 30 See, eg, Taiwan’s Supreme Court 71-Tai-Shang-No 2052 Civil Decision (1982); 88-Tai-Shang-No 2115 Civil Decision (1999); 93-Tai-Shang-No 907 Civil Decision (2004); 94-Tai-Shang-No 907 Civil Decision (2005). 31 See, eg, Taiwan’s Supreme Court 89-Tai-Shang-No 1119 Civil Decision (2000); 89-Tai-Shang-No 572 Civil Decision (2000); 91-Tai-Shang-No 1871 Civil Decision (2002); 92-Tai-Shang-No 1054 Civil Decision (2003); 94-Tai-Shang-No 362 Civil Decision (2005).

260  Wen-Yeu (Wallace) Wang and Yueh-Ping (Alex) Yang Recently, Taiwan’s Supreme Court has switched to a different position. Instead of approaching name-borrowing arrangements from the lens of trust contracts, the Court has switched to the lens of mandate agreements, ie, a contract whereby the parties agree that one of them commissions the other party to deal with his affairs, and the latter agrees to do so.32 With that understanding, the Court found that, based on the principle of contractual freedom, name-borrowing arrangements are valid and enforceable as long as they do not derogate from mandatory laws and/or public orders and good morals.33 In practice, only in the situation where the arrangement is designed with the primary intent of circumventing specific mandatory laws will the Court find it null and void.34 The above case law position has and continues to receive wide support among Taiwanese legal scholars. The majority of scholars have refused to consider name-­ borrowing arrangements per se as a circumvention of laws and agreed that name-­ borrowing arrangements are null and void only when they breach specific mandatory laws; similar to Taiwan’s Supreme Court, they have grounded their position on the ­principle of contractual freedom.35 Only a few scholars have argued against the validity of name-borrowing arrangements. One has argued that most name-borrowing arrangements are for the primary purpose of circumventing laws and thus should be considered null and void per se.36 Another has argued that name-borrowing ­arrangements create an inconsistency between title and actual ownership and thus should attract trusts laws, and that Taiwan’s trusts laws manifestly deny the validity of passive trusts. Hence, his position is that name-borrowing arrangements cannot be protected under the principle of contractual freedom and should be null and void per se; otherwise, these arrangements would simply promote circumvention of laws.37 These opinions, however, are held by a minority of Taiwanese legal scholars.

ii.  External Relationship After settling that name-borrowing arrangements are valid, Taiwan’s Supreme Court decided to focus on how to deal with the external relationship raised by a name-­ borrowing arrangement. This question arises specifically when name-lenders dispose of 32 Civil Code, Art 528 (Taiwan). 33 See, eg, Taiwan’s Supreme Court 98-Tai-Shang-No 990 Civil Decision (2009); 99-Tai-Shang-No 1662 Civil Decision (2010); 99-Tai-Shang-No 2448 Civil Decision (2010); 106-Tai-Shang-No; 2678 Civil Decision (2017); 107-Tai-Shang-No 1875 Civil Decision (2018). 34 See, eg, Taiwan’s Supreme Court 104-Tai-Shang-No 65 Civil Decision (2015); 105 Tai-Shang-No 2017 Civil Decision (2016). 35 See, eg, Lin (n 3) 405–07; Jan Sheng-Lin (詹森林), ‘The Legal Relationship of Name-Borrowing Arrangements’ (借名登記契約之法律關係) (2003) 43 Taiwan Law Journal (台灣本土法學雜誌) 128, 129; Cho Hsin-Ya (卓心雅), ‘The Contracts of Borrowing Others’ Name for Real Estate Registration: Focusing on the Attribution of Ownership’ (論不動產借名登記契約─以所有權歸屬為中心) [2011] Journal of New Perspectives on Law (法學新論) 91, 93–96. 36 Guo Song-Tao (郭松濤), ‘Name-Borrowing Arrangements: Commenting Taiwan Supreme Court’s 98-Tai-Shang-No 990 Decision’ (談借名登記契約──兼評最高法院98年度第990號判決) (2012) 1579 Judicial Weekly (司法周刊) 2, 2. 37 Shieh Jer-Sheng (謝哲勝), ‘Passive Trusts and Name-Borrowing Arrangements are Circumvention of Laws: Commenting Related Judicial Decisions’ (消極信託和借名登記形同脫法行為──實務相關判決評釋) (2006) 132 Taiwan Law Review (月旦法學雜誌) 188, 195–201.

Taiwan  261 the subject property to a third party, hence breaching the name-borrowing arrangement to the extent that the name-borrower did not consider granting any rights to the namelender to dispose of the subject property to another party. Taiwanese scholars are split on this issue. Some scholars have argued that namelenders have full capacity in disposing of the subject property; thus, disposal is valid even if the third party involved is not bona fide. These scholars have advocated that name-borrowing arrangements are essentially trust contracts, or at least passive trusts, under which name-lenders obtain the registered title.38 To secure the integrity of the real property registration system, name-lenders should be considered as owners of the subject property after being vested with the title according to the name-borrowing arrangement. In this sense, name-lenders become the legal owners of the subject property, while the name-borrowing arrangement merely serves as a restriction of their capacity in disposing of the subject property. Such a restriction, however, is merely internal to the name-borrower and name-lender, and its effect cannot extend to other third parties. Therefore, any third party, be it bona fide or not, should be able to obtain the subject property from the legal owner of the property, ie, the name-lender.39 While this interpretation shifts the risk to name-borrowers, this risk allocation is reasonable because it may discourage name-borrowers from entering into name-borrowing arrangements for the primary purpose of circumventing the law.40 However, this interpretation still poses a risk to parties who enter into name-borrowing arrangements for acceptable and perfectly legal purposes. On the other hand, many scholars have advocated that name-lenders do not have the capacity to dispose of the subject property to a third party and that such disposal is not valid unless the third party is bona fide.41 Several reasons are given by these scholars. First, as Taiwan’s Supreme Court has emphasised, name-borrowing arrangements are not trust contracts; thus, one should not consult trusts laws for the purpose of resolving this issue. Second, even under the Trust Act, beneficiaries may revoke the trustee’s disposal to a non-bona fide third party;42 thus, name-borrowers should have the opportunity to void the disposal of name-lenders in order to secure transactional protection. Lastly, in principle, a name-borrower should undertake the risk arisen from the titleownership inconsistency that she herself has caused. That said, when a non-bona fide third party knows that the disposal may infringe on the interests of the name-borrower, she has the opportunity to seek the name-borrower’s consent to balance the latter’s interest; thus, she should undertake the risk for failing to do so according to the settled principle that the advantaged party assumes the risk in such arrangements.43 38 Wu (n 28) 66. 39 Cho (n 35) 104–11. 40 Wu (n 28) 66–67. 41 Some scholars further argue that a name-lender’s capacity in disposing of the subject property should depend on whether she obtains the title to the subject property from the name-borrower directly or from another third party on behalf of the name-borrower. See Lin (n 3) 415–17. See also Wang Chien-Wei (王千維), ‘Real Property Name-Borrowing Arrangements Through the Lens of the Supreme Court’s Third Civil Court Resolution in 2017’ (由最高法院一○六年度第三次民事庭會議決議看不動產借名登記) (2017) 271 Taiwan Law Review (月旦法學雜誌) 28. 42 Trust Act, Art 18(2)(c) (Taiwan). 43 See Jan Sheng-Lin (詹森林), ‘The Disposal Without Capacity of Name Lenders, the Base of Restoration Claim of Name Lenders, and the Illegal Administration Liability of Name Lenders under Name-Borrowing

262  Wen-Yeu (Wallace) Wang and Yueh-Ping (Alex) Yang Taiwan’s Supreme Court initially found that a name-borrower remains the actual owner of the subject property while a name-lender does not enjoy ownership and thus has no disposal capacity; accordingly, the name-lender’s disposal is not valid unless the third party is bona fide.44 In later cases, however, the Court has found that name-lenders become owners of the subject property after the title transfer and thus have full capacity in disposing of the subject property to a third party, regardless of whether the latter is bona fide.45 This inconsistent position among Supreme Court judges led to the Third Civil Court Resolution of the Supreme Court in 2017. In that Resolution, the Court resolved that name-lenders have full capacity in disposing of the subject property. The Court explained that according to the name-borrowing arrangement, name-lenders typically have no capacity in administering, using, profiting from, or disposing of the subject property. That said, it emphasised that the name-lender’s lack of capacity is vis-a-vis the name-borrower, and its effect does not extend to external third parties. For external third parties, since name-lenders are registered as the owners of the subject real property, they possess full capacity in disposing of the property. Since the Resolution was made, Supreme Court decisions have generally followed suit.46

iii. Summary In summary, after several decades of case law development, Taiwan’s Supreme Court has settled the legal issues relating to name-borrowing arrangements. Internally, a nameborrowing arrangement is treated as a mandate agreement instead of a trust contract. This interpretation avoids the controversy of passive trusts under Taiwan’s Trust Act and thus permits the validity of name-borrowing arrangements unless they breach specific mandatory laws. Externally, since name-lenders are the titleholders of subject properties they are considered as the property owners and thus have full capacity in disposing of subject properties to third parties.

V.  Some Thoughts on Name-Borrowing Arrangements In this part of the chapter, we revisit name-borrowing arrangements and offer a critical viewpoint of the current case law. Our critique will focus mainly on the public order implication of name-borrowing arrangements, but we also engage in a discussion Arrangements: Commenting the Supreme Court 99-Tai-Shang-No 1114 Decision’ (借名登記出名人之無權 處分及借名人回復登記之請求權基礎，兼論出名人之不法管理責任──最高法院99年度台上字第11 14號判決評析) (2011) 186 Taiwan Law Journal (台灣法學雜誌) 49, 52–54. 44 See, eg, Taiwan’s Supreme Court 96-Tai-Shang-No 1487 Civil Decision (2007); 98-Tai-Shang-No 76 Civil Decision (2009); 99-Tai-Shang-No 1114 Civil Decision (2010); 104-Tai-Shang-No 298 Civil Ruling (2015). 45 See, eg, Taiwan’s Supreme Court 97 Tai-Shang-No 637 Civil Decision (2008); 103-Tai-Shang-No 1192 Civil Decision (2014); 103-Tai-Shang-No 1518 Civil Decision (2014); 103-Tai-Shang-No 2142 Civil Decision (2014); 103-Tai-Shang-No 323 Civil Decision (2014); 104-Tai-Shang-No 38 Civil Decision (2015). 46 See, eg, Taiwan’s Supreme Court 106 Tai-Shang-No 304 Civil Decision (2017); 107-Tai-Shang-No 139 Civil Decision (2018); 107-Tai-Shang-No 2096 Civil Decision (2018); 108-Tai-Shang-No 574 Civil Decision (2019). cf 107-Tai-Shang-No 1664 Civil Decision (2018).

Taiwan  263 relating to the characterisation of name-borrowing arrangements as atypical contracts, the analogy of name-borrowing arrangements to trust contracts, and more broadly, the public notice system in Taiwan.

A.  Atypical Contracts or Bare Trusts: Does it Matter? We return to the discussion of whether name-borrowing arrangements should be considered as atypical contracts or bare trusts. However, we also raise a further question. Does this distinction ultimately matter especially when it comes to public order considerations? We understand that it is highly contentious whether name-borrowing arrangements can be considered atypical contracts or bare trusts. Nevertheless, we believe that regardless of how they are classified, name-borrowing arrangements raise serious questions of public order. This need to take into account public order considerations stems from the fact that name-borrowing arrangements exist for a multitude of reasons, including illegitimate ones. For example, name-borrowing arrangements may be used for tax avoidance purposes, which the law should be well equipped to prevent. The damage to public order and transactional security, and the degradation of the title-ownership consistency principle are just some public order considerations which are often overlooked when name-borrowing arrangements are concerned.

B.  Public Order Considerations i.  Title-Ownership Consistency Our first critique underscores the principle of title-ownership consistency as an important element of public order under Taiwan’s legal system. In our view, name-borrowing arrangements pose an irreconcilable contradiction with the principle of title-ownership consistency and thus should be null and void per se because, as such, they breach public order. Taiwan’s Supreme Court acknowledges name-borrowing arrangements because it wishes to honour the principle of contractual freedom. It is important to note that we do not take issue with the principle of contractual freedom, but we do wish to highlight that contractual freedom is not without limits under Taiwan’s civil law system, just as is the case in any jurisdiction. Taiwan’s Civil Code enumerates at least two major limits, ie, mandatory laws47 and public order or good morals.48 In acknowledging the validity of name-borrowing arrangements, the Court has indeed made clear that such arrangements cannot derogate from mandatory laws. The Court has, however, omitted to mention public order or good morals as the other qualification, which, in our view, is a fatal omission. Public order is conceptually distinct from mandatory laws, and the



47 Civil 48 ibid

Code, Art 71 (Taiwan). Art 72.

264  Wen-Yeu (Wallace) Wang and Yueh-Ping (Alex) Yang Supreme Court is required to give it separate weight when examining the validity of name-borrowing arrangements. Even if name-borrowing arrangements do not derogate from any mandatory law, they are not thereby in line with public order. Taiwan’s Supreme Court, unfortunately, has blurred these two concepts. In our view, the principle of title-ownership consistency amounts to an element of public order under Taiwan’s civil laws and hence cannot be breached by private arrangements. As mentioned in section II, in Taiwan’s legal system, the principle of title-ownership consistency is highly valued. Specifically, title-ownership consistency is a crucial means for creating a credible public notice system that ensures transactional certainty in Taiwan. Taking real property registration for instance, Taiwan’s Civil Code even presumes the right-holder recorded in the register as owning the rights legitimately.49 Many private transactions and even state actions, such as civil foreclosure or tax collection, are made nearly exclusively based on registration status. Considering that real property registration plays such a huge role in Taiwan’s legal system, ensuring titleownership consistency becomes crucial for sustaining a credible registration system. The principle of title-ownership consistency thus serves public interest considerations and has implications for public order, to which contractual freedom should cede. The validity of name-borrowing arrangements is doubtful because such arrangements are inconsistent with the public order of title-ownership consistency. Under name-borrowing arrangements, name-lenders are titleholders recorded in the register and presumed to be the owner of the subject property. Name-lenders, however, do not possess any capacity in exercising such presumed ownership; on the contrary, according to the arrangement, name-lenders are not allowed to administer, use, or dispose of the subject property. Instead, name-borrowers retain such rights and are thus the actual owners of subject property. This inevitably separates titleholders from actual owners and creates confusion for third parties. In light of this, name-borrowing arrangements should be found null and void per se. This interpretation has a further implication for the registration system. In light of it, registration authorities, upon finding nameborrowing arrangements on the register, ought to cancel the registration to restore title-ownership consistency and maintain the credibility of the registration system. That said, we wish to add a caveat to our above interpretation. We do not deny that the purpose of a name-borrowing arrangement in a given case may be relevant when considering whether the arrangement offends public order. After all, public order is a complicated concept and multiple considerations should be taken into account in any given case. While name-borrowing arrangements have a negative general impact on the principle of title-ownership consistency, thus jeopardising public order, they may serve other legitimate interests in specific cases. In some cases, the legitimate interests may even go so far as to counterbalance the initial disruption to public order, thus justifying the negative general impact. For instance, some parents might have legitimate purposes for their usage of name-borrowing arrangements, such as to better plan the allocation of assets for their children who may be minors. The Court should evaluate whether the purpose behind a name-borrowing arrangement is legitimate enough to justify the departure from the principle of title-ownership consistency in any given case, and the

49 ibid

Art 759-1(1).

Taiwan  265 burden of proof shall lie with the party seeking to uphold the arrangement as valid. We note, however, the Court never seems to attempt to make this calculation, which results in our critique of its position. Ultimately, we believe that name-borrowing arrangements should be, in principle, null and void because they derogate from public order by offending title-ownership consistency. Even if the principle of title-ownership consistency is inherently flawed, it exists as a legal principle and hence Taiwanese civil law should be aligned with it. In our view, Taiwan’s Supreme Court over-emphasises contractual freedom while ignoring the importance of the principle of title-ownership consistency. This fundamentally undermines public order.

ii.  The Third-Party Effect of Name-Borrowing Arrangements Taiwan’s Supreme Court and some scholars might counter-argue that name-borrowing arrangements do not derogate from title-ownership consistency because their interpretation of such arrangements also offers adequate protection to third parties. Specifically, the Court has acknowledged the full capacity of name-lenders to dispose of the subject property. In that way, a third party obtains the subject property despite the objection of a name-borrower. We, however, do not believe that the current approach adopted by the Court can remedy the damage to public order caused by name-borrowing arrangements. We highlight that title-ownership consistency serves not only the interests of third parties but also the integrity of Taiwan’s registration system. As mentioned above, the registration system forms the basis for many activities, ranging from private ­foreclosure to state actions. Placing a subject property under the title of a name-lender not only deviates from the actual ownership of that subject property but also leads to many distortions. For instance, name-borrowers’ creditors are precluded from foreclosing a subject property while name-lenders’ creditors may foreclose it. To give another example, tax authorities are precluded from collecting tax from name-borrowers, even though name-borrowers continue to enjoy ownership over subject properties. While these concerns do not implicate third party interests in a transaction, they have serious public order implications. On the topic of third-party protection, we do not deny that third parties are adequately protected under the current position of Taiwan’s Supreme Court. On the contrary, we are concerned that they may have received too much protection. Under Taiwan’s legal system, in cases where a titleholder differs from the actual owner, concerns regarding third-party protection are raised because Taiwanese laws, in general, protect the interests of bona fide third parties. This applies in respect of both personal property and real property.50 In name-borrowing arrangements, once the capacity of name-lenders to dispose of subject property is acknowledged, even non-bona fide third parties who are conscious of the name-borrowing arrangement can make claims against namelenders. In our view, this protection does not safeguard the principle of title-ownership consistency; on the contrary, it reinforces the departure from this very principle as it potentially allows mala fide third parties to have a legal claim to the property.

50 See

Civil Code, Arts 759-1(2), 801, 948 (Taiwan).

266  Wen-Yeu (Wallace) Wang and Yueh-Ping (Alex) Yang Some scholars argue that this interpretation may discourage name-borrowers from engaging in name-borrowing arrangements and thus secure the credibility of the registration system, albeit indirectly.51 While this argument may make some functional sense, we respond that a more direct way to discourage name-borrowing arrangements is to simply deny the validity of such arrangements. While name-borrowing arrangements are valid, it is only possible to discourage and deter a limited number of nameborrowers as some will proceed regardless of risks. If name-borrowing arrangements are invalid, registration authorities may, based on their expert judgement and expertise on the subject matter, cancel a registration and restore a title to a name-borrower if they discover that a name on the register is that of a name-lender and not that of the actual owner.

C.  The Unsound Use of Analogy to Trusts On the issue of third-party effects, some scholars have supported the interpretation of Taiwan’s Supreme Court by making an analogy to trusts. As mentioned above, these scholars have followed past case law and argued that name-borrowing arrangements are essentially ‘passive trusts’. Since, under Taiwan’s Trust Act, the trustee is the legal owner of the trust property52 and has full capacity in disposing of the trust property, name-lenders should possess a similar capacity.53 This argument essentially analogises name-borrowing arrangements to trusts. We have a reservation about this trust analogy. As noticed by several Taiwanese scholars, later case law has changed the position and preferred to treat name-borrowing arrangements as mandate agreements instead of trust contracts,54 which makes the analogy to trusts less sound. Besides, as previously highlighted, even when applying trusts laws, Taiwan’s Trust Act only protects bona fide third parties while permitting the beneficiary to revoke a trustee’s disposition if the third party knows or should have known that the disposition breaches the trust contract.55 On this view, even if nameborrowing arrangements can be analogised to trusts, non-bona fide third parties should still not obtain the subject property.56 We support these scholarly observations. We also caution that the analogy of name-borrowing arrangements to trusts may be considered unsound. An analogy makes sense only when two subject matters are sufficiently similar. In our view, however, name-borrowing arrangements are significantly different from trusts as trusts are subject to a whole set of regulations and limitations as provided in related trusts laws. To name a few of relevance here, trusts may employ trust registration to serve a public notice function so as to balance the interests of trust beneficiaries with those of third parties.57 Besides, trusts laws also ensure the partitioning



51 Wu

(n 28) 66–67. Act, Art 9(1) (Taiwan). eg, Wu (n 28) 66. 54 Jan, ‘The Disposal Without Capacity of Name Lenders’ (n 43) 52–54. 55 Trust Act, Art 18(2)(c) (Taiwan). 56 Jan, ‘The Disposal Without Capacity of Name Lenders’ (n 43) 52–54. 57 Trust Act, Art 4(1) (Taiwan). 52 Trust 53 See,

Taiwan  267 of trust property from other assets. For instance, although trust property is nominally owned by the trustee, it is separate from the trustee’s property and the trustee’s creditors cannot foreclose it.58 These rules are mandatory and hence should prevail over party autonomy. A trustee is further obligated to separate trust property from her property unless agreed otherwise.59 Overall, these rules maintain a delicate balance between the interests of trustors, trustees, beneficiaries and potential third parties. Specifically, they address concerns regarding third-party protection caused when trusts deviate from the consistency of title-ownership principle. Name-borrowing arrangements, in contrast, lack these design features. Namelenders are not obligated to separate subject property from their own property unless agreed otherwise. According to the Court’s understanding, subject property is owned by the name-lender, and the name-lender’s creditors can claim and foreclose it. In this sense, subject property under a name-borrowing arrangement simply falls under the title of the name-lender rather than forming a distinct asset group like trust property. This poses a threat to the interests of name-borrowers. Moreover, while nameborrowers continue enjoying actual ownership over subject property, no public notice system is in place to inform third parties of the inconsistency regarding title-ownership. This creates uncertainty for potential third parties and hence affects the overall transactional order and security. In a sense, name-borrowing arrangements incorporate many features of trusts, specifically the separation between titleholders and actual owners, but do not adopt the legal safeguards maintained in trusts laws. In our view, this can be regarded as circumvention of trusts laws, which should not be easily permitted, at least in principle. This is due to the fact that the relevance of trusts in any legal system is secured by the various legal safeguards that each jurisdiction enforces in their trusts laws. Without these same legal safeguards, it is unlikely that trusts would have risen to become such significant legal vehicles for managing wealth, especially in common law jurisdictions, and more recently in civil law jurisdictions as well.60 Thus, our position is that name-borrowing arrangements, if allowed to incorporate features of trusts while at the same time not adopting the same legal safeguards found in trusts laws, jeopardise public order and should not be permitted. Our position finds some comparative support. We note that, historically, the Republic of Korea faced similar struggles with name-borrowing arrangements, known as ‘title trust agreements’ in Korea, and thus promulgated the Act on the Registration of Real Estate under Actual Titleholder’s Name in 1995. Under this Act, title trust agreements are prohibited61 and considered null and void,62 and hence the associated change of real property registration is also null and void.63 Only when the third party is bona fide can she assert that the change of real property registration under a title trust agreement is valid.64 We believe that name-borrowing arrangements in Taiwan should be



58 ibid

Art 11. Art 24(1). and Lee (n 2) 3. 61 Act on the Registration of Real Estate under Actual Titleholder’s Name, Art 3(1) (Korea). 62 ibid Art 4(1). 63 ibid Art 4(2). 64 ibid Art 4(2) proviso. 59 ibid 60 Ho

268  Wen-Yeu (Wallace) Wang and Yueh-Ping (Alex) Yang treated similarly to title trust agreements in Korea, especially as Korea is a civil law jurisdiction that shares similar concerns regarding the undesirability of permitting such arrangements.

D.  A Rigid Understanding of Public Notice and Registration Taiwan’s Supreme Court acknowledges name-lenders as property owners mainly because the real property register states this. Since the real property register possesses a presumptive effect as mentioned above,65 the Court prefers to respect the registration status and determines the property owner based on that status. However, we do not understand the presumptive effect of registration in that way. When discussing the topic of public notice and registration systems, it is crucial to take into account Article 4 of the Trust Act. Article 4 states that ‘no trust in respect of a property right that requires trust registration shall be valid against third parties unless trust registration of the right has been duly completed’. This requirement of trust registration protects the security of transactions involving property held on trust by providing public notice while not compromising on the interests of bona fide third parties.66 Conceptually, the rationale and reasoning behind having this requirement of public notice registration is sound. However, in practice, there are certain issues which may arise due to the complexities surrounding trusts. As we understand it, the legal institution of the trust is envisioned as a regime for managing wealth and assets. Furthermore, trusts essentially comprise a floating pool of assets which is constantly changing based on the private arrangements made between parties. Theoretically, every item has its own property rights and title which must be attached to its owner, regardless of the value or importance of the item. The sheer volume of all these items that have to be registered alone would defy and overwhelm any registration system. Consequently, this requirement for the registration of trust assets, when seen from this light, may not be as viable or practicable as we deem it to be. Although it is impracticable to register all trust assets at all times, Taiwanese trusts law still requires registration of trust assets. This impracticable requirement can be attributed to the dogmatic thinking that characterises Taiwanese jurisprudence. Another important point is that trusts are not considered separate legal entities in the same vein as companies are under company law in many jurisdictions. Companies are able to manage their own pool of assets and register them accordingly. In contrast, it is not easy to recognise who exactly property belongs to when trusts are concerned as they are not separate legal entities which can hold properties. This, coupled with the difficulties involving trust registration, is hard to reconcile with the previously mentioned dogmatic mindset. To be clear, we respect the function of public notices, which is also why we have highlighted the importance of title-ownership consistency. That said, undeniably, sometimes the title recorded in a public register may deviate from actual ownership. When that

65 Civil 66 Ho

Code, Art 759-1(1) (Taiwan). and Lee (n 2) 72.

Taiwan  269 happens, blindly sticking to the title recorded in the register, and anticipating that this can cover up the undesired inconsistency between title and ownership, is not the right way to safeguard the credibility of the register. Rather, it will sustain the inconsistency and lead to more distortion as actual ownership is not accurately recognised. Instead, the right approach is to cancel the registered title and to restore the actual ownership status to end the inconsistency found in public records. Admittedly, this solution would inevitably lead to a change of registration status, which might affect third parties who rely on the public notice system to make informed decisions. But these concerns regarding third-party protection can be addressed by designing an exception for bona fide third parties. In this way, we may end the title-ownership inconsistency without jeopardising the interest of bona fide third parties. This is, in our view, a more balanced way to deal with title-ownership inconsistency in name-borrowing cases. By choosing to rigidly defer to the registration status and interpreting name-lenders as actual owners under a name-borrowing arrangement, Taiwan’s Supreme Court, unfortunately, permits the circumvention of laws. This, in our view, substantially discredits the public notice function of the title register.

E. Summary Ultimately, we believe that, unlike trusts, name-borrowing arrangements should be, in principle, null and void because they derogate from the principle of title-ownership consistency which should be an element of public order under Taiwan’s legal system. Following this interpretation, name-lenders should have no capacity to dispose of subject property even though they hold the title to that property. This interpretation does not sacrifice the interests of third parties because bona fide third parties should still be able to claim their rights based on ordinary bona fide third-party protection rules. The major difference between our interpretation and that of Taiwan’s Supreme Court is that non-bona fide third parties cannot obtain subject property from a name-lender. To us, this is a more balanced outcome than that produced by the Court’s jurisprudence. To prevent any misunderstandings, we accept that on rare occasions when the purpose behind a specific name-borrowing arrangement prevails over title-ownership consistency, such an arrangement may be considered valid. In those cases, name-lenders should have the capacity to dispose of subject property, and name-borrowers undertake the risk that name-lenders may potentially dispose of subject property without the name-borrowers’ consent. This outcome resembles the outcomes that sometimes arise with trusts, but in name-borrowing cases the outcome should only be tolerated in exceptional circumstances, and the burden of proof should lie with the party seeking to uphold the arrangement as valid.

VI. Conclusion In conclusion, even though the majority of Taiwanese legal scholars consider name-borrowing arrangements to be atypical contracts, the question of whether

270  Wen-Yeu (Wallace) Wang and Yueh-Ping (Alex) Yang name-borrowing arrangements are atypical contracts or bare trusts is not settled. Regardless of the viewpoint taken regarding the classification of name-borrowing arrangements, we believe that the lack of attention to public policy considerations in name-borrowing cases is truly concerning. We also believe that the overuse of analogical thinking to liken name-borrowing arrangements to trusts may raise its own issues, especially when the analogy of mandate agreements to name-borrowing agreements is constantly used and reinforced. Furthermore, as a civil law jurisdiction, Taiwan faces complexities in light of its transplantation of trusts law. Civil law jurisdictions tend to hesitate when acknowledging trusts because key concepts of trusts and trusts law tend to depart from the highly valued civilian principles. But by paying close attention to the development of case law regarding name-borrowing arrangements in Taiwan, we observe a reverse phenomenon in this civil law jurisdiction. Taiwan’s Supreme Court acknowledges not only trusts but furthermore even name-borrowing arrangements, ie, arrangements mimicking trusts but are unbound by trusts laws. To argue against this, we argue that name-borrowing arrangements should be, in principle, null and void based on public policy considerations. We further argue that a name-lender has no capacity in disposing of subject property, and a third party cannot obtain the subject property from a name-lender unless she is bona fide. In our opinion, the Supreme Court’s acknowledgment of name-borrowing arrangements arises from an overemphasis on contractual freedom as well as an underemphasis on public order, the inappropriate analogy of name-borrowing arrangements to trusts, and a blind deference to the public notice system in the title register. We recognise the difficulty in reconciling the requirement for trust registration and the practicality of registering every item to recognise the property rights of every legal owner. Specifically, we observe a misunderstanding of the role of the public registration regime under Taiwan’s trusts law. Perhaps it is this misunderstanding that contributes to the halfhearted reception of trusts law in Taiwan.

15 The Legal Nature of the Chinese Charitable Trust HUI JING*

I. Introduction With the mass transfer of wealth into private hands, the People’s Republic of China (‘China’) possesses enormous socio-economic resources that can be mobilised to develop charitable undertakings. The available channels by which private actors may participate in charitable causes are, nevertheless, extremely limited.1 There have been three major institutional forms for establishing charities over the last two decades, namely: foundations (jijin hui 基金会), social associations (shehui tuanti 社会团体) and privately operated non-enterprise organisations (minban feiqiye danwei 民办非企业单位). They have high establishment thresholds and are subject to the requirement that they do not engage in commercial activities. These forms are generally used by government organs or private companies with large-scale assets. It is financially difficult for an individual person to establish charities through these forms. Trusts have three main institutional advantages over foundations, social associations and privately operated non-enterprise organisations. First, there is no threshold for initial start-up funds for the creation of trusts. Second, the cy-près doctrine can be applied in certain situations to save a trust from failure and thus preserve the trust assets in the public domain on an ongoing basis. Third, trusts can carry out commercial activities on the condition that the profits obtained therefrom are exclusively used for charitable purposes. To encourage the general public to play a proactive role in developing charitable undertakings, legislators, by drawing on the experience of public welfare trusts in Japan2 and South Korea,3 introduced public welfare trusts

* Assistant Professor, School of Law, City University of Hong Kong. 1 Siyi Lin, ‘China’s New Charity Law: A New Era of Charitable Trusts’ (2018) 24 Trusts & Trustees 768, 768–69. 2 M Arai, ‘Trust Law in Japan: Inspiring Changes in Asia, 1922 and 2006’ in L Ho and R Lee (eds), Trust Law in Asian Civil Law Jurisdiction: A Comparative Analysis (Cambridge University Press 2013) 44–45. 3 Wu Ying-Chieh, ‘Trust Law in South Korea: Developments and Challenges’ in L Ho and R Lee (eds), Trust Law in Asian Civil Law Jurisdiction: A Comparative Analysis (Cambridge University Press 2013) 47.

272  Hui Jing (gongyi xintuo 公益信托) to the Chinese legal system in 2001 with the promulgation of the Chinese Trust Law.4 The practical uptake of public welfare trusts has, however, been low: over the last 20 years, no more than 20 public welfare trusts have been successfully established. Drawing on the failure of the public welfare trust, legislators then introduced the charitable trusts (cishan xintuo 慈善信托) model in 2016 with the enactment of the Chinese Charity Law.5 A new legislative framework was constructed for this model: for example, greater scope is given to the civil capacity of legal actors, and special regulators are introduced to supervise charitable trust affairs. Charitable trusts in China are still in a formative stage, and there exists a great deal of uncertainty in the operation of this model. In light of this, an examination of the legal nature of Chinese charitable trusts is of great significance in both theory and practice. On the one hand, it may clarify the relationship between charitable trusts and analogous institutions (for example, public welfare trusts), so as to better understand what roles charitable trusts are intended to play, in what way they may relate to other forms of charities, and to what extent the law may draw from analogous institutions when developing charitable trusts. At a macro level, this study can help to assess what efforts Chinese legislators have made in advancing ‘state–society relationships’,6 so as to better understand what role private actors may play in the construction of civil society in China. This chapter will argue that the institution of Chinese charitable trusts is a mixture of both public law and private law norms.7 These norms relate to each other in different ways in different aspects of Chinese charitable trusts. For example, the public law thinking prevails in the assessment of charitable trust purposes, in the sense that only purposes that are consistent with the public welfare goals of the government are recognised as qualifying charitable purposes. At the same time, there exists a certain space for private law norms to operate, for example the autonomy of settlors to determine what types of benefit the charitable trust will create and which sectors of the public can receive such benefits. In other aspects, such as the administration of trust affairs, private law thinking is prominent, in the sense that settlors are endowed by law with wide supervisory powers, entitling them to keep a close eye on the management of charitable trust affairs. At the same time, such powers should be exercised in line with the charity promoting objective of the trust and cannot be used to advance the private interests of the parties to the trusts. In the aforesaid two examples, regardless of the weight that has been assigned to each of the two sets of norms, private law norms are always subordinate and subject to public law norms, in that the operation of charitable trusts should always be aligned with the public welfare policy of the state. To offer an in-depth analysis of the public–private nature of Chinese charitable trusts, this chapter has been organised into four sections. Section II makes observations about the nature of charitable trusts from two specific perspectives. The first is

4 《中华人民共和国信托法》[Trust Law of the People’s Republic of China] (People’s Republic of China) National People’s Congress, 28 April 2001, ch 6. 5 《中华人民共和国慈善法》[Charity Law of the People’s Republic of China] (People’s Republic of China) National People’s Congress, 16 March 2016, ch 5. 6 R Lee, ‘Modernizing Charity Law in China’ (2009) 18 Pacific Rim Law & Policy Journal 347, 372. 7 K Chan, The Public–Private Nature of Charity Law (Hart Publishing 2016) 7.

China  273 the relationship between charitable trusts and public welfare trusts. The second is the institutional objectives of Chinese charitable trusts. In so doing, my aims are twofold: (a) to measure the extent to which the public law nature of public welfare trusts may illuminate the understanding of the nature of charitable trusts; and (b) to examine the way in which the objectives of charitable trusts can be understood and how this may help to decipher the nature of charitable trusts. Where appropriate, comparisons will be made with charitable trusts in Australia and the UK, with a view to delineating the unique characteristics of Chinese charitable trusts. Although the development of charitable trusts varies in these three legal jurisdictions, these comparisons may shed light on the interpretation of Chinese charitable trusts – particularly given that the language describing Chinese charitable trusts suggests similar conceptual characteristics and origins. Based on the analysis in section II, section III will further analyse the regulatory framework of charitable trusts so as to identify the ways in which the scope and function of the regulatory framework of charitable trusts are shaped by the public law and private law norms. Finally, section IV concludes with some comments.

II.  Two Perspectives for Observation In response to the gap between the advantages that public welfare trusts supposedly have in developing charities, and the limited role that they have played in practice, Chinese legislators introduced the charitable trust in 2016, with a view to unlocking the potential of trust institutions to further develop charitable causes. Based on this social context, the section below will analyse the nature of charitable trusts from two specific perspectives: (a) the relationship between public welfare trusts and charitable trusts; and (b) the institutional objectives of charitable trusts. There are two reasons for selecting these perspectives. First, it has been widely acknowledged that the public welfare trust sits entirely within the sphere of public law.8 Examining the relationship between public welfare trusts and charitable trusts can shed light on whether public law norms exist in the structure of charitable trusts, and if so, in what way they exist. Second, the institutional objectives of a specific institution relate to the role and function of that institution, the examination of which relies heavily on the understanding of legislative arrangements of the institution. A closer review of the charitable trust’s objectives can help to examine what role and function it should play; what its legislative arrangement looks like; and, on the basis of the aforesaid two aspects, what its legal nature is.

A.  Relationship with Chinese Public Welfare Trusts Presently, the consensus among scholars and academics is that the institution of public welfare trusts primarily belongs in the sphere of public law, although one may draw 8 赵廉慧 [Zhao Lianhui], 《信托法解释论》[Interpretative Theory of Trust Law] (中国法制出版社 [China Legal Publishing House] 2015) 523; 金锦萍 [Jin Jinping],《论公益信托之界定及其规范意义》 [‘Research on the Definition of the Public Welfare Trust and Its Normative Significance’] (2015) 6 华东政法大学学报 Journal of East China University of Political Science and Law 72, 83.

274  Hui Jing on private law concepts of personhood to give it substance. In light of the historical background against which charitable trusts were introduced, there is no debate that charitable trusts were constructed by drawing on the experiences and lessons of public welfare trusts over the last 20 years. Nonetheless, it is unclear to what extent, and in what way, the two institutions relate to each other. Clarification of the relationship between the two institutions can provide insights into the legal nature of charitable trusts. First let us examine what the law says about how the two institutions relate to each other. Pursuant to Article 44 of the Chinese Charity Law and Article 2 of the Measures for Charitable Trusts, ‘charitable trusts belong to (shuyu 属于) public welfare trusts’.9 This legislative language has given rise to intense debate as to the relationship between the two institutions. Some scholarly writing and commentaries opine that the two institutions are identical and thus share the same legal meaning,10 whereas others propose that public welfare trusts are in nature distinguishable from charitable trusts.11 Aside from the semantic difference between the terms ‘charitable’12 and ‘public welfare’,13 examining what ‘belong to’ means in the context of charitable trusts is the key here. This examination concerns a textual interpretation of the legal term and offers useful insights for further constructive discussion about the relationship between the two institutions. Legal terms, obviously, ‘are best understood and investigated by reference to the content of the doctrines that create the concepts rather than by reference to dictionary definitions’,14 but nevertheless a dictionary definition is a good starting point.

9 《中华人民共和国慈善法》[Charity Law of the People’s Republic of China] (People’s Republic of China) National People’s Congress, 16 March 2016 (n 5) Art 44; 《慈善信托管理办法》[Administrative Measures for Charitable Trusts] (People’s Republic of China) China Banking Regulatory Commission and Ministry of Civil Affairs, 10 July 2007, Art 2. 10 See, eg, 倪受彬 [Ni Shoubin], 《现代慈善信托的组织法特征及其功能优势 – 与慈善基金会法人的比较》[‘The Advantage and Character of Modern Charitable Trust as Organisation – In Comparison of Charity Foundation’] (2014) 46 学术月刊 Academic Monthly 86, 87; 王建军 [Wang Jianjun], 燕翀 [Yan Chong] and 张时飞 [Zhang Shifei], 《慈善信托法律制度运行机理及其在我国发展的障碍》[‘The Operational Mechanism and Theories Related to the Charitable Trust and Its Development Obstacles in Mainland China’] (2011) 4 环球法律评论 Global Law Review 108, 110. 11 See, eg, 李文华 [Li Wenhua], 《完善我国慈善信托制度若干问题的思考》 [‘Thoughts on Several Issues of Perfecting the Charitable Trust System in China’] (2017) 7 法学杂志 Law Science Magazine 89, 91; 刘迎霜 [Liu Yingshuang], 《我国公益信托法律移植及其本土化: 一种正本清源与直面当下的思考》[‘The Transplantation and Localisation of Charitable Trust in China: A Thought of Radical Reform and Facing up to the Present’] (2015) 27 中外法学 Peking University Law Journal 151, 154–55. 12 In Chinese language, the term ‘charity’ represents benevolence, sympathy and compassion, which serves to offer relief for people who are destitute. See 马剑银 [Ma Jianyin], 《中国慈善法立法观察》 [‘Legislative Observations on the Chinese Charity Law’] in 杨团 [Yang Tuan] (ed), 《中国慈善发展报告（2016）》 [Annual Report on China’s Philanthropy Development (2016)] (社会科学文献出版社 [Social Science Academic Press] 2016) 28–30; 薛宁兰 [Xue Ninglan] and 邓丽 [Deng Li], 《中国慈善法研究与立法建议稿》 [Research on Chinese Charity Law and Relevant Legislative Proposals] (中国社会科学出版社 [China Social Science Press] 2014) 125. 13 In Chinese language, the term ‘public welfare’ relates to providing benefits for the whole community or solving fundamental problems in relation to human beings, such as fairness, justice and equality. See 刘迎霜 [Liu Yingshuang] (n 11) 155; 王建军 [Wang Jianjun], 燕翀 [Yan Chong] and 张时飞 [Zhang Shifei] (n 10) 109; 李文华 [Li Wenhua] (n 11) 91. 14 M Conaglen, Fiduciary Loyalty: Protecting the Due Performance of Non-Fiduciary Duties (Hart Publishing 2010) 77.

China  275 In Chinese dictionaries, the term ‘belong to’ entails two meanings – ‘being part of the ownership of ’ or ‘falling under the category of ’.15 How does the dictionary meaning of ‘belong to’ relate to its legal meaning? The laws relevant to charitable trusts do not define ‘belong to’. But in other related areas of laws such as trusts law, contract law and property law, the usage of that term suggests that its legal meaning reflects its two dictionary meanings. First, to say that A ‘belongs to’ B means that B has ownership over A. This kind of meaning is evident in Article 41 of the Chinese Property Law16 and Article 16 of the Chinese Trust Law.17 Second, to say that A ‘belongs to’ B could also indicate that A falls under the scope or category of B. Examples of this meaning can be seen in the application of Article 242 of the Chinese Contract Law18 and Article 60 of the Chinese Trust Law.19 The next question to be considered is to what extent does the usage of the term in those three related areas of laws inform us of the legal meaning of ‘belong to’ for the purposes of charitable trusts? Two observations may be made. First, it is clear that the legal usage of ‘belong to’ in trusts law, contract law and property law does not entail that A is the same as B in terms of its nature or scope. It is unclear whether this conclusion also applies to charitable trusts. Since each area of law is unique, the experience of related areas of laws is informative but cannot be applied directly without having a closer review of the unique characteristics of charitable trusts and their differences with those other areas of law. In this regard, before analysing the characteristics of charitable trusts in the next section, it is at least safe to conclude that the legal meaning of ‘belong to’ in trusts law, contract law and property law has a certain guiding significance, but it is unclear as to the extent to which this guiding significance may illuminate the way in which charitable trusts relate to public welfare trusts. The second observation is based on the first: one can assume that the legal meaning of ‘belong to’ in the three areas of law can be referenced when studying the relationship between charitable trusts and public welfare trusts, given their institutional similarities. If this assumption stands, a possible conclusion is that charitable trusts fall under the scope of public welfare trusts, which means that public welfare trust doctrines may be applicable to charitable trusts. In this sense, charitable trusts may also comprise a considerable public element in their legal structure.

15 汉语大字典编纂处 [Office of Chinese Dictionary Compilation], 《现代汉语词典》 [Modern Chinese Dictionary] ([四川辞书出版社 Sichuan Dictionary Press] 2014]) 723; 中国社会科学院语言研究所 [Institute of Language Studies, Chinese Academy of Social Sciences], 《现代汉语词典》 [Modern Chinese Dictionary], 7th edn ([商务印书馆 The Commercial Press] 2016) 1215. 16 《物权法》第四十一条:法律规定专属于国家所有的不动产和动产,任何单位和个人不能取得所 有权 The author’s English translation is: ‘[n]o units or individuals shall be allowed to acquire ownership of the immovables and movables which are exclusively owned by the State as are provided for by law’. 17 《信托法》第十六条: 信托财产与属于受托人所有的财产相区别，不得归入受托人的固有财产 或者成为固有财产的一部分 The author’s English translation is: ‘[t]he trust property is different from the property belonging to the trustee, and may not be included in, or made part of the trustee’s own property’. 18 《合同法》第二百四十二条：出租人享有租赁物的所有权。承租人破产的，租赁物不属于破产 财产 The author’s English translation is: ‘[t]he lessor enjoys ownership of the leased item. In the event that the lessee goes bankrupt, the leased item does not belong to the category of bankruptcy property’. 19 《信托法》第六十条：为了下列公共利益目的之一而设立的信托，属于公益信托 … （7）发展 其他社会公益事 The author’s English translation is: ‘[a] trust created for one of the following public welfare purposes belongs to the scope of public welfare trusts … (7) developing other public welfare causes’.

276  Hui Jing

B.  Institutional Objectives of Chinese Charitable Trusts As discussed above, the semantic analysis of ‘belong to’ at best demonstrates that charitable trusts relate to public welfare trusts to some extent, but it cannot illustrate how public law thinking takes effect in charitable trusts; whether private law norms exist in the structure of the charitable trust; and if so, in what ways public and private norms interact with each other. In this section, we examine the legal nature of charitable trusts from the perspective of their institutional objectives. The ‘institutional objective’ reveals how legislators understand the role of a specific institution, and in turn, the role of an institution informs how its legal nature should be understood. In the discussion which follows, ‘objective’ refers to a set of core values served by a particular trust institution;20 while ‘purpose’ relates to a desired, rather than incidental, outcome of the person’s actions.21 In contrast to the flourishing development of charitable trusts at common law, almost 95 per cent of trusts created in China over the last two decades have been trusts established for commercial purposes.22 In line with the experiences of commercial trust businesses, a great number of regulations (guizhang 规章) stipulate that the key objective of commercial trusts lies in protecting the rights and interests of parties to commercial trusts.23 Despite the rapid development of commercial trust businesses in post-reform China, the large numbers of the poor, the disabled and the unemployed have created a huge social demand for developing charitable causes.24 Regulators and legislators have held a wide range of conferences and forums to discuss what legislative reforms can be taken to spur and empower trusts in developing charities. Against this social background, the Chinese Charity Law introduced the model of charitable trusts in 2016. This social context indicates that the main task associated with the operation of charitable trusts is to align them with the public welfare goals of the state. This task is inherent in the legislative arrangement of charitable trusts, and it sheds light on the

20 H Hansmann and U Mattei, ‘The Functions of Trust Law: A Comparative Legal and Economic Analysis’ (1998) 73 New York University Law Review 434, 472. 21 There is no consistency as to how terms of purpose, objective and intention are used. The meaning of each term shall be examined with reference to or analysis of the context out of which these terms arise. See Y Grbich, ‘Fraud on a Power: Judicial Control of Appointments by Discretionary Trustees’ (1977) 3 Monash University Law Review 210, 218; J Edelman, ‘Four Fiduciary Puzzles’ in M Harding and E Bant (eds), Exploring Private Law (Cambridge University Press 2010) 316. 22 中国人民大学信托与基金研究所 [Institute of Trust and Fund of Renmin University of China], 《中国信托业发展报告（2018）》 [The Development Report of Chinese Trust Business (2018)] (中国经济出版社 [China Economic Publishing House] 2018) 112–13. 23 See, eg, 《信托公司集合资金信托计划管理办法》 [Administrative Measures for Collective Investment Trust Schemes of Trust Companies] (People’s Republic of China) China Banking Regulatory Commission, 4 February 2009, Art 1; 《信托投资公司信息披露管理暂行办法》 [Interim Measures for the Administration of Information Disclosure by Trust Companies] (People’s Republic of China) China Banking Regulatory Commission, 18 January 2015, s 1. 24 AS Chodorow, ‘Charity with Chinese Characteristics’ (2012) 30 UCLA Pacific Basin Law Journal 1, 34–35; Xin Huang et al, ‘Charity Development in China: An Overview’ (2007) 17 Asia Pacific Journal of Social Work and Development 79, 80–81; AJ Spires, ‘Contingent Symbiosis and Civil Society in an Authoritarian State: Understanding the Survival of China’s Grassroots NGOs’ (2011) 117 American Journal of Sociology 1, 12; Qiusha Ma, ‘The Governance of NGOs in China since 1978: How Much Autonomy?’ (2002) 31 Nonprofit and Voluntary Sector Quarterly 305, 318; 徐卫 [Xu Wei], 《慈善宣言信托制度构建研究》 [Research on the Construction of Charitable Declaration Trust] (法律出版社 [Law Press] 2012) 33–35.

China  277 understanding of the objectives of charitable trusts and the approach charitable trusts should take in advancing the public welfare policy of the state.

i.  Promoting Charitable Undertakings The charitable trust model was introduced in a context where charity development was a crucial concern of the state, suggesting that a core objective of this model is to promote charitable undertakings in China. This idea is further evidenced by Article 1 of the Measures for Charitable Trusts, which stipulates that one of the incentives for its enactment is to promote the development of charitable causes. Three main types of legislative arrangements respond to this objective – namely, the requirement of public benefit, the rule of all charitable use and the application of the cy-près doctrine. The public benefit requirement is stipulated in Article 7 of the Measures for Charitable Trusts. Pursuant to this Article, a trust established for the purpose of carrying out public benefit activities (gongyi huodong 公益活动) is considered to be a charitable trust. Satisfying the public benefit test is also necessary for the creation of charitable trusts in common law jurisdictions, in addition to the requirements that the trust is not created to benefit private individuals.25 According to Article 7 of the Measures for Charitable Trusts, ‘public benefit activities’ are defined broadly and flexibly, providing settlors and trustees with considerable autonomy to define what types of benefit the charitable trust will create and which sectors of the public can receive that benefit. Despite this private law element, public law thinking prevails in this doctrine in the sense that the charitable benefits provided must fall under the scope prescribed by legislators. This indicates that public benefit should be interpreted according to the public welfare policy of the central government. Charitable trusts that fail to comply with this policy will not be capable of being recorded, as further discussed below. The doctrine’s promotion of the autonomy of individuals to formulate their own charitable benefits is subordinate to its concern of ensuring the alignment of charitable trusts with the state’s public welfare goals.26 The second aspect concerns the legislative requirement of ‘all charitable use’. Article 23 of the Measures for Charitable Trusts stipulates that charitable trust assets and the proceeds thereof must all be used for charitable purposes. The effect of this rule is to prevent charitable trusts from becoming vehicles for corruption or crime, or being used as channels for the unregulated flow of funds. This rule is primarily concerned with preserving the other-regarding or altruistic nature of charitable trusts, the enactment of which is attributable to two types of consideration. The first relates to the charity promoting objective of charitable trusts. The second concerns the legislators’ perception of risk. The last two decades has seen a series of scandals or misconduct regarding the use of charitable funds. Legislators are therefore fully aware of the risks of misappropriation that may arise from the day-to-day operation of charitable trusts. Moreover, as the establishment of charitable trusts is in its formative stages, it is not yet fully clear in what ways the legislative framework will be given practical effect and what challenges the regulatory framework will face. In order to minimise risks associated with the use

25 J

Garton, Public Benefit in Charity Law (Oxford University Press 2013) [6.05]. [Zhao Lianhui] (n 8) 533–34; 刘迎霜 [Liu Yingshuang] (n 11) 155.

26 赵廉慧

278  Hui Jing of charitable assets, the law strictly requires that all charitable trusts must solely further charitable purposes. Following this requirement, any incorporation of subsidiary or ancillary private benefits in the operation of a charitable trust is not permissible under the current legislative framework. The application of the cy-près doctrine also embodies the public law thinking of charitable trusts and is consistent with the objective of promoting charitable undertakings. Pursuant to Article 43 of the Measures for Charitable Trusts, civil affairs departments are vested with the jurisdiction to approve cy-près schemes to redirect the use of charitable assets. Cy-près allows charitable trusts to continue to be preserved within the public domain and contribute to the prosperity of charities on an ongoing basis. On the other hand, it is noteworthy that the regulators are only authorised to redirect charitable assets on the basis that, where a charitable trust is terminated, the trust assets have no owner or that the owner of the trust assets is the unspecified general public. This strict limitation manifests a distinctly private law thinking to protect the autonomous interests and will of settlors. In contrast, the courts at common law have assigned more weight to the public interest when applying the cy-près doctrine. The main situation that gives rise to cy-près issues is where a gift fails for initial impracticability or impossibility. Common law courts have flexibly interpreted the two conditions (ie, impracticability and impossibility) in order to facilitate invocation of their inherent27 or statutory jurisdiction over the supervision of charitable trusts. Its overall effect has been to strongly orient the courts towards intervening in the affairs of charitable trusts.28 The cy-près doctrine, combined with the rule of ‘all charitable use’ and the requirement of public benefit, helps to achieve charity promoting objectives in various ways throughout the life cycle of a charitable trust. More specifically, by ensuring that the charitable benefits to be provided are consistent with the state’s understanding of public benefit, charitable trusts are aligned with the state’s goal of developing charitable undertakings. Moreover, to enable settlors and regulators to maintain a continual review of the charitable use of trust assets, the assets in question may only be used exclusively for charitable purposes, so as to advance the state’s public welfare goals as much as possible. Finally, by allowing regulators to intervene in the termination of a charitable trust, the capacity to which the state protects the public interest in the administration of charitable assets is increased. This increasing capacity makes it easy to control charitable trusts and ensure that they are in line with the public welfare policy of the state.

ii.  Giving Effect to the Settlor’s Wishes Aside from the furtherance of charitable purposes, there is also a private law-oriented objective associated with the operation of charitable trusts. The current laws prescribe

27 P Luxton and J Hill, The Law of Charities (Oxford University Press 2001) [11.06]; G Newey, ‘Constraints on the Exercise of Trustees’ Powers’ in PG Turner (ed), Equity and Administration (Cambridge University Press 2016) 46. 28 H Picarda and RO Wilberforce, Baron Wilberforce, The Law and Practice Relating to Charities, 4th edn (Bloomsbury Professional 2010) 446–47; G Watt, Trusts and Equity, 5th edn (Oxford University Press 2014) 240; GE Dal Pont and S Petrow, Law of Charity (LexisNexis Butterworths 2010) 418–20.

China  279 that charitable activities should be carried out in conformity with settlors’ wishes.29 Although the law is not very clear here, on the surface it can be said that the objective of giving effect to the settlor’s wishes embodies a strong private law-leaning tendency. Based on this understanding, how do the settlor’s wishes manifest in the administration of charitable trust affairs? In what way are the settlors’ wishes given effect? Is there scope for conflict to arise between the furtherance of charitable purposes and the protection of the settlor’s wishes? To examine the relationship between this objective and the first one, as well as the way private law thinking works with respect to this objective, answering the aforesaid three questions is of great importance. a.  The Wide Powers Held by the Settlor Giving effect to the settlor’s wishes is closely connected to the entrustment arrangement with regard to the vesting of charitable trust assets. Instead of adopting the term ‘transfer’, the current law uses the term ‘entrust’,30 which indicates that the vesting of ownership of trust assets in trustees is not necessary for creating charitable trusts in China. The term ‘entrust’ is not unique to Chinese charitable trusts, but rather it is widely used in relationships of agency31 and entrustment contracts,32 where the transfer of legal title is not necessarily contemplated. The lack of the need to vest trust assets is not a legislative oversight. Instead, it is a deliberate and conscious legal arrangement, which can be traced back to the background against which the Chinese Trust Law was enacted. When it comes to charitable trusts, there is a legislative arrangement which complements this entrustment arrangement; namely, that the settlor is endowed with extensive powers. This legislative approach stands in marked contrast to that of charitable trusts laws in common law jurisdictions. At common law, settlors drop out of the picture once a trust is validly established,33 unless they reserve to themselves a power. In contrast, the approach adopted by the Chinese Trust Law enables the settlor persistently to intervene in the management of trust affairs, and this suggests that the role of the trustee is more akin to an agent of the settlor rather than akin to a common law trustee. Two explicit examples are the settlors’ powers to consent and to appoint trust supervisors. Article 38 of the Measures for Charitable Trust prescribes that settlors are empowered to grant or withhold consent on certain matters, such as adding new settlors, increasing trust assets or changing the scope of beneficiaries. The granting of the power to consent is derived from the notion that owners are provided with maximal freedom in disposing of their assets.34 Since it is the settlors who supply 29 《慈善信托管理办法》[Administrative Measures for Charitable Trusts] (People’s Republic of China) China Banking Regulatory Commission and Ministry of Civil Affairs, 10 July 2007 (n 9) Art 2. 30 《中华人民共和国慈善法》 [Charity Law of the People’s Republic of China] (People’s Republic of China) National People’s Congress, 16 March 2016 (n 5) Art 44. 31 《中华人民共和国民法总则》 [General Rules on the Civil Law of the People’s Republic of China] (People’s Republic of China) National People’s Congress, 15 March 2017, s 2. 32 《中华人民共和国合同法》 [Contract Law of the People’s Republic of China] (People’s Republic of China) National People’s Congress, 15 March 1999, ch 21. 33 Kai Lyu, ‘Re-Clarifying China’s Trust Law: Characteristics and New Conceptual Basis’ (2015) 36 Loyola of Los Angeles International and Comparative Law Review 447, 458; Tey Tsun Hang, ‘Reservation of Settlor’s Powers’ (2009) 21 Singapore Academy of Law Journal 517, 524. 34 S Gardner, An Introduction to The Law of Trusts (Oxford University Press 2011) 296.

280  Hui Jing the charitable trust’s assets, it is understandable that they are entitled to determine how the assets are going to be used. The objective of protecting settlor autonomy can also be seen through the protection provided by statute when settlors exercise this power. For example, settlors are allowed to consent to the relieving of trustees from fiduciary liabilities in transactions involving conflicts of duty and duty (or of duty and interest), although the transactions concerned should also be carried out at a fair market price. This requirement in substance is consistent with the protection of the will and autonomous interests of settlors. After all, without truly understanding the risk that the transactions in question carry, the settlors cannot be placed in a position to freely determine whether to take the risks arising out of the waiving of that protection. Allowing the non-conflict principle to be relaxed can help balance its protective function and the value of ensuring the autonomy of settlors. Autonomous decisions outweigh that protective function, but only on condition that settlors fully understand the consequences of their decisions. The second power is the settlor’s power to appoint trust supervisors. This enables the settlor to keep an eye on the performance of the trustee’s duties.35 In contrast to public welfare trusts, the appointment of trust supervisors is not mandatory in the context of charitable trusts36 and depends primarily on settlors’ wishes. Furthermore, the law does not specify the trust supervisor’s powers and its obligations around the exercise of these powers. In this light, the extent to which trust supervisors may play a supervisory role can vary considerably, depending on the contractual arrangements between settlors, trustees and trust supervisors. Again, this demonstrates that giving effect to the settlor’s wishes is an important objective of charitable trusts. b.  The Rule of Standing Another aspect that is in line with the granting of wide powers to settlors is the rule of standing. There is a distinction between public law and private law in terms of who can sue. Private law integrates the question into its causes of action while public law considers it separately. The former grants standing as a matter of right on the basis of plaintiffs’ personal interests; the latter grants it as a matter of discretion in consideration of various factors.37 This divergence is primarily attributable to the different types of relationship regulated by private law and public law. Private law deals with actions in which legal actors protect their autonomous interests; public law deals with approaches by which the whole society is administered or governed.38 35 FH Foster, ‘American Trust Law in a Chinese Mirror’ (2009) 94 Minnesota Law Review 602, 645; SE Sterk, ‘Trust Protectors, Agency Costs, and Fiduciary Duty’ (2005) 27 Cardozo Law Review 2761, 2763. 36 《慈善信托管理办法》[Administrative Measures for Charitable Trusts] (People’s Republic of China) China Banking Regulatory Commission and Ministry of Civil Affairs, 10 July 2007 (n 9) Art 11. 37 相庆梅 [Xiang Qingmei], 《民事诉权论》 [Research on the Right of Civil Suits] (PhD Thesis, China University of Political Science and Law) 9–10; 王锡三 [Wang Xisan], 《近代诉权理论的探讨》[On the Theory of Modern Appealing Right] (1989) 6 现代法学 Modern Law Science 16, 16–17. 38 J Freeman, ‘Extending Public Law Norms Through Privatization’ (2003) 116 Harvard Law Review 1285, 1303–4; JF Krahe, ‘The Impact of Public Law Norms on Private Law Relationships’ (2015) 2 European Journal of Comparative Law and Governance 124, 126.

China  281 This procedural dimension offers a number of critical insights into the substantive dimension of Chinese charitable trusts. The charitable trust was a mixture of public law and private law norms from its very inception, in that it ‘represented the adaptation of a private law institution in the service of a perceived public interest’.39 In view of these private law norms, under the state’s goal of promoting charitable undertakings, a settlor’s wishes can be given effect to the largest extent so as to encourage the public to take advantage of trusts in developing charitable causes. This thinking is evident in the rule of standing through the fact that regulators are not allowed to bring proceedings to remedy the misuse of charitable trust assets on the public’s behalf.40 Although promoting charitable undertakings is one of the objectives of charitable trusts, the law of standing puts a limitation on the courts’ jurisdiction to adjudicate disputes initiated by regulators. Limiting the parties who are entitled to file lawsuits against defaulting trustees of charitable trusts to only settlors and trust supervisors indirectly promotes the autonomy of settlors. For example, the trustee can follow a settlor’s instructions without worrying that these instructions are not what a regulator determines to be in the best interests of the charitable trust’s purposes. This legislative approach, in substance, is in line with the private law-leaning tendency of charitable trusts and is responsive to the objective of giving effect to the settlor’s wishes. In contrast, the charitable trusts laws in Australia and the UK have a tendency to lean towards public law in terms of the rule of standing. As a matter of public policy, an object’s entitlement to bring proceedings is granted by legislation or case law, independent of the analytical nature of the charitable trust. This legislative approach has substantively expanded the scope of the persons who are entitled to sue. For ­example, sections 114 and 115 of the Charities Act 2011 (England and Wales) identify four classes of person with standing to bring charity proceedings: the Attorney-General or Charity Commission, the charity or any of its trustees, any person interested in the charity, and any two or more inhabitants of an area served by a local charity.41 Likewise, the statutes in South Australia and Australian Capital Territory stipulate that potential objects (the objects of a class that the charitable trust is intended to benefit), identified intended objects (the objects that have been selected by the trustee as beneficiaries) and past objects (the objects that have received trust benefits in the past) are entitled to bring proceedings. More significantly, the scope of their standing can extend to the general administration of charitable trusts, irrespective of how much and what type of interest they may have in the trust properties.42

39 Chan (n 7) 12. 40 《慈善信托管理办法》[Administrative Measures for Charitable Trusts] (People’s Republic of China) China Banking Regulatory Commission and Ministry of Civil Affairs, 10 July 2007 (n 9) arts 11, 49. 41 Charities Act 2011 (England and Wales) ss 114 and 115(1). See also Haslemere Estates Ltd v Baker (1982) 1 WLR 1109, 1122D; Re Hampton Fuel Allotment Charity (1988) 3 WLR 513, 517E; Bradshaw v University College of Wales (1988) 1 WLR 190, 193F. 42 Trustee Act 1936 (SA) s 36(1c)(d); Trustee Act 1925 (ACT) s 94A(3). See also Ngarluma Aboriginal Corp RNTBC v Attorney General (WA) [2014] WASC 245 [47], [52], [73]; Thorn v Bettens [2006] SASC 59 [12]; Metropolitan Petar v Mitreski [2001] NSWSC 976 [16].

282  Hui Jing

C.  Key Observations In light of the explanations above, three key findings can be observed. First, examining the relationship between Chinese charitable trusts and Chinese public welfare trusts from a semantic perspective is helpful, but the insights that can be provided into the legal nature of Chinese charitable trusts are relatively limited. Second, comparisons with charitable trusts laws in Australia and the UK show that charitable trusts in all three jurisdictions are a mixture of public law and private law norms. However, the institution of charitable trusts assigns a somewhat different weight to the public and private interests that may be specific to each jurisdiction. Third, examining the institutional objectives of Chinese charitable trusts from the perspective of their legislative framework is insightful, as it shows how the norms of public law and private law manifest themselves in different dimensions of Chinese charitable trusts, and how much weight has been assigned to the public and private interests in different stages in the life of a Chinese charitable trust. Pursuant to the analysis of institutional objectives, a new question arises: how do the two objectives interact with each other? This question concerns the understanding of the relationship between the autonomous interests of charitable trust settlors and the public interest in charitable trust assets. Although the law does not provide an explicit answer to this question, a closer look at Article 59 of the Measures for Charitable Trusts and Article 105 of the Chinese Charity Law may provide insights into how the two objectives might interact. The two Articles stipulate that any use of charitable trust assets for non-charitable purposes will attract administrative liabilities on the part of the trustees. Consistent with the textual interpretation of these two Articles, two observations can be drawn in relation to settlors’ wishes in the context of charitable trusts. First, the settlor has the freedom to determine the methods that can be taken to administer trust affairs and how trust properties should be distributed.43 The settlor places a certain amount of money in charitable trusts, so it is understandable that he is eligible to determine how the money should be administered. Moreover, courts are willing to uphold such wishes in consideration of the idea that benevolent property owners are endowed with maximal liberty to dispose of their assets.44 Second, after a charitable trust has been validly established, the trust parties are prohibited from advancing their private interests when conducting charitable trust business. In this regard, any consideration of the private interests of trust parties is in conflict with the scope of the settlors’ wishes, as stipulated in Article 44 of the Chinese Charity Law and Article 2 of the Measures for Charitable Trusts. Such observations are informative in guiding our understanding of the relationship between the two institutional objectives. That is to say, there is a hierarchical relationship between them: the objective of giving effect to the settlor’s wishes is subject to the objective of promoting charitable undertakings; and under the overarching objective of

43 《慈善信托管理办法》[Administrative Measures for Charitable Trusts] (People’s Republic of China) China Banking Regulatory Commission and Ministry of Civil Affairs, 10 July 2007 (n 9) arts 14, 38. 44 See also analysis in section II.B.ii.a.

China  283 promoting charitable undertakings, it is permissible to give effect to a settlor’s wishes to the fullest extent. In light of the correlation between its legal nature and institutional objectives,45 the aforesaid interpretation of its institutional objectives also suggests that the charitable trust is a mixture of both public law and private law norms. Regardless of the weight that has been assigned to each of the two types of norms, private law norms are always subordinated and subject to public law norms, in the sense that the operation of charitable trusts should always be aligned with the public welfare policy of the state. The analysis above connects us back to the analysis of the relationship between charitable trusts and public welfare trusts. As noted previously,46 the semantic interpretation of ‘belong to’ suggests that charitable trusts may relate to public welfare trusts to a certain extent, but it cannot illustrate the way in which the two institutions interact. This gap in the analysis can be supplemented by a closer review of the institutional objectives of charitable trusts, which involves an interpretation and examination of the legislative arrangements relevant to charitable trusts. The ­analysis in this part shows that charitable trusts are distinguishable from public welfare trusts. Specifically, in contrast to the public law nature of public welfare trusts, the legal nature of charitable trusts is a hybrid in which a certain amount of weight has been given to the promotion of the autonomy of benevolent property owners. The legal nature of a particular institution informs how its legislative framework should be put into effect. In consideration of the private law elements of charitable trusts, it thus follows that the extent to which the experiences of public welfare trusts apply to charitable trusts may be strictly limited, and it may be unsuitable to assume that charitable trusts and public welfare trust are synonymous.

III.  Observations on the Regulatory Framework After considering the relationship between charitable trusts and public welfare trusts, and the institutional objectives of charitable trusts, I have inferred that the institution of charitable trusts is a mixture of both public law and private law norms. This section will further test this inference from the perspective of the regulatory framework. In contrast to internal supervision from trust parties, the application of regulatory measures serves to ensure that the performance of the trust parties’ duties is compliant with the regulatory goals of charitable trusts. The regulatory measures adopted under the current legal framework illustrate how regulators look at the legal nature of Chinese charitable trusts and how regulators understand the role of private actors in developing charitable causes in China. In this part, these regulatory measures will be examined against the public law–private law analysis of charitable trusts, so as to observe in what way each of the measures falls into the respective categories of public law and private law, and to what extent the public law–private law analysis is compatible with the current regulatory framework of charitable trusts.

45 See 46 See

analysis in section II.B. analysis in section II.A.

284  Hui Jing

A.  Establishment of Specialised Regulators The charitable trust is modelled on the public welfare trust, but the regulatory framework around the two institutions is considerably different. In terms of regulatory practice, responsibilities for the regulation of public welfare trusts have, over the last 20 years, been shared by civil affairs departments, public security bureaus, and a wide range of government organs or agencies at provincial, municipal and county levels. This fragmented system of regulation has largely contributed to the failure of public welfare trusts in two respects. The first is the difficulty in identifying public welfare administration authorities from the perspective of benevolent property owners, and the second is the conservative attitude taken by regulators towards issuing consent for registration.47 Drawing on the regulatory experiences of public welfare trusts, Article 6 of the Chinese Charity Law and Article 6 of the Measures for Charitable Trusts have established a specialised regulatory framework for charitable trusts. In this framework, the banking regulatory authority of the State Council and its local offices (BRAs), and the civil affairs departments at and above the county level (CADs) are tasked to regulate the creation and day-to-day administration of charitable trusts. In China, the BRAs have jurisdiction over the ‘supervision and management of trust companies and their business activities’,48 which explains why the BRAs are involved in the regulatory framework of charitable trusts where the duties of trusteeship are performed by trust companies. Meanwhile, since charitable trust purposes are closely connected to the promotion of the public welfare of the public, the CADs are, in accordance with their core objectives and roles, designated as one of the regulators in the supervision of charitable trust affairs.

B.  Regulatory Measures and Powers The charitable trust is a mixture of public law and private law norms in the general sense that it represents the use of a private law institution for a purpose which has more of a public law nature.49 Measures and powers are the two main pillars constituting the framework in which charitable trusts are regulated. In what way is the tension or interplay between public law and private law mirrored in the regulatory framework for charitable trusts? An examination of the regulatory measures and powers can provide insights into this question.

i.  Private Law Concerns a.  Recording vis-à-vis Registration It is widely recognised that the application of regulatory measures aims to strike a balance between accountability and over-regulation.50 The balance is manifested in 47 赵廉慧 [Zhao Lianhui] (n 8) 542. 48 《信托公司管理办法》 [Measures for Administration of Trust Companies] (People’s Republic of China) China Banking Regulatory Commission, 23 January 2007, Art 5. 49 Chan (n 7) 181. 50 Feng Xiaoming, ‘China’s Charitable Foundations: Development and Policy-Related Issues’ (2015) 48 The Chinese Economy 130, 137.

China  285 different ways in respect of charitable trusts and other types of charities, such as public welfare trusts, foundations, social service agencies and associations. An illustrative example is the role played by regulators in the creation of charities. Apart from the measures of information disclosure and the submission of annual reports, which are ex-post supervision and commonly applied to all types of charities, there exists one measure which considerably differentiates charitable trusts from other forms of charities: recording (beian 备案). To create a public welfare trust,51 foundation,52 association,53 or social service agency,54 it is necessary to obtain approval from the relevant regulatory authorities. These authorities will undertake a substantive examination of the documents submitted by relevant parties for registration, and make a number of enquiries of them, for example, what the true purpose of the trust is; in what way public benefits are provided; and how specific or detailed the provisions of the trust instruments are. These authorities are granted by law a high degree of discretion when reviewing the registration documents, thereby having the capacity to reject applications where, according to their judgement, the documents in question are considered inconsistent with the formalities or substantive requirements prescribed by law. The high level of involvement of regulators in the creation stage indicates the regulators’ concern in protecting the public interest in properly administered charity properties. More specifically, the regulators tend to use their administrative discretion to decline the establishment of certain charities whose operation is deemed to risk damage to public trust and confidence in the charitable sector. In contrast, as already noted in the Introduction, in consideration of the operational experiences of charities over the last two decades, the Chinese Charity Law and Measures for Charitable Trusts have put into effect the practice of recording as the threshold for creating charitable trusts.55 Since the promulgation of the Chinese Trust Law in 2001, this is the first time the practice of recording has been put in place in the area of Chinese trusts laws. A textual interpretation of this practice suggests that, legally speaking, the regulators have no discretion to decline recording applications when the trust documents submitted have met the formal requirements of the law. The legislative change from registration to recording suggests that more credit is given to the civil capacity of legal actors, and those who regulate charitable trusts have undergone a transition from control to cooperation in terms of regulatory philosophy. This approach indicates that, by minimising the extent to which, and the scope in which, regulatory agencies intervene, laws relevant to charitable trusts aim to promote the autonomy interests of trust parties and their capacity for innovation, so as to encourage the wide application of trusts in the development of charitable causes.

51 赵磊 [Zhao Lei], 《公益信托法律制度研究》 [Research on the System of Public Welfare Trusts] (法律出版社 [Law Press] 2008) 135; 卞耀武 [Bian Yaowu], 《中华人民共和国信托法释义》[Interpretation of the Trust Law of the People’s Republic of China] (法律出版社 [Law Press] 2002) 41–42. 52 《基金会管理条例》 [Regulations on Administration of Foundations] (People’s Republic of China) State Council, 3 August 2004, Art 6. 53 《社会团体登记管理条例》 [Regulations on Registration Administration of Associations] (People’s Republic of China) State Council, 6 February 2016, Art 3. 54 《民办非企业单位登记管理暂行条例》 [Interim Regulations on the Administration of the Registration of Privately-Operated Non-Enterprise Organisations] (People’s Republic of China) State Council, 25 October 1998, Art 5. 55 《慈善信托管理办法》[Administrative Measures for Charitable Trusts] (People’s Republic of China) China Banking Regulatory Commission and Ministry of Civil Affairs, 10 July 2007 (n 9) ch 3.

286  Hui Jing b.  Increasing Level of Public Participation The second representative example, which is consistent with private-law thinking, concerns the wide use of collaborative measures by regulators. According to the Guiding Opinions of the State Council on Promoting Healthy Development of Charitable Causes, regulators are clearly tasked with educating and supporting charity participants on what the best practices are in relation to charitable activities.56 In light of this policy, regulatory agencies at local levels have conducted a wide range of educational or training programmes in relation to the management of charitable trust assets and the disclosure of charitable trust information.57 Of these collaborative measures, it is worth noting that private actors are highly encouraged to play an active role in raising awareness about charitable trusts. For example, the Notice of the Shanghai Bureau of Civil Affairs on the Implementation of the Chinese Charity Law and the Implementation Plan for Promoting the Development of Charitable Causes in Haidian District of Beijing stress that ‘the public plays a positive role in the implementation of charity-related policies’.58 Likewise, the strategies relating to charitable trusts in Zhejiang and Jiangsu provinces envision a collaborative mechanism in which the government guides, the charitable trust sector self-regulates, and the public oversees.59 Because of such a favourable regulatory environment, this has engaged the public’s interest in charitable trusts, as evidenced in the wide establishment of research institutions, as well as advisory services associated with legal firms or Chinese universities. This increasing level of public participation is an embodiment of the increasing level of autonomy and capacity of private parties, and a reflection of the fact that regulators have given great value to the role of individuals in the advancement of state–society relationships.

ii.  Public Law Concerns In spite of the foregoing autonomy-promoting measures, the overarching objective of promoting charitable undertakings has, on the other hand, acted as a counterbalance to

56 《国务院关于促进慈善事业健康发展的指导意见》 [Guiding Opinions of the State Council on Promoting Healthy Development of Charitable Causes] (People’s Republic of China) State Council, 24 November 2014, chs 4–5. 57 See, eg, 《2019年上海民政工作要点》 [Key Work Points of Shanghai Civil Affairs Bureau in 2019] (People’s Republic of China) Shanghai Civil Affairs Bureau, 22 January 2019, s 1; 《杭州市民政系统2017年工作总结和2018年工作要点》 [Work Summary of Hangzhou Civil Affair System in 2017 and Key Work Points in 2018] (People’s Republic of China) Hangzhou Civil Affairs Bureau, 13 February 2018, s 2. 58 《上海市民政局关于贯彻落实的通知》 [Notice of the Shanghai Bureau of Civil Affairs on the Implementation of the Charity Law of the People’s Republic of China] (People’s Republic of China) Shanghai Bureau of Civil Affairs, 26 August 2016, pt 1; 《北京市海淀区关于促进慈善事业发展的实施方案》 [Implementation Plan for Promoting the Development of Charitable Causes in Haidian District of Beijing] (People’s Republic of China) Haidian District Government of Beijing, 14 March 2017, s 7. 59 《浙江省实施办法》 [Measures for the Implementation of the Chinese Charity Law in Zhejiang Province] (People’s Republic of China) Standing Committee of Zhejiang Provincial People’s Congress, 30 November 2018, arts 5–6, 35; 《江苏省慈善信托备案管理暂行实施办法》 [Interim Measures for the Administration of the Recording of Charitable Trusts in Jiangsu Province] (People’s Republic of China) Jiangsu Provincial Civil Affairs Department and Jiangsu Office of the China Banking Regulatory Commission, 23 October 2017, arts 51, 57–58.

China  287 the protection of the interests of private actors. This counterbalance has been achieved through the granting of wide supervisory powers to regulators, among which the most noticeable are the powers to revoke the registration licences of trustees and to conduct supervisory conversations.60 The two types of power are administrative in nature, subject to the regulator’s discretion and mostly intended to be punitive. As regards the power to revoke, this power is a type of ex-post supervision, the exercise of which depends heavily on the severe contravention of laws or regulations by trust parties. The legal consequences associated with the exercise of this power have a strong deterrent effect, for the revocation of a registration licence effectively bans trustees from engaging in trust businesses for a long period of time. In comparison, supervisory conversations is a type of ex-ante supervision – it is a phase in the ongoing administrative decisionmaking process, which does not necessarily lead to any change or elimination of rights or obligations on the counterparty being interviewed.61 By interfering with the administration of charitable trust affairs at an early stage, this power in substance serves to prevent serious legal liabilities from emerging as a result of the perpetuation of illegal acts. These two types of power are in line with the objective of deterring the wrongful conduct of trustees, but the way in which this deterrence takes place is different between the two powers. This disparity reflects the different degrees of risks that are addressed by the two powers. Consistent with the granting of wide regulatory powers, the balance in the current regulatory framework, viewed as a whole, is tilted in favour of public interest for the proper administration of charitable trust assets. This observation is derived from two factors. The first relates to the procedure for exercising the two regulatory powers mentioned above. There is no doubt that the two powers are strongly influenced by public law norms. The gateway through which regulators intervene in the management of charitable trust affairs is largely relaxed when looking at the fact that there are very few restrictions imposed on the exercise of the two powers – the existing law does not specify the factors to be considered when determining whether the registration licence of a trustee should be revoked; likewise, there are massive ambiguities concerning the nature of supervisory conversations, the scope of application and the procedures for conducting them.62 Because of these ambiguities, it is foreseeable that the regulators have a high degree of discretion in

60 《慈善信托管理办法》[Administrative Measures for Charitable Trusts] (People’s Republic of China) China Banking Regulatory Commission and Ministry of Civil Affairs, 10 July 2007 (n 9) Art 51. Similarly, the Australian Charities and Not-for-profits Commission (hereinafter ACNC) has also been granted extensive powers to regulate charitable trusts. s 110-15 of the ACNC Act prescribes that the Commissioner has the power to do all things necessary or convenient for the performance of his or her functions. This suggests that the Commissioner can depend on various authorities to perform his or her duties, including the ACNC Act, the statutes of a State or Territory, the common law and equity. 61 孟强龙 [Meng Qianglong], 《行政约谈法治化研究》 [‘Study on Legalisation of Administrative Talks’] (2015) 6 行政法学研究 Administrative Law Review 99, 105–06; 王虎 [Wang Hu], 《风险社会中的行政约谈制度: 因应、反思与完善》 [‘The System of Administrative Talks in Risk Society: Response, Reflection, and Improvement’] (2018) 1 法商研究 Study of Law and Business 22, 26. 62 朱新力 [Zhu Xinli] and 李芹 [Li Qin], 《行政约谈的功能定位与制度建构》 [‘The Functional Orientation and Institutional Design of Administrative Interviews’] (2018) 4 国家行政学院学报 Journal of Chinese Academy of Governance 91, 92; 王虎 [Wang Hu] (n 61) 26–27.

288  Hui Jing exercising the supervisory powers. It is unclear whether this wide discretion was deliberately intended by legislators. Despite this uncertainty, however, it is certain that, in theory, the existence of this wide discretion is favourable for regulators to supervise the performance of trustees’ duties, so as to meet the dual purposes of satisfying the public’s demand for accountability and preventing dishonest trustees in such employments from committing fraud. The second factor lies in the policy statements associated with the promotion and regulation of charitable causes. Close scrutiny of these statements suggests that they rarely talk about the autonomy interests of individuals; rather, they discuss heavily the maintenance of public trust and confidence in the charitable sector and what measures can be taken to incentivise individuals into participating in charity-promoting activities.63 When it comes to charitable trusts, the legislative arrangement that natural persons are excluded from acting as trustees is a typical embodiment of this kind of policy thinking. This arrangement is primarily attributable to the consideration that charitable trusts are still in their infancy, and it is not yet fully clear what challenges the regulatory authority may face. In this light, trustee entitlements should be strictly limited, and only charitable organisations and trust companies that have already been subject to comprehensive regulation are permitted to take the office of trust.64 This approach strongly tends towards public-law thinking, in which the concern of securing the individual’s autonomy yields to the concern of protecting public interest in the proper administration of charitable trust assets.

IV. Conclusion The discussions and findings above have shown that the Chinese charitable trust is a mixture of public law and private law norms. The way in which, and the extent to which, the two types of norms interact with each other vary in different dimensions of charitable trusts. The two institutional objectives for charitable trusts strike a sensible balance between public law and private law, in that under the overarching objective of promoting charitable undertakings, it is permissible to give effect to a settlor’s wishes to the largest extent. This type of tension is also mirrored in the measures and powers employed by regulators. Consistent with the relationship of the two institutional objectives, the balance in the regulatory framework is tilted in favour of

63 See, eg, 《 全 国 人 民 代 表 大 会 关 于 国 民 经 济 和 社 会 发 展 第 十 三 个 五 年 规 划 纲 要 的 决 议 》 [Resolution of the National People’s Congress on the Outline of the Thirteenth Five-Year Plan for National Economic and Social Development] (People’s Republic of China) National People’s Congress, 16 March 2016, ch 64; 《国务院关于促进慈善事业健康发展的指导意见》 [Guiding Opinions of the State Council on Promoting Healthy Development of Charitable Causes] (People’s Republic of China) State Council, 24 November 2014 (n 56) chs 1, 3. 64 《全国人大法律委员会关于修改情况的汇报》 [Report of the Law Committee of the National People’s Congress on the Revision of Charity Law of the People’s Republic of China (Draft)] (People’s Republic of China) The People’s Congress, 21 December 2015, s 4.

China  289 public interest in the proper administration of charitable trust assets. The application of recording and collaborative measures show that the state has given great weight to promoting the autonomy of individuals and their capacity to advance state–society relationships. These private-law interests have been counterbalanced by the fact that regulators are granted with a wide range of supervisory powers, the exercise of which orients them towards intervening to align charitable trusts with the public welfare goals of the state.

290

part iv

292

16 The Surviving Legacy of English Trusts Law and Trusts in Thailand SURUTCHADA REEKIE* AND ADAM REEKIE**

Introduction On 10 July 2018, the Thai Cabinet approved a new draft bill on trusts for the purpose of asset management.1 This draft bill, as outlined in the consultation paper released three months earlier, is intended to tackle the problem of assets flowing out of the ­country, presumably into jurisdictions that recognise trusts of personalty.2 The draft bill, together with the Inheritance Tax Act BE 25583 (2015) which for the first time introduced taxation at the point of the passing of inherited property, have sparked an interest in trusts law – still an unfamiliar concept to most Thai lawyers. The general understanding of trusts in Thailand is that they are prohibited except where expressly permitted by statutes. This is by virtue of section 1686 of the Civil and Commercial Code (the CCC), which forms part of Book 6 of the CCC, on succession and inheritance law, promulgated in 1935. This section states that, subject to laws specifically allowing the creation of trusts, the purported creation of a trust, directly or indirectly, during the lifetime or after the death of the would-be settlor, will have no legal effect. Indeed, the reference to an exception for specific laws was only introduced in 2007 to pave the way for the introduction of the Trust for Transactions in the Capital Market Act BE 2550 (2007). The remit of the Trust for Transactions in the Capital Market Act is limited to statutory trusts for the purpose of facilitating investment in the capital

* Faculty of Law, Chulalongkorn University. ** Faculty of Law, Thammasat University. 1 Cabinet Resolution on the Draft Bill on Trusts for the Purpose of Personal Asset Management (10 July 2018). 2 The Department of Fiscal Economics, the Ministry of Finance, ‘The Consulting Paper on the Draft Bill on Trusts for the Purpose of Personal Asset Management’, available at: www.fpo.go.th/main/Draft-Law/Draftlaw-is-in-between-Public-hearing/.8208aspx (Thai language). 3 BE is an abbreviation for Buddhist Era. Thailand generally uses the Buddhist calendar, for which the starting reference date is equivalent to BCE 543. In this chapter, dates are given in CE unless otherwise stated and dates in BE are accompanied by the equivalent CE date in brackets.

294  Surutchada Reekie and Adam Reekie markets. The specialised and restricted scope of these trusts, together with the long period of time – over three-quarters of a century – in which the creation of trusts has otherwise been prohibited by the CCC, means that the concept of trusts, being an equitable creature originating in a common law jurisdiction, has never occupied a central position in the country’s mainstream legal consciousness. However, rarely explored by academic literature and fundamentally forgotten by the public are the persisting effects of trusts that were established in Thailand before section 1686 of the CCC came into force.4 Prior to the adoption of the CCC, a number of trusts were created in Thailand, then called Siam, using principles of English trusts law; and when Book 6 of the CCC came into force in 1935, it did not apply ­retrospectively to abolish trusts already established in the Kingdom. These trusts – referred to as ‘common law trusts’ in this chapter in order to distinguish them from statutory trusts – have been routinely recognised and enforced by the Supreme Court of Thailand. This chapter investigates the lingering effects of English trusts law in Thailand’s civil law jurisdiction through judicial interpretation and enforcement. The investigation reveals that common law trusts still exist in the legal landscape of Thailand and are enforced by the Thai courts through a pragmatic application of principles of English trusts law. This judicial attention has resulted in the development of Thailand’s own distinct, if limited, common law trust jurisprudence, which provides for a fascinating study of the adoption and persistence of a foreign concept in an evolving legal system. However, as discussed in the conclusion, this jurisprudence may well have no effect on, and be unaffected by, Thailand’s present and future statutory trusts. This chapter is divided into four sections. Section I will explore the historical background of common law trusts in Thailand, established using principles of English trusts law. Section II discusses the prohibition of the establishment of trusts under the CCC. Section III examines the trust cases decided by the Supreme Court of Thailand after section 1686 came into effect, in an attempt to understand the implications of these cases from the point of view of comparative law. The conclusion discusses the implications, if any, of the jurisprudence developed through these cases for statutory trusts in Thailand.

I.  Historical Background to Common Law Trusts in Thailand This investigation into the historical development of common law trusts in Thailand, called Siam prior to 1939, is punctuated by two important points in time. The first is the year 1855 when Siam signed the first unequal trade treaty with Western powers. 4 Thai textbooks on inheritance law usually briefly discuss the topic of trusts. While it is acknowledged that trusts established prior to 1935 were not retrospectively abolished, academic literature is yet to explore the historical development and context of the introduction and curtailment of trusts in Thailand, or the continuing legal effects: see, eg, P Kampusiri, Principles of Inheritance Law, 3rd edn (Duan Tula 2017) (Thai language) 178–80; A Na Takuatung, Explanation of Book 6 of the Civil and Commercial Code on Inheritance (Nitibannakarn 2007) (Thai language) 222–28; P Na Nakorn, Explanation of Inheritance Law, 4th edn (Winyuchon 2015) (Thai language) 383–86.

Thailand  295 This trade treaty incidentally opened up the country to the influx of foreign laws, including English trusts law. The end point is the year 1935 when Book 6 of the Civil and Commercial Code came into force, introducing section 1686 which renders the creation of would-be trusts from that date devoid of any legal effect. The discussion in this section will first consider the extraterritoriality created by the treaties signed by Siam, paving the way for English trusts law to enter the Kingdom, and then examine the use of trusts between 1855 and 1935. In the final part of this section, the introduction of section 1686 and its development will be examined.

A.  Extraterritoriality and the Emergence of Common Law Trusts in Siam A strong presumption may be made that the starting point of the creation of common law trusts in Siam is the year 1855. Finally succumbing to years of external pressure to open up to international trade, Siam signed the Bowring Treaty with Great Britain,5 followed by similar treaties with 14 other powerful nations.6 A major legal implication of the Bowring Treaty was the introduction of extraterritoriality. Under Article II, the Thai authorities’ jurisdiction over foreign subjects was excluded in favour of consular jurisdiction. Similar provisions were included in treaties signed with other, predominantly Western, nations and typically applied to not only the native European subjects of the treaty party but also those from elsewhere in their empires. Soon after the treaties were signed, these empires reached the borders of Siam. Extraterritoriality also extended to those Siamese citizens who were able to register themselves with Western powers and thus gain consular protection.7 For example, in order for Siamese authorities to arrest a British subject suspected of committing a crime, they would need first to approach the British Consul and convince him to grant them a warrant. Although the practical impact of this was limited at first due to the small number of foreigners in Siam, later in the nineteenth century, circumstances changed.8 On the one hand, the extension of the British Empire reached the borders of Siam to the northwest and south, increasing the number of Asiatic-British subjects in Siam under British consular jurisdiction.9 On the other, owing to a dispute concerning territory to the east of Siam, France granted the power to register for the protection of French

5 The Treaty of Friendship and Commerce, between Great Britain and Siam, signed (in the English and Siamese languages) at Bangkok, 18 April 1855 (the Bowring Treaty). See MB Hooker, ‘The “Europeanization” of Siam’s Law 1855–1908’ in MB Hooker (ed), The Laws of South-East Asia (Butterworth 1988). 6 The list of the countries which signed unequal treaties with Siam, and the year of the signing, are as follows: the United Kingdom (1855); the United States (1856); France (1856); Denmark (1858); Portugal (1859); the Netherlands (1860); Germany (1862); Sweden (1868); Norway (1868); Belgium (1868); Italy (1868); Austria-Hungary (1869); Spain (1870); Japan (1898); Russia (1899). Source: JC Ingram, Economic Change in Thailand 1855–1970 (Stanford University Press 1971) 33–35. 7 F Sayre, ‘The Passing of Extraterritoriality in Siam’ (1928) 22 American Journal of International Law 70, 76. 8 A Iijma, ‘The “International Court” System in the Colonial History of Siam’ (2008) 5 Taiwan Journal of Southeast Asian Studies 31, 34. 9 ibid 43.

296  Surutchada Reekie and Adam Reekie consular jurisdiction to Siamese citizens claiming to originate from the disputed territory.10 Thus, extraterritoriality began to have a more significant impact on the Siamese government’s administration of the Kingdom. Achieving release from extraterritoriality became a driving force behind the wide-ranging legal reforms in Siam at the end of the nineteenth and start of the twentieth centuries.11 The introduction of extraterritoriality also has important implications for comparative law scholarship; it exposed Siam to the reception of foreign laws through parallel legal systems applied and enforced by foreign consular officers. Since Siam signed 15 treaties in total with similar requirements concerning extraterritoriality, the country experienced 15 foreign legal systems operating in parallel to the domestic law, creating a vibrant setting for the reception of foreign legal ideas. Indeed, the scope of extraterritoriality was wide-ranging. Article II of the Bowring Treaty, read together with a Commercial Agreement signed in the following year,12 provided that any dispute between Siamese and British subjects was to be heard by the British Consul in conjunction with appropriate Siamese officers, while matters which involved only British subjects were to be dealt with solely by the Consul, in both cases applying English law. The final sentence of Article II includes the phrase that Siamese authorities will not ‘interfere in questions which only concern the Subjects of Her Britannic Majesty’.13 On the basis of the wording of the treaties, a British subject could establish a trust in Siam; in doing so, English trusts law would apply and be enforced by British consular authorities. In 1909 the legal position changed, although English law continued to assert influence in Siam. A treaty of that year extended the jurisdiction of an international court, which had for some prior years been operating in the north-west border region, to operate throughout the Kingdom.14 This international court was staffed by Siamese judges and applied Siamese law to cases involving British subjects, but operated subject to safeguards to protect British interests.15 Judgments had to be signed by European legal advisers and there was a right for the British Consul to remove cases from the court’s jurisdiction, and apply consular jurisdiction, so long as a verdict had not yet been given.16 In addition to the presence of the European legal advisers in the courts, there was a practice, arising at the end of the nineteenth century and recognised by the

10 Sayre (n 7) 73; C Baker and P Phongpaichit, A History of Thailand, 3rd edn (Cambridge University Press 2014) 62. 11 See, eg, Sayre (n 7) 81; Hooker, ‘The “Europeanization” of Siam’s Law’ (n 5) 548; T Loos, Subject Siam: Family, Law, and Colonial Modernity in Thailand (Silkworm Books 2006) 40–63. 12 Commercial Agreement, supplementary to the Treaty between Great Britain and Siam, of 1855, signed at Bangkok, 13 May 1856. 13 The Bowring Treaty, Art II. 14 The Anglo-Siamese Treaty, 10 March CE 1909, ratified 9 July CE 1909, British and Foreign State Papers Volume 102, 126. See PW Thornely, The History of a Transition (Siam Observer Press Ltd 1923) 199–201; Iijma (n 8) 52. 15 Thornely (n 14) 200. 16 There were similar arrangements with other European powers; eg, with the French following the 1907 Franco–Siamese Treaty, which likewise adopted the jurisdiction of the International Court: see Sayre (n 7) 79.

Thailand  297 Siamese government, of Siamese judges using English law in commercial cases where Siamese law was silent or obsolete on an issue.17 The use of English law rather than the law of another treaty party may reflect the fact that foreign commercial interests in the Kingdom at the time were predominantly British,18 as well as the fact that prominent Siamese jurists of the period had received legal education in England, including for example Prince Rabhipatthanasak (Prince Ratchaburi) who was assigned to restructure the judicial system and who gave lectures on English law in the Siamese law school.19 The extent of the influence of English law in Siam as a result of extraterritoriality can be seen from a memorandum of Georges Padoux, a French legal adviser to the Siamese government and one of those tasked with reforming Siam’s laws by adopting a civil law influenced codified legal system, expressing his concerns: The Siamese Government has agreed that in any commercial cases where there is no Siamese Law or practice, the International Courts would be guided, so far as circumstances admit, by British statutes & cases. I venture to say that if nothing is done to improve the present situation, British statutes & cases will be applied in a number of litigations where a Siamese law or practice exists, simply because the Foreign Judge or Adviser, even being assisted by Siamese Judges, will not be informed of the existence of such Siamese practice or Law.20

It is clear from this memorandum that over the decades following the introduction of extraterritoriality, English law had occupied a prominent status in Siam, especially in civil and commercial matters. Moreover, the authors’ research has revealed that the influence of English law during this period included the establishment of trusts, governed and enforced using principles of contemporary English law, a fact hitherto unexplored in Thai legal scholarship. It should be noted that, despite the authors’ extensive efforts, the exact number of English common law trusts established in Siam before creation of new trusts was barred in 1935 remains, and likely always will remain, unknown. Trusts established by deeds or wills are private instruments and only become matters of public record once they are the subject of a legal dispute that reaches the courts. Moreover, unlike the practice in many common law jurisdictions, in Thailand only cases at Supreme Court level are generally published. The authors have reviewed both the publicly accessible online database of cases of the Supreme Court21 and other collections,22 and found

17 Thornely (n 14) 220; P Kasemsup, ‘Reception of Law in Thailand: A Buddhist Society’ in M Chiba (ed), Asian Indigenous Law: In Interaction with Received Law (KPI 1986) 292–93. 18 Baker and Phongpaichit (n 10) 88–90. 19 ibid 65; R Kittayapong, ‘The Origins of Thailand’s Modern Ministry of Justice and Its Early Development’ (PhD Thesis, University of Bristol, 1990) 262. 20 ‘Memorandum of Georges Padoux dated 20 July 1909’ (Archive of the Office of the Council of State (1/166) Microfilm Roll 01-01) 1. 21 See: deka.supremecourt.or.th. Currently, the database dates back only to the early twentieth century, and contains selected cases. 22 Chulalongkorn University’s Law Library, Thammasat University’s Law Library, and the non-publicly accessible archive of the Supreme Court Library via the library staff who have the authority to handle the case reports directly.

298  Surutchada Reekie and Adam Reekie 47 cases which involve common law trusts or trust analysis, which will be discussed in detail in section III.A. The earliest case was heard in 1920,23 and the most recent was heard in 2012.24 This indicates that a significant number of English common law trusts must have been created in Siam, such that they had led to 47 disputes which reached the highest court of the land decades later.

B.  Trusts in Siam, 1855–1935 The incursion of the trust into the Siamese legal landscape is reflected not only in published judgments, but also in legislation created prior to the CCC. That the Siamese legislature was aware of the use of trusts is evident from the Issuance of Land Deed Act Number 2 of 1916. The Act, promulgated in the Government Gazette on 17 September 1916, introduced a new system of land management and the use of land deeds. Section 8 of the Act recognised the concept of trusts and relevant legal principles, and attempted to incorporate these into the country’s new land law. The provision states: If someone is a trustee of land which has a map deed, or of land which has an investigation certificate or a receipt for a deed or a map, that trustee has the right to register his name. And after the name the record must state ‘On the duty of trustee in such matter’. And when all trustees have transferred or revised the registration for the benefit of another person fraudulently or mistakenly, and the transferee or the one who benefits from this does not know of this fraud or mistake, it shall be that the transfer of such benefit is valid in law.25

While this is the only piece of legislation which formally acknowledged the existence of common law trusts in Siam before they were effectively barred by section 1686 of the CCC, it can be seen that by 1916 trusts had already become an important legal concept, used sufficiently widely to receive attention in the country’s new land law scheme. Another piece of evidence which demonstrates the common use of trusts for the purpose of managing personal assets is a record of the Office of the Council of State, also known as the Office of the Juridical Council, or ‘Krisdika’ in Thai language. The role of Krisdika was to consider draft laws and advise the government on legal matters. In 1936, only one year after the prohibition of the creation of trusts in the CCC, Krisdika was consulted by the Land Registrar regarding the British Consul’s request to establish a trust of a piece of land given by King Chulalongkorn for the purpose of founding a cemetery for foreigners in Chiang Mai, a northern province of Thailand. The British Consul requested to have a trustee’s signature on the land deed as legal owner. In rejecting this particular request, and at the same time rejecting the recognition of trusts in Thai law, the record offered a glimpse into the early application of English trusts law in Siam: Moreover, trust is an English law creation, which at the time [of King Chulalongkorn’s reign in 1868–1910] was not included in Thai law. Afterwards some English subjects had



23 Dika

Number 390/2463 of 1920. Number 9757/2555 of 2012. 25 Government Gazette, vol 33, 136 (17 September BE 2459) (Thai language, translation by the first author). 24 Dika

Thailand  299 established trusts and hence it was necessary that the courts accept cases which involved these trusts.26

Apart from this record, further support for the use and popularity of common law trusts in Siam between 1855 and 1935 can be found in the 47 common law trust judgments of the Supreme Court of Thailand, or the ‘Dika Court’, discussed further below in section III. Many of these cases contain references to the facts and circumstances in which the trusts were created, and the year in which they were created. The oldest trust referred to can be found in Dika Number 728/2506 of 1963, in which the Supreme Court stated that the trust in dispute was created approximately 100 years ago – around 1863.27 This was only eight years after the signing of the Bowring Treaty. Apart from this, many cases refer to common law trusts established by wills, extending as far back as 1911.28 Other cases mention common law trusts created by the registration of a trustee’s name on a land deed, as far back as 1910;29 and the establishment of a trust by a transfer of land into the name of a trustee, as far back as 1933.30 Evidence from these cases indicates that the British Consul in Bangkok routinely oversaw the application and enforcement of English trusts law. In Dika Number 1372/2498 of 1955 which involved a dispute between the trustees and the heirs of the settlor regarding the ownership of trust property, the settled facts included in the judgment state that the trust was established by the settlor on 3 November 1900, at the British Consul-General, Bangkok.31 Similarly, in Dika Number 2676/2528 of 1985, the Supreme Court referred to the fact that the trust instrument was registered with the British Consul about 80 years prior to the hearing.32 Moreover, in Dika Number 1404-1405/2508 of 1965, which involved a trust established by will, the Court noted that a purported ‘estate manager’, and presumably an intended trustee, had asked for permission of the Court of the British Consul to relieve himself from such responsibility.33 These pieces of evidence together point towards widespread use of English common law trusts in Siam prior to the prohibition of their creation by section 1686 of the CCC. Moreover, they also suggest that the concept of common law trusts was perhaps starting to become part of Siam’s emerging legal landscape in the early part of the twentieth century. Indeed, had it not been for a change in direction during the legal reform process, as the chapter now turns to discuss, Thailand would, perhaps, have always allowed the use of trusts for the purpose of personal asset management, without the need to introduce the new draft bill. 26 ‘A request for signing the land deed as trustee which is a problem in relation to section 1686 of the Civil and Commercial Code’ (Record of the Office of the Council of State, Completed Matter Number 56/2479 of August BE 2479) 2 (Thai language, translation by the first author). 27 Dika Number 728/2506 of 1963, para 8. 28 Dika Number 1346/2535 of 1992. Apart from this, Dika Number 1699/2515 of 1972 referred to a trust created by will in 1917; and Dika Number 871/2478 of 1935 referred to a trust created by will in 1934. 29 Dika Number 3148/2540 of 1997. Apart from this Dika Number 3477/2540 of 1997 and Dika Number 7278-7279/2554 of 2011 referred to a land deed registration in the name of a trustee in 1919. Moreover, Dika Number 9757/2555 of 2012 referred to a land deed registration in the name of a trustee in 1933. 30 Dika Number 507-508/2480 of 1937. 31 Dika Number 1372/2498 of 1955, para 9. 32 Dika Number 2676/2528 of 1985, para 7. 33 Dika Number 1404-1405/2508 1965, para 8.

300  Surutchada Reekie and Adam Reekie

II.  Section 1686 of the CCC and the Purported End of Common Law Trusts in Thailand Section 1686 forms part of Title 3, entitled ‘Wills’, of Chapter 4, ‘Appointment of Estate Manager’, of Book 6 of the Civil and Commercial Code, which deals with the issue of inheritance and succession. Book 6 was promulgated in the Government Gazette on 7 June 1935,34 and came into force on 1 October of the same year. In its original form, section 1686 states: ‘Trust [sic] created whether directly or indirectly by an act inter vivos or mortis causa shall have no effect whatever’.35 By virtue of the Civil and Commercial Code Amendment (Number 17) Act of 2007, an exception was added to the end of the provision as follows: ‘except when allowed by a law enacted for the purpose of creating such trust’. The rationale of the exception, as stated in the Postscript to the Act, was that there was a need to introduce a new law to enable the use of investment trusts as a tool to increase the efficacy of the country’s financial market.36 The exception has since paved the way for the introduction of the Trust for Transactions in the Capital Market Act of 2007 and the proposed draft bill on trusts for the purpose of asset management. While it appears that the exception was introduced as a response to the changing economic, financial or social landscape of the country, the absolute prohibition of trusts in the original version of section 1686 is more intriguing. The historical legal evidence on the issue remains incomplete. Nonetheless, the authors’ investigation has found two plausible explanations for Siam’s rejection of trusts: the executive and legislative elites’ aversion to English trusts law; and economic concerns regarding resources distribution. These will be discussed in turn.

A.  Aversion to English Trusts Law The starting point of the investigation into the rationale behind the prohibition of trusts, despite the fact that, as evidence shows, by 1935 common law trusts had been in use in the country for decades, was one brief passage found in the record of the Office of Council of State mentioned above: However, it can clearly be seen that when there was a provision in the Code, trusts have been absolutely prohibited (Section 1686 of the Civil and Commercial Code). And on this issue, there was an order from the government that ‘The Civil and Commercial Code, on the issue of trusts, the law must not allow them’. (Order dated 6 September BE 2475). Therefore, trusts may no longer be established in Thailand.37 34 The Act Announcing the Coming into Force of Book 6 of the Civil and Commercial Code BE 2477, Government Gazette, vol 52, 529 (7 June BE 2478) (Thai language). 35 ‘High Translating Committee (1935) – Book VI: Civil and Commercial Code’ (Archive of the Office of the Council of State (133) Microfilm Role 19) 1340. 36 Government Gazette, vol 125, Pt 9n, 44 (14 January BE 2551) (Thai language, translation by the first author). 37 ‘A request for signing the land deed as trustee which is a problem in relation to section 1686 of the Civil and Commercial Code’ (Record of the Office of the Council of State, Completed Matter Number 56/2479 of August BE 2479) 3 (Thai language, translation, verbatim, by the first author).

Thailand  301 According to this record, there was a particular order from the government in BE 2475, or 1932, which prohibited the recognition of trusts in Thai law. The authors’ research in the Archive of the Office of the Council of State uncovered a draft memorandum from ‘the President of the People Executive Committee’ to the Secretary of the Law Drafting Department, a predecessor of the Office of the Council of State, written in both Thai and English, with the date appearing (only in the English version) as 6 September BE 2475 (1932),38 which corresponds to the ‘order from the government’ referred to above. The draft memorandum, in fact, was a response to a list of questions submitted by René Guyon, a legal adviser to the drafting committee of the CCC, regarding issues on Siam’s inheritance and succession law.39 Guyon’s question number 17 asks whether ‘the English practice of “trust” was to receive statutory sanction in Siam’,40 to which the English version of the draft memorandum answered as follows: ‘Question 17. There shall be no statutory sanction for “Trust”, except in cases concerning the administration of the property of a minor’.41 Most interestingly, the Thai version of the draft memorandum provided a more detailed answer, as it stated: ‘The matter of trust is very complicated and may have detrimental effects similar to the issue of substitution above’.42 In response to this direction given by the government, the first version of the draft law in 1932 included the concept of a guardian or curator of property (ผู้ครองทรัพย์ [phukrongsap]), which echoes some elements of English trusts law within the limited remit of the administration of property for a minor. The explanation accompanying the draft section 105, the first provision on the issue, provides a very illuminating explanation of the rejection of trusts as follows: Explanation: According to the order of the People Executive Committee to include the provisions on the guardian of property, appointed by will, in inheritance law on the issue of minor legatee, it should be noted that the appointment by will of the guardian of property slightly follows the path of Anglo-Saxon law. Such Anglo-Saxon law has a very special characteristic, which many commentators do not agree with. Some argue that in such circumstances the ownership of inheritance should be transferred to a trustee, and therefore the trustee is the legal owner of such property. Some argue that such property falls outside the trustee’s jurisdiction, and others argue that the beneficiary is the actual owner. Without having to consider these contradicting opinions, it should be deemed that [the concept of trusts] is a special policy, full of problems, and only applicable in the laws of certain ­countries only. It should not be applied in Thai law as it would only bring about disputes and uncertainties.43

38 ‘Civil and Commercial Code Book VI: Successions Vol VI’ (Archive of the Office of the Council of State (131/58) Microfilm Roll 19) 1003 (Thai language). 39 ‘Enquiry Concerning Book VI CCC (Inheritance)’ (Archive of the Office of the Council of State (121/33) Microfilm Roll 19) 978. 40 ibid 999. 41 ‘Civil and Commercial Code Book VI: Successions Vol VI’ (Archive of the Office of the Council of State (131/58) Microfilm Roll 19) 1008. 42 This answer refers to the rejection of the adoption of the English concept of substitution or estate-tail: see ibid 1005 (Thai language, translation by the first author). 43 ‘Draft Civil and Commercial Code Book VI: Successions Vol VI’ (Archive of the Office of the Council of State (131/64) Microfilm Roll 19) 1092–1093 (Thai language, translation by the first author).

302  Surutchada Reekie and Adam Reekie As can be seen, English trusts law was not favourably received by either the government or the drafting committee of Book 6 of the CCC. English trusts law, based on equitable rules, was perceived as complicated and unique to England and not ­suitable for Siam. Further aversion to English trusts law may be found in a later stage of the drafting process, in 1934. An attempt to reintroduce the words ‘trust’ and ‘trustee’ instead of ‘guardian of property’ was made in 1933 during the next stage of the drafting process.44 However, the idea of the use of trusts, even in limited circumstances, met with strong resistance once again during the reading by the Commission of the Assembly, a committee appointed by the legislature to examine the draft; the provisions regarding trusts and trustees were dropped and replaced by provisions referring to an ‘administrator of property’ (ผู้ปกครองทรัพย์ [phupogkrongsap]), with its own rules distinct from English trusts law.45 An explanation for this change of direction may be found in the minutes of the twentieth meeting of the Commission, on 25 December 1934, written in the form of a summary of the discussion and decisions of the Commission, as follows: Regarding Chapter IV on the issue of appointment of administrator of property by will, the Commission discussed the policy on whether the concept of trusts should be received into the law. Eventually, the Commission unanimously agreed that principles regarding trusts, which originated in English law, were complicated and were created in a piecemeal fashion. Such creation was truly unique to English society … Reception of trusts will not only be dangerous but also bring difficulty. The difficulty is that if there are to be trusts, we must draft many more provisions in order to provide a complete set of rules for trusts. If the reception is only partial and incomplete, trusts will never be conveniently used. And in order to draft a complete set of rules for trust, experts on this complex subject will be needed. Thus the concept of trust is rejected, and Mr René Cazeau is appointed with the task to draft a provision which prohibits trusts, whether established by a juristic act during the lifetime of the settlor or by will, whether directly or indirectly, shall have no effect at all in Siam.46

The above documents all point to a conclusion that there was opposition, from the legal and executive elites, to the reception of English trusts law into the country’s new legal framework. The major source of reluctance, it seems, stemmed from the trust being considered a creature unique to common law systems which would be ill-suited to, and inconsistent with, the country’s newly adopted codified system.

B.  Economic Concerns Regarding Distribution of Resources Another rationale for the prohibition of trusts in the CCC can be glimpsed from concerns that trusts were economically undesirable. The Thai version of the draft memorandum from the government, mentioned above in section II.A, stated that trusts

44 ‘Draft for renee [sic]’ (Archive of the Office of the Juridical Council (AC 52, 127) Roll 18, 1987). 45 Provisions relating to trusts under the heading ‘Chapter IV: Legacies with Constitution of Trust’ were crossed off and replaced by new provisions revolving around ‘administrator of property’: see ‘Draft as Corrected by the Two Commissions (1934)’ (Archive of the Office of the Council of State (AC 52/2, 129) Microfilm Roll 19) 64–69. 46 ‘Minutes of 20th meeting of 25 December BE 2477 in Records of the meetings of the Commission of the Assembly (end of 1934 to beginning 1935)’ (Archive of the Office of the Juridical Council (AC 52/3, 130) Roll 19, 397–98) (Thai language, translation by the first author).

Thailand  303 were complicated and may have similar detrimental effects to the issue of substitution. Substitution, in the answer to Question 14 in the same memorandum, was considered to be ‘detrimental to the interests of the country [as it would] tie down assets for the benefits of certain groups of people [and therefore] it should not be included in the Code’.47 Another piece of evidence of economic concerns can be seen from the minutes of twentieth meeting of the Commission for the Assembly, mentioned above in section II.A. Apart from the aversion to English trusts law and its equitable root, the Commission also stated that the adoption of English trusts law into Siam would result in hindering the transferability of assets.48 These important glimpses into Thailand’s legal history reveal a fascinating interplay between the forces shaping legal change: trusts represent a transplanted legal mechanism which has started to take root in society only to be uprooted by the legal and executive elites’ perceived concerns over incompatibility and economic detriments. However, as will be seen from the following discussion, section 1686 of the CCC did not, in fact, completely eradicate common law trusts from Thailand as a prima facie reading of the provision might suggest. Judicial recognition and enforcement of these trusts has continued, essentially from the date the provision came into effect. The discussion now turns to examine these cases.

III.  Trust Disputes and the Supreme Court of Thailand The authors’ attempt to uncover the extent of the judicial development of trusts in Thailand has not been without difficulties, and it is important that the analysis and conclusions be read in light of the limitations of the research. The first limitation concerns access to judicial decisions. Judgments of the Courts of First Instance and the Court of Appeal are not available to the public; additionally, the online database of judgments of the Supreme Court49 offers selected cases and is subject to periodic updates. Another limitation is the fact that Supreme Court judgments are written in a per curiam style, representing the agreed version of all judges and without any dissenting opinions. This renders it impossible to analyse the nuances and inconsistencies between the opinions of different judges. Moreover, the published judgments are brief, usually between one and five pages, and hence do not contain as much information regarding the reasoning behind the decision as typical judgments in the highest courts in common law countries. Given these limitations, the review of published cases of the Supreme Court has been done with best endeavours and as completely as possible, as of August 2019.50

47 ‘Civil and Commercial Code Book VI: Successions Vol VI’ (Archive of the Office of the Council of State (131/58) Microfilm Roll 19) 1005 (Thai language, translation by the first author). 48 ‘Minutes of 20th meeting of 25 December BE 2477 in Records of the meetings of the Commission of the Assembly (end of 1934 to beginning 1935)’ (Archive of the Office of the Juridical Council (AC 52/3, 130) Roll 19) 397. 49 Available at: deka.supremecourt.or.th. 50 See discussion at the end of section I.A above on the limitations and sources.

304  Surutchada Reekie and Adam Reekie The authors’ review found 47 cases dating from 1920 to 2012 which involve issues relating to common law trusts.51 Analysis of the judgments reveals some common components and emerging legal principles. These will be discussed in turn.

A.  Anatomy of Trusts Cases before the Supreme Court The trusts in dispute in these 47 cases may be divided into four categories. The first category comprises cases that involve the successful establishment of private trusts for the purpose of managing personal property and inheritance. These cases are marked either by the Supreme Court’s decision that such a trust was validly established or by a mere recognition of the existence of the trust, implicitly affirming its validity. There are 24 cases in this category.52 The second category is composed of cases which involve a failed attempt to establish a common law trust or to argue that a common law trust exists. There are 10 cases in this category.53 The third category involves trusts for charitable purposes. Interestingly, these cases solely concern trusts for the purpose of managing land donated to religious organisations, to build religious structures or cemeteries. This category of trusts accounts for nine cases.54 The final category is made up of cases in which no common law trust is established or recognised, but which involve an instrument strikingly similar to trusts by royal charter in English law, and hence requires a special mention here for the sake of completeness. There are four cases in this category.55 In terms of parties involved in the disputed trusts, 14 of the 47 cases contain facts that demonstrate that either the settlor or a trustee was or is a British subject, or that the trust was established under the supervision of the British Consul, indicating that the settlor must have been British.56 A further five cases involved parties who were likely to 51 The research excludes cases which involve trusts established in foreign jurisdictions as vehicles of financial services, tax management or private property management. 52 Dika Numbers 390/2463 of 1920; 575/2465 of 1922; 891/2469 of 1926; 560/2470 of 1927; 748-749/2471 of 1928; 880/2471 of 1928; 494-495/2473 of 1930; 1229/2473 of 1930; 563/2474 of 1931; 719/2475 of 1932; 208/2477 of 1934; 871/2478 of 1935; 661/2481 of 1938; 136/2481 of 1938; 176/2483 of 1940; 1041/2484 of 1941; 866/2487of 1944; 163/2491 of 1948; 1735/2500 of 1957; 1483/2506 of 1963; 1404-1405/2508 of 1965; 2587/2518 of 1975; 2686/2528 of 1985; and 3680/2535 of 1992. 53 Dika Numbers 1023/2463 of 1920; 1511/2479 of 1936; 507-508/2480 of 1937; 419/2491 of 1948; 862/2495 of 1952; 581/2508 of 1955; 336/2502 of 1959; 3175/2522 of 1979; 4338/2531 of 1988; and 3292/2538 of 1995. 54 Dika Numbers 1372/2498 of 1955 (land donated to build a mosque); 1106/2501 of 1958 (land donated to build a masjid); 728/2506 of 1953 (land donated to build a Shia Islam religious structure); 28-29/2513 of 1980 (land donated to build a Hindi cemetery); 1518/2521 of 1978 (land donated to build a Shia Islam religious structure); 3148/2540 of 1997; 3477/2540 of 1997; 7278-7279/2554 of 2011 (land donated to build a Hokkien Chinese cemetery); and 9757/2555 of 2012 (land donated to build a Christian cemetery). 55 Dika Numbers 1688/2515 and 1700/2515 of 1972; 2372/2532 of 1989; and 1346-1377/2535 of 1992. 56 Dika Number 871/2478 of 1935 (the claimant, and alleged heir and beneficiary, was a British subject); Dika Numbers 507-508/2480 of 1937 and 163/2491 of 1948 (involved the same trust established by a British subject); Dika Numbers 1372/2498 of 1955, 1106/2501 of 1958, 2676/2528 of 1985 (involved the same trust established under the supervision of the British Consul); Dika Numbers 1404-1405/2508 of 1965 and 25-29/2513 of 1970 (involved the same trust which was under the supervision of the British Consul); Dika Numbers 3148/2540 and 3477/2540 of 1997, and 7278-7279/2554 of 2011 (involved the same trust established

Thailand  305 be British subjects, Asiatic or non-Asiatic, based on their names and circumstances of the case.57 One case, interestingly, involved a trust established by a French subject.58 The other cases involved Thai parties only, which demonstrates that before they were barred by section 1686, the popularity of trusts as a legal tool for asset management extended beyond the British expatriate circle to the international expatriate circle and the local Thai populace as well.

B.  Legal Principles in Trust Cases in the Supreme Court of Thailand From the analysis of the 47 cases and relevant documents, it is possible to extract important lines of reasoning which have been applied by the Supreme Court in common law trust disputes. The Supreme Court’s approach to these disputes seems to have been generally consistent in respect of the application of the relevant legal principles. This section discusses some important legal principles and practices which have emerged from this body of cases.

i.  The Prohibition under Section 1686 does not Apply Retrospectively The non-retrospectivity of the prohibition of trusts under section 1686 was clearly stated in Dika Number 176/2483 of 1940. In this case, the Supreme Court held that section 1686 did not have retrospective effect, hence the provision would not retrospectively invalidate trusts duly established prior to the coming into force of the provision. This interpretation is in accordance with the explanation provided by the Committee for Examination of the Observations of Foreign Countries upon the Siamese Code, as appeared in the documentation regarding the revision of Book 6 between 1937 and 1938.59 Reference was made to the British legation’s question concerning the legal effect of section 1686, and the answer from the Committee was as follows: The British legation is right when presuming that it was not intended to apply retrospectively Section 1686. If there is no provision in the case of Book VI concerning rights accruing before the new law came into operation, it is because Section 1686 is subject to the principle of nonretrospectivity as are all other sections of the Code.60

by a British subject); Dika Number 9757/2555 of 2012 (trustees were British subjects); Dika Number 719/2475 of 1932 (settlor and trustees were British subjects); Dika Number 1735/2500 of 1957 (the settlor was a wellknown British sea captain who served in the Siamese government). 57 Dika Number 3292/2538 of 1995 (the settlor was Mr Charles Keith Highland); Dika Numbers 163/2491 of 1948 and 507-508/2480 of 1937 (involved the same trust established by Mr Theodore Amandus Gedge); Dika Number 390/2463 of 1920 (the settlor was a foreigner whose nationality was not mentioned in the facts, but likely to be a British Asiatic subject of Chinese origin); Dika Number 728/2506 of 1963 (the settlor was a foreigner whose nationality was not mentioned in the facts, but likely to be a British Asiatic subject of Arabic origin). 58 Dika Number 575/2465 of 1922. 59 ‘Revision: Civil and Commercial Code Book VI (1937–1938), Examination by Mom Rajavong Seni and Mr Cazeau (August 1938)’ (Archive of the Office of the Council of State (AC 34, 139) Microfilm Roll 19) 1973. 60 ibid.

306  Surutchada Reekie and Adam Reekie Accordingly, the matter is settled that the prohibition under section 1686 does not apply retrospectively to invalidate all trusts in Siam duly established before 1 October 1935.

ii.  The Thai Courts may Apply English Trusts Laws in Relevant Cases by Virtue of Section 4 of the CCC Section 4 of the CCC provides the fundamental principles for interpreting the provisions in the Code. It states that: The law must be applied in all cases which fall within the remit of the letter and the spirit of any of its provisions. Where no provision is applicable, the case shall be decided according to local custom. Where there is no such local custom, the case shall be decided by analogy to the provision most applicable, and, in absence of such provision, by general legal principles.

In the first common law trust case before the Supreme Court, Dika Number 871/2478 of 1935, the Court ruled that English trusts law could be applied to the case at hand, holding that English trusts law can be considered ‘general legal principles’ for the purpose of the last paragraph of section 4. Therefore, in the absence of a relevant provision of the law, applicable directly or by analogy, or local custom, English trusts law may be applied. In this case, the Court gave three reasons to support this: first, that the trust in dispute was established prior to the prohibition by section 1686; second, that the newly promulgated Book 6 of the Civil and Commercial Code CCC did not explicitly change or eradicate rights which existed prior to its coming into force; and finally that Thai law at the time did not have any applicable provisions. The Court then concluded that English trusts law applied to the dispute mutatis mutandis. This judgment seems to have established a fundamental principle and justification in the application of English trusts law, essentially a body of foreign law, by the Supreme Court in later cases. Section 4 has been explicitly cited as the basis for the Court’s legal reasoning in two further cases.61 In other cases, while there was no explicit reference to the provision, the Court demonstrated implicit approval of the principle by referring to English trusts law in solving the disputes.62 The explicit recognition by the Supreme Court that English trusts law may be directly inserted into domestic disputes is important for several reasons. First, despite being one of the most important provisions in the CCC, the term ‘general legal principles’ in section 4 has not received authoritative interpretation. In other words, there is no exhaustive list or finite scope of what falls within or outside of the term. Rather, the term can be applied as a highly convenient, practical tool in applying any general, or even foreign, legal principle in solving domestic legal issues. These trust cases offer excellent examples of the extensive scope of section 4, and the willingness of the judiciary to use that section in finding a solution to difficult legal disputes involving an overlooked, and perhaps mostly forgotten, English legacy. Second, this recognition by the Supreme Court that English trusts law may be used adds a level of specificity, perhaps invoking the circumstances concerning the use of

61 Dika 62 See,

Number 163/2491 of 1948; and Dika Number 1346-1377/2535 of 1992. eg, Dika Number 871/2478 of 1935; and Dika Number 136/2481 of 1938.

Thailand  307 trusts in the relevant era. English trusts law is to be applied, not principles of trusts law as are generally recognised across jurisdictions which acknowledge trusts. Finally, the Supreme Court’s recognition raises a further question: English trusts law of which era should be applied? Does the Supreme Court apply English trusts law as it existed at the time of the creation of the relevant trust, for example? Or does it apply English trusts law as it exists today? If the latter, does it account for English legislation which has changed and shaped the operation and nature of trusts, such as the Trustee Act 2000 which, relatively recently, made significant changes to the scope of the powers of trustees? An intuitive answer to this question may be to ignore modern UK-specific legislation and apply instead fundamental principles of trusts developed through case law, considering only these as ‘general legal principles’ for the purpose of section 4 of the CCC. However, it is surely also impossible to separate the ‘fundamental legal principles’ developed through case law from the legislation which is applied in those cases. Are all cases concerning the powers of trustees decided after the UK’s Trustee Act 2000 to be ignored by the Thai Courts? If so, what about earlier cases concerning the powers of trustees decided by applying the UK Trustee Act 1925? The cases which have come before the Supreme Court of Thailand to date have not given a clear indication of the answer to this question, given the nature of the disputes. However, since these trusts are still in existence, it seems likely that this question will need to be addressed by the courts eventually. As discussed further in section III.C below, the authors argue that the Supreme Court has developed its own trust jurisprudence, which should be considered independent from, though evolving from and influenced by, English trusts law.

iii.  Principles Regarding the Establishment of Trusts In the cases which involve the issues of wills and inheritance, the legal analysis of the Supreme Court often involves the question of whether the trust in question was duly established. On this issue, the Supreme Court’s rulings appear in line with English trusts law despite the absence of explicit references to decided cases or relevant equitable principles. In particular, it is clear from a number of cases that the Supreme Court has followed the ‘three certainties’ required for the valid establishment of express trusts under English law.63 The following cases demonstrate that even though the Court did not explicitly cite this principle as their legal basis, the Court considered the three certainties as a fundamental requirement, if not the fundamental requirement, for the valid establishment of a trust. A good example is provided by three cases concerning certainty of objects. The first is Dika Number 419/2491 of 1948, which involved an inheritance dispute. One of the issues before the Supreme Court was whether the testatrix’s attempt to give a piece of land to her youngest daughter so that she could sell it and use the proceeds for the purpose of either merit-making or the testatrix’s funeral expenses was sufficient to create a valid trust.



63 Knight

v Knight (1840) 49 ER 58 (Lord Landale MR).

308  Surutchada Reekie and Adam Reekie On this issue, the Supreme Court ruled that: To establish a trust requires a transfer of ownership of property, but with a condition that the transferee must use the property for the benefit of a person or persons as ascertainably specified or for specific charitable purposes. The testatrix’s order that [the proceeds] must be used for merit-making was a very general term, without sufficient certainty as to what exactly was to be done. Accordingly, it was merely Mrs Pan [the testatrix]’s expression of her intention but not [sufficient for] a trust.64

The reasoning of the Supreme Court here is in line with principles established in English trusts law in relation to trusts for purposes, the general rule being that trusts for purposes fail for uncertainty because the benefits of carrying out such purposes cannot be localised to specific individuals and therefore no one has standing to enforce the trust.65 In Dika Number 336/2502 of 1958, one of the main issues of the case was whether a will which stated that the testator’s house should not belong to any particular family member, but should be ‘common property’ for all members, created a valid trust. The Supreme Court’s ruling on this issue was that the wording of the will created uncertainty regarding who would benefit from such an arrangement; as such it was an attempt to create a trust without identifying any ascertainable beneficiary, and hence no trust was created. Again, this is in line with English law concerning the certainty of objects, which requires there to be ascertained or ascertainable beneficiaries for a trust to be validly formed.66 Similarly, in Dika Number 862/2495 of 1952, the testator’s will stated that property should fall into a common pool for the purpose of, among others, merit-making for ‘the house and the temple’. The Court ruled that such an expression of intention was insufficiently certain as the wording was vague, and it was unclear what kind of meritmaking was intended, or which house or temple the testator had in mind. Again, this is in line with principles established in English trusts law in relation to trusts for purposes, consistent with Dika Number 419/2491 discussed above. The Court, here again probably consistently with English law,67 appears to have considered that the purposes were not charitable. From these three cases, it can be seen, despite no explicit reference, that the Supreme Court applied the requirement of certainty of objects, an absence of which will bar the successful establishment of a trust.68 The result of these Supreme Court cases would therefore be squarely in line with English trusts law.

iv.  Principles Regarding Perpetuity The issue of perpetuity has been brought to the Supreme Court in cases relating to charitable trusts. In Dika Number 7278-7279/2554 of 2011 and Dika Number 9759/2555 64 Dika Number 419/2491, para 7 (Thai language, translation by the first author). 65 This general rule is subject only to recognised exceptions of charitable purposes, which has a technical legal meaning, and an anomalous category of testamentary trusts for the maintenance of particular animals, graves and funeral monuments. See, eg, discussions in PH Pettit, Equity and the Law of Trusts, 12th edn (Oxford University Press 2012) 58–59; and JE Penner, The Law of Trusts, 10th edn (Oxford University Press 2016) 249–55. 66 Re Endacott [1959] EWCA Civ 5, [1960] Ch 232, 246 (Lord Evershed MR). 67 See, eg, Gilmour v Coats [1949] UKHL 1, [1949] AC 426. 68 See, eg, McPhail v Doulton [1970] UKHL 1, [1971] AC 424.

Thailand  309 of 2012, the Supreme Court clearly stated that charitable trusts last perpetually. While the Court was silent with regard to the legal basis for this particular ruling, the ruling is crucial for the continuing validity of these historical trusts, now a century after some of them were established in Siam. Again, this is in line with English trusts law, which considers that charitable trusts are unaffected by the rule against perpetual trusts.69

C.  Thai Trusts Law: A Legal Transplant or a Unique Legal Creature? From the above discussion, the authors argue that the principles observed and followed in the Supreme Court cases are direct legal transplants from English trusts law. Indeed evidence to support this contention is ample. On occasion, the Supreme Court has clearly stated that they had to apply or consider English trusts law in order to decide the case, or that they were willing to give legal effect to, and enforce, trusts established under English law during the time of extraterritoriality in Siam. On the other hand, it is also possible to make the following observations which indicate that the body of Thai trusts law, as developed by the judiciary, is rather distinct.

i.  The Supreme Court has Applied its Own Understanding and Interpretation of English Trusts Law The way in which the Supreme Court has applied English trusts law principles is, in some ways, distinctly different from how an English court would apply such principles. Perhaps due to the different legal cultures and training, the Supreme Court in the above trust cases70 never cites an English case which laid down the legal principle it is relying on, nor does the Court ever distinguish or compare the facts of the case at hand with English trust cases. As can be seen from the discussion of the rulings in section III.B above, the Court gives the appearance of having identified relevant legal principles of English trusts law without discussion, and directly applies them to the facts of the case. Perhaps the brevity of the judgments prevents detailed legal analysis which would shed much needed light on the underlying reasoning behind decisions in Thai common law trust cases. Nevertheless, these cases demonstrate that the Thai Supreme Court has adopted ­principles of English trusts law and applied them within the Thai style of judicial reasoning. The Thai Supreme Court has not engaged in or adopted a characteristic common law approach to legal analysis and reasoning – it has applied principles of English trusts law without the discussion of the concepts of ratio decidendi, obiter dicta, distinguishing or overruling. Effectively, once the Court concluded that English trusts law may be applied to domestic legal disputes through the application of section 4 of the CCC, this body of foreign law then entered the domestic legal arena where it is applied in 69 See A Hudson, Equity and Trusts, 7th edn (Routledge 2013) 1005. 70 However, the authors have identified one historic Supreme Court judgment concerning the sale of goods and lien, rather than trusts, Dika Number 737/2469 of 1926, which directly cites an English case: Laurie & Morewood v Dudin & Sons (1926) 1 KB 223.

310  Surutchada Reekie and Adam Reekie accordance with the local legal culture and approach. This leads our discussion to the next observation.

ii.  The Supreme Court has Combined Principles of English Trusts Law with Thai Legal Principles to Create New Principles Applicable to Thai Common Law Trusts Cases While acknowledging that English trusts law is applicable to common law trusts ­established prior to 1935, the Supreme Court has shown its willingness to combine English trust principles with Thai legal principles in a seamless manner when solving a legal problem. Examples of this are found in cases in which the Supreme Court has applied the English trusts law concept of the split between legal and equitable titles to Thailand’s inheritance law. In Dika Number 1372/2498 of 1955, which involved a trust of a mosque in Bangkok, the Supreme Court held that individuals whose names appeared on the land deed were in fact trustees, hence they did not own the land as their private property and could not pass it to their heirs in accordance with Thai inheritance law. Similarly, in Dika Number 3477/2540 of 1997, the Supreme Court held that a trustee of land used for a Chinese cemetery, whose name was registered as owner on the land deed, did not hold the trust property as his private property, hence it could not be passed to his heir as inheritance.71 The separation of legal and equitable titles is also implicitly recognised in Dika Number 728/2506 of 1962, where the Supreme Court held that once a trust of land is established and the land registered under the name of the trustee, ‘he may not exercise all the rights of ownership under the Civil and Commercial Code’.72 However, the Court did not elaborate on what rights a trustee may exercise as the legal owner of the land. Another good example of the Supreme Court combining English trusts law­ principles with Thai legal principles relates to the issue of adverse possession of land held as trust property. Section 1382 of the CCC allows adverse possession of land if a person has taken possession of such land continuously for 10 years, in a peaceful and open manner and with the intention to be its owner. However, the Supreme Court has been consistent in its ruling that a trustee may not rely on this provision to claim adverse possession of land held as trust property against the beneficiaries. Dika Number 1229/2473 of 1930 and Dika Number 563/2474 of 1931 both involved a family member who was a trustee of land refusing to transfer that land to a beneficiary. In both cases, after having established that a party was a trustee, the fact that they had taken possession of the land in accordance with section 1382 above did not give them a claim of adverse possession due to their position of trustee. While the reported judgments of these cases are brief, and the Court did not elaborate on its reasoning, it may be argued that the Court had in mind the English concept of the trust and the separation of legal and ­equitable title. A trustee, as the holder of legal title to the land, may not hold the land



71 Dika 72 Dika

Number 3477/2540, para 7. Number 728/2506, para 8 (Thai language, translation by the first author).

Thailand  311 ‘with the intention to be its owner’ in accordance with section 1382, since ownership and the intention behind it must be interpreted in accordance with section 1336 of the CCC, which requires absolute legal ownership that may not be split in such a manner as that under the concept of ownership under English trusts law. As such, a trustee of land held on a common law trust will always be unable to demonstrate the necessary ingredients of possession of the land and the intention to be its owner under Thai law. Accordingly, it can be seen from these cases that the Supreme Court has applied Thai legal principles alongside English trusts law.

iii.  The Supreme Court Refers to its Own Past Cases rather than English Trusts Law Principles In Dika Number 3175/2522 of 1989, the issue was whether a testatrix’s will created a trust. The will stated that the testatrix gave the land and attached buildings to the defendant with the proviso that he must not sell or dispose of the property and that he must use the income arising from the property to pay a monthly sum to the claimant and others named in the will. On the issue of whether a trust was created, the Appeal Court answered in the positive, relying on a previous Supreme Court judgment in Dika Number 419/2491 of 1948, which ruled that a trust is created when a will contains a declaration transferring legal ownership of property to a transferee who is bound by an obligation to use that property for the benefit of another person or for a charitable purpose. However, the Supreme Court in this case overturned the Appeal Court on this point and ruled that the will did not create a trust, but made an absolute gift with a charge over the land, in accordance with section 1700 of the CCC. Despite the disagreement between the courts, the use of a previous Supreme Court decision as the basis for the Appeal Court’s ruling provides a clear example of how Thai courts searched for their own legal reasoning regarding trusts, rather than solely relying on English trusts law. This demonstrates that the Thai courts have recognised and applied their own trust jurisprudence, which has been gradually developed through judgments of the Supreme Court over the course of almost one hundred years. Even though Thailand, a civil law country, does not have a system of binding precedent or stare decisis, these judgments serve as useful and persuasive legal guidance, if not legal authority, on disputes which involve trusts established prior to 1935.

Conclusion This chapter draws three simple conclusions from the foregoing discussion. First, the existence and continuing legal effects of trusts established prior to 1935 have been largely overlooked by academic literature and forgotten by the collective legal psyche. Nevertheless, these common law trusts have survived the effect of the prohibition in section 1686 of the CCC, and remain to this day legally valid and enforceable in the courts. This invites further research into the existence of these trusts, the property in Thailand currently held on trust – although the exact amount may not be ascertained

312  Surutchada Reekie and Adam Reekie with certainty due to the private nature of trust instrument – and the implications for the current legal framework of the country. Second, the Supreme Court, in validating and enforcing these trusts, has rather openly adopted principles of English trusts law, hence importing English common law and equitable jurisprudence into the realm of Thai civil law. The adoption appears to be on the basis that these principles are ‘general legal principles’ for the purpose of section 4 of the CCC. However, there remain questions about which rules of English trusts law would constitute ‘general legal principles’ to be applied in future cases. It follows from this second conclusion that there is an arguable case that the body of Thai trusts law should be considered a direct legal transplant from English trusts law. However, a closer inspection reveals that over time the Supreme Court has gradually developed its own trusts law jurisprudence, which is similar to, yet distinct from, English trusts law. It is applied with a Thai judicial style; it is applied alongside and together with Thai legal provisions and concepts which are distinct from English law; and it refers to its own jurisprudence rather than that of England. As such, it may be argued that thanks to judicial pragmatism – Thai Supreme Court judges being compelled by circumstances to apply together sets of rules which were never made in contemplation of one another – Thailand can now be said to have her own body of trusts law developed from a number of judicial rulings. This is separate from English trusts law. It is also separate and distinct from rules relating to statutory trusts under specific Acts such as the 2007 Act and the proposed draft bill on trusts for the purpose of personal asset management. Accordingly, due to the different origins and nature of statutory trusts and judicially validated common law trusts in Thailand, it is highly probable that the existence of the 2007 Act or any future Act on trusts would not upset the existence and enforcement of these trusts that were established before 1935. A further question to consider is whether the interpretation of these Acts might conversely be affected by jurisprudence on Thailand’s common law trusts. For example, would judges, in interpreting the scope of duties of trustees under the statutory trusts, be guided by analogies with trustees’ duties under Thailand’s common law trusts and by further analogy with English law relating to trustees? While this is possible, it is perhaps more likely that Thai judges may see the different trust concepts as entirely separate, rather than as different incarnations of the same underlying concept, and may prefer to keep the relevant rules siloed. In other words, it can be conjectured that common law trusts will remain subject to the distinct body of judicially developed trusts law, akin to English trusts law, and hence unlikely to fall within the ambit of any future legislation which aims to regulate statutory trusts. Consequently, in the future, trusts law in Thailand may be divided into several distinct areas: trusts established prior to 1935 which are subject to judicially created Thai trusts law; statutory investment trusts which are subject to the 2007 Act; and, if the draft bill is passed, statutory private trusts for the purpose of personal asset management.

17 Arrangements Resembling Trusts under Indonesian Land Law EDDY M LEKS*

I. Introduction The law of trusts promulgated in Indonesia is applied principally to banking activity in the form of safekeeping and management.1 However, this does not mean that trust-like arrangements do not exist in other civil settings in Indonesia. In fact, arrangements resembling trusts are recognised in various Indonesian laws and regulations. Under the Indonesian Civil Code (ICC), there are several arrangements similar to trusts, such as those dealing with inheritance rights of third parties (wasiat melompat), bewindvoering,2 civil associations (persekutuan perdata),3 and agreements for the benefit of third parties.4 Outside the ICC, trust-like arrangements are found in company law, social welfare law, foundation law, waqf law and capital market law, for example, real estate investment trusts and infrastructure investment trusts. Those arrangements are, strictly speaking, not trusts, but nonetheless they resemble trusts. In land transactions, there are many trust-like arrangements using different ­structures and models. For instance, where a foreigner is investing or buying a piece of land in Indonesia, he or she will request an Indonesian to be the title holder of the land (trustee) for the benefit of the foreigner. The Indonesian will issue a declaration to the foreigner in which she states that she is only acting as trustee and the true owner of the land is the foreigner. This practice shows that the Indonesian legal system recognises what in common law would be described as a legal owner and an equitable owner.

* Managing Partner, Leks & Co, Indonesia. I would like to thank my colleague Hesa Adrian Kaswanda who assisted me in the research and engaged in fruitful discussions for this chapter. 1 A trust is defined as the activity of safekeeping and management of the settlor’s (penitip) assets on the basis of a written agreement between the bank as a trustee (penerima dan pengelola harta trust) and the settlor for the benefit of the beneficiary (penerima manfaat): see art 1 of No 2 Financial Service Authority Regulation No 27/POJK.03/2015 on Bank Business Activity. 2 See arts 978, 983, 1019 ICC. 3 Section VIII in Book III ICC. 4 Art 1317 ICC.

314  Eddy M Leks Nonetheless, as a country with a civil law tradition, Indonesian law does not formally recognise the idea of a division of legal and equitable ownership, especially in its land law.5 Another practice involves a loan transaction between a foreigner and an Indonesian. The foreigner is regarded as a lender/creditor; the Indonesian will be the title holder of land and will be regarded as a borrower/debtor. There will be an agreement to use the land, or a lease, enabling the foreigner to use the land legally while holding a security interest over the land (through a mortgage). This agreement to grant a mortgage may be continued or may not be continued; if it is continued it will cost a considerable amount of money. But this practice is very common nowadays and widely used in Indonesia, not only in respect of land but also in respect of shares in corporations despite the fact that the 2007 Investment Law clearly prohibits this.6 The Investment Law goes even further by stating that if a domestic or foreign investor makes such an agreement and/or declaration it will be considered null and void, meaning it is considered as though it never existed. It is clear that the Investment Law does not recognise trustlike arrangements since it does not acknowledge a division between legal and equitable ownership. The Investment Law recognises only one owner, the title holder. The same applies for Indonesian land law. It does not provide for any arrangement that acknowledges the division between legal and equitable ownership. In Indonesian land law, a title holder is considered both the legal and beneficial owner. There is no provision for registration of ‘any other owner’ than a legal owner of land (title holder). Despite the provisions of the Investment Law and the non-existence of provisions under Indonesian land law that differentiate between a legal owner and an equitable owner, arrangements resembling trusts do exist under Indonesian law, particularly in relation to land. In what follows, I argue that a trust-like arrangement in relation to land is possible within the parameters of the ICC and Indonesian land law. This chapter thus analyses several types of arrangement resembling trusts that might arise in respect of land. In order to do that, it is important to understand the scope and meaning of the trust under English law (including equity) and its scope and meaning under Indonesian law. It is then possible to turn to arrangements resembling trusts under Indonesian law with a focus on land.

II.  Trusts under English Law Historically, trusts were born in the crusades of the thirteenth century which caused English noblemen to leave England for years.7 Considering that the noblemen were also

5 Art 12, para (2) of the latest draft bill of the Land Law stipulates that a person is prohibited to register his land by using the name of another person who is not the land’s owner. 6 Law No 25 of 2007, art 33 para (1) stipulates, ‘a domestic or foreign investor investing in the shares of a limited liability company is prohibited from making an agreement and/or a declaration emphasizing that the ownership of shares in the limited liability company is for and on behalf of another person’. 7 The trust is usually considered peculiar to systems of law based on English law. There is an opinion however that an idea of the trust was first developed in the Middle East to provide for quasi-charitable purposes in the form of the waqf: see A Hudson, Understanding Equity & Trusts (Routledge-Cavendish 2008) 13.

Indonesia  315 the most significant landowners in England, problems arose in their absence as to who would be able to manage their land.8 Alistair Hudson gives a definition of the trust, in the eighth edition of his text Understanding Equity and Trusts:9 The essence of a trust is the imposition of an equitable obligation on a person who is the legal owner of property (a trustee) which requires that person to act in good conscience when dealing with that property in favor of any person (the beneficiary) who has a beneficial interest recognized by equity in the property. The trustee is said to ‘hold the property on trust’ for the beneficiary. There are four significant elements to the trust: that it is equitable,10 that it provides the beneficiary with rights in property, that it also imposes obligations on the trustee, and that those obligations are fiduciary in nature.

As mentioned above, an equitable obligation on the trustee arises as a result of a split between legal ownership and equitable ownership of property. The trustee holds formal legal title to property for the benefit of a beneficiary who enjoys equitable ownership simply because the settlor declares it to be so.11

III.  Trust-Like Arrangements Relating to Land in Indonesia As mentioned in the Introduction, there are several arrangements resembling trusts in the Indonesian legal system, including Indonesian land law. Since waqf is one of them, it is important to understand the waqf. A waqf is the legal action of a waqif (the party who establishes the waqf) to separate and/or deliver part of his property to be used for an indefinite or definite period according to his interest (intention) for the purpose of worship and/or public welfare under the Syariah.12 A nazhir (who may also be called a trustee) will receive the waqf property from the waqif and is obligated to administer, manage and develop the waqf property according to its purpose and function and the designated purpose of the waqf, supervise and protect the waqf property, and report on the implementation of these duties to the Indonesia Waqf Institute. The waqf property can only be separated by a waqf if it is owned and possessed by the waqif legitimately. The management and development of a waqf by a nazhir is regulated under the Indonesia Waqf Institute Regulation on the Guidance of the Management and Development of Waqf Property (BWI Regulation) which stipulates several limitations for a nazhir. For instance, a nazhir is not allowed to change the designated purpose of the waqf, and a nazhir may be paid from the waqf development not more than 10 per cent of its profit.

8 ibid. 9 ibid. 10 ibid. 11 BJ Crawford, ‘Less Trust Means More Trusts’ (2019) 75 Washington and Lee Law Review Online 74, 76–77. 12 Art 1, point 1 of Waqf Law. A waqf cannot be terminated, it belongs to God and must be for eternity, according to the human’s cleverness to secure that eternity. Such eternity is secured with a legal fiction stating that that property has been transferred to the hand of the God Almighty: see Asaf AA, Outlines of Muhammad Law (Tinta Mas 1961), as quoted by R Usman, Hukum Perwakafan (Sinar Grafika 2009).

316  Eddy M Leks The mauquf alaih (who may also be called the beneficiary) is determined by the waqif as the party that will obtain the benefit of the waqf property. Article 30 paragraph (3) of Government Regulation Number 42 of 2006 on the Implementation of Waqf Law as amended in 2018 (Waqf GR) divides waqfs into two types depending on the mauquf alaih, namely the waqf-khairi and the waqf-ahli.13 There is no specific provision regarding the mauquf alaih, and therefore any designation of mauquf alaih will be permitted so long as it does not violate the Syariah and prevailing regulations.14 Often, the mauquf alaih will passively enjoy the benefit of the management and development of waqf property. Nevertheless, for productive waqfs,15 the mauquf alaih might manage and develop the waqf property along with the nazhir so long as this does not violate the Syariah and prevailing regulations.16 The waqf derives from Islamic law. Nevertheless, in Islamic law, there is no single concept of the waqf since there are various opinions about it.17 The waqf ’s function is to realise the economic benefit and potential of waqf property for the purpose of worship and to improve public welfare. Under Islamic law, in order for there to be a waqf, there must be a waqif, a nazhir,18 waqf property, a waqf pledge, a stipulated purpose for waqf property, and a stipulated period of time for the waqf. To establish the waqf, a waqf pledge must be performed in the Waqf Pledge Assembly before the Waqf Pledge Deed Officer, and attended by the nazhir, the mauquf alaih and at least two witnesses. The mauquf alaih (beneficiary) is the party appointed to obtain the benefit from the waqf property according to the waqif ’s declaration of intention as contained in the Waqf Pledge Deed. If the mauquf alaih is the public (not an individual) then the presence of the mauquf alaih in the Waqf Pledge Assembly is not required. The waqf property can be in the form of movable or immovable property. Immovable property might be a land right (registered or unregistered), a building or part of it over land, plants and other property related to land, a right of ownership over a condominium unit, or other types of immovable property according to

13 Waqf Ahli means the waqf designated for the prosperity of the family of the waqif. Waqf GR does not specifically define Waqf Khairi. However, the Ministry of Religious Affairs, through its book of Fiqh Waqf, defines Waqf Khairi as a waqf arrangement designated for religious matter or public needs. See art 30 Waqf GR, and Directorate of Waqf Empowerment of the Ministry of Religious Affairs, Fiqih Wakaf (Ministry of Religious Affairs 2006) 17. 14 If the waqf is designated for a business undertaking, then it has to comply with the Syariah guidance from the National Syariah Council. This statement is based on an interview with Fahruroji, the Vice Secretary of Indonesia Waqf Institute, which was conducted on 5 July 2019 by the author’s assistant Mr Kaswanda: see also art 22 of Waqf Law. 15 Waqfs may be classified into two types according to their designation; first, the waqf consumptive which aims to fulfil the short-term basic needs of the mauquf alaih; and second, the waqf productive aimed to empower the mauquf alaih to build long-term socio-economic resilience: see Bank Indonesia et al, ‘Core Principles for Effective Waqf Operation and Supervision’, available at: www.bwi.go.id. See also, N Usman, Varian Mauquf Alaih Am sebagai Alternatif dalam Pengembangan Wakaf Produktif, Jurnal Ilmu Syariah dan Hukum (2017) 1–2. 16 Based on an interview with MP Burhanudin as the Governance and Advocacy Division of Indonesia Waqf Institute on 10 July 2019. 17 Abdurrahman, Ketentuan-Ketentuan Pokok tentang Masalah Agraria Pertambangan, Transmigrasi, dan Pengairan (Alumni 1979) as quoted by R Usman, Hukum Perwakafan di Indonesia (Sinar Grafika 2011) 51. 18 A nazhir may be an individual, an organisation or a legal entity: see art 9 of Waqf Law.

Indonesia  317 Shariah and prevailing laws and regulations. If a waqf involves immovable property, then delivery of a land certificate or other evidence is required to be provided along with the Waqf Pledge Deed. Waqfs resemble trusts in many ways. First, the relationship between the waqif, the nazhir and the mauquf alaih is similar to the legal relationship between the settlor, the trustee and the beneficiary of a trust. Second, the requirement that a trustee keep trust property separate from his own19 is reflected in the Waqf GR which stipulates that waqf property must be registered in the name of a nazhir for the interest of a party contained in the Deed of Waqf Pledge according to its designation. The registration of waqf property in the name of a nazhir does not prove that the nazhir has ownership over that waqf property. These provisions clearly show that the role of nazhir is similar to (if not the same as) the role of trustee.20 There are also provisions of the Waqf GR concerning the obligation of a nazhir that has the form of an organisation (nazhir organisasi) to keep the treasury record between waqf property and their own asset separately. Furthermore, the obligation of a nazhir to administer, manage, develop, supervise and protect the waqf property is highly similar to the fiduciary obligation of a trustee in respect of stewardship of the trust property.21

IV.  Indonesian Property Law Property law is part of Indonesian national law. Property law is generally regulated in the ICC and other separate stand-alone laws such as laws relating to intellectual property rights. Mariam Darus Badrulzaman explains that in Indonesia property law has characteristics that are different from those of personal law. She explains that the characteristics of property law are as follows: a. A property right is absolute. This means that a property right can prevail against anyone. The right holder is entitled to claim against anyone who interferes with his right; b. The time period of a property right is unlimited; c. A property right has a droit de suite character which means that the right follows the property whomever holds it. If there are several property rights in respect of the same thing, then the power of each right will be determined based on its timing. d. A property right gives considerable authority to its owner to transfer, pledge, rent, or use it.22

19 The principal duty of a trustee is to keep trust property separate from his own (and from that of others) and to dispose of it according to the terms of the trust. In carrying out this duty, the trustee must keep track of what he does with the trust property; this is called keeping the trust account(s), and normally it involves keeping the documents concerning transactions with the trust property in good order: see JE Penner, The Law of Trusts, 10th edn (Oxford University Press 2016) 31. 20 Art 3, paras (1)–(2) Waqf GR. 21 A fiduciary is someone whose role is to act on behalf of – serve the interests of – another. Thus, a trustee’s obligation extends to the exclusion of any personal interest in providing stewardship of the trust property: see S Gardner, An Introduction to the Law of Trusts, 3rd edn (Oxford University Press 2011) 15. 22 MD Badrulzaman, Mencari Sistem Hukum Benda Nasional (Alumni 1997) 30–31.

318  Eddy M Leks In contrast, Badrulzaman explains that, under Indonesian law, a personal right has the following characteristics: a.

A personal right is relative in nature, which means that it can only prevail against a specific person or persons. b. The time period of a personal right is limited. c. A personal right may be enforced in the same way irrespective of the timing of its establishment. d. A personal right gives limited authority to its holder. The holder of a personal right may only enjoy anything that is his. This right may be transferred with its owner’s consent.23 Badrulzaman also explains that, under Indonesian law, property rights are further divided into perfect property rights and limited property rights. A perfect property right gives a perfect (full) enjoyment to its holder and is also named an ‘ownership right’ institution. Badrulzaman says that this institution is known in various laws and regulations as a ‘property right’.24 A limited property right is a right that gives less than full enjoyment to its holder. Such a right may be held in respect of movable or immovable property. With regard to a limited property right over immovable property (such as land), Badrulzaman notes that such a right is both strong and weak. It is strong since it contains ‘zakelijke karakter’ (an in rem character), as is the case with a right to cultivate and right to build.25 It is weak since it only has ‘persoonlijke karakter’ (an in personam character).26 Badrulzaman identifies a further distinction between property rights under Indonesian law, between master rights and derivative rights. Deriving from an owner’s authority to possess property, the right of ownership serves as a master right (moederrecht). From that master right may emerge a derivative right, namely a utilisation right granted by an owner to a third party. Such a utilisation right may be in the form of a limited property right or a personal right. Badrulzaman says that such a utilisation right is limited since its period is limited, as is the case with a right to build and an encumbrance right. A utilisation right that is personal in nature may be in the form of a right to use,27 a right of lease, etc.28

V.  Indonesian Land Law Indonesia only obtained its own dedicated land law on 24 September 1960. Before that, land was regulated under the ICC and customary law. The recognition of Indonesian 23 ibid. 24 ibid 43. 25 The scope and meaning of the right to build will be elaborated in the next section (V. ‘Indonesian Land Law’). 26 Badrulzaman (n 22) 74. 27 The right to use should be differentiated from the right of use that will be explained in the next section (V. ‘Indonesian Land Law’). The right of use mentioned by Badrulzaman is provided for by Book III of the ICC which stipulates that ‘[a] borrow-use means an agreement where one party delivers specific property to be used freely by another, on condition that the receiving party, after using the property or the lapse of a determined period, will return that property’. 28 Badrulzaman (n 22) 69.

Indonesia  319 customary law is regulated by Article 131 of Indische Staasregeling. This regulation enables Indonesians to choose whether they wish to be bound by the ICC or by customary law in some matter. Europeans, on the other hand, must be subject to the ICC. This was the position prior to the 1960 Agrarian Law. The Agrarian Law revoked several regulations enacted by the Dutch colonists, including Book II of the ICC,29 to the extent they were related to earth, water, or natural resources contained in earth or water, except for certain provisions on hypothecs.30 This revocation means that, from 1960, the land rights set forth in the ICC are no longer applicable in the land law system in Indonesia. Land rights under Indonesian land law include rights of ownership, rights to ­cultivate, rights to build, rights of use, rights of lease, rights to open land, rights to collect a forest’s yield, other rights determined under the law, and other temporary rights such as pledge rights, profit sharing rights, rights to lease a farm and rights to stay. In light of the argument in this chapter, I will discuss only rights of ownership, rights to build, rights of use and rights of lease.

A.  The Right of Ownership (hak milik – HM) HM is contrasted with the eigendom right stipulated under the ICC, in that the eigendom right is an absolute, unlimited right, while HM is limited by social functions and may be revoked by the government when necessary. Under the Agrarian Law, HM is a hereditary right, the strongest and the fullest that a person may have over land without disregarding the social function of any land right. To say that this is the ‘strongest and fullest’ right a person may have over land does not mean that this is an absolute right over land. It is, rather, intended to differentiate between HM and other land rights such as the right to build (hak guna bangunan), the right to cultivate (hak guna usaha) and the right of use (hak pakai). Only an Indonesian national may have HM.31 This is in accordance with the nationality principle in the Agrarian Law. Even dual citizens are prohibited from having HM. HM is materialised based on customary law, determination by the government, or by provisions of the law. Every transfer of HM, removal of HM and pledge of HM with other rights must be registered, and registration of HM serves as strong evidence of its validity. The wording ‘pledge of HM with other rights’ shows that HM is considered as a full ownership right that may be pledged with other limited types of land right. This will be discussed further in the sections below on the right to build (hak guna ­bangunan), the right of use (hak pakai) and the right of lease for building (hak sewa untuk bangunan).

29 Book I of the ICC is about persons; Book II is about property; Book III is about agreement; and Book IV is about evidence and expiration. 30 These hypothec provisions under the ICC were applicable until the promulgation of Law No 4 of 1996 on Mortgage Right over Land along with Properties related to Land on 9 April 1996. 31 The government may determine the legal entity that may have the right of ownership and its conditions. See art 21, para (2) of Agrarian Law.

320  Eddy M Leks

B.  The Right to Build (hak guna bangunan – HGB) HGB means the right to construct and own a building over land not owned by the builder for a period of not more than 30 years; this period may be extended by not more than 20 years. The holder of HGB must be either an Indonesian national or a legal entity established according to the laws of Indonesia and domiciled in Indonesia. GR No 40 of 199632 stipulates that HGB may be issued over state land, a right of management,33 or HM. HGB over HM is materialised by a grant by the holder of HM through a deed made by a Pejabat Pembuat Akta Tanah (PPAT) or Land Conveyance Officer. This grant should be registered in the land office. HGB binds a third party since it is registered. It is not surprising that HGB can be materialised over HM since HM is considered as ‘the fullest and strongest’ right that can be held over land. In addition, as already explained above, the Agrarian Law stipulates that HM can be pledged with other types of land right. There is a difference of character between HGB over state land and HGB over HM. The former is granted for not more than 30 years, a period that may be extended for another 20 years at most. The latter is granted for a period not more than 30 years but this period of time may not be extended. Instead, the HGB itself may be renewed for a further period. This is done through an agreement between the holders of HGB with the holder of HM, under which a new HGB may be created through a deed made by PPAT, which right must then be registered. The transfer of HGB over HM must be with consent in writing from the holder of HM. If HGB over HM is removed, then the former holder of HGB must deliver his land to the holder of HM and must fulfil what was agreed under the land grant agreement.

C.  The Right of Use (hak pakai – HP) HP is defined as the right to use and/or collect from land’s yield that is directly possessed by the state or land owned by another party. HP thus entails authority and obligation as determined in the granting decision of an authorised official, or in an agreement with the landowner that is not regarded as a lease agreement or an agreement to cultivate the land. This type of right may be granted for a definite period of time or for as long as the land is used for a definite purpose. Nevertheless, the normal period of HP would be not more than 25 years, and extendable for not more than 20 years. This type of right can be granted freely, upon a payment or the delivery of any type of service.

32 Government Regulation Number 40 of 1996 on HGU, HGB and Right of Use over Land. 33 A right of management is a right of possession by the state, whose authority is partially delegated to its holder (art 1, point (2) of GR No 40 of 1996).

Indonesia  321 HP may be held by an Indonesian national, a foreigner domiciled in Indonesia,34 a legal entity established under Indonesian law and domiciled in Indonesia, or a foreign legal entity having its representative in Indonesia. In the case of land directly possessed by the state, HP may be transferred to another party only with the permission of an authorised official. But when it is over land owned by a non-state party, then HP can be transferred under an agreement between the landowner and the holder of HP. As with HGB, HP can be materialised over state land, a right of management, or HM. HP over HM is materialised through a grant by the holder of HM by a deed made by the PPAT. This deed must be registered at the land office. HP over HM binds third parties since it is registered. Accordingly, the regulation on land sets out when HM materialises and when HM binds third parties. Again, as with HGB, HP over HM is granted for not more than 25 years but may not be extended. Nonetheless, depending on the agreement between the holder of HP over HM and the holder of HM, a new HP may be granted through a deed made by the PPAT which must be registered.

D.  The Right of Lease for Building (hak sewa untuk bangunan – HSB) There is another type of land right stipulated in the Agrarian Law that has persoonlijk (in personam) character. This is HSB. HSB is a personal right but also has a proprietary element since the holder of this right is entitled to construct buildings over land. An individual or a legal entity may hold HSB if they are entitled to use land owned by another party for buildings and pay a sum of money as rent. The payment of rent may be made once or in stages, before or after the land is used. As with HP, a foreigner or legal entity domiciled in Indonesia is able to enjoy HSB. Badrulzaman argues that HSB essentially has the character of HGB since HSB enables the construction and ownership of a building,35 but is not subject to ­registration.36 In other words, HSB is essentially a personal right, since it arises out of an agreement and is a limited property right (in contrast to HM). Moreover, Badrulzaman argues that, in HSB, the building owner and the landowner may agree on the rights of the building owner in the event that one of the parties is bankrupt or dead, even though this agreement does not bind a third party.37 This argument is critical when analysing arrangements resembling trusts under Indonesian land law, a point to which I will return in section VI. 34 Under GR No 103 of 2015, a foreigner is considered as being domiciled in Indonesia when they generate benefits to national development and enter Indonesia through a visit licence, such as a stay permit, diplomatic permit, visit permit, etc. 35 This argument is based on the horizontal separation principle recognised in the Agrarian Law stipulating that land ownership does not necessarily include the building or any items above the land. Moreover, art 35, para (3) of Law No 28 of 2002 on Building stipulates that the construction of a building on another party’s land must be based on a written agreement between the landowner and the building owner. This provision essentially implements the principle of horizontal separation and legitimises the right of a party to construct and own that building (using a lease agreement for this purpose). 36 Badrulzaman (n 22) 99. 37 ibid 101.

322  Eddy M Leks Because the Agrarian Law has revoked Book II of the ICC, one may ask whether Indonesian land law still recognises the provisions set forth in Book III of the ICC, which contains the principal provisions on agreement, even though these provisions have not been revoked, especially since customary law principles are applied to land transactions. The question remains whether provisions of Book III of the ICC, other than provisions conflicting with transfer of title, are recognised under Indonesian land law. One judicial decision on land law states a rule that ‘The provisions in Article 19 of Government Regulation Number 10 of 1961 do not intend to override the Articles of the ICC or unwritten legal provisions regarding sale and purchase’,38 and another decision states a rule that ‘The conditions in Article 19 of Government Regulation Number 10 of 1961 do not exclude the conditions for sale and purchase within the ICC/customary law, but only a condition for agrarian officials’.39 These rules do not explicitly refer to provisions of the ICC except for those relating to sale and purchase. But from the rules, one can be certain that the provisions of the ICC should not be disregarded in Indonesian land law. This means that provisions of the ICC relating to land transactions, except for Book II of the ICC (to the extent that it is covered in the implementing regulations) and Book III of the ICC (to the extent that it conflicts with customary law principles) are still applicable. This is a logical argument since customary law only provides legal principles, and does not stipulate provisions in detail. For a modern context, especially where legal development is changing rapidly, people must have a legal framework to conduct business transactions and that framework should be provided by the ICC as the main civil code of Indonesia.

VI.  Returning to Trust-Like Arrangements under Indonesian Land Law As outlined previously, a pure trust concept is not recognised under Indonesian law since that law does not recognise equity. As mentioned at the end of section I, there are four important elements of the trust of real property in the English tradition, namely: that it is equitable; that it provides the beneficiary with rights in real property; that it imposes obligations on the trustee; and that those obligations are fiduciary in nature. It is, however, not conducive to draw on these elements to analyse trust-like arrangements in Indonesia, as Indonesia is a country with a tradition of continental European civil law. Accordingly, how arrangements resembling trusts are made in continental European countries is important to understanding the position in Indonesia.



38 Decision 39 Decision

No 1363 K/SIP/1971. No 952 K/SIP/1974.

Indonesia  323

A.  Trusts in Common Law and Continental European Traditions According to Gunawan Widjaja, trust-like arrangements in the continental European tradition may take the following forms: (a) through delivery of a property right other than ownership or a personal right in respect of a good or property that is recognised as property under the law, while maintaining the ownership right over that property in the hands of settlor, provided that the property right or personal right attached to that property may still be maintained even though the settlor is declared bankrupt; and (b) through delivery of an ownership right over a good or property to be held on trust for the beneficiary, provided that the property is a separate asset from the personal assets of that beneficiary with a revocation of specific authority so that the beneficiary is not authorised to carry out free legal acts in respect of that property, such that the property is not part of the beneficiary’s bankrupt estate if the beneficiary is declared bankrupt.40 Widjaja argues that despite the particular differences between trusts in the different traditions, there are neutral elements or characteristics of trusts, as follows.41 First, trusts always involve three parties, namely the settlor, the trustee and the beneficiary. Trusts may arise due to death (by will) or during the settlor’s life (inter vivos), as a result of an agreement for the benefit of a third party. Second, in a trust there is always the delivery of a good, whether tangible or intangible and whether in the form of a property right or a personal right recognised as a good. A property right that is delivered may be an ownership right or right that is derivative of an ownership right (jura in re aliena). A personal right that may be delivered is thus recognised as a good under the law. The settlor delivers a good and/or a property right and/or a personal right to a party that becomes the owner under the law and manages the good and/or property right and/or personal right that is the trust corpus. This party is called the trustee. Third, the good delivered by the settlor may be recorded under the name of the trustee and/or another party, such as the beneficiary, for management by the trustee. Further, even though the good is recorded under the name of the trustee or another party such as the beneficiary, the trust corpus is separate property owned by the trustee himself. Fourth, the delivery of a good by the settlor to the trustee is always related to the obligation of the trustee to manage that good and to deliver the enjoyment or utility or yield obtained from the management of that good to the beneficiary. That obligation is reflected in the declaration or agreement creating the trust and in prevailing laws and regulations, including judicial decisions. When that obligation is violated or neglected, a claim to demand its fulfilment may be made. 40 G Widjaja, Transplantasi Trusts dalam KUH Perdata, KUHD, dan Undang-Undang Pasal Modal Indonesia (Rajagrafindo Persada 2008). 41 These are considered ‘neutral’ as they do not depend on equity, which is not recognised under Indonesian law or the legal systems of continental European countries.

324  Eddy M Leks Fifth, the settlor, trustee and beneficiary are three different parties. A settlor may possibly become a beneficiary; equally, a trustee in a certain matter may become a beneficiary. If a settlor also acts as a trustee, a grantor trust will be established, and this arrangement is revocable. If a trustee becomes a beneficiary, there must be more than one trustee and/or beneficiary. Widjaja thus identifies what I call (a): the party principle; (b) the delivery principle; (c) the separation principle; (d) the obligation principle; and (e) the party combination principle.

B.  Trust-Like Arrangements under the ICC With this account of the neutral elements of the trust in mind, it is time to analyse trustlike arrangements under Indonesian law. Widjaja argues that at least four elements are crucial for the formation of an arrangement resembling a trust in Indonesia.42 The first is the possibility that property may be owned by more than one individual. With regard to ownership, the ICC provides that ownership may be by a legal entity, or jointly by two or more individuals. The second element identified by Widjaja is the possibility of a pledge of a right over the right of ownership, whether a pledge of a personal right or a limited property right43 – ie, jura in re aliena, such as a usufructory right. Widjaja’s third element is the possibility of a promise for the benefit of a third party as regulated in Article 1317 of the ICC.44 Article 1317 provides that a person may promise to himself that he will deliver an ownership right over property to another person, where the promisor himself will still retain enjoyment, whether in the form of a personal right or a limited property right – ie, jura in re aliena such as a usufructory right. That Article also provides that a person may promise to himself that he will deliver a personal right along with a limited property right freely, where the promisor himself will be the holder of the ownership right over that property. Finally, Article 1317 provides that a person may deliver an ownership right over property to other person, with a promise to the other person that a certain personal right along with a limited property right over that property is delivered to a third party freely. The fourth element identified by Widjaja consists of legal provisions regulating the problem of incapacity and non-authority to act under the law. If there is a violation of this element, the subjective requirements of an agreement are breached and the ­agreement may be cancelled.

42 Widjaja (n 40) 383. 43 There is a discussion of the meaning of personal right and property right as set forth in Indonesian law in section IV. ‘Indonesian Property Law’. 44 Art 1317 ICC stipulates that ‘[i]t is possible to make an agreement for the benefit of a third party, if an agreement made for oneself, or a grant to another, contains such conditions. Anyone that has determined a condition, cannot revoke it, if the third party has stated to use that condition’.

Indonesia  325 From Widjaja’s explanation, it seems that Article 1317 enables arrangements ­resembling trusts.45 Consider first a situation where a person (settlor’ promises to himself that he will deliver an ownership right over property to another person (trustee), where the first person retains enjoyment (as ‘beneficiary’) of a personal right or a limited property right. This is a two-party arrangement but one where the two parties occupy three different roles. In this scheme, the settlor will become the beneficiary of a limited property right. Second, consider a situation where a person (settlor) promises to himself that he will deliver to another person (as ‘beneficiary’) a personal right along with a limited property right, where the first person himself will be the holder (as trustee) of an ownership right over the property in question. In this scheme, the settlor holds an ownership right but takes a second role as trustee for the benefit of the beneficiary in respect of the limited property right. Third, consider a situation where a person (settlor) delivers an ownership right over property to another person (trustee), with a promise to the other person that a certain personal right along with a limited property right is delivered to a third party (beneficiary). To focus the analysis even more, let us see how Article 1317 operates when the ­property in question is real property, and the distinction is recalled between full­ property rights and limited property rights under Indonesian land law. Let us consider the case where a person (settlor) promises to himself that he will deliver an ownership right (HM) over real property to another person (trustee), where the promisor himself (as ‘beneficiary’) will retain enjoyment, whether in the form of a personal right or a limited property right (ie, HGB, HP, HSB, or some other temporary limited property right such as a pledge right, a profit sharing business right, etc). In this scheme, the settlor is also the beneficiary of a limited property right, such as HGB, HP, or HSB. As explained in section V, HGB and HP may be issued over HM. The holder of HM may make an agreement with another party to hold HSB for a limited period of time for the purpose of construction of a building. What is interesting is that such an arrangement, even though based purely on the ICC with no source in ­customary law, is recognised under customary law and by the Supreme Court of Indonesia.46 This scheme satisfies what I described earlier as the party principle since there is a settlor, a trustee and a beneficiary. There is also delivery of an ownership right from the settlor to the trustee which satisfies what I described as the delivery principle, and in return, the settlor becomes a beneficiary receiving a limited property right. The separation principle, as I described it earlier, is not satisfied in respect of the right of ownership since this is not separated from the trustee’s other assets. But the limited property right that the settlor retains enjoyment of is separated from the trustee’s asset. The obligation principle that I introduced earlier is satisfied since the trustee is constrained to provide

45 Art 1317 ICC is relevant in the context of land arrangements since the Supreme Court has determined that provisions of the ICC are relevant in this context (see section V. ‘Indonesian Land Law’). 46 See Supreme Court Decision No 3329 K/Pdt/1991.

326  Eddy M Leks benefits to the beneficiary as long as the limited property right is valid. Lastly, what I described as the party combination principle is also satisfied since, in this scheme, a settlor also acts as a beneficiary. Now let us consider the case where a person (settlor) who holds HM in real property promises to himself that he will deliver to another person (as beneficiary) a personal right along with a limited property right (HGB, HP, HSB or some other temporary limited property right such as a pledge right, a profit sharing business right, etc), and to that extent, will hold HM as ‘trustee’. This scheme satisfies the party principle since there is a settlor, a trustee and a beneficiary. The delivery principle is also satisfied since the settlor delivers the limited property right to the beneficiary while keeping for himself the full ownership right. The separation principle is not satisfied in relation to HM, since HM is not separated from the trustee’s other assets. But the limited property right is separated from the trustee’s assets since the limited property right is delivered to the beneficiary. The obligation principle is satisfied since the trustee is constrained to provide benefits to the beneficiary as long as the limited property right is valid. Lastly, the party combination principle is also ­satisfied since, in this arrangement, a settlor also acts as a trustee. Next, let us consider the situation where a person (settlor) delivers HM to another person (trustee), with a promise to this other person that a certain personal right along with a limited property right (HGB, HP, HSB, or some other temporary limited property right such as a pledge right, a profit sharing business right, etc) is delivered to a third party. This scheme satisfies the party principle since there is a settlor, a trustee and a beneficiary. Indeed, there is no party with a dual role in this scheme. The delivery principle is also satisfied since the settlor delivers HM to the trustee but promises to deliver the limited property right to the beneficiary. The separation principle is not satisfied in relation to HM since HM is not separated from the trustee’s other assets. But the limited property right is separated from the trustee’s other assets since the limited property right is delivered to the beneficiary. The obligation principle is satisfied since the trustee is constrained to provide benefits to the beneficiary as long as the limited property right is valid. Lastly, the party combination principle is also satisfied since there is no conflict of roles between the settlor, trustee and beneficiary.

C.  Waqf Arrangements in Relation to Real Property As outlined above, waqf is the legal action of a waqif to separate or deliver part of his real property to be used for an indefinite or definite period according to his intention for the purpose of worship or public welfare under the Syariah. After delivery of his real property, the waqif will no longer be entitled to that property. Thus, the waqif can be seen as analogous to a settlor. A party who is managing and developing real property under waqf is called the nazhir. The real property held by the nazhir is separated from his own personal assets. Hence, the role of nazhir is highly similar to that of trustee. The party who is entitled to obtain the benefit of real property managed by a nazhir is called the mauquf alaih. The mauquf alaih can be an individual or a group of individuals.

Indonesia  327 The mauquf alaih can also be the public at large. The mauquf alaih will not have the legal title nor be registered as the legal owner of the waqf property. The mauquf alaih only has the right to obtain benefit from that property. A waqf arrangement satisfies the party principle since there is a settlor, a trustee and a beneficiary. The delivery principle is also satisfied since the waqif delivers his property right to the nazhir. Unlike the three scenarios discussed in the last section, in which the separation principle is not fully satisfied, in waqf arrangements this principle is fully satisfied. Even though the nazhir is registered as the legal owner under the law, the waqf property is separated from the nazhir’s personal assets. The obligation principle is fulfilled as well since the nazhir must carry out the administration, management, development, supervision and protection of the waqf property as stated by the waqif in the waqf pledge for the benefit of designated mauquf alaih. Lastly, the party combination principle is fully satisfied since the roles of settlor, trustee and beneficiary are very clear and distinct.

D.  Arrangements Resembling Trusts under Indonesian Land Law for Foreigners It is clear from the explanation of land rights in section V above that a foreigner may hold either HP or HSB under Indonesian land law. A foreigner is unable to hold HM since HM can only be held by an Indonesian national or a specific (and limited) Indonesian legal entity. Under Indonesian law, HGB, even though it may be considered a limited or derivative property right, cannot be owned by a foreigner. A foreigner who seeks to benefit from a trust-like arrangement under Indonesian land law may use any of the three types of scheme discussed above, with one exception: a foreigner cannot request the party that will act as settlor (and perhaps as trustee) to grant HGB over HM, but may request only that the party grant HP over HM or HSB over HM. Therefore, a foreigner cannot request an Indonesian national or an Indonesian legal entity to hold land (HM or HGB) and then grant all use rights over that land to the foreigner as beneficiary as if the foreigner were the owner of a full property right. This is considered to violate the nationality principle in Indonesian law, and even though legal title is held by the Indonesian trustee, that type of arrangement may be considered as null and void by the courts.47 Likewise, if a foreigner is designated as mauquf alaih in a waqf arrangement over land, the arrangement must comply with the Syariah and national laws as set forth in the Waqf Law. Moreover, taking into account the provisions of the Waqf Law and the Waqf GR, one can see that the spirit of waqf regulation is structured so that it does not override the Agrarian Law. While the Syariah does not explicitly forbid a foreigner to 47 Supreme Court Decision No 147 K/SIP/1979 rules that ‘[t]he sale and purchase of land/a house was illegal, since in accordance with the testimony of the seller’s proxy, the original Defendants are not the actual buyer, but only lend their identities, whereas the real buyer is the original Plaintiff who was still a Foreigner at that time. Thus, the sale and purchase agreement are for a purpose that is prohibited by the Law (ongeoorloofde oorzaak), namely to avoid the provisions stipulated in Art 5 in conjunction with Art 21 of Agrarian Law’.

328  Eddy M Leks be mauquf alaih, the nationality principle of the Agrarian Law has to be considered by the parties when entering into a waqf arrangement. Thus, if a foreigner is designated as mauquf alaih, and as a result he or she obtains benefits from the land, a nazhir may utilise one of the three schemes outlined above in order to comply with the nationality principle of the Agrarian Law. Accordingly, it is possible, in limited circumstances, for a foreigner to benefit from arrangements resembling trusts under Indonesian land law notwithstanding the nationality principle.

Postscript The author began to write this chapter 2019 and finalised it in mid-2020. On 2 November 2020 an Employment Creation Law was promulgated in Indonesia. This law contains some provisions relating to land. One of its implementing regulations is the Government Regulation Number 18 of 2021 on Rights of Management, Land Rights, Condominium Units, and Land Registration (‘GR No 18 of 2021’). GR No 18 of 2021 revokes GR No 40 of 1996, discussed in the chapter. On the whole the provisions in GR No 40 of 1996 have been preserved in the new GR No 18 of 2021. Hence, the chapter’s discussion of GR No 40 of 1996 is still applicable. There is however one ­additional provision in GR No 18 of 2021 that relates to limited property rights. GR No 18 of 2021 stipulates that an interested party may seek registration of a lease agreement over registered land. This is optional, not compulsory. However, when a lease agreement is registered, a third party with an interest in particular land will know of a lessee,s interest in respect of that land.

18 Property Management Relationships and ‘Trusts’ in Vietnam NGUYEN HUNG QUANG* AND NGUYEN THUY DUONG**

Introduction Like many other civil law jurisdictions, Vietnam has no legislation providing specifically for trusts law. In this chapter, we conduct a thorough review of property management relationships arising in different contexts in Vietnamese law1 and compare these with the trust to ascertain their similarities and differences. In section I, we begin with a historical overview of the topic. Sections II–IV then explore property management relationships in, respectively, the civil law, commercial law and other contexts. Drawing from these analyses, the final section of this chapter discusses the challenges of incorporating the common law trust in the Vietnamese legal system.

I.  A Historical Overview Although Vietnamese law has never explicitly recognised the trust, it had developed a legal framework to govern property management relationships from an early stage. For instance, from 1461 to 1517, the laws of the Le Dynasty provided for the management of property for the purposes of worship.2 From the twentieth century, civil codes were * Managing Partner, NH Quang & Associates. ** Senior Associate, NH Quang & Associates. We are grateful for the research assistance of Vu Thi Dieu Thao, Le Mai Phuong and Le Hai Linh from NH Quang & Associates. 1 These include the civil law, investment, trade, bankruptcy and management of state capital contexts. We exclude from this study property management relationships arising from community affairs such as social funds or charity funds. 2 An Order from the second year of Quang Thuan to the second year of Quang Thieu provided: ‘[i]n the event of both parents’ death without testamentary provision being made in relation to their land, 1/20 of the property’s value will be used to pay the expenses for worshiping parents, which will be managed by the eldest son’: Phan Huy Chu, The Rules of Dynasties by Categories, Rules on Examinations: Rules on Household Registration, Tax Rate, Tax Collection, Land and Currency Regime: Rules on Laws and Penalties [Lịch triều Hiến chương Loại chí, Khoa Mục chí – Quốc dụng chí – Hình luật chí], vol 4 (Youth Publishing House 2014) 352–56.

330  Nguyen Hung Quang and Nguyen Thuy Duong gradually formed to govern civil relations in the three regions of Tonkin, Annam and Cochin China. These civil codes were strongly influenced by the Napoleonic Code of France3 and each had its own section on agency and guardianship.4 While the term ‘trust’ (‘uỷ thác’ or ‘tín thác’) appeared in these laws, they were similar in nature to agency provisions in modern civil laws.5 The Civil Codes of 1995 and 2005 marked the development of a more systematic legal framework for governing civil relationships, with reference being made to more foreign legal sources beyond the Napoleonic Code. However, property management relationships remained governed primarily by guardianship and agency laws. It was only in the Civil Code 2015 that usufructuary rights and surface rights were included. In relation to commercial practice, there was a perception that trust relationships appeared in Vietnam before 1975 but only in the South, during the period of the Republic of Vietnam regime.6 However, few official documents have been found recognising the formation, development, as well as legal bases governing trust relationships in this period. Rather, a clear legal framework for governing property management relationships in the commercial arena emerged from the 1980s, especially in relation to foreign and securities investments. In relation to investments, the ideals of an open economy began to form in the late 1970s.7 Following the perestroika of the Soviet Union in 1985,8 Vietnam initiated an ­innovative reform programme known as Doi Moi or ‘Renovation’ in 1986.9 This programme aimed to encourage open economic activities and strengthen Vietnam’s legal institutions and legislation.10 A number of laws recognising private businesses, economic freedom and private ownership were enacted, including the first law on foreign investment in Vietnam, which allowed foreign capitalists to do business in Vietnam.11 When Vietnam was recognised as an observer of the World Trade Organisation in 1995, it made a great number of efforts to revise its legislation on commercial activities to align itself closer to international commercial practice.12

3 Thai Vinh Thang, French Legal Culture and Influences on Vietnamese Laws [Văn hóa pháp luật Pháp và những ảnh hưởng tới pháp luật ở Việt Nam], available at: thongtinphapluatdansu.edu.vn/2009/07/25/3404. 4 Phan Van Thiet, A Brief of Civil Code [Dân luật Tu tri] (Khai Tri Bookstore 1961) 135–44, 297–98. 5 ibid 297, 325. 6 Ha Que Anh, The Reception of Trust in Different Legal Systems: Some Lessons for Vietnam (Kovač 2008) 221. 7 Dang Phong, Vietnam Economic Thinking in 1975–1989 [Tư duy kinh tế Việt Nam năm 1975–1989] (Tri Thuc Publishing House 2009) 314. 8 J Gillespie, ‘The Juridification of State Regulation in Vietnam’ in J Gillespie and AHY Chen (eds), Legal Reforms in China and Vietnam: A Comparison of Asian Communist Regimes (Routledge Law in Asia 2010) 81. 9 ‘Doi Moi’ is a slogan for political reform in Vietnam aiming to improve economic development mentioned in the Report of Communist Party Executive Committee in the Party Congress VI (from 15–18 December 1986); E-portal of the Vietnam Government, Orientations and Tasks of the Five-Year Socio-Economic Development Plan 1986–1990 [Phương hướng, nhiệm vụ kế hoạch phát triển kinh tế – xã hội 5 năm 1986–1990], see: chinhphu.vn/portal/page/portal/chinhphu/kehoachphattrienkinhtexahoi. 10 M Sidel, ‘Vietnam: The Ambiguities of State-Directed Legal Reform’ in Poh-ling Tan (ed), Asean Legal Systems: Law, Society and Pluralism in East Asia (Butterworths Publishing 1997) 359, 363; E-portal of the Vietnam Government (n 9). 11 Phong (n 7) 348. 12 J Gillespie, ‘Understanding Legality in Vietnam’ in S Balme and M Sidel (eds), Vietnam New Order: International Perspectives on the State and Reform in Vietnam (Palgrave Macmillan 2007) 153–54; E-portal of the Ministry of Finance, WTO Door Opens for Vietnam, available at: www.mof.gov.vn/webcenter/portalh0.

Vietnam  331 Similarly, the legal framework regulating stock markets was also formed in Vietnam in the late 1990s, with the government focusing on developing the stock market as a new channel for attracting investment.13 However, before the first fund management company in Vietnam (VietFund Management Company) was officially licensed in 2003, there had already been other close-ended Vietnamese investment funds providing offerings in foreign stock exchanges to channel foreign capital into Vietnam (offshore funds).14 There were 47 licensed fund management companies in 2008,15 but an increase to only 48 in 2020.16 In addition, there were no licensed onshore funds until 2006, when the first Law on Securities was enacted.17 It is worth noting that the fund management company structure in the Vietnamese legal system is quite similar to the common law investment trust model, which will be further clarified in section III.A below.18

II.  Property Management Relationships in Civil Law A. Agency Under the Civil Code 2015, agency is a transaction by which a person (the principal) gives to another (the agent) the authority to do something for the principal and in his name.19 This concept of agency is similar to the mandat in the French Civil Code and the vertretung in the German Civil Code. The agent acts for the benefit of the principal pursuant to a mutual agreement, and a transfer of property title from the principal to the agent is not required.20 The agency relationship shares many characteristics of the trust. For example, agents and trustees both act for the benefit of another person, and they may be individuals or legal entities;21 the principal is in an analogous position to that of a settlor who

13 Inter-agencies Steering Committee for Vietnam’s Legal System Development Needs Assessment, Report on Comprehensive Needs Assessment for the Development of Vietnam’s Legal System to the Year 2010, Need 3.3.2.6 (5), 2001; Resolution 48-NQ/TW of the Politburo on Strategy for Development and Completion of Legal System to 2010 and vision toward 2020, 2005, Section II.3; E-portal of State Securities Commission of Vietnam, Development History, available at: www.ssc.gov.vn/ubck/faces/en/enmenu/enpages_engioithieu/ introduction. 14 JL Golin, Capital Flows Along the Mekong: The Complete Guide to Investing in Cambodia, Laos, Myanmar & Vietnam, vol 2 (Asia Law and Practice 1996) 49–50; A Sack and J McKenzie, Establishing a Venture Capital Firm in Vietnam (MPDF 1998) 9, 19. 15 Nga Nguyen, ‘Onshore Investment Fund: Question on Capital Mobilization Has Not Been Answered’ [Quỹ đầu tư trong nước: Bài toán huy động vốn chưa có lời giải] (2011) Investment and Securities Magazine, available at: tinnhanhchungkhoan.vn. 16 E-portal of the State Securities Commission, Public Information [Công bố thông tin], available at: www.ssc.gov.vn; M Phuong, ‘Korean Investors Invests into a Vietnamese Fund Management Company’ [Nhà đầu tư Hàn Quốc rót vốn mua một công ty quản lý quỹ Việt Nam]’ Thanh Nien Magazine (15 February 2020), available at: thanhnien.vn/tai-chinh. 17 Sack and McKenzie (n 14) 19–20. 18 World Bank, Report on the Observance of Standards and Codes (ROSC): Corporate Governance: Country Assessment: Vietnam (2013) 9. 19 Civil Code 2015, arts 134–35. 20 ibid art 138, cl 1; French Civil Code, art 1984; German Civil Code, art 164, cl 1. 21 Civil Code 2015, art 138, cl 1.

332  Nguyen Hung Quang and Nguyen Thuy Duong constitutes himself sole beneficiary under a trust; and the assets that may be involved in an agency relationship are also as diverse as those that can be subject to a trust.22 There are two main differences between trust and agency. The first is that agency does not require the transfer of property title, but a trust does. The second concerns the party responsible for transactions conducted by the trustee or agent. While the agent does not bear personal responsibility for transactions relating to his role except where he performs transactions beyond the scope of his duties, thereby causing damage to the principal,23 trustees are personally responsible for acts relating to the trust (although they ordinarily have recourse to an indemnity from the beneficiaries when acting within the scope of their duties). In addition, the Civil Code 2015 requires agency relationships to be established on the basis of an agreement between the parties, while the common law trust may be created unilaterally. The duration of an agency relationship is usually determined in the parties’ agreement. Where such agreement is lacking, the agency relationship will terminate when the civil transaction performed by the agent is completed, or one year from the time the agency arose (in cases where the agency is not associated with the performance of a civil transaction).24 In fact, the principal and the agent may consent to an agency relationship of an unlimited term, but in this event, the agency agreement will terminate when either party dies or (where a legal entity is party to the agreement) the legal entity ceases to operate.25 This is different from the trust, whose existence is usually subject to perpetuity rules but does not terminate with the death or ceasing of operation of the trustee. The rules governing the recovery of property when the agent violates his obligations under the agency agreement are also different from the usual common law tracing rules. According to the Civil Code 2015, if the agent and the third party with whom he transacts deliberately enter into the transaction beyond the scope of agency, the transaction, insofar as it exceeds the scope of the agency, will not give rise to rights and obligations that affect the principal.26 If the transaction causes damage to the principal, the agent and the third party will also be jointly liable to compensate the principal.27 However, the transaction remains valid where property is transferred to a bona fide third party, provided that the property is not subject to registration and the transfer is not in the form of a gift, or provided that the transaction has been registered at a competent authority where the property requires registration.28 The principal has no right to reclaim the property from the bona fide third party in such cases but could proceed against the agent to claim for an indemnity of expenses and compensation for damages.29

22 GG Bogert, Handbook of the Law of Trusts (West Publishing Co 1921) 70–71. The Civil Code 2015 does not limit the scope of assets: see ch IX, arts 134–43 of this Code. 23 Civil Code 2015, art 143, cl 4. 24 ibid art 140, cl 1, cl 2, point b. 25 ibid art 140, cl 3, point dd. 26 ibid art 143, cl 1. 27 ibid art 143, cl 4. 28 ibid art 133, cl 1–2. 29 ibid art 133, cl 3.

Vietnam  333 The Vietnamese trial practice reveals the emergence of hybrid civil relations which borrow elements from both trust and agency, the most notable of which arises where foreigners (often diaspora) persuade Vietnamese citizens to hold title to land on their behalf. This is a common practice in Vietnam to circumvent the restrictions on foreign ownership of land. In 2016, the Justice Council of the Supreme People’s Court (SPC) adopted Precedent 02/2016/AL in relation to this issue.30 The precedent is based on the case of Thanh v Tam.31 In 1993, Ms Thanh, a Vietnamese residing in the Netherlands, wanted to purchase an agricultural plot of land in Vietnam at 21.99 mace of gold. As she was not in Vietnam, she was unable to put her name on the title transfer document. Her younger brother, Mr Tam, agreed to hold the land title on this document and to act on her behalf to manage and cultivate the land to make financial provision for their parents. In 2004, Tam transferred the use right of the land to another person for VND1,260,000,000, despite Thanh’s objection. Thanh initiated a lawsuit to recover the monies Tam had received. The Justice Council of the SPC recognised that Tam had merely lent his name to the land title transfer document on Thanh’s behalf. However, it held that Tam’s efforts in managing, preserving and increasing the value of the land must be recognised. Ultimately, it held that the sum Tam received from the transfer of the land title, less 21.99 mace of gold, was held for the mutual benefit of Thanh and Tam. The relationship between Thanh and Tam shares similarities with a trust. Tam’s role was analogous to a trustee’s, having been entrusted by Thanh to hold the land title as well as to manage and cultivate the land and use the income generated to support their parents. While in Thanh v Tam the SPC did not find that the parties’ agreement was void, in other cases bearing similar facts,32 the courts have refused to recognise the validity of the parties’ agreement on the basis of the regulation that overseas Vietnamese are not eligible to purchase land in Vietnam. In some of these cases, the courts have auctioned off the land and returned the sale proceeds to the ‘settlor’ (under the Civil Code 1995), while in other cases the courts have allowed the ‘trustee’ to use and manage the land as a true owner under the condition that the ‘trustee’ must return the entire entrusted sum to the ‘settlor’ (under the Civil Code 2005). In the event that the land has been transferred to a third party for a value higher than the initial entrusted sum, the difference is expropriated to a public fund under the state (under the Civil Code 1995) or divided among the parties, including the ‘settlor’ and the ‘trustee’ (under the Civil Code 2005).33 It can be seen that courts do not take a consistent approach, and that Precedent 02/2016/AL is not comprehensive because it does not deal with the validity of the agreement. 30 Precedent or case law in Vietnam operates differently from other common law countries. According to Resolution No 04/2019/NQ-HDTP of the Justice Council of SPC on the Process for Selection, Announcement and Application of Precedents, the precedents will be selected by the Justice Council of SPC and announced by the Chief Justice of SPC (Art 1). 31 See: anle.toaan.gov.vn/webcenter/portal/anle/chitietanle?dDocName=TAND014298. 32 The practice of foreigners transferring money to domestic citizens to purchase and hold land on their behalf is also widespread in other Asian jurisdictions: see L Ho and R Lee, Trust Law in Asian Civil Law Jurisdictions: A Comparative Analysis (Cambridge University Press 2013) 14. 33 Cassational review: Decision 11/2010/DS-GDT dated 2 April 2010.

334  Nguyen Hung Quang and Nguyen Thuy Duong

B. Guardianship In the Civil Code 2015, guardianship arises when an individual or an organisation (the guardian) takes care of and protects the legitimate rights and interests of an orphan, a legally incapacitated person or a person with limited cognition and behaviour control, etc (a ward).34 A guardian must satisfy certain conditions such as having good ethics and not being prosecuted for criminal liability (for individuals),35 or meet the necessary requirements to perform rights and obligations of a guardian (for legal entities).36 Guardianship in the Civil Code 2015 is quite similar to tutorship (tutelle) or curatorship (curatelle) in French law and guardianship (vormundschaft) in German law.37 According to the Civil Code 2015, under the supervision of the guardianship ­supervisor,38 the guardian’s obligations are to take care of and educate the ward, represent the ward in civil transactions (except where it is provided by law that wards under 15 years of age can enter in and perform civil transactions by themselves), manage the ward’s property, and protect the legitimate rights and interests of the ward.39 In essence, a guardian’s obligations are not only confined to the management over the ward’s properties but extend to caring for and representing the ward. Therefore, in Vietnamese law, as well as French law and German law,40 guardianship is not preconditioned on the transfer of property title from the ward to the guardian. Guardianship in Vietnamese law is highly similar to guardianship at common law: the guardian acts for the benefit of a third party (the ward) and has the right to possess and transfer the ward’s properties.41 However, the way in which a guardian may be appointed differs. At common law, a guardian may be a trustee appointed by the settlor, or a court staff appointed by the court,42 or appointed in the deed or verdict of the equity court.43 Meanwhile, in Vietnamese law a guardian is appointed in one of three ways:44 he may be stipulated by law (a ‘natural guardian’);45 designated by administrative agency at the communal People’s Committee (the lowest governmental level) or appointed by the court;46 or selected by the ward.47 The relationship between the guardian and ward is more akin to agency than trust. Unlike a trustee, a guardian is not allowed to transfer property title and has to follow

34 Civil Code 2015, art 46, cl 1. 35 ibid art 49. 36 ibid art 50. 37 ibid art 47; French Civil Code, arts 373–75, 380, 440; German Civil Code, arts 1773, 1896. 38 Civil Code 2015, art 51, cl 1. 39 ibid arts 55–57. 40 ibid art 51; French Civil Code, art 454; German Civil Code, art 1799; Access to Justice for Persons with Intellectual Disabilities (AJuPID), Comparison of Legal Systems in Access to Justice for Persons with Intellectual Disabilities in the Following Countries: Bulgaria, Finland, France, Hungary, Ireland (2015) 24, available at: foundationnet.info/wp-content/uploads/2016/02/AJuPID_Research_Report_2015.pdf. 41 Bogert (n 22) 38; Civil Code 2015, art 59, cl 1. 42 Bogert (n 22) 38–39. 43 ibid 39. 44 Civil Code 2015, arts 52–54. 45 ibid arts 52–53. 46 ibid art 54, cl 1. 47 ibid art 48, cl 2.

Vietnam  335 certain principles in managing the ward’s property. Specifically, in relation to civil transactions involving ‘high value’ property (a phrase which, however, is not precisely defined), the guardian must obtain consent from the guardianship supervisor; a guardian is not allowed to present the ward’s property to others; and civil transactions between a guardian and a ward relating to the ward’s property are all void except where the transaction is performed for the ward’s benefit and with the consent of the guardianship supervisor.48 Of course, a guardian is also not allowed to use the ward’s property to repay his personal liabilities or debts.

C.  Usufructuary Rights and Surface Rights Usufructuary rights and surface rights were newly included in the Civil Code 2015.49 Previously, these rights were mentioned in the civil legislation of the French colonial state before 1945 and the civil legislation of the Vietnam Republic (the South of Vietnam before 1975);50 indeed, some of these rights were mentioned in civil legislation before 2015, such as the right of use, the right to enjoy the income and yield from inheritance property based on the Court’s order, the right to exploit forests, etc. However, usufructuary rights and surface rights were not formally provided for in any civil code of Vietnam until 2015.51 The incorporation of usufructuary rights and surface rights in the Civil Code 2015 was inspired by the civil codes of several countries, primarily that of the French Civil Code.52 According to the Civil Code 2015, a usufruct right is the right to exploit the functions, yield or income derivable from a property under ownership of another entity over a certain period of time;53 while a surface right is defined as an entity’s right over the ground, water surface, space thereon and earth bowel of land of which the use right belongs to another entity.54 Usufructuary rights are similar to the right to use property in property lease or borrowing agreements. However, the scope of usufructuary rights is wider as it allows others to exploit, use, collect the yield and income from the object of the usufructuary right or lease the usufructuary right without requiring the property owner’s permission.55 48 ibid art 59, cl 1. 49 Ministry of Justice, Explanation of Draft of Civil Code (Amendment) Presented to the Standing Committee of National Assembly (September 2014) 38. 50 This right was also stipulated in the civil law of Vietnam before 1945 in the Cochin China Civil Code 1883; the Tonkin Civil Code 1931; the Annam Civil Code 1936 (under the name of right to benefit (‘quyền hưởng dụng thu lợi’); and laws of Southern Vietnam 1954–75 in the Civil Code of the Republic of Vietnam 1972 (under the name of right of usufruct (‘quyền dụng ích, quyền hành dụng, quyền cư dụng’): Nguyen Hong Hai, ‘Usufruct Helps Protect the Disadvantaged in Civil Relations’ (Vietnam Laws and Legal Forum, No 275, May 2017) 10–13. 51 Phung Trung Tap, ‘Usufructuary Right and Surface Right’ [Về quyền hưởng dụng và quyền bề mặt] (2016) Journal of Legislative Studies, available at: www.lapphap.vn/Pages/tintuc. 52 Ministry of Justice, The Report on Summary of International Experience on Civil Codes (the Report in the Legislation Documents on the Draft of Civil Code) 58. 53 Civil Code 2015, art 257. 54 ibid art 267. 55 Do Van Dai, Scientific Comments on New Points of the Civil Code 2015 [Bình luận khoa học những điểm mới của Bộ luật Dân sự năm 2015] (Hong Duc Publishing House: Vietnam Lawyers Association 2016) 261.

336  Nguyen Hung Quang and Nguyen Thuy Duong Usufructuary rights and surface rights are established under the law, upon agreement or by will.56 The parties involved in this relationship include the owner of usufructuary rights/surface rights (this could be an individual, group of individuals or a legal entity) and the property owner. The right-holder is in a comparable position to a trustee who is also a beneficiary, in that they both have the right to exploit the relevant property as well as to enjoy the yield and income obtained from it. Note, however, that while a sole trustee cannot be the sole beneficiary in trusts law,57 it is possible for there to only be one right-holder who has a usufructuary or surface right. Just as in the case of guardianship and agency, usufructuary and surface rights differ from the trust in relation to the inability of right-holders to transfer property title. Another difference is that the object of surface rights can only be immovable ­properties.58 In terms of obligations, the right-holder must reserve, manage and fix the relevant property,59 and is only allowed to perform actions relating to the property as agreed. In principle, the property or right subject to usufructuary or surface rights may not be used to repay the right-holder’s liabilities or debts since title still belongs to the owner. The term of usufructuary and surface rights is determined by agreement or by law. The maximum term of usufructuary rights is the lifetime of the first right-holder (where he is an individual) or 30 years (if the first right-holder is a legal entity).60 The term of surface rights may not exceed the term of the land use right.61 Surface rights are important as they serve as a legal basis for clarifying the relationship between land under ownership by the entire people and land use rights of organizations and individuals, and offering more options in exploiting land and land-attached property and exercising land use rights as well as ensuring stability in property-related transactions and protecting the rights of bona fide third parties.62

III.  Property Management Relationships in Commercial Law A.  Securities Investment Fund Popular types of fund in Vietnam today include open- or close-ended funds, ­membership funds and other variations such as real estate investment funds and exchange-traded funds. According to the Law on Securities of Vietnam (including the original law in

56 Civil Code 2015, arts 258, 268. 57 Bogert (n 22) 91. 58 Civil Code 2015, art 267. 59 ibid art 262, cls 2–4. 60 ibid art 260, cl 1. 61 ibid art 270. 62 Nguyen Hong Hai (Deputy General-Director Department of Civil-Economic Laws, Ministry of Justice), ‘Right of Superficies Concretises: The Role of Civil Code as Law of Market Economy’ Vietnam Law and Legal Forum Magazine (5 May 2017), available at: vietnamlawmagazine.vn.

Vietnam  337 2006 and its revision in 2010), funds involve investors contributing capital to create fund assets which are managed and developed by a fund management company to generate profits for the investors. The transactions and financial matters of such management activities are supervised by a supervisory bank.63 The draft law of the Law on Securities 2006 provided a definition of ‘investment fund’64 as well as regulations pertaining to investment funds, management companies and fund custodians. Because the term ‘investment fund’ is widely used in developed markets, it was advisable to bring the definition of that term in Vietnam in line with international best practices and Western usage.65 Indeed, based on the lessons learned from China,66 a clearly defined term would avoid unnecessary problems down the road by ensuring that any entity operating like an investment fund is licensed by the State Securities Commission, which prevents illegal investment funds from operating.67 In common law countries, a similar model to the Vietnamese fund model is the investment trust, a special trust model that governs trust relationships serving commercial investment purposes. This model is run primarily by investment companies or mutual funds,68 which are usually registered as a company.69 Both Vietnamese funds and investment companies in common law countries must meet certain conditions of establishment and operation such as conditions of minimum capital and management conditions to avoid conflicts of interest in the investment process.70 Both models are also analogous to a trust: the investors are the ‘settlors’ and ‘beneficiaries’, while the

63 Law on Securities 2006–2010 (Incorporated Document 41/VBHN-VPQH), ch VII. 64 The ‘Investment Fund’ is defined as ‘any entity (by way of shares, units, participation certificate, partnership, right or beneficial interest) offered to any person, with the purpose of collecting subscriptions (in money or in property), and with the stated intention to invest those subscriptions (in securities, money deposits or any other type of asset), whereby the investors do not have day to day control over investment decision making, and which has the aim of providing subscribers with a return on their investment in proportion to their ownership of the investment fund (in the form of either capital or income or any other benefit)’. This definition excludes cases not considered as investment funds including (i) mutual cooperatives (funeral societies, friendly societies, credit unions and micro finance organisations); (ii) investment clubs; (iii) families investing as a group, etc. The definition of ‘Investment Fund’ under applicable laws is shortened to ‘a securities investment fund is a fund established through capital contribution by investors to make investment in securities or other assets, including real estate. Investors do not have the right to daily control the investment decisions of the fund’. 65 C Kennedy, Commentary to Draft Four of the Securities Law for Vietnam (2005) 7. 66 ibid 7. Kennedy argues that ‘China has a big problem in this respect, since the new Law on Investment Funds, which came into force in June 2004, did not have a sufficiently tight definition, and thus, as a result, the authorities are having difficulties in restraining illegal funds, whose size is approximately twice that of properly licensed funds’. 67 Kennedy (n 65) 7. 68 Bogert (n 22) 383. 69 US Securitites and Exchange Commission, ‘Investment Companies’, available at: www.sec.gov/ fast-answers. 70 For instance, the conditions for forming a membership fund include the minimum capital contributed is 50 billion Vietnam dong (Law on Securities, art 95); independent members of the fund’s representation board must not be related to a person of any fund management company, supervisory bank (Circular 224/2012/ TT-BTC guiding the establishment and management of open-ended funds, membership funds, art 2, cl 13); US Investment Act of Company of 1940, s 14 (Size of Investment Company) and s 10 (Affiliations of Directors): www.Investment_Company_Act_1940.

338  Nguyen Hung Quang and Nguyen Thuy Duong fund management company (under Vietnamese law) and the investment company (in common law) act as the ‘trustee’. A significant difference between the Vietnamese and common law models can be found in the capital structure. In relation to common law investment companies, the investors’ capital is not separated from the company’s capital.71 However, in the Vietnamese investment fund model, the investors’ capital is concentrated in the fund and this is established separately from the fund management company. Vietnamese regulations require fund assets to be deposited with a third party such as a supervisory bank. They also require fund assets to be independent from the assets of the fund management company, and they may not be used to repay debts of the fund management company.72 In the event that a fund management company violates its obligations, resulting in a loss of the fund assets, the investors may replace the fund management company at a general meeting.73 Investors can also take legal action, including claiming for damages if the fund management company infringes their rights and interests.74 In 2019, the National Assembly of Vietnam enacted the revised Law on Securities.75 One of the notable revisions relates to asset separation. Previously, the Law on Securities 2006 and 2010 only stipulated that the fund management company must separate the assets of each investor and the company’s assets, without confirming the investors’ ownership of entrusted assets.76 The 2019 Law on Securities now clearly specifies that assets entrusted by an investor to a fund management company are under the ownership of that investor and are not considered assets of the fund management company.77 This revision ensures that the principle of asset separation would comply with international commitments of protecting investors in securities activities and facilitating the handling of assets when fund management companies dissolve or go bankrupt.78

B.  Trusteeship of Credit Institutions Although Vietnamese law does not recognise the trust, it provides for the trusteeship of credit institutions. Trusteeship of credit institutions under the Law on Credit Institutions79 covers businesses involved in (i) lending; (ii) finance leasing; (iii) capital contributing, shares purchasing; (iv) manufacturing/business project investing; 71 US Investment Company Act of 1940, Custody of Securities, 57, available at: www.Investment_Company_ Act_1940; US Securitites and Exchange Commission, ‘Investment Companies’ (n 69). 72 Law on Securities 2006–2010 (Incorporated Document 41/VBHN-VPQH) arts 92, 95, 125; Circular 212/2012/TT-BTC of December 5, 2012, guiding the establishment, organization and operation of the fund management companies, arts 10, 24. 73 Law on Securities 2006–2010 (Incorporated Document 41/VBHN-VPQH) art 85, cl 2, point d. 74 ibid art 84, cl 1, point d. 75 Ministry of Finance, Concrete Explanatory Statement of Proposal to Develop the Law on Securities (amended) (2017) 1–5. 76 Circular 212/2012/TT-BTC (n 72) art 24, cl 2, cl 4, point b. 77 Law on Securities 2019, art 88. 78 Ministry of Finance (n 75) 1–5. 79 Including (i) banks (including commercial banks, policy banks, cooperative banks); (ii) non-banking credit institution (including financial companies, finance leasing companies and other non-banking credit institution); (iii) micro finance institutions; and (iv) people’s credit fund as provided in Law on Credit Institutions (Incorporated Document 07/VBHN-VPQH) art 4, cls 1, 2, 4.

Vietnam  339 and (v) corporate bond purchasing.80 According to the guidance from the State Bank on credit institutions and branches of foreign banks, trusteeship of credit institutions is mostly conducted among the credit institutions themselves.81 Generally, other individuals and organisations can only be involved in this type of relationship through lending and manufacturing or by investing in business projects, in which case the relevant individual or organisation would be a ‘settlor’ and the financial company or commercial bank will act as ‘trustee’.82 Trusteeship of credit institutions is formulated based on the agreement between the settlor and the trustee under a written trusteeship agreement.83 By transferring an amount of capital to the trustee and enjoying benefits from the trustee’s management of the capital, the settlor is also akin to a beneficiary in a common law trust.84 However, trusteeship of credit institutions is much more limited than the common law trust. Unlike the trust model which allows for diverse types of trust properties,85 the assets in relation to credit institutions can only be money (Vietnamese or foreign currency).86 The regulations remain unclear as to whether trust money must be separated from the trustee’s own assets. However, it is regulated that even though the money has been transferred to the trustee, the settlor still holds the title of the money, and the money is accounted for in the balance sheet of the settlor and not the trustee.87 This feature, which is similar to agency where the principal remains the title-holder of the property used in the relationship, is also another significant difference from the common law trust. As regards the trustee’s obligations, he must use the transferred capital to conduct lending and investment activities in accordance with the contents and scope of trusteeship without sub-trusting to any third party,88 and to return to the settlor all legitimate interests, related documents and papers as stipulated in the trusteeship agreement.89 The law does not at present specifically address the legal consequences which may arise if trustees fail to perform the task in accordance with the terms of the trusteeship, but parties may proactively stipulate the relevant consequences in trusteeship agreements.90 The trustee is also not responsible for any risks arising from the trusteeship; any risk is borne by the settlor.91 This is again similar to agency, where the responsibilities and the benefits concerning the capital will belong to the title-holder. In the case where a credit institution is declared bankrupt, the settlor’s assets are still guaranteed. In particular, the Law on Bankruptcy 2014 provides that the owner of the

80 Law on Credit Institutions, art 106; Circular of the State Bank on trust and receiving trust of credit ­institution, branches of foreign banks (Incorporated Document 35/VBHN-NHNN) art 1, cl 1. 81 Circular on trust and trust business of credit institution, branches of foreign banks (Incorporated Document 35/VBHN-NHNN) arts 10–16. 82 ibid art 10, cl 2, point a; art 11, cl 2, point a; art 12, cl 2, point b. 83 ibid art 4, cl 1. 84 Bogert (n 22) 128. 85 ibid 70–71. 86 Circular on trust and trust business of credit institution, branches of foreign banks (Incorporated Document 35/VBHN-NHNN) art 4, cl 8. 87 ibid art 17, cl 1. 88 ibid art 4, cl 4. 89 ibid art 1, cl 1; art 7, cl 2, point b, point dd. 90 ibid art 5, cl 2. 91 ibid art 5, cl 1, point i.

340  Nguyen Hung Quang and Nguyen Thuy Duong assets entrusted to a credit institution may submit the papers proving the ownership right and related documents to a civil judgment enforcement agency to receive his properties within 10 business days from the date of receiving the decision on bankruptcy of the credit institution.92 The trusteeship term must be stipulated in the trusteeship agreement.93 However, the trusteeship agreement may provide for the termination of the relationship before the prescribed term for the expiry of the trust by mutual agreement (this must also be specified in the agreement).94

C.  Sham Investments, Trust and ‘Interest-Sharing’ Investments Some foreign investment flows do not follow licensing procedures stipulated in laws on foreign investment. The laws are also not adhered to for various reasons such as avoiding licensing costs or legal restrictions over foreign investment in certain business lines or locations. Such activities are often known as ‘off-the-record investments’ (đầu tư núp bóng) or sham investments (or unorthodox investments) (đầu tư chui) and are recorded in a resolution of the Politburo of Communist Party of Vietnam on foreign investment in 2019.95 A typical sham investment model can be described as follows. A foreign investor transfers an amount of capital to a Vietnamese citizen(s) under the form of a loan, trust or agency agreement for investment. The citizen(s) may establish a company in Vietnam and act as shareholder(s). However, the foreign investor will control the company. If the Vietnamese shareholder does not wish to continue the arrangement, he may transfer his shares to a third party under the instruction of the foreign investor and terminate the agreement. In some cases where the company has been operating stably for some time and/or has fully completed all licensing procedures or satisfied business conditions, the shares will be transferred back to the foreign investor and the agreement will be terminated. The agreement between the foreign investor and the Vietnamese citizen(s) is often binding on the Vietnamese citizen(s), and may contain provisions such as: a restriction on transferring shares to other individuals or organisations; an obligation to obtain the foreign investor’s consent in relation to important decisions taken by the company, etc. In several cases, the Vietnamese citizen(s) is even compelled to sign an advance agreement to transfer the shares back to the foreign investor (with the duration of the agreement left blank) so that the foreign investor can register their subscription of shares with the competent state authorities of Vietnam in the future. Therefore, by nature, sham investment trusts are similar to agency rather than trust, which is indicated by the fact that the foreign investor holds real control over the Vietnamese citizen’s 92 Law on Bankruptcy 2014, art 102. 93 Circular on trust and trust business of credit institution, branches of foreign banks (Incorporated Document 35/VBHN-NHNN), art 5, cl 1, point dd. 94 ibid art 5, cl 1, point k; cl 2. 95 s I.2 of Resolution 50-NQ/TW dated 20 August 2019 by the Politburo on Orientation for Advancing the Constitution and Policy, Improving the Quality and Efficiency of Foreign Investment Cooperation up to 2030 has indicated this situation.

Vietnam  341 use of the capital money. Moreover, unlike a trust, in a sham investment there is no requirement for asset separation. One of the biggest risks to the foreign investor in this contractual relationship is for the Vietnamese citizen to renege on the agreement. The foreign investor must rely on dispute settlement instruments in Vietnam to claim their rights and interests. In practice, there has been a lot of controversy over whether or not to recognise such agreements. In some circumstances, the courts will not recognise the parties’ agreement if the investment business lines are subject to restrictions for foreign investors, which may result in the investment trust agreement being declared void due to falsification.96 This is the likely conclusion for cases decided after 1 July 1996, the day the Civil Code of 1995 came into effect, in which the mechanism of falsification was introduced.97 In the case that the relevant investment business lines are not subject to restrictions, the courts may recognise the investment trust agreement and require the parties to transfer ownership of the company to the foreign investor and terminate the agreement. The recognition of the agreement in this case would ensure that the normal operation of the company and the jobs of employees are protected, and also ensure that there is no violation of investment laws. Other ‘interest-sharing’ investment models (such as time-shares, condotels in tourism real estate business or officetels in office real estate, etc) have been developed in Vietnam recently, especially in tourist areas.98 These models help companies, which are granted with large-scale tourism real estate projects (dự án bất động sản du lịch), to mobilise capital from single investors to diversify risks. Single investors also find advantages in such investment models, where they may obtain profits as well as the possibility of real estate possession and use, and the possibility of investment right transfers, etc. However, the applicable laws on interest-sharing investments are still vague. Similar to the sham investment model, both the company calling for investment capital and the investors themselves may suffer potential risks when opting for these models of investment; and in reality, they usually come to a temporary compromise for some alternative solutions, such as holding shares of the companies that own the tourism real estate projects or signing business cooperation agreements between them. However, these alternative solutions do not reflect the nature of interest-sharing investments for the reason that the investors are only concerned about making profits and have no intention of becoming shareholders. Also, the company’s shareholders consider such investors as derivative investors or even real estate buyers rather than business partners.99 96 Art 124 of the Civil Code 2015 providing for void civil transactions due to falsification. Accordingly, if the parties falsely enter into a civil transaction for the purpose of concealing another transaction, the false transaction shall be void and the concealed transaction remains valid, unless it is also void under the provisions of this Code or relevant laws. If the parties enter into a civil transaction falsely for the purpose of evading responsibilities to a third person, such transaction shall be void. 97 Civil Code 2015, art 124; Civil Code 2005, art 129; Civil Code 1995, art 138. 98 Doan Manh Cuong, Managing Condotel and Tourism Villa Business (Part 1: Overview of Condotel and Practice in Vietnam) [Quản lý kinh doanh khách sạn căn hộ và biệt thự du lịch (Phần 1: Tổng quan về ­condotel và thực trạng ở Việt Nam)] E-portal of the Ministry of Culture, Sports and Tourism: Vietnam National Administration of Tourism, 2 July 2019, available at: vietnamtourism.gov.vn/index. 99 Viet Dung, ‘Condotel and a Decade of “Turmoil” because of the Name’ [Condotel và một thập kỷ “rối loạn” chỉ vì tên gọi]’ Saigon Times (30 November 2019), available at: www.thesaigontimes.vn; Van Dung, ‘Condotel Transforms into Securitised Real Estate’ [Condotel biến tướng thành chứng khoán hoá bất động sản]’ Dan Viet (18 December 2019), available at: danviet.vn/condotel.

342  Nguyen Hung Quang and Nguyen Thuy Duong Due to the uncertain legal regulations, the practice of ‘interest-sharing’ investments might lead to disputes among parties. The most controversial case in Vietnam is one relating to a Coco Bay project in Da Nang – one of the most visited tourist cities in Vietnam. Between 2016 and 2017, this tourism condotel project (dự án căn hộ du lịch) was very popular among the investors for its profit commitment of 12 per cent in the first eight years of investment,100 a rate which was much higher than the maximum deposit interest at that time which fluctuated from approximately 5 to 7 per cent.101 More than 2,000 single investors signed contracts with the project owner, Thanh Do Investment, Development and Construction Joint Stock Company, to hold more than 2,000 tourism real estate parcels. However, in late 2019 the owner of the project announced that they would stop paying profits to investors from 2020 due to ‘difficulties in money flow’.102 This news certainly created a shockwave among the investors, who had just received two years’ worth of profits and would not have recovered their investment capital (mostly consisting of bank loans). Moreover, they could not withdraw from this project by selling these condotels as they had not yet acquired the certificate for ownership or a right of use over them. Regarding this issue, the competent agency announced that the government and the relevant agencies were developing the regulations on c­ ondotels,103 but in fact the agencies struggled to determine if the land for building condotels was used for commercial or residential purposes. So far, there have been guidelines on the modes of investment (by Dispatch 703/BTNMT-TCQLDD),104 but these guidelines neither provide a complete regime on the condotel nor truly offer a solution to the controversy surrounding the issuance of certificates for ownership rights or rights of use over condotels. In early 2020, the contract breaches of the project owner were under investigation at the request of the investors.105 However, in mid-June 2020, the parties reached an agreement on the case settlement. Accordingly, 197 investors (accounting for 10 per cent) will receive their condotels from Thanh Do for residing or doing business by themselves under the condition that the condotels would be transferred to be condominiums; 303 investors (accounting for 15 per cent) will remain in their role as investors in these projects; 1,093 investors (accounting for 55 per cent) will proceed to contract liquidation with Thanh Do and receive their money back. Additionally, there

100 Tan Loc-Quang Huy-Le Phi, ‘From Cocobay Da Nang “Broke Up” to the Solution to Save the Condotel [Từ Cocobay Đà Nẵng ‘vỡ trận’ tới giải pháp cứu condotel]’ Phap Luat E-news (30 November 2019), available at: plo.vn/bat-dong-san/tu-cocobay-da-nang. 101 Tran Xuan Huy, ‘The Interest Rates in 2016 and Solutions to Maintain Interest Rates Stable [Tình hình lãi suất ngân hàng năm 2016 và giải pháp duy trì lãi suất ổn định]’ Industry and Trade Magazine (18 May 2017), available at: tapchicongthuong.vn; An Nhien, ‘Credit Growth in 2017 Is Estimated at 17% [Tăng trưởng tín dụng năm 2017 ước đạt 17%]’ The Leader, available at: theleader.vn. 102 Tan Luc, ‘How Many Condotel Buyers Stuck in the Cocobay Project [Có bao nhiêu khách hàng mua condotel ‘mắc kẹt’ tại Cocobay Đà Nẵng]’ Tuoi tre (27 November 2019), available at: tuoitre.vn. 103 Nguyen Hong, ‘Da Nang Replies on the Cocobay Project [Đà Nẵng lên tiếng về vụ dự án Cocobay]’ VnEconomy (29 November 2019), available at: vneconomy.vn. 104 Dispatch 703/BTNMT-TCQLDD promulgated on 14 February 2020 providing guidance on land use regime and certification of non-residential construction work ownership. 105 Nhat Nam, ‘Cocobay Da Nang Case: Transfer the Denunciation and Petition against Thanh Do Company to the Police Investigation [Vụ Cocobay Đà Nẵng: Chuyển đơn kêu cứu và tố cáo khẩn cấp Công ty Thành Đô sang cơ quan cảnh sát điều tra]’ Tri thuc tre (27 February 2020), available at: ttvn.toquoc.vn/ vu-cocobay-da-nang.

Vietnam  343 are more than 400 investors (accounting for 20 per cent) still negotiating with Thanh Do to find a final solution.106

IV.  Other Property Management Relationships A.  State Capital Management and Investment Business and capital management activities of the state are conducted by two organisations: the State Capital Investment Corporation (SCIC) – primarily responsible for business by the state capital; and the Committee for Management of State Capital (CMSC) – primarily responsible for state capital management. The CMSC also manages the SCIC’s business. Essentially, both organisations exercise rights and responsibilities as state ownership representatives with respect to companies with partly or wholly stateowned capital.107 However, they have certain differences in mandate, organisational structures and business. While the CMSC was structured as a governmental agency,108 the SCIC was established in the corporate form.109 The SCIC was born in June 2005 against the background of needing an impetus for the development of the market economy. Before the SCIC was established, the Ministry of Finance studied and analysed many models from different countries such as the state-owned Assets Supervision and Administration Commission of China, Temasek Holdings of Singapore, Khazanah of Malaysia, etc.110 Finally, the corporate form of the SCIC was developed based on the model of Temasek Holdings, a professionally and arranged managed investment company wholly owned by the Singapore government.111 In this model, Temasek is an exempt private company under the Singapore Companies Act. The Temasek board has a fiduciary duty towards Temasek as a company.112 The government does not direct or influence the investment or divestment decisions of

106 Phuong Uyen, ‘Da Nang Coco Bay Project Owner Found a Common Voice with Thousands of Customers [Chủ đầu tư Cocobay Đà Nẵng tìm được tiếng nói chung với hàng nghìn khách hàng]’ Enternews (16 June 2020), available at: enternews.vn/chu-dau-tu-cocobay-da-nang-tim-duoc-tieng-noi-chung-voihang-nghin-khach-hang-175316.html. 107 Decree 10/2019/ND-CP on implementation of rights and responsibilities of state owner’s representatives (Decree 10) art 4, cls 1, 3. 108 Decree 131/2018/ND-CP defining functions, tasks, powers and organizational structure of the Committee for Management of State Capital at companies (Decree 131) art 1, cl 1. 109 Organizational and Operational Charter of State Capital Investment Corporation annexed to the Government’s Decree No 148/2017/ND-CP on organizational and operational Charter of State Capital Investment Corporation (Decree 148) art 3, cl 2. 110 Ho Mai, ‘State Capital Management: From Temasek of Singapore to SCIC of Vietnam’ [Quản lý vốn Nhà nước: Nhìn Temasek của Singapore ngẫm đến SCIC của Việt Nam]’ Investors E-news (23 October 2017), ­available at: nhadautu.vn/quan-ly-von-nha-nuoc-nhin-temasek-cua-singapore. 111 Giang Oanh, ‘Learning Experience of Singapore in Management over State Capital in the Enterprises [Tham khảo kinh nghiệm của Singapore trong quản lý vốn Nhà nước tại các doanh nghiệp]’ website of Office of the Government (8 July 2009), available at: vpcp.chinhphu.vn/Home/Tham-khao-kinh-nghiem-cuaSingapore; Background and Context of Temasek Charter 2009, point 15, at 3: www.temasek.com.sg. 112 Temasek Overview 2019, 38: www.temasek.com.sg.

344  Nguyen Hung Quang and Nguyen Thuy Duong Temasek.113 Temasek is a typical model of a sovereign wealth fund114 – one of the vehicles for sovereign investment.115 While the SCIC is not independent like Temasek, it is responsible to the National Assembly and the government.116 From time to time, the SCIC’s business is considered unproductive because there are a number of shortcomings in its structure.117 The CMSC was born a decade after the SCIC, in 2018, with a common policy of separating capital management and state capital trading, which also follows the Temasek model.118 That is also the reason why the CMSC manages the activities of the SCIC. However, after more than one year of operation, the CMSC’s activities are very limited, stemming from unclear mechanisms and policies, and ineffective coordination between the CMSC and other ministries/state agencies.119 Unlike the trust, the state capital management relationship between the state and the CMSC or the SCIC is formed on the basis of legal documents, including government resolutions, decisions of the Prime Minister120 and decrees in which the functions, tasks, powers and organisational structure or the organisation and operation of the CMSC or the SCIC are provided. Accordingly, the CMSC and the SCIC’s activities are not restricted by time limits and can only be suspended or terminated under decisions by the government or Prime Minister. It can be acknowledged that the act of learning from the Temasek model was not a thorough one, as reflected in the inability to separate the commercially driven mission 113 Background and Context of Temasek Charter 2009, point 19, at 3. 114 Wilson Ng, ‘The Evolution of Sovereign Wealth Funds: Singapore’s Temasek Holdings’ (2009) 18 Journal of Financial Regulation and Compliance 6: ‘[f]ollowing Fotak et al (2008) and Truman (2007), a sovereign wealth fund is defined as a pool of assets owned and managed by a Sovereign State to achieve various economic and financial objectives, including the accumulation and management of reserve assets, and the stabilization of macroeconomic effects. The point about sovereign wealth funds is that these objectives need not be of direct commercial benefit to the sponsoring fund(s). Instead, the fund prioritises economic benefits to the sovereign nation that owns the fund’. 115 There are sovereign investment vehicles as follows: – – – –

Sovereign Wealth Funds (SWFs) – example Qatar Investment Authority; Public Pension Funds – example CalPERS; State-Owned Enterprises – example Chinalco; Sovereign Wealth Enterprises (SWEs) – example St Martins Property.

See: www.swfinstitute.org/research/sovereign-wealth-fund. 116 MPDF, ‘The State Capital Investment Corporation’ Business Issue Bulletin (2007) 3; Thien Giao, ‘The State Capital Investment Corporation, a Temasek of Vietnam? [Tổng công ty đầu tư kinh doanh vốn nhà nước’, một Temasek của Việt Nam]’ RFA (2008), available at: www.rfa.org. 117 Le Son, ‘Standing Deputy Prime Minister: Investment into Strategic Sectors, Increasing Values of the Economy [Phó Thủ tướng thường trực: Đầu tư lĩnh vực chiến lược, nâng cao giá trị nền kinh tế]’ website of Office of the Government (29 April 2020), available at: baochinhphu.vn/Kinh-te/Pho-Thu-tuong-Thuongtruc-Chinh-phu-Dau-tu-linh-vuc-chien-luoc; Hoang Oanh, ‘Necessity of a Strong Organization to Manage State Capital [Cần một tổ chức kinh doanh mạnh để quản lý tài sản nhà nước]’ (21 July 2016), available at: vneconomy.vn/doanh-nhan. 118 Mai Linh, ‘Prime Minister: “CMSC” Could Not Be the Administrative Unit that Burdens the Enterprises [Thủ tướng: “Siêu Uỷ ban” không thể là cấp hành chính tạo gánh nặng cho doanh nghiệp]’ E-portal of Ministry of Finance: www.mof.gov.vn/webcenter/portal/mthanhtra; Ng (n 114) 6–14. 119 Lan Nhi, ‘Ministries/State Agencies and CMSC Rarely Cooperate with Each Other [Bộ, ngành và Ủy ban quản lý vốn nhà nước ít hợp tác với nhau]’ Saigon Times (17 January 2020), available at: www.thesaigontimes. vn/bo-nganh-va-uy-ban-quan-ly-von-nha-nuoc-it-hop-tac-voi-nhau. 120 Resolution 09/NQ-CP of 2018 on establishment of the Committee for Management of State Capital at companies; Decision 151/2005/QD-TTg establishing the State Capital Investment Corporation.

Vietnam  345 from political and policy management by the state. In general, the relationship between the CMSC, the SCIC and the state is a hybrid relationship between entrustment and agency, in which the element of agency is considered to be somewhat more prominent as the state exercises considerable control over the business and capital management activities of both organisations. Most of the CMSC and the SCIC’s activities require government consultation, and the role of both organisations in this case is similar to being agents of the state, and they must not act beyond the scope of agency. In some cases where the CMSC and SCIC are free to decide, their roles are then similar to that of a trustee, with the state playing the role analogous to a settlor-beneficiary. However, unlike trustees who can operate independently and be solely responsible for their investment and business decisions, the CMSC and the SCIC are still supposed to regularly report and be responsible to the state or their business and capital m ­ anagement activities.121 The assets that the CMSC and the SCIC are responsible for trading and managing include only state shares in companies,122 with assets contributed as capital normally from the state budget.123 Unlike the trust, the title of the assets is not transferred to the CMSC or the SCIC, and the state remains their owner. Thus, there is no element of property separation as seen with the common law trust. In relation to the SCIC in particular, the obligations and responsibilities of state capital trading and management are mostly taken by the Chairman of the Member Council, members of the Member Council and the General Director of the SCIC. Where a decision shows signs of excessive authority, abuse of position or power, which causes damage to the SCIC and the state, compensation must be made in accordance with law and the SCIC’s Charter.124 In the event that the above-mentioned subjects commit any violation that is not yet subject to criminal liability prosecution (for example, causing losses to the SCIC, causing losses of state capital, making inefficient investment projects, etc),125 the penalty applicable shall be no reward, no salary rise and disciplinary treatment depending on the seriousness of the violation.

B.  Property Management of Insolvency Administrators (IAs) Legislation on IAs was first enacted in Vietnam in the Law on Bankruptcy 2014. This legislation replaced the previous Law on Bankruptcy 2004 on asset management and liquidation teams in order to reduce the workload of judges in bankruptcy practice as well as enhance the effectiveness of the bankruptcy legislation.126 It was based on UNCITRAL’s Legislative Guide on Insolvency Law.127 IAs in Vietnamese law must be

121 Decree 131, art 7, cl 4; Decree 148, art 74. 122 Decree 148, art 4. 123 Law on state capital management and utilization invested in the company’s manufacturing and business activities 2014 (Law on State Capital Management) art 3, cl 8. 124 Decree 148, art 38, cl 1, point e. 125 ibid art 38, cl 4. 126 Letter of Explanation 10/TTr-TANDTC of the Bill on Bankruptcy of the SPC dated 25 October 2013, 14. 127 ibid 14–16; UNCITRAL, Legislative Guide on Insolvency Law, 174–89.

346  Nguyen Hung Quang and Nguyen Thuy Duong natural persons.128 They may practise as an individual, or company by establishing, engaging in the establishment of, or working under contracts for companies managing and liquidating assets.129 An IA could be a lawyer, auditor or a person licensed by the Minister of Justice.130 According to the Law on Bankruptcy 2014, one of the main duties of IAs is to manage assets, supervise business activities and liquidate the assets of insolvent companies or cooperatives.131 Specifically, IAs’ asset management includes three main types of ­activity:132 verifying companies’ actual assets, preserving and developing the assets of the companies (including preserving assets and preventing asset sale and transfer without judges’ permission, preventing deprivation of assets, maximising the asset value of companies and cooperatives when selling and liquidating, and supervising business activities of companies and cooperatives in accordance with the law) and disposing assets to cover bankruptcy expenses or to divide the assets of the companies. In essence, the legal framework of IAs in Vietnamese bankruptcy law is quite similar to that of receivers in common law133 and more similar to agency than trust. Both IAs and receivers conduct asset management activities for the benefit of a third party (such as the insolvent/bankrupt companies or their shareholders/creditors/employees, etc) on the basis of an order by the court. Neither receivers nor IAs can transfer property titles. However, it should be noted that while a receiver is a court officer, an IA in the Vietnamese legal system is an independent practitioner (usually lawyer/auditor) and is not a court employee. Asset management activities of IAs are developed on the basis of the court’s order.134 The three main parties in the asset management relationship – the court, IAs and the bankrupt company – do not correspond to the role of the parties to a trust relationship. Specifically, the court is not the owner of assets like the settlor; IAs also do not receive property title as trustee. Moreover, company shareholders rank after employees and creditors in the order of distribution of assets in the event of bankruptcy.135 Similar to the diversity of trust assets, the assets managed by IAs are not limited by type (movable/immovable), quantity, value or any other characteristic, as long as they are the assets of the bankrupt companies, which are managed by the IAs assigned by the court.136 Title transfer does not occur either for the reason that neither the court nor IAs are the owner of the assets, as mentioned earlier. The title still belongs to the bankrupt company until assignment of assets is conducted (such as asset sale/liquidation) in accordance with the laws on bankruptcy. Thus, the law on IAs does not provide for the principle of asset separation.

128 Law on Bankruptcy 2014, art 4, cl 7. 129 Decree 22/2015/ND-CP providing detailed regulations on implementation of several articles of the Law on Bankruptcy for the IAs, asset management and liquidation practicing, art 8, cl 1. 130 Law on Bankruptcy 2014, art 12. 131 ibid art 16, cl 1. 132 ibid; grouping is made by the authors. 133 Bogert (n 22) 39–41; Law on Bankruptcy 2014. 134 Law on Bankruptcy 2014, art 45. 135 ibid art 54. 136 ibid art 124 on property which is entitled to be sold by the IAs, including movables and real estate.

Vietnam  347 According to existing laws137 and the practice of IAs,138 where assets are sold (by auction or otherwise) IAs shall have the right to sell assets and sign the contract of asset sale and purchase. To ensure the benefit of the buyers, the Ministry of Justice, the Supreme People’s Court and the Supreme People’s Procuracy of Vietnam have set up a cooperative mechanism to coerce the handover of assets and documents to the winning bidder in case the IAs fail to do so (for example due to the uncooperative behaviour of the bankrupt company in the handover process).139 IAs conduct asset management activities when appointed by the judge until the end of the bankruptcy case (or when there is a decision by the judge to change the IA). According to the Law on Bankruptcy, IAs shall be changed if they commit any breach of the obligations under the Law on Bankruptcy or if there are grounds to prove that the IAs are not objective in performing their duties. Depending on the nature and seriousness of the violations, they will be subject to administrative sanctions or prosecution for criminal liability. In the case that they cause any damage, they will be subject to paying compensation in accordance with the law.140 In this case, the compensation will be subject to regulations of the Civil Code on non-contractual compensation.

Conclusions and Recommendations A consistent feature of all the property management relationships discussed in this chapter is the absence of transfer of property title to the trustee. This is a special feature of civil law systems, which relates to the absolute nature of ownership. It is therefore difficult to fully adopt the common law trust, which reflects a dual (legal and equitable) ownership concept.141 This will be a challenge for Vietnamese lawmakers if they want to introduce the trust institution into Vietnam’s legal system. However, Vietnam can learn from the experience of some civil law countries, such as France and Germany, which have applied a trust-like device (fiducie and treuhand respectively), as well as other Asian countries, such as Japan, China, Korea and Taiwan, where the trust has been incorporated by legislation. In these arrangements, the ownership of property is still transferred to the trustee, but the trustee is bound by certain obligations to act for the benefit of the beneficiary or for a defined purpose.142 This sort

137 Law on Bankruptcy 2014, art 124; Law on Property Auction 2016, art 5, cl 5; art 47, cl 2, point b. 138 Van Thi Tam Hong, ‘Supervising the Insolvency Administrators in Asset Liquidation of Enterprises or Cooperatives Declared Bankrupt [Giám sát đối với Quản tài viên trong thanh lý tài sản của doanh nghiệp, hợp tác xã bị tuyên bố phá sản]’ Portal of the General Department of Civil Judgment Enforcement: Ministry of Justice: thads.moj.gov.vn/noidung/tintuc/Lists/ThongTinChung/. 139 Joint Circular 07/2018/TTLT-BTP-VKSNDTC-TANDTC dated 12 June 2018 on cooperation in enforcement of court’s decision on bankruptcy settlement, art 13. 140 Law on Bankruptcy 2014, art 46, cl 8. 141 Ho and Lee (n 32) 22. 142 J Koessler, ‘Is There Room for the Trust in a Civil Law System? The French and Italian Perspectives’ 8, available at: papers.ssrn.com/sol3/papers.cfm?abstract_id=2132074; M Gelter and G Helleringer, ‘Fiduciary Principles in European Civil Law Systems’ in EJ Criddle, PB Miller and RH Sitkoff (eds), Oxford Handbook of Fiduciary Law (Oxford University Press 2018) 18; Ho and Lee (n 32) 22.

348  Nguyen Hung Quang and Nguyen Thuy Duong of transaction would be considered in Vietnam as a contract for the benefit of third parties. The third party can still enforce their rights even in the case where the settlor dies or no longer exists because, in accordance with the Civil Code 2015, the third party has the right to personally demand the obligor to perform the obligations to the third party.143 However, if the settlor and the beneficiary are the same person, which is especially common in commercial trusts, the form of contract for the benefit of third parties will no longer exist. If Vietnam expressly provides for the trust, the legal system on property registration may need to be amended accordingly. With the applicable property registration regulations, the person named on the title documents is determined to be the true owner of the property, and this can pose a risk to beneficiaries when a trustee violates his obligations by transferring property to a third party. The beneficiary must then request the court to declare that the property transfer to the third party is void. However, as mentioned in the previous sections, if the property is transferred to a bona fide third party, in several cases, this transfer is still effective. This requires that the system of property registration identifies the property as ‘trust property’ in the title documents and to make it possible for third parties wishing to make a transaction with the trustee to know the origin of the property and verify its ‘transferability’ through the trust instrument or the public property registration system. The clear separation from the property registration also limits the risk for a beneficiary, in the event that the trustee goes bankrupt, or its assets are blockaded. In addition, tax law will also need to be amended if Vietnam wants to adopt the trust. It is necessary to identify taxes that are likely to arise in the trust relationship, including personal income tax, corporate income tax (if one of the parties is a company), and value added tax (if property management is considered a professional service and conducted by a registered legal entity). Furthermore, it requires identification of the taxable subject, the entity obliged to pay taxes, and the method of tax declaration and payment, etc. It would also need to make provision to separate the trust property from profits to determine the corresponding tax liability. Procedural laws may also require amendment to give the court more authority to appoint trustees or resolve trust-related disputes. There may be new business conditions imposed on organisations and individuals providing professional property management services. It may also need to be supplemented by the rules of tracing, duty of loyalty, etc. This is a significant challenge since trusts law is pervasive in common law and relates to many other provisions such as inheritance, agency, guardianship, financial services, fund and bankruptcy. In practically every context where the trust is invoked in the common law, there are detailed rules of operation for the trust, whether in statute or case law.144 In interviews we conducted with officials from the Ministry of Justice and the Ministry of Planning and Investment of Vietnam, the general sentiment was that Vietnam does not need to adopt any particular trust legislation since Vietnam’s existing



143 Civil 144 Ho

Code 2015, art 415. and Lee (n 32) 25.

Vietnam  349 legal framework governing property management relationships is sufficient. However, in our opinion, contract or agency can hardly replace the trust, especially in terms of ring-fencing property from the trustee’s creditors.145 Indeed, transplantation of the trust must be seriously considered if Vietnam wants to attract more foreign investment, manage sham investments as indicated in the Politburo Resolution in 2019, and solve the problems with ‘interest-sharing’ investment models to increase investor confidence.

145 U Mattei, ‘The Functions of Trust Law: A Comparative Legal and Economic Analysis’ (1998) 73 New York University Law Review 434, 438.

350

part v

352

19 Offshore Trusts in the South Pacific: How Far can the Concept of the Trust be Stretched before it Breaks? KATY BARNETT*

I. Introduction ‘Offshore’ jurisdictions are typically associated with the Channel Islands or the Caribbean. However, the South Pacific region also has countries with ‘offshore trusts’. The focus of this chapter is on ‘offshore trusts’ in the Cook Islands, Niue and Western Samoa (hereafter Samoa).1 ‘Offshore’ jurisdictions have taken the basic structure of a traditional trust and stretched it.2 While the offshore trust has a nominal trustee, in many offshore trusts, the true controller of the trust may be a third-party ‘protector’ or ‘enforcer’ who directs the trustee via ‘letters of wishes’. The enforcer or protector may also be the settlor, and the settlor may retain such a degree of control over the assets as to render the trust a bare trust, effectively ‘illusory’,3 or even a sham.4 Some offshore jurisdictions allow ‘orphan structures’ or pure purpose trusts where there is no clear beneficiary;

* Professor, Melbourne Law School, University of Melbourne (BA/LLB (Hons), PhD (Melb)). Presented at the ‘Conference on Asia-Pacific Trusts Law: Theory and Practice in Context’, Melbourne Law School, Melbourne, 9–10 December 2019. Thank you to Mark Bennett, Michael Bryan, Helen Dale, Lusina Ho, David Marks QC, Lionel Smith, Deborah Staines, Miranda Stewart and Derek Whayman for their helpful suggestions; to Yeo Tiong Min for his insightful commentary on my paper; and to the participants at the conference for their excellent feedback. 1 Labuan will not be considered for reasons of space. Vanuatu will not be considered because, although it apparently has offshore trusts, it has no trusts legislation or regulation of trusts, and it is not clear that trusts in Vanuatu are even lawful. 2 JP Webb, ‘An Ever-Reducing Core? Challenging the Legal Validity of Offshore Trusts’ (2015) 21 Trusts & Trustees 476, 477: ‘[t]he key question is whether these developments stretch the trust, an “institute of great elasticity”, beyond conceptual breaking point’. 3 M Bennett, ‘Competing Views on Illusory Trust: The Clayton v Clayton Litigation in its Wider Context’ (2017) 11 Journal of Equity 48. 4 See Jessica Palmer, ‘A Lament for Trust Principles in New Zealand’, ch 3 in this collection, regarding increased settlor control and the stretching of trust principles in New Zealand, with which two of the countries in this chapter are in free association.

354  Katy Barnett others allow ‘Red Cross trusts’,5 where there is a nominal residual beneficiary (usually a charity) who is not really intended to receive the benefit of the trust. Lionel Smith has questioned whether these are really trusts at all.6 While, as Richard Garnett’s chapter in this collection shows, private international law has typically allowed a hundred flowers to bloom in defining the notion of the trust,7 perhaps reflecting my common law prejudices, my chapter argues that there must be some coherent limit on those flowers which are covered by the definition ‘trust’, and that some of these things called ‘trusts’ are so far stretched as to be illusory or shams.8 The focus on the downsides of offshore trusts has often been on how they allow settlors to evade paying taxes in their home jurisdictions, but it should be emphasised that this is not their sole aim.9 Other aims include avoiding ‘forced heirship’ laws in the settlor’s home jurisdiction which require property to be divided among certain family members, keeping money from spouses and spendthrift beneficiaries, keeping money from judgment creditors and other creditors, evading prudential requirements in a home jurisdiction, and facilitating ‘off-balance sheet’ financing.10 An unusual aspect of South Pacific offshore trusts is the tendency to ‘asset protection trusts’ which have the express intention of making assets in Pacific jurisdictions extremely difficult to access for legitimate creditors in a settlor’s home jurisdiction (even large government organisations).11

II.  Political and Legal Background ‘Offshore financial law’ is described by Rose-Marie Belle Antoine as legislation, legal practices and law concerned with investment, financial arrangements and entities created by non-residents of a particular jurisdiction but structured within their jurisdiction. Such investments or arrangements are usually focussed on some business advantage, tax avoidance, protection from creditors and judgment debtors or privacy.12

The offshore trust is part of the offshore financial investment package. There has been an increasing focus on offshore trust regimes in the South Pacific region after successive leaks of legal advice from offshore law firms in the ‘Panama Papers’ in 2015 and the ‘Paradise Papers’ in 2017: The database culled from the leaked files known as the Panama Papers reveals how some tiny countries in the South Pacific have been favoured as places to set up offshore trusts.

5 Sometimes also called ‘black hole trusts’. 6 L Smith, ‘Massively Discretionary Trusts’ (2017) 70 Current Legal Problems 17. 7 Richard Garnett, ‘Identifying an Asia-Pacific Private International Law of Trusts’, ch 20 in this collection. 8 See Palmer (n 4) in this collection, who has a similar concern. 9 A Duckworth, ‘The Trust Offshore’ (1999) 32 Vanderbilt Journal of Transnational Law 879, 811, 899–900. 10 See R-M Belle Antoine, Offshore Financial Law: Trusts and Related Tax Issues (Oxford University Press 2005) [1.12]. 11 International Trusts Act 1994 (Cook Islands) s 13D; Niue Act 1966 (Niue) s 95(2); Trusts Act 2014 (Samoa) s 13. 12 Belle Antoine (n 10) [1.12] adopted in Re Asia Credicom Ltd (Sup Ct, BVI) No 20 of 1999, decided 30 July 1999.

South Pacific Offshore  355 According to the database, there have been more than 13,000 offshore companies and trusts set up in Samoa, population 200,000, and nearly 10,000 in Niue, which has a population of just 1200. Some of the trusts listed are no longer operational. It appears Samoa has become a more favoured destination in recent years after Niue implemented changes to its tax arrangements about a decade ago. There are also more than 500 entities listed under the jurisdiction of the Cook Islands, population 10,000, and more than 600 in Singapore, population 5.7 million. … Australia’s Taxation Office is investigating about 800 Australians in relation to the Panama Papers.13

Of the offshore trust regimes in the South Pacific region, the Cook Islands ‘international trust’ regime is the most startling. The Cook Islands claims to be the first offshore regime to develop the ‘asset protection trust’. Niue and Samoa have similar regimes, although there is much less legal academic consideration of them. In this section, I will describe these three jurisdictions. Other jurisdictions which had previously had ‘offshore trusts’ (such as Nauru and Tonga) have moved away from them after international pressure. Figure 19.1  Map of the South Pacific

Source: www.britannica.com/place/Pacific-Islands

13 AAP, ‘South Pacific Nations Used as Tax Havens’ SBS News (10 May 2016), available at: www.sbs.com. au/news/south-pacific-nations-used-as-tax-havens. Litigation with regard to Australian Tax Office action against individuals who are said to have used offshore tax havens resulted in Glencore International AG v Commissioner of Taxation [2019] HCA 26, where Glencore unsuccessfully attempted to prevent the ATO from accessing data obtained as a result of the leak of the ‘Paradise Papers’ on the basis that the documents were

356  Katy Barnett

A.  The Cook Islands The Cook Islands is composed of 15 islands with a total land area of 240 km,2 in an area comprising 2.2 million km2 of the Pacific Ocean. The Cook Islands became selfgoverning in free association with New Zealand in 1965 (prior to this it was a dependent territory of New Zealand). Since then, the Cook Islands has been fully self-governing in relation to internal affairs, while New Zealand retains responsibility for defence and external affairs. Prior to independence, the Cook Islands Act 1915 (NZ) provided that the English system of common law applied, as did certain New Zealand statutes. When the Cook Islands became independent, this law continued to apply, but as time has gone on, the Cook Islands has developed its own body of statute law. It is a parliamentary democracy with a customary body of tribal leaders called the House of Ariki. There is a High Court and Court of Appeal, and an ultimate appeal to the Judicial Committee of the British Privy Council.14 Control of Cook Islands taxation was handed back to New Zealand after the so-called ‘Winebox inquiry’ revealed the possibility that prominent New Zealand companies were using the Cook Islands as a tax haven.15 The Cook Islands inherited the common law trust and allows for ordinary ‘onshore trusts’. However, it also allows for ‘offshore trusts’ after the enactment of the International Trusts Act 1984 (Cook Islands).16 The Cook Islands ‘international trust’ law was intended to attract American clientele, and was in fact drafted by a lawyer from Denver after he was unable to persuade local US jurisdictions to adopt it.17 The Marketing Director of the Cook Islands Financial Services Development Authority says that the legislation came about as a result of ‘demand from US attorneys to strengthen

subject to legal professional privilege. As an aside, Glencore was founded by disgraced commodities trader Marc Rich, who was convicted of 65 criminal offences, including income tax evasion, wire fraud, racketeering, and trading with Iran during the US oil embargo, and fled arrest in 1983, eventually being pardoned on the last day of Bill Clinton’s presidency in 2001: see A Baghdjian, ‘Marc Rich, “King of Oil” pardoned by Clinton, Dies at 78’ Reuters Business News (26 June 2013), available at: uk.reuters.com/article/uk-marcrich/marc-richking-of-oil-pardoned-by-clinton-dies-at-78-idUKBRE95P0C920130626. Rich’s ex-wife had a Cook Islands trust which was set up for her as she was divorcing Rich: see Leslie Wayne, ‘Unlocking the Secrets of the Cook Islands’ (International Consortium of Investigative Journalists Blog, 16 December 2013), available at: www.icij. org/blog/2013/12/unlocking-secrets-cook-islands/. 14 OECD, Global Forum on Transparency and Exchange of Information for Tax Purposes Peer Reviews: Cook Islands 2015: Phase 2: Implementation of the Standard in Practice (OECD Publishing 2015) 12–15, available at: dx.doi.org.10.1787/9789264231450-en. 15 The ‘Winebox Inquiry’ arose as a result of allegations that prominent New Zealand companies had used the Cook Islands as a tax haven, and that the New Zealand Serious Fraud Office and the Inland Revenue Department were incompetent and corrupt. A public commission found that there was no fraud or corruption: New Zealand, Commission of Inquiry into Certain Matters relating to Taxation (1997), but this conclusion was subsequently challenged in a series of cases that went up to the New Zealand Court of Appeal (Peters v Davison [1998] NZLR 309; Peters v Davison [1999] 2 NZLR 164; Peters v Davison [1999] 3 NZLR 744). 16 As amended by the International Trusts Amendment Act 1985 (Cook Islands); International Trusts Amendment Act 1989 (Cook Islands); International Trusts Amendment Act (No 2) 1989 (Cook Islands); International Trusts Amendment Act 1991 (Cook Islands); International Trusts Amendment Act 1995–96 (Cook Islands); International Trusts Amendment Act 1999 (Cook Islands); International Trusts Amendment Act 2004 (Cook Islands); and the International Trusts Amendment Act 2013 (Cook Islands). The legislation is not consolidated, so it is particularly opaque. 17 Leslie Wayne, ‘Cook Islands: A Paradise of Untouchable Assets’ New York Times (14 December 2013), available at: www.nytimes.com/2013/12/15/business/international/paradise-of-untouchable-assets.html.

South Pacific Offshore  357 the position of their US resident high net worth clients who were finding their wealth at risk to certain socio-economic factors’, said to include ‘frivolous and vexatious litigation’, ‘vexatious plaintiffs, over-zealous personal injury lawyers and permissive juries seeking an opportunity re-distribute wealth’, ‘unavailability of insurance’ and ‘deep pocket defendants’ being targeted by contingency fee lawyers.18 (As will be seen, some of the persons who set up Cook Islands trusts are rather less sympathetic than this: fraudsters, negligent physicians and Ponzi scheme organisers.) In practice, all international trusts are governed by Cook Islands law despite the provision in the International Trusts Act for the trust deed to specify the applicable law.19 In 2015, it was reported to the OECD that 99–100 per cent of the international trusts in the Cook Islands were discretionary trusts.20 The OECD also reported that as at 31 December 2013, 2,575 international trusts were registered with the Financial Supervisory Commission.21 The wealth management industry contributes 10–15 per cent of the Cook Islands GDP, and has become particularly necessary after the Cook Islands pearl industry was decimated by disease in 2000 (it had previously provided a similar proportion of the GDP).22 Locals, however, have a less positive view of the industry, as Brooke Harrington observes: In the Cook Islands, a chance encounter with a prosperous local fisherman offered me some insight into native residents’ view of the wealth management industry and its impact on the nation. ‘They’re why everyone calls us the “Crook Islands” now; they’ve got our government in their pockets’, he said. ‘I hate what they’ve done to my country’.23

As a sociologist, Harrington notes that offshore financial centres often suffer from a crisis of state legitimacy, resulting in a hollowing out of civil society and distrust in government and the judiciary.24

B. Niue Niue is a coral atoll in the Pacific. Niue became self-governing in free association with New Zealand in 1974 (prior to this, like the Cook Islands, it was a dependent territory of New Zealand). New Zealand remains responsible for Niue’s defence. Again, like the Cook Islands, Niue’s legal system is based on the English common law. Pursuant to the Niue Constitution, New Zealand law that applied before 1974 now applies unless repealed by the Niue Assembly. Niue is a parliamentary democracy, and has a High Court. The High Court consists of a Chief Justice (based in New Zealand) and other judges and commissioners. The commissioners of the High Court are local laypersons.

18 A Taylor, ‘Trust Matters in the Cook Islands’ (2017) 24 Journal of International Tax, Trust and Corporate Planning 209, 210. 19 OECD, Cook Islands 2015 (n 14) 42; cf International Trusts Act 1984, s 13G. 20 OECD, Cook Islands 2015 (n 14). 21 ibid 44. 22 B Harrington, Capital Without Borders: Wealth Managers and the One Percent (Harvard University Press 2016) 158. 23 ibid 247. 24 ibid.

358  Katy Barnett The Niue Court of Appeal has five judges with professional judicial experience in New Zealand (either current or retired).25 Niue also inherited the common law trust. Trusts are governed by the common law (Niuean, but New Zealand law is highly persuasive), the Trustee Act 1956 (NZ), the Trusts Act 1994 (Niue) and the Trustee Companies Act 1995 (Niue). The legislation under the Trusts Act 1994 appears to provide for trusts which have some hallmarks of the ‘offshore trust’. This legislation was introduced upon the suggestion of the Panamanian law firm, Mossack Fonseca, which was later subject to the ‘Panama Papers’ leak.26 It appears that Mossack Fonseca seeks out small, poor nations whose main advantage is the sovereign power to legislate, and suggests that they enter the offshore financial industry. Niue was a popular destination for offshore finance from 1994 until 2005, after which significant wealth was transferred to Samoa instead. In 2002, Niue repealed the International Banking Act 1997 (Niue) and closed the International Banking Registry. In 2006, Niue repealed the International Business Companies Act 1994 (Niue), resulting in the dissolution of international business companies on 31 December 2006, unless such companies requested restoration pursuant to the new Companies Act 2006 (Niue).27 A press release from the government of Niue said that this had been done as a response to concerns about unlawful activity and money laundering.28

C. Samoa Samoa is an independent state located in the South Pacific. It consists of two main islands, Savai’i and Upolu, and eight small islets, which have a land area of 3000 km2. Samoa began as a German colony, but it was under New Zealand’s control from 1914 until it gained independence in 1962. The Samoan Constitution provides that law includes the English common law and equity from time to time insofar as it is not excluded by other acts in force in Samoa.29 Samoa is a parliamentary democracy combined with a traditional chiefly system. It has two District Courts, a Supreme Court with six local judges and an Appeal Court which uses foreign judges. There is a separate Land and Titles Court to deal with questions of traditional land ownership and matai (chief) titles. Like other Pacific islands, Samoa inherited the common law notion of the trust. Like the Cook Islands, it has also allowed for international trusts under the Trusts Act 2014 (Samoa). These display many ‘offshore trust’ hallmarks. As noted above, the Samoan regime has been strongly influenced by Panamanian law firm Mossack Fonseca, which

25 OECD, Global Forum on Transparency and Exchange of Information for Tax Purposes Peer Reviews: Niue 2016: Phase 2: Implementation of the Standard in Practice (OECD Publishing 2016) 11–14. 26 Liam Fox, ‘Niue, Samoa Money Laundering History Looms Large in Panama Papers’ Radio Australia: Pacific Beat (4 April 2016), available at: www.abc.net.au/radio-australia/programs/pacificbeat/niue,-samoamoney-laundering-history-looms-large/7298164. 27 OECD, Niue 2016 (n 25) 15. 28 Press Release, ‘Information on Niue’s Repeal of Offshore Company Formation Laws and Compliance with Taxation Sharing Agreements: Niue No Longer a Secrecy Haven’ (undated), available at: www.gov.nu/wb/ media/PRESS%20RELEASES%202017/Niue%20No%20Longer%20a%20Secrecy%20Haven.pdf. 29 Samoa Act 1921 (NZ) s 349; Constitution (Samoa) arts 111, 114.

South Pacific Offshore  359 seeks suitable venues for offshore finance, and capital was moved from Niue to Samoa in around 2005.30

III.  The Nature of Offshore Trusts in the South Pacific Before discussing the nature of South Pacific offshore trusts, it is necessary to first briefly lay out the nature of onshore trusts to explain why offshore trusts are different. Of course, the distinction between offshore and onshore trusts is not dictated solely by geography. Moreover, some onshore jurisdictions, such as the United States, Singapore and Hong Kong, have adopted trusts with offshore characteristics,31 and the Cook Islands, Niue and Samoa retain onshore trusts for locals. The distinction is more of a spectrum than a sharp dichotomy. But the nomenclature reflects the fact that onshore trusts are typically associated with large or economically powerful former Commonwealth countries, whereas offshore trusts developed on small, less economically powerful islands with some historical link to Britain or the Commonwealth. The offshore trust is not meant for the use of locals: instead, it is designed to attract foreign money and investment into the jurisdiction. Typically, (although not always) offshore jurisdictions are small, rely on tourism and do not have many other products to export. Essentially, they allow foreigners to bypass inconvenient laws in their home jurisdiction, and store wealth and property in the offshore jurisdiction.

A.  Onshore Trusts: A Brief History The nature of the onshore trust in the strict sense is well known to those who have been legally trained in common law countries. The discussion in this chapter will consider Australian onshore trusts law, and then return to the three offshore jurisdictions already introduced. A trust exists when a legal owner of property (the trustee) must deal with specified property (the trust property) for the benefit of another person or persons (the beneficiary or beneficiaries), or for the advancement of certain purposes (generally charitable). The trustee has legal title, and with a fixed express trust, the beneficiary has beneficial or equitable ownership – that is, the right in equity to enjoy the fruits of the property. A trust is said to separate the management of property from the beneficial enjoyment of that property. The settlor or creator of the trust generally relinquishes any right to manage the trust property, and even if there are no express rules against settlor control, the adverse taxation consequences of retained settlor control in onshore jurisdictions ensure this.32

30 Fox (n 26). 31 See, eg, Lusina Ho and Rebecca Lee, ‘Trusts in Hong Kong: Historical Application and Current Practice’, ch 4 in this collection for a description of this development in Hong Kong. 32 Bennett (n 3) 57–58; D Waters, ‘Trusts: Settlor Reserved Powers’ (2005–06) 25 Estates, Trusts & Pensions Journal 234, 235–46. In Australia, see, eg, Income Tax Assessment Act 1936 (Cth) s 102.

360  Katy Barnett It is axiomatic in onshore trusts law that a trust must comply with the ‘three certainties’: certainty of intention to create a trust on the part of the settlor;33 certainty of subject matter (trust property);34 and certainty of objects (including persons, charitable purposes and limited non-charitable purposes). However, the certainty of object rule with regard to trusts for persons has been progressively loosened. At first, all trusts for persons required settlors to comply with ‘list certainty’: in other words, it was necessary for a court to be able to compile a comprehensive list of beneficiaries for fixed trusts, and for the two powers of appointment under discretionary trusts, trust powers and mere powers. The list certainty test still applies to fixed trusts.35 Re Gulbenkian’s Settlement Trusts36 and McPhail v Doulton37 loosened the test for powers of appointment, so that a description of objects is deemed sufficiently certain if it complies with the ‘criterion certainty’ test (namely, whether it is possible to say definitively whether an individual falls within the criterion which specifies the objects), with an added ‘loose class’ test to ensure administrative workability for trust powers.38 These developments allowed for the creation of large-scale pension trusts to benefit employees and dependants, where beneficiaries could not always be certainly ascertained in a list format.39 Discretionary objects do not have a right to trust property unless an appointment is made to them by the trustee; otherwise they have a mere expectation.40 The species of allowable charitable trusts in Australia have not changed much since Pemsel’s Case,41 and include trusts for the relief of poverty, the advancement of religion, the advancement of education and other purposes beneficial to the community within the spirit and intendment of the 1601 Statute of Charitable Uses. Although it is now possible for a charitable purpose trust to be valid even if it is coupled with a noncharitable purpose, generally purely non-charitable purpose trusts are only allowed in narrow and exceptional circumstances (particularly for the maintenance of animals or tombs) and where there is a ‘taker-in-default’.42 It is also generally accepted in onshore trusts law that the trustee is a fiduciary and is subject to an ‘irreducible core’ of obligations to carry out the terms of the trust in good faith.43 However, as Langbein notes, there has been an increasing tendency to 33 Paul v Constance [1977] 1 WLR 527; Byrnes v Kendle [2011] HCA 26, (2011) 243 CLR 253. 34 Palmer v Simmonds (1854) 2 Drew 221, 61 ER 704; Re Golay’s Will Trusts [1965] 1 WLR 969. 35 Inland Revenue Commission v Broadway Cottages Trust [1955] Ch 678; Kinsela v Caldwell (1975) 132 CLR 458. 36 Re Gulbenkian’s Settlement Trusts [1970] AC 508 (Re Gulbenkian). 37 McPhail v Doulton [1971] AC 424 (McPhail). 38 ibid 457 (Lord Wilberforce). 39 Although the High Court of Australia has not yet considered Re Gulbenkian or McPhail in Australia, these decisions have consistently been applied in State courts, as noted by P Creighton, ‘Certainty of Objects of Trusts and Powers: The Impact of McPhail v Doulton in Australia’ (2000) 22 Sydney Law Review 93. 40 Gartside v Inland Revenue Commissioners [1968] AC 553. 41 Commissioners for Special Purposes of Income Tax v Pemsel [1891] AC 531, 583 (Lord Macnaghten). There has been some legislative expansion of charitable purposes: see, eg, Trusts Act 1973 (Qld) s 103 (sporting facilities). The High Court in Aid/Watch Inc v Commissioner of Taxation (2010) 241 CLR 539 held that agitation for legislative change was now an allowable charitable purpose (cf Bowman v Secular Society Ltd [1917] AC 406 (HL)). The Commonwealth government has enacted the Charities Act 2013 (Cth) but this has not affected the operation of trusts law. 42 See In Re Astor’s Settlement [1952] Ch 534, 547 (Roxburgh J). 43 Armitage v Nurse [1998] Ch 241, 253 (CA) (Millett LJ). See JSC Mezdhunarodniy Promyshlenniy Bank v Pugachev [2017] EWHC 2426 (Ch) [170]–[173] (Birss J).

South Pacific Offshore  361 ‘contractualise’ the trust, making that irreducible core smaller.44 The contractualisation of the trust is the ne plus ultra of the offshore trust, the ultimate in flexible expansion of the trust by agreement.45 Palmer and Rickett have theorised that two developments have allowed for the greater contractualisation of the trust: first, the requirement of certainty of object was relaxed by McPhail;46 and second, the requirement that a trust has a human beneficiary was reduced by Re Denley’s Trust Deed,47 which allowed for a greater operation of the non-charitable purpose trust.

B.  Seven Differences between Onshore Trusts and South Pacific Offshore Trusts This chapter discusses seven ways in which offshore trusts differ from onshore trusts, and how these differences play out in the Cook Islands, Niue and Samoa. Belle Antoine has described the offshore trust as a ‘hybrid’ trust, which borrows heavily from the traditional trust, but represents a radical evolution of traditional principles.48 As she notes, they force us to question what a trust really is.49

i.  The Presence of a Protector and Retention of Control by a Settlor As noted above, while settlors of onshore trusts generally do not retain powers to dictate the operation of a trust (often for taxation reasons), offshore trusts present extensive means of allowing a settlor to maintain control over trust property.50 They use a ‘protector’ or ‘enforcer’ who is appointed under the trust instrument to direct or restrain the trustees in relation to their administration of a trust. This is done by means of ‘letters of wishes’ which explain what the settlor really wants (which is generally not evident from the express terms of the trust instrument). There are rational reasons for settlors of offshore trusts retaining control: settlors are concerned about appointing trustees in a small, distant country when their trust holds a great deal of their wealth.51 When settlors reserve extensive powers over trust assets in offshore trusts, this raises the question of the extent to which ‘illusory’ trusts are allowable: while it is often clear

44 JH Langbein, ‘The Contractarian Basis of the Law of Trusts’ (1995) 105 Yale Law Journal 625, 627. 45 TH Wu, ‘Teaching Trust Law in the Twenty-First Century’ in E Bant and M Harding (eds), Exploring Private Law (Cambridge University Press 2010) 145; J Palmer and C Rickett, ‘The Revolution and Legacy of the Discretionary Trust’ (2017) 11 Journal of Equity 157, 157. 46 [1971] AC 424. See Palmer and Rickett (n 45) 164–68. 47 Re Denley’s Trust Deed [1969] 1 Ch 373. See Palmer and Rickett (n 45) 168–71. 48 Belle Antoine (n 10) [1.13]–[1.17]. 49 ibid [1.18]–[1.21]. 50 For useful discussions of settlor control, see Waters (n 32); Bennett (n 3); T Barkley, ‘The Content of the Trust: What Must a Trustee Be Obliged to Do With the Property?’ (2013) 19 Trusts & Trustees 452; J Palmer, ‘Controlling the Trust’ (2011) 12 Otago Law Review 473; L Ho, ‘“Breaking Bad”: Settlors’ Reserved Powers’ in RC Nolan, KFK Low and TH Wu (eds), Trusts and Modern Wealth Management (Cambridge University Press 2018). 51 Ho (n 50) 36–39.

362  Katy Barnett the settlor intended to create a trust agreement, the level of control maintained by the settlor tends to suggest that the trustee is not the entity truly in control of the trust.52 The courts tend to deal with retained settlor powers in two ways: asking either whether it undermines the concept of the trust or whether, for the purposes of a third party’s rights in relation to trust property, the powers are tantamount to ownership.53 These possibilities are distinct from a ‘sham’, where no trust was intended and the trust hides the true arrangement. As Mark Bennett has noted, the question of illusory trusts remains unsettled and unresolved even in onshore jurisdictions: can a trust be an illusory trust simply because the settlor is the true holder of powers over the assets?54 However, these problems are more acute in offshore jurisdictions. In the Cook Islands and Niue, the retention of control or benefits by a settlor will not affect the validity of an offshore trust,55 and the protector may also be a settlor, trustee or beneficiary of the trust.56 Moreover, in the Cook Islands, the settlor can retain control and benefits in an international trust, including powers of revocation, disposition, amendment, acquisition, removal or appointment of trustees or protectors, and direction of a trustee or protector.57 In Samoa, it is specifically noted that the settlor, beneficiary or protector of a trust may direct the trustee to perform the functions of the trust by means of a ‘letter or memorandum of wishes’.58 Similarly in Niue, it is noted that the settlor or beneficiary of a trust may direct the trustee to perform the functions of the trust by means of a ‘letter of wishes’.59 The Cook Islands, Niue and Samoa, as is typical of offshore jurisdictions, allow for trust instruments to create the office of protector of a trust.60 There are several reasons for a settlor to wish to appoint a protector in relation to a trust.61 First, protectors allow flexibility when dealing with changes in circumstances. Second, the settlor may be concerned that the trustee may not pay sufficient attention to his wishes. Third, the settlor may want to withhold certain powers from the trustee and retain them for himself. Finally, the settlor may want a third party to act as a main point of contact between the beneficiaries and the trustee. The powers vested in the protector vary according to the law of the jurisdiction and the terms of the trust instrument, and may include powers to remove and appoint trustees; powers to approve a change of proper law; powers to approve the addition or removal of beneficiaries; powers to approve trust distributions; powers to approve the appointment of an agent or adviser either generally or in relation to specific matters; powers to approve investment recommendations;

52 Bennett (n 3) 48–49. 53 Ho (n 50) 38. 54 Bennett (n 3); J Palmer and N Peart, ‘Clayton v Clayton: A Step Too Far?’ (2015) 8 New Zealand Family Law Journal 114. See Clayton v Clayton (Vaughan Road Property Trust) [2016] NZSC 29, [2016] NZFLR 230, the New Zealand case discussing reservation of settlor powers, which did not come to a clear conclusion. 55 International Trusts Act 1984 (Cook Islands) s 13C. 56 ibid s 20(3); Trusts Act 1994 (Niue) s 10, s 18. 57 International Trusts Act 1984 (Cook Islands) s 13C(a)–(f). 58 Trusts Act 2014 (Samoa) s 43. 59 Trusts Act 1994 (Niue) s 14. 60 International Trusts Act 1984 (Cook Islands) s 20(1); Trusts Act 1994 (Niue) s 17(1); Trusts Act 2014 (Samoa) ss 21–22. 61 Wu (n 45) 131.

South Pacific Offshore  363 powers to appoint replacement protectors; and powers to terminate the trust or approve the termination of the trust. The office of protector sits uneasily with traditional onshore trusts law: it undermines the role which has historically been fulfilled by the trustee.62 Typically, in onshore trusts, the trustee has a non-delegable duty to carry out the terms of trust in good faith as part of the ‘irreducible core’, including to approve distributions to beneficiaries, another non-delegable duty.63 By contrast, the role of the protector is unclear, and can encompass a spectrum of ‘watchdog’ roles: on the strong end, a protector can dictate the exercise of administrative and dispositive powers by the trustee; and on the weak end, the trustee simply has to consult the protector before exercising powers, but is not bound to follow the protector’s wishes.64 Emily Campbell et al note, ‘Where, as is usual, the protector is given power to hire and fire trustees and to veto decisions, it is not unrealistic to regard the ultimate power as lying with the protector’.65 It is also unclear whether protectors owe fiduciary duties to beneficiaries (although in practice, many trust instruments expressly state that they do).66 In the Cook Islands, unless the trust instrument otherwise provides, the protector is not liable or accountable as a trustee or as any other person having a fiduciary duty in relation to any act or omission in performing the function of a trust.67 In Niue, the protector is not regarded or accountable as a trustee,68 but subject to the terms of the trust, the protector will owe fiduciary duties.69 It is specified that for charitable trusts, the enforcer is the Minister of Justice, but for non-charitable purpose trusts, the enforcer is the protector.70 A trust may also be a ‘protective or spendthrift trust’. This means that the beneficiary’s interest may be subject to termination or restriction on alienation, or diminution or termination in the event of the beneficiary becoming insolvent or his property becoming liable to be seized or sequestered.71 In Samoa, it is noted that a trust may have either a protector or an enforcer.72 The powers of the protector are said to include (subject to the terms of the trust) the power to: remove and to appoint new or additional trustees; add or remove any person as a beneficiary of the trust; create any excluded person; change the law of the trust; and change the forum of administration of the trust.73 There is no mention of the protector being a fiduciary, but certain exculpatory provisions which apply to trustees are said also

62 cf M Hubbard, Protectors of Trusts (Oxford University Press 2013) [2.25]–[2.27] (a protector is distinct from a trustee). 63 Armitage v Nurse (n 43). 64 E Campbell, R Ham, J Hilliard and M Tennet, ‘Protectors’ in D Hayton, The International Trust, 3rd edn (Jordan Publishing Ltd 2011) [4.2]. 65 ibid [4.4]. 66 ibid [4.5]–[4.11]. See also Davidson v Seelig [2016] EWHC 549 (Ch) [55]; JSC Mezdhunarodniy Promyshlenniy Bank v Pugachev [2017] EWHC 2426 (Ch) [181]–[189]; M Conaglen and E Weaver, ‘Protectors as Fiduciaries: Theory and Practice’ (2012) 18 Trusts & Trustees 1. 67 International Trusts Act 1984 (Cook Islands) s 20(4). 68 Trusts Act 1994 (Niue) s 17(4). 69 ibid s 17(5). 70 ibid s 28(4). 71 ibid s 15. 72 Trusts Act 2014 (Samoa) ss 21–22. 73 ibid s 21(6)(a)–(f).

364  Katy Barnett to apply to protectors.74 Samoan law also provides that it is necessary to have an enforcer for non-charitable purpose trusts created pursuant to section 66 of the Trusts Act 2014 (Samoa).75 Again, the exculpatory provisions which apply to trustees apply equally to enforcers under Samoan law.76

ii.  ‘Massively Discretionary Trusts’ Smith has noted that offshore trusts tend to be massively discretionary, in that the beneficiary of the trusts are not well defined, and in that the trusts are subject to control by a settlor or protector.77 Just as the discretionary beneficiaries of an onshore trust do not have any rights to trust property, the discretionary beneficiaries of an offshore trust do not have rights to trust property unless an appointment is made to them by the trustee.78 Massively discretionary trusts may arise when offshore trust regimes allow noncharitable purpose trusts without a definite beneficiary. These trusts may be used to set up ‘orphan structures’ holding the shares of a company.79 Second, offshore trusts may take the form of ‘Red Cross’ trusts, where there is a defined ‘residuary beneficiary’, often a charity, but the real persons intended to benefit from the trust are mere objects of discretionary powers.80 Of course, as Schmidt v Rosewood Trust Ltd shows, difficulties may arise where the real objects of a power are so encased in secrecy that they are unable to be ascertained.81 This reflects the rise in popularity of offshore trusts with settlors from non-common law backgrounds whose main concern is to facilitate unorthodox investments and to retain secrecy, but who do not have much familiarity with the trust structure.82 In the Cook Islands, the legislation provides that a trust shall be charitable where it is ‘substantially’83 for the purposes of relief of poverty, advancement of education, advancement of religion or other purposes beneficial to the community.84 Cook Islands law also seems to remove or dilute the requirement for a charitable purpose trust to be for the benefit of the public, although it may not get rid of the requirement altogether. It is ultimately unclear how this works.85 In Niue and Samoa, the situation is slightly different. The law stipulates charitable purposes include relief of poverty, advancement of education, advancement of religion, 74 ibid s 73. 75 ibid s 22. 76 ibid s 74. See the discussion of trustees’ duties below at III.B.iii. 77 Smith, ‘Massively Discretionary Trusts’ (n 6). 78 Gartside (n 40). 79 Wu (n 45) 133. 80 A recent case in Guernsey allowed the collapse of such a ‘Red Cross’ trust with a sole beneficiary pursuant to the Guernsey statutory power under Saunders v Vautier: Rusnano Capital AG v Molard International (PTC) Ltd [2019] GRC 011. I am indebted to Lionel Smith for informing me of this case. He predicted that courts may be willing to do this in Smith, ‘Massively Discretionary Trusts’ (n 6) 42. 81 Schmidt v Rosewood Trust Ltd [2003] 2 AC 709. 82 JD Davies, ‘Integrity of Trusteeship’ (2004) 120 Law Quarterly Review 1, 3. 83 It seems that this is intended to water down charitable trusts law, but the use of the word ‘substantially’ is difficult: see A Doyle and M Carn, ‘Purpose Trusts’ in D Hayton, The International Trust, 3rd edn (Jordan Publishing Ltd 2011) [5.263]. 84 International Trusts Act 1984 (Cook Islands) s 12(1). 85 Doyle and Carn (n 83) [5.624]–[5.266].

South Pacific Offshore  365 protection of the environment, the advancement of human rights and fundamental freedoms, the advancement of amateur sport and any other purposes beneficial to the community.86 A purpose will not be regarded as charitable unless it is for the benefit of the community or a substantial section of the community having regard to the purpose.87 The Cook Islands provides for non-charitable purpose trusts by providing that a trust will not be void or voidable simply because it is held for a purpose which is not charitable.88 Moreover, a trust will still be valid if persons are named in the trust as appointed with the right to enforce it, even if they are not beneficiaries under the terms of the trust.89 Unlike Niue and Samoa (noted below), there is no necessity for the settlor of a non-charitable purpose trust to appoint a protector or an enforcer, nor is there any requirement that a trustee must be a ‘designated person’ who can enforce the trust.90 However, there are provisions for the replacement of enforcers in the subsections which follow.91 Niue and Samoa also provide that non-charitable purpose trusts can be created as long as the purpose is reasonable and capable of fulfilment, the purpose is not contrary to public policy, and the terms of the trust provide for the appointment of a protector and a successor (in the case of Niue) or an enforcer (in the case of Samoa) who can enforce the trust.92 It is also stipulated that a trust for the benefit of a beneficiary is valid, whether or not the beneficiary is yet ascertained or in existence.93 However, on the other hand, a trust will be invalid if it has no beneficiary who is identifiable or ascertainable,94 excepting the case of trusts for purposes. In all jurisdictions (the Cook Islands, Niue and Samoa), there are provisions for the creation of ‘protective or spendthrift trusts’.95 In essence, these trusts may be subject to termination or restriction upon alienation of or dealing with trust property if certain stipulated events occur. The intention is to allow settlors to protect assets from creditors, spouses and profligate heirs.

iii.  Trustee Exemption Clauses As Adam Hofri-Winogradow has noted,96 one way in which trusts generally have been stripped of their characteristics qua trust is by allowing extensive trustee exemption

86 Trusts Act 1994 (Niue) s 15(1); Trusts Act 2014 (Samoa) s 65(1). 87 Trusts Act 1994 (Niue) s 15(2); Trusts Act 2014 (Samoa) s 65(1). 88 International Trusts Act 1984 (Cook Islands) s 12(2). 89 ibid. 90 cf British Virgin Islands: Trustee Amendment Act 1993 (BVI) ss 84(2)(c), 84A(3)(c). 91 International Trusts Act 1984 (Cook Islands) s 12(3)–(4). 92 Trusts Act 1994 (Niue) s 16(1); Trusts Act 2014 (Samoa) s 66(1). 93 Trusts Act 1994 (Niue) s 3(a). 94 ibid s 8(2)(a); Trusts Act 2014 (Samoa) s 10(2)(c). Section 11(3) of the Niuen Act and s 16 of the Samoan Act outline the rules with regard to ascertaining the beneficiaries of trusts for persons. 95 Trusts Act 1994 (Niue) s 13; Trusts Act 2014 (Samoa) s 64; International Trusts Act 1984 (Cook Islands) s 13E–13F. 96 AS Hofri-Winogradow, ‘The Stripping of the Trust: From Evolutionary Scripts to Distributive Results’ (2014) 75 Ohio State Law Journal 529, 544–46 (‘Stripping of the Trust I’); AS Hofri-Winogradow, ‘The Stripping of the Trust: A Study in Legal Evolution’ (2015) 65 University of Toronto Law Journal 1, 4–7.

366  Katy Barnett clauses in trust deeds. It comes as no surprise to know that extensive trustee exemption clauses are possible in South Pacific offshore jurisdictions. In the Cook Islands, any exculpatory provision within a trust deed appears to be enforceable. While trustees must exercise the care, diligence and skill that a prudent person would exercise in managing the affairs of another,97 this is qualified by a subprovision which suggests that these duties and obligations only apply to the extent that a contrary intention is not expressed in the trust instrument.98 A later provision provides that any limitation of the liability of a trustee is valid and effective, ‘and every such provision shall be given a fair, large and liberal interpretation so as to give full effect to its tenor, notwithstanding any rule of law or equity to the contrary’.99 Neither of the other two jurisdictions have provisions as broad as the Cook Islands. Samoa has some compulsory duties, including: the duty to make application to the court for directions;100 to carry out the terms of the trust;101 to keep proper accounts and records;102 to keep trust property separate;103 and to ensure there is a proper enforcer for a purpose trust.104 Certain other duties apply but may be overturned if the terms of the trust provide otherwise, including: preserving and enhancing the value of the trust;105 not profiting from the trust or causing someone else to profit from the trust;106 joining in performing the trust if there is more than one trustee;107 only exercising a power if all trustees agree, where there are multiple trustees;108 dissenting in writing if the trust allows a majority decision and the trustee dissents;109 and being impartial and not exercising powers for the benefit of one beneficiary or purpose over another.110 A trustee must also exercise reasonable care and skill, the standard to depend upon whether the trustee is professional or not.111 However, this rule is qualified by the Schedule to the Act, which states in paragraph 4 that the duty to exercise reasonable care and skill applies only to the extent that the trust deed indicates, by its terms, that it should apply.112 This appears to contemplate the possibility of a wide exculpatory clause. Niue has the least extreme position, closest to the onshore position. Trustees have the general duties of a trustee, including: to act with due diligence; to act with good faith; to act to the best of their skills and abilities; to exercise the standard of care of a reasonable and prudent businessman;113 to carry out the terms of the trust;114 as well

97 International Trusts Act 1984 (Cook Islands) s 19A(1)–(2): lay trustees and professional trustees respectively. 98 International Trusts Act 1984 (Cook Islands) s 19A(3). 99 ibid s 19E. 100 Trusts Act 2014 (Samoa) s 29(2)(a). 101 ibid s 29(2)(b). 102 ibid s 29(3)(a). 103 ibid s 29(3)(b). 104 ibid s 29(3)(c). 105 ibid s 29(4). 106 ibid s 29(5). 107 ibid s 29(6). 108 ibid s 29(7). 109 ibid s 29(8). 110 ibid s 29(9). 111 ibid s 30. 112 ibid (Samoa) Schedule, para 4. 113 Trusts Act 1994 (Niue) s 28(1). 114 ibid s 28(2).

South Pacific Offshore  367 as owing a fiduciary obligation to the beneficiaries of a trust or the purpose for which the trust was created.115 It is not possible to draft an exclusion clause to exclude liability arising from the trustee’s own fraud or wilful misconduct.116 A trustee may be relieved of liability by the court if it appears that he has acted honestly and reasonably.117

iv.  Perpetuity Periods Most onshore trusts, including discretionary trusts,118 are subject to the law against perpetuities, unless they are charitable purpose trusts. The rationale of this rule is that property cannot be tied up indefinitely while it is ascertained who the true beneficiaries are. It should be noted, however, that several jurisdictions in Canada and the United States have effectively abolished the rule.119 By contrast, in offshore jurisdictions, including South Pacific jurisdictions, legislation provides for very long perpetuity periods or no perpetuity period at all. This ensures that assets can be tied up for lengthy periods of time. Thus, in the Cook Islands and Samoa, the rule against perpetuities is abolished,120 unless the trust instrument specifies a set period.121 In Niue, the rule against perpetuities is said to be abolished,122 but it is stated that the maximum duration of a trust shall be 120 years from the date of its creation, unless it is a purely charitable trust.123 In each of the Cook Islands, Samoa and Niue, the rule against accumulations is abolished.124 The Cook Islands also abolished the rules with regard to double possibilities.125

v.  The Rule in Saunders v Vautier Onshore trusts may be wound up by unanimous agreement of the beneficiaries if all the beneficiaries are ascertainable and over the age of 18 years. Indeed, it has been said that the rule in Saunders v Vautier126 is essential for a valid express trust, because otherwise there is no one who can wind up the trust.127 By contrast, in offshore jurisdictions, the rule in Saunders v Vautier is often abrogated or abolished, so that beneficiaries have no rights to end the trust. In the Cook Islands, the rule in Saunders v Vautier is amended so that where a trust instrument empowers a trustee to accumulate income or refrain from making a

115 ibid s 28(3). 116 ibid s 51(6). 117 ibid s 55. 118 J Glover, ‘The Rule against Perpetuities and its Application to Discretionary and Unit Trusts’ (2007) 14 Australian Property Law Journal 255. 119 L Smith, ‘Give the People What They Want? The Onshoring of the Offshore’ (2018) 103 Iowa Law Review 2155, 2166 fn 69. 120 International Trusts Act 1984 (Cook Islands) s 6(1), (3); Trusts Act 2014 (Samoa) s 14(1)–(2). 121 International Trusts Act 1984 (Cook Islands) s 6(2), (4), (5), (6); Trusts Act 2014 (Samoa) s 14(3)–(4). 122 Trusts Act 1994 (Niue) s 7(3). 123 ibid s 7(1)–(2). 124 International Trusts Act 1984 (Cook Islands) s 9; Trusts Act 2014 (Samoa) s 15; Trusts Act 1994 (Niue) s 7(4). 125 International Trusts Act 1984 (Cook Islands) s 8. 126 Saunders v Vautier (1841) Cr & Ph 240, 49 ER 282. 127 Palmer and Rickett (n 45) 162.

368  Katy Barnett distribution, the trustee does not have to follow any direction from a beneficiary where the law would otherwise require it.128 In Niue and Samoa, it is provided that where all beneficiaries are in existence, ascertainable, of age and full capacity and agree to do so, they may require the trustee to terminate the trust and distribute the trust property.129 However, this rule does not apply where there is a ‘protective’ or ‘spendthrift’ trust.130 A ‘Red Cross’ trust with a sole named beneficiary was wound up pursuant to the Guernsey Saunders v Vautier statutory power131 in Rusnano Capital AG v Molard International (PTC) Ltd.132 Section 53(3) and (4) of The Trusts (Guernsey) Law provide: (3) Without prejudice to the powers of the Royal Court under subsection (4), and notwithstanding the terms of the trust, where all the beneficiaries are in existence and have been ascertained, and none is a minor or a person under legal disability, they may require the trustees to terminate the trust and distribute the trust property among them. (4) The Royal Court, on the application of any person mentioned in section 69(2), may – (a) direct the trustees to distribute, or not to distribute, the trust property, or (b) make such other order in respect of the termination of the trust and the distribution of the trust property as it thinks fits.133

McMahon, Esq, Deputy Bailiff, held that, although more potential beneficiaries might be appointed to the trust, this had not occurred yet, and thus ‘all the beneficiaries’ were in existence and ascertained.134 Accordingly, the applicant in that case (the sole presently named beneficiary) was entitled to ask the court to terminate the trust and distribute its assets.

vi.  Asset Protection Most express trusts (whether onshore or offshore) are designed to protect assets in some way. Protection of assets is the raison d’etre of the trust. As Kent Schenkel has argued, the trust effectively performs a ‘magic trick’: the trust allows the beneficial owner of property to offload the costs of benefiting from property onto others.135 However, the level to which offshore trusts protect assets is higher and perhaps more unabashed than in the onshore trust. ‘Asset protection trusts’, in particular, are specifically designed to prevent creditors from accessing assets, which is achieved by amending the rules with regard to fraudulent conveyances. The asset protection trust reflects a contractarian American conception of the trust (it is no coincidence that the originator of the Cook Islands regime was American). American law has always allowed ‘spendthift trusts’: trusts which prevent the beneficiary from alienating trust property, either voluntarily



128 International

Trusts Act 1984 (Cook Islands) s 10. Act 1994 (Niue) s 48(1); Trusts Act 2014 (Samoa) s 77(d). 130 Trusts Act 1994 (Niue) s 48(2). 131 The Trusts (Guernsey) Law 2007, s 53(3). 132 Rusnano Capital AG v Molard International (PTC) Ltd [2019] GRC 011. 133 Emphasis added. 134 Rusnano Capital AG (n 132) [23]–[34]. 135 KD Schenkel, ‘Exposing the Hocus Pocus of Trusts’ (2012) 45 Akron Law Review 63, 69–70. 129 Trusts

South Pacific Offshore  369 or involuntarily (thus, creditors and other third parties cannot access trust property).136 Generally speaking, all American states permit spendthift trusts,137 but settlors cannot self-create spendthrift trusts of which they are also the beneficiary because of a concern such trusts will be used to defraud creditors.138 However, 17 American states have amended their laws to allow ‘domestic asset protection trusts’.139 Among other things, these regimes allow self-settled spendthrift trusts, and the regimes target mainly out-ofstate settlors.140 The Cook Islands was the front-runner in the development of the ‘asset protection trust’, before the United States. The Cook Islands ‘international trust’ regime has been replicated to a large degree in Samoa. The Cook Islands regime and its complications will be explained first. The Cook Islands provides for the creation of ‘international trusts’ which are registered under the International Trust Act 1984. There are certain requirements as to the identity or status of the trustees, and the beneficiaries must at all times be non-residents of the Cook Islands.141 In the Cook Islands, neither an international trust or a disposition to an international trust shall be void or voidable in the event that the settlor is bankrupt, insolvent or in liquidation.142 It is worth noting that the Cook Islands has a comprehensive registration system for international trusts, whereas Niue and Samoa do not. It has been suggested that Niuean law should be amended to allow for registration.143 In the Cook Islands, any ‘international trust’ is valid even though it may be invalid according to the law of the settlor’s domicile, place of ordinary residence or place of incorporation.144 Similarly, in Samoa, any ‘Samoan trust’ is valid even though it may be invalid according to the law of the settlor’s domicile, place of ordinary residence or place of incorporation (although as noted, there is not a corresponding obligation to register the trust).145 And, as explained earlier, settlor-created ‘international trusts’ in which settlors retain extensive control are not invalid. Both Cook Islands law and Samoan law state that offshore trusts or dispositions to offshore trusts will only be open to claims by creditors in very narrow circumstances.

136 ibid 70–73. 137 ibid 71–73. 138 Hofri-Winogradow, ‘Stripping of the Trust I’ (n 96) 542. See, eg, Texas Property Code, §112.035. 139 Seventeen states in the United States have adopted asset protection trusts: West Virginia (2016); Mississippi (2014); Ohio (2013); Virginia (2012); Hawaii (2010); New Hampshire (2009); Tennessee (2007); Wyoming (2007); Missouri (2005); South Dakota (2005); Oklahoma (2004); Utah (2003); Nevada (1999); Rhode Island (1999); Delaware (1997); Alaska (1997); Michigan (2016). See Ashlea Ebeling, ‘Comparing Domestic Asset Protection Trust States’ Forbes (6 July 2016), available at: www.forbes.com/sites/ashleaebeling/2016/07/06/ comparing-domestic-asset-protection-trust-states/; Ashlea Ebeling, ‘Onshore Asset Protection With The Selfie Trust’ Forbes (6 July 2016, appearing in 26 July 2016 edition of Forbes), available at: www.forbes.com/ sites/ashleaebeling/2016/07/06/onshore-asset-protection-with-the-selfie-trust/. 140 Hofri-Winogradow, ‘Stripping of the Trust I’ (n 96) 542–43. 141 International Trusts Act 1984 (Cook Islands) s 2. 142 ibid s 13A. 143 J Molea, ‘Niue Trusts Act: A Potential Tax Evasion Mechanism?’ (2018) Laws 542: Offshore Trusts Paper, Victoria University of Wellington, available at: researcharchive.vuw.ac.nz/xmlui/bitstream/handle/10063/ 7940/paper_access.pdf?sequence=1. 144 International Trusts Act 1984 (Cook Islands) s 5(2); Trusts Act 2014 (Samoa) s 9(3). 145 ibid.

370  Katy Barnett In the Cook Islands, the section which limits liability to creditors is said to apply to all actions in which fraud, deceit, unconscionable conduct or any other inequitable conduct or unjust enrichment is alleged, against any person with regard to the settlement of or a disposition to an international trust.146 Importantly, in both the Cook Islands and Samoa, it is deemed that there is no intention to defraud in certain circumstances, which depends then upon the date that the cause of action accrued.147 Thus, a settlement or disposition is deemed not to be fraudulent: if it took place before the date on which the cause of action accrued;148 or if it took place more than two years after the date on which the cause of action accrued.149 In the Cook Islands, a settlement or disposition is also deemed not to be fraudulent: if it took place less than two years after the date on which the cause of action accrued, but the creditor has not commenced action within one year from the date of settlement or jurisdiction;150 or if it took place less than two years after the cause of action accrued and the creditor has commenced proceedings within one year in a court of competent jurisdiction but, has not commenced proceedings within two years of the date of settlement or disposition in local courts.151 As will be noted later, several amendments to the Cook Islands regime followed the Orange Grove cases, where creditors successfully accessed funds. In both the Cook Islands and Samoa, if a creditor can leap the relevant ‘deeming’ hurdles, he or she may be entitled to a limited remedy, but only if he or she can establish ‘beyond reasonable doubt’ that an international trust was established with the ‘principal intent’ to defraud that creditor,152 and that when the settlement or disposition took place, the money could have been used to satisfy the creditor’s claim.153 A settlor is not to have imputed to him or her an intent to defraud a creditor solely because the settlement or disposition took place within two years of the cause of action accruing, or because the settlor is a beneficiary.154 Additionally, in the Cook Islands, the settlor is not deemed to have imputed to him or her an intent to defraud because the settlor retained any powers or benefits, because the settlor is a trustee or protector, or because the settlor settled or disposed of the property at a time when proceedings had already been commenced.155 In the Cook Islands also, the onus of proof is on the creditor to show an intent to defraud.156 In both the Cook Islands and Samoa, the section operates to the exclusion of any other remedy or rule of law acting in any other jurisdiction.157



146 International

Trusts Act 1984 (Cook Islands) s 13B(9). s 13B(8); Trusts Act 2014 (Samoa) s 12(7)(a)–(b). 148 International Trusts Act 1984 (Cook Islands) s 13B(4); Trusts Act 2014 (Samoa) s 12(4). 149 International Trusts Act 1984 (Cook Islands) s 13B(3)(a); Trusts Act 2014 (Samoa) s 12(3)(a). 150 International Trusts Act 1984 (Cook Islands) s 13B(3)(b). 151 ibid s 13K(1). 152 International Trusts Act 1984 (Cook Islands) s 13B(1)(a); Trusts Act 2014 (Samoa) s 12(1)(a). 153 International Trusts Act 1984 (Cook Islands) s 13B(1)(b); Trusts Act 2014 (Samoa) s 12(1)(b). 154 International Trusts Act 1984 (Cook Islands) s 13K(6); Trusts Act 2014 (Samoa) s 12(5)(a)–(b). 155 International Trusts Act 1984 (Cook Islands) s 13K(6). 156 ibid s 13B(7). 157 ibid s 13B(10); Trusts Act 2014 (Samoa) s 13. 147 ibid

South Pacific Offshore  371 In the Cook Islands alone, the fraud section operates even if a trust is no longer registered.158 A creditor can only enforce a claim on a foreign judgment if it can demonstrate to the High Court of the Cook Islands that it has exhausted all remedies against the settlor’s remaining property, and all rights of appeal against the foreign judgment have been exhausted.159 Punitive, exemplary or vindictive damages are not available,160 unless an award has been made at the time of settlement or disposition,161 and the burden of proof will be on a creditor to prove damages are not punitive.162 This relates to the fact that the object of offshore trusts is often to preemptively avoid liability for large damages awards. As will be discussed in greater detail later, several notorious individuals from the United States have set up Cook Islands trusts where they have been found to have committed medical negligence, insurance fraud, securities fraud or the like.163 A creditor’s remedy in both the Cook Islands and Samoa is limited because the creditor will only be entitled to satisfaction of his or her claim to the extent that the property would have been available but for the settlement or disposition occurring, and only to the extent of the settlor’s interest in the property.164 In determining whether any settlement of or disposition to an international trust has rendered a settlor insolvent for the purposes of a claim by a creditor, the fair market value of the property at the time of settlement or disposition is used.165 A separate legislative provision holds that foreign judgments are not enforceable.166 In Niue, the legislation provides that if a trust is created under the law of Niue, the court is not to recognise any claims against trust property from a court of another jurisdiction in respect of ‘the personal or proprietary consequences of marriage or the termination of marriage’, ‘succession rights (whether testate or intestate) including the fixed shares of spouses or relatives’ and ‘the claims of creditors in an insolvency’.167 This appears to be an attempt to create a limited asset protection trust, albeit not of the strength of the Cook Islands or Samoa. There are no deeming provisions.

vii.  ‘Firewall’ Provisions and Private International Law Concerns All of the South Pacific offshore trust regimes have ‘firewall’ provisions which state that foreign laws and judgments are not enforceable in relation to offshore trusts.168 Among other things, this is designed to prevent legitimate judgment creditors from other jurisdictions from enforcing their claims, although it also allows offshore trusts to

158 International Trusts Act 1984 (Cook Islands) s 13B(11), subject to s 16(6) on the consequences of deregistration. 159 International Trusts Act 1984 (Cook Islands) s 13B(13)(a)–(b). 160 ibid s 13B(14). 161 ibid s 13B(16). 162 ibid s 13B(15). 163 See discussion below at IV.B. 164 International Trusts Act 1984 (Cook Islands) s 13B(6); Trusts Act 2014 (Samoa) s 12(1). 165 International Trusts Act 1984 (Cook Islands) s 13B(2); Trusts Act 2014 (Samoa) s 12(2). 166 In the Cook Islands see: International Trusts Act 1984 (Cook Islands) s 13D. See also s 13I, which provides that foreign law is expressly excluded. In Samoa, see Trusts Act 2014 (Samoa) s 13. 167 Trusts Act 1994 (Niue) s 8(6)(a)–(c). 168 International Trusts Act 1994 (Cook Islands) s 13D; Niue Act 1966 (Niue) s 95(2); Trusts Act 2014 (Samoa) s 13.

372  Katy Barnett be shielded from other laws such as tax laws, prudential laws, company laws, heirship laws and the like. In light of the differences between onshore and offshore trusts, we may question how far onshore regimes should allow recognition of offshore trusts where an offshore trust would be invalid according to an onshore regime. This raises issues of private international law and the Hague Trusts Convention.169 The Convention provides for choice of law rules, but also provides for jurisdictions that have ratified it to recognise trusts from other jurisdictions, including recognition of choice of law clauses within trust deeds.170 The only Asian-Pacific countries to have ratified the Convention are Australia and Hong Kong.171 Obviously, this may create problems when someone seeks to enforce an offshore trust which is contrary to the public policy or the trusts law of the home jurisdiction. As Smith has noted, it is still unclear whether the Convention requires signatories to recognise foreign trusts which are not recognised under local law.172

IV.  Does the Offshore Trust Strain the Principles of Trusts Law beyond Redemption? A.  Are these Trusts at All? As I noted above, an important rationale of the express trust is, and always has been, asset protection (with associated tax benefits that may flow from that). Thus, it could be said that the South Pacific offshore trust (particularly the asset protection trust) is simply a logical offshoot of that fundamental rationale behind the express trust: the ultimate contractarian extension. However, as others have suggested before me,173 there must be a point where the trust is stretched so far that the concept is broken. As Smith has said, ‘the idea of the irreducible core is that if you do not have it, you don’t have a trust any more’.174 Smith has identified two senses of the trust: the ‘wide sense’, which is simply a legal structure in which property is held in trust; and the ‘narrow sense’, which is an obligation

169 Hague Convention of 1 July 1985 on the Law Applicable to Trusts and on their Recognition (entered into force 1 January 1992) (Hague Trusts Convention). Ratified by 17 countries: Australia; Cyprus; Canada (9 provinces: Alberta, New Brunswick, British Columbia, Ontario, Newfoundland, Manitoba, Saskatchewan, Nova Scotia and Prince Edward Island); Chinese Special Administrative Region of Hong Kong; Italy; Luxembourg; Liechtenstein; Malta; Monaco; the Netherlands (European territory only); Panama; San Marino; Switzerland; and the United Kingdom (including Bermuda, British Antarctic Territory, Falkland Islands, Turks and Caicos Islands, St Helena and Dependencies, South Georgia and the South Sandwich Islands, Sovereign Base areas of Akrotiri and Dhekelia, British Virgin Islands, Montserrat, Isle of Man, Jersey and Gibraltar). The United States has signed but not ratified it. See Richard Garnett’s chapter in this collection (ch 20). 170 Hague Trusts Convention, art 6. 171 In Australia, see Trusts (Hague Convention) Act 1991 (Cth); in Hong Kong, see Recognition of Trusts Ordinance 1990 (Cap 76) (HK). For a detailed discussion of how international trusts operate in Hong Kong, see R Lee, ‘The Evolution of the Modern International Trust: Developments and Challenges’ (2018) 103 Iowa Law Review 2096. 172 Smith, ‘Give the People What They Want?’ (n 119) 2163. 173 See Smith, ‘Massively Discretionary Trusts’ (n 6); Smith (n 119). 174 Smith, ‘Give the People What They Want?’ (n 119) 2157.

South Pacific Offshore  373 with respect to the benefit of property.175 The very nature of the trust (in Smith’s ‘narrow sense’) is that the settlor relinquishes control of the trust property and the trustee is responsible for administering the trust property for the benefit of the beneficiaries.176 The offshore trust undermines this in several ways. First, the settlor often retains control via letters of wishes and the protector. It is unclear whether protectors and enforcers owe fiduciary obligations to their beneficiaries. Second, and relatedly, the massively discretionary nature of the offshore trust means either that there is no beneficiary, or that the true intended beneficiary is discretionary so that there is no one with an enforceable right (even if there is an apparent named beneficiary, as with a ‘Red Cross’ trust).177 Consequently, there is the need to enforce the trust via other means (protectors and enforcers) who do not have clear fiduciary obligations.178 Third, the abrogation of the rules against perpetuities means that such trusts can potentially last, and thus, property can be tied up for a long time or indefinitely. Fourth, any changes to the rule in Saunders v Vautier mean that any named beneficiaries may find it hard to wind up the trust. As Bennett has discussed, the law does not clearly govern the situation where there is an intention to create a trust but the settlor retains extensive control over assets. There is a spectrum of views. On the one hand, Bennett has identified what he calls ‘narrow views’, which focus on the formal existence of obligations upon the trustee.179 Thus, according to these views, a high degree of settlor control will be possible as long as the beneficiaries can formally hold the trustee accountable,180 or as long as the trustee’s discretions are not entirely overborne by another (mere retention of powers is not enough).181 On the other hand, Bennett has identified what he calls ‘wide views’,182 which tend to see a trust as at least illusory where there is a lack of control in substance, not form. Thus, according to these views, a trust will be illusory where a trustee takes the benefit of the trust fund to the detriment of other beneficiaries,183 where the ‘reality of control’ of trust assets lies with someone other than the trustee,184 or where there is no meaningful accountability on the part of the trustee.185 Of course, it is always possible that offshore trusts may end up not being controlled by any party, such that their ultimate aims may be frustrated. Schmidt v Rosewood Trust Ltd is a famous case of this, albeit in a different offshore jurisdiction, namely the

175 Smith ‘Massively Discretionary Trusts’ (n 6) 19. 176 ibid 19. 177 ibid 21–29. 178 Some have argued that the presence of an enforcer makes such trusts more acceptable: see D Hayton, ‘Developing the Obligation Characteristic of the Trust’ (2001) 117 Law Quarterly Review 96. 179 Bennett (n 3) 61–65. 180 See, eg, D Hayton, ‘Exploiting the Inherent Flexibility of Trusts’ in D Hayton (ed), Modern International Developments in Trust Law (Kluwer 1999) 319–20; D Hayton, ‘The Irreducible Core Content of Trusteeship’ in AJ Oakley (ed), Trends in Contemporary Trust Law (Clarendon Press 1996). See also Re AQ Revocable Trusts [2010] SC(B)(da) 40 Civ [29]. 181 See, eg, Waters (n 32). 182 Bennett (n 3) 65–73. 183 See, eg, Barkley, ‘The Content of the Trust’ (n 50); T Barkley, ‘Clayton v Clayton: The Court of Appeal on the Concepts of Property and Trusts’ [2015] New Zealand Law Journal 164. 184 See, eg, J Wadham, Willoughby’s Misplaced Trust 2nd edn (Gostick Hall Publications 2002); Ho (n 50) 46 (‘repugnancy with the trust concept’). 185 Palmer and Peart (n 54).

374  Katy Barnett Isle of Man.186 The offshore trusts were ‘Red Cross’ trusts, one with a hybrid power, both highly discretionary. The named residuary beneficiaries for each were the Royal National Lifeboat Institution, but with provision for certain discretionary beneficiaries, including the settlor’s son, Vadim. After the settlor, Vitali Schmidt (a Russian oil oligarch) died in mysterious circumstances alone in his apartment in Moscow, it transpired that the settlor’s attempts to vest an interest in Vadim in the event that the settlor died had been ineffectual.187 Vadim sought information from the trustee both in his own right (as either beneficiary or object of a power) and as administrator of Schmidt’s will. The Privy Council allowed Vadim to access the information: it did not depend on any distinction between transmissible and non-transmissible discretionary interests or between rights of an object of a discretionary trust and those of an object of a mere power of a fiduciary character. But the broader point is that the structure of the trusts was so opaque that it was impossible to work out who the settlor really was, and who the real intended beneficiaries were. Thus, offshore trusts are not without risk. Questions of who is really in control have particular pertinence in offshore trusts, where the overlapping roles of settlor, trustee, protector and beneficiary may enable a settlor to retain a huge degree of control, and exploit convenient ambiguity as to precisely what his or her role is. Thus, in JSC Mezdhunarodniy Promyshlenniy Bank v Pugachev, Mr Pugachev was simultaneously the settlor,188 protector and beneficiary of certain trusts. Birss J noted the phenomenon of ‘Angora cat’ trusts,189 where the same trust instrument can be presented in radically different ways: When the validity or effect of the trust is challenged, the trustee can put forward emollient submissions about Protector’s powers being confined and narrow as a result of their fiduciary nature. That has happened in these proceedings. But in other circumstances, for example where Mr Pugachev [the settlor] needs collateral for a bank loan, a completely different stance can be taken in relation to the very same instrument. Mr Pugachev can be presented as the owner of the trust assets. This latter event has happened too.190

The settlor/protector/beneficiary can direct the trustee to alienate or use assets (via letters of wishes) which mean that he can act as the effective ultimate beneficial owner of the assets where necessary and convenient, but may also disclaim ownership where this is strategically necessary (for example, in the case of a claim by a de facto partner and children, in the case of Mr Pugachev himself). In the event, Birss J took a ‘wide view’ and held that the trust in Pugachev was effectively illusory: the extensive control retained by Mr Pugachev as protector (including the power to remove trustees without cause)191 meant that he was still owner of the property. My own preference is to take a ‘wide view’ of the reality of the situation, rather than a formal view.

186 [2003] 2 AC 709. 187 ibid [66]–[67]. 188 Birss J noted that the deeds named no settlor at all and considered that this was an attempt to hide Mr Pugachev’s involvement: [2017] EWHC 2426 (Ch) [271]. 189 [2017] EWHC 2426 (Ch) [438]–[442]. 190 ibid [440]. 191 ibid [272].

South Pacific Offshore  375 There is also the possibility that an offshore trust will be declared a sham, as in Raftland Pty Ltd v Federal Commissioner of Taxation.192 The usual definition of sham is that given by Diplock LJ in Snook v London & West Riding Investments Ltd: [I]t is, I think, necessary to consider what, if any, legal concept is involved in the use of this popular and pejorative word. I apprehend that, if it has any meaning in law, it means acts done or documents executed by the parties to the ‘sham’ which are intended by them to give to third parties or the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intended to create.193

A sham is therefore a transaction where the true effect and intention is not the represented effect. There are two ways of characterising a sham in trusts law: either that it is part of the enquiry as to whether there is the requisite ‘certainty of intention’ to create a trust;194 or that it is a separate doctrine which serves to invalidate the trust.195 In Pugachev, Birss J would have found the trust was a sham in the alternative. My own preference (in light of cases like Pugachev) is to treat the question of sham and related questions as one of intention: the intention is clearly to deceive and to retain effective ownership of the asset except when it is expedient to deny it. In this case, even if the trust is required to be recognised by a convention such as the Hague Trusts Convention, it can be found that the intention to create it was not effective, and the trust fails and the property results back to the settlor under a resulting trust.

B.  ‘Onshoring’ Offshore Trusts Deeming provisions such as those in the Cook Islands which deem trust dispositions to be valid and non-fraudulent in all but the most extreme circumstances allows settlors to use asset protection trusts in ways that are distinctly unsavoury. With my remedies law hat on, I find the idea that people can deliberately hide money away from judgment creditors particularly distasteful. In 2013, the New York Times, with the International Consortium of Investigative Journalists, investigated asset protection trusts in the Cook Islands as a result of the ‘Paradise Papers’ document leak and found that trusts were held by people including convicted Ponzi scheme directors, commodities traders convicted of corruption and racketeering, and doctors and medical practitioners who had committed fraud and medical malpractice.196 Even the US government has had difficulty proceeding against Cook Islands trusts: Fannie Mae, a government sponsored

192 Raftland Pty Ltd v Federal Commissioner of Taxation [2008] HCA 21, (2008) 238 CLR 516. 193 Snook v London & West Riding Investments Ltd [1967] 2 QB 786, 802. 194 See, eg, J Palmer ‘Dealing with the Emerging Popularity of Sham Trusts’ [2007] New Zealand Law Review 81; S Douglas and B McFarlane, ‘Sham Trusts’ in H Conway and R Hickey (eds), Modern Studies in Property Law: Volume 9 (Hart Publishing 2017); YK Liew, ‘“Sham Trusts” and Ascertaining Intentions to Create a Trust’ (2018) 18 Journal of Equity 237. 195 M Conaglen, ‘Sham Trusts’ (2008) 67 Cambridge Law Journal 176; M Conaglen, ‘Sham Trusts’ (2009) 16 Journal of International Trust and Corporate Planning 133; M Conaglen, ‘Trusts and Intention’ in E Simpson and M Stewart (eds), Sham Transactions (Oxford University Press 2013). 196 Wayne, ‘Cook Islands’ (n 17); Wayne, ‘Unlocking the Secrets of the Cook Islands’ (n 13).

376  Katy Barnett lender, had only recovered $12,000 of a $10 million judgment against an Oklahoma developer who defaulted on his loans because his assets were tied up in a Cook Islands trust, and the Federal Trade Commission (FTC) has been unable to recover its $37.5 million judgment against Kevin Trudeau for deceiving consumers with a book called The Weight Loss Cure because Trudeau’s assets are in a Cook Islands trust.197 There are risks associated with setting up a Cook Islands trust to get around the law in this way. In the Anderson case, the Andersons were sued by the FTC for their role in promoting a Ponzi scheme. They had transferred US$6 million in commissions to a Cook Island trust (of which they were the co-trustees, protectors and beneficiaries), and the District Court ordered them to repatriate the assets.198 The Andersons instructed the Cook Islands trustee (a licensed Cook Islands trustee company) to repatriate the assets. However, the trust deed had an ‘anti-duress’ clause which removed the Andersons as co-trustees of the trust, and the Cook Islands trustee refused to repatriate the assets. The Andersons were then jailed for six months for contempt of court. They argued that it was impossible to comply with the order, but the District Court said the impossibility was self-created. The FTC then attempted to get the Andersons to sign documents removing the Cook Islands trustee and themselves as protectors, and to appoint a Cook Islands company owned by the FTC as trustee and protector. The Cook Islands High Court decided that the conduct of the FTC constituted duress and that the Cook Islands trustee had correctly considered that it triggered the ‘anti-duress’ provisions.199 An attempt to set aside the dispositions for fraud under section 13B of the International Trusts Act was unsuccessful, and eventually, in 2002, the Federal Trade Commission settled with the Cook Islands trustee for US$1.2 million.200 The Cook Islands has since passed several anti-money laundering statutes.201 This is not to say that all attempts to hide assets in Cook Islands trusts are successful. As Smith has noted, there have been some successes in ‘onshoring’ offshore trusts, including in the Cook Islands Orange Grove cases. The cases arose after the plaintiffs (who had purchased condominiums from developers) obtained a judgment in California for US$6 million in 1994 against the developers. The developers moved to Mexico and transferred some of their assets to an asset protection trust in the Cook Islands. In the first Orange Grove case, the plaintiffs sought a Mareva injunction in the Cook Islands.202 Recall that under the Cook Islands legislation, the settlement of a trust is deemed not to be fraudulent if it took place more than two years after the date on which the cause of action accrued.203 The defendants sought to argue that the cause of action accrued when 197 ibid. 198 Federal Trade Commission v Anderson, 179 F3d (9th Cir, 1999), 1999 US App LEXIS 13130. 199 In re XYZ Irrevocable Trust [1999] CKHC 5; OA 6.1999 (11 August 1999): www.paclii.org/ck/cases/ CKHC/1999/5.html. 200 ‘Announced Actions for 13 December 2002’ (Federal Trade Commission), available at: www.ftc.gov/ news-events/press-releases/2002/12/announced-actions-december-13-2002. 201 Crimes Amendment Act 2003 (Cook Islands); Proceeds of Crime Act 2003 (Cook Islands); Mutual Legal Assistance on Criminal Matters Act 2003 (Cook Islands); Financial Transactions Reporting Act 2004 (Cook Islands). 202 515 South Orange Grove Owners Association v Orange Grove Partners [1995] CKHC 1, 208:1994 (Cook Islands), reported in ‘Case Report’ (2001) 15 Trusts Law International 41: www.paclii.org/ck/cases/ CKHC/1995/1.html. 203 International Trusts Act 1984 (Cook Islands) s 13B(3)(a).

South Pacific Offshore  377 the plaintiffs bought their apartments, and thus the settlement had occurred more than two years after the date on which the cause of action had accrued. The High Court of the Cook Islands held that the plaintiffs were judgment creditors with fixed claims, and their cause of action had accrued when the jury made its decision as to damages. In so doing, the Court said: On one view, the purpose of the Act may be said to be to provide a haven which protects funds deposited with trust companies to the exclusion of the rights of creditors. On another view, the purpose of the Act may be said to protect funds against actions by creditors but only after giving those creditors a chance of recovery within certain time limits. In the end we think the Court should strive to give a commonsense approach to a piece of legislation which is at once very sophisticated but also ineptly drafted in parts. We think that the better view is that Parliament, in attempting to balance the interest of settlors, trustees and creditors, has prescribed certain specific limitation periods; that the right to sue on either a cause of action or a judgment is abridged but not eliminated, and that a common sense interpretation should allow for intention to be given to those two concepts. It should not be lightly assumed that Parliament intended to defeat the claims of creditors by allowing international trusts to be used to perpetrate a fraud against a creditor.204

The Court also referred to the parliamentary debates surrounding the 1989 amendments, and noted: [The then-Prime Minister of the Cook Islands] extended his thanks to ‘those in the industry who have spent so much time putting this amendment bill together for the sake of an industry that is becoming extremely important in the economic development of this country’. He went on to emphasise the extreme importance of maintaining ‘high quality services and to maintain the integrity of the industry …’ The Bill was a bi-partisan measure. The Leader of the Opposition, Mr N George also referred to the industry as ‘growing in confidence and stature’ and said that to get the confidence ‘we must display total integrity and stability’. In the light of those words we would be loathe [sic] to interpret the International Trusts Act as a statute which was intended to give succour to cheats and fraudsters by totally excluding the legitimate claims of overseas creditors.205

The second Orange Grove case involved a second Cook Island international trust formed before the plaintiffs obtained judgment in California.206 Recall that the International Trusts Act 1989 (Cook Islands) deems that a settlement or disposition is not fraudulent if it took place before the date that the cause of action accrued.207 Given that in the first Orange Grove case, the High Court of the Cook Islands had decided that the cause of action accrued when the jury awarded damages, this seemed to present a problem for the plaintiffs. However, the Cook Islands Court of Appeal found it significant that the precise wording of the section provided that the settlement or disposition was not fraudulent if it took place before the cause of action ‘accrued or had arisen’. The Court noted that this qualification in section 13B(4) had not been present in the other section,

204 515 South Orange [1995] (n 202) 53. 205 ibid 54. 206 515 South Orange Grove Owners Association v Orange Grove Partners (No 2) [1996] CKCA 2, 1 OFLR 003, see: www.paclii.org/ck/cases/CKCA/1996/2.html. 207 International Trusts Act 1984 (Cook Islands) s 13B(4).

378  Katy Barnett section 13B(3)(a), which had simply referred to when the cause of action ‘accrued’. Consequently, the Court interpreted the section as referring to two periods, for otherwise the words ‘or had arisen’ had no purpose: In our view the words ‘accrued or had arisen’ set up two periods. The word ‘accrued’ refers to 13 April 1994 and the words ‘or had arisen’ refer to a prior date upon which notice of the existence of the cause of action was given to the settlor. For the above reasons we incline to the view that the plaintiffs’ submission that s 13B(4) is to be construed in its ordinary sense as providing alternative dates before which a settlor must have settled or established a trust or made dispositions if seeking the exemptive protection of the section is a correct interpretation. That date is not just 13 April 1994 being the date of the accrued cause of action. The words ‘or had arisen’ could establish a much earlier date and the settlor would have to prove dispositions occurred prior to that earlier date.208

Consequently, the plaintiffs could also access this trust. As Smith has noted, ‘The two cases together make a cautionary tale indeed. Onshore judges do not like this kind of legislation. I agree with them, and I suspect that many others do as well’.209 Of course, the legislation has since been amended. The reference to ‘or has arisen’ has been deleted from section 14B(4), and it has been further deemed that a settlement or disposition is not fraudulent if it took place less than two years after the date on which the cause of action accrued, but the creditor has not commenced action within one year from the date of settlement or jurisdiction;210 or if it took place less than two years after the cause of action accrued and the creditor has commenced proceedings within one year in a court of competent jurisdiction but has not commenced proceedings within two years of the date of settlement or disposition in local courts.211 There is a constant pas de deux between the Courts and the legislature, all with a background setting of international pressure. It should also be noted for completeness that the onshoring of offshore trusts has also been achieved by laws deeming offshore trust assets to be part of a party’s assets or financial resources for the purposes of onshore family law.212

V. Conclusion Although it is typical when considering offshore trusts to think of the Caribbean or the Channel Islands, the unique characteristics and culture of South Pacific trusts bear closer analysis. The Caribbean and the Channel Islands are not the only jurisdictions to have produced exotic and unusual blooms in the garden of trusts law. This chapter has attempted to shed further light on this fascinating area of law.

208 515 South Orange [1996] (n 206). 209 Smith, ‘Give the People What They Want?’ (n 119) 2161. 210 International Trusts Act 1984 (Cook Islands) s 13B(3)(b). 211 ibid (Cook Islands) s 13K(1). 212 For further helpful discussion of this, see R Lee, ‘The Vulnerability of Trusts in Divorce’ in RC Nolan, KFK Low and TH Wu (eds), Trusts and Modern Wealth Management (Cambridge University Press 2018).

South Pacific Offshore  379 The most startling aspect of the South Pacific offshore trusts is the tendency towards ‘asset protection trusts’ which seek to shield assets from creditors and third parties. The use of these trusts in such jurisdictions reflects a desire to utilise sovereign power to legislate to draw investment and money into the jurisdictions in question. As HofriWinogradow has noted, these trusts benefit their users and those who administer them at the expense of third parties including creditors, spouses and others.213 It is no surprise that service providers (overseas law firms and lawyers) were behind the legislation in all three South Pacific jurisdictions considered in this chapter. Whether such regimes actually provide net benefits to locals is questionable; in fact, Niue’s choice to move away from being an offshore jurisdiction because of money laundering concerns seems to suggest any benefits are not worth the trouble. On a legal basis, this chapter has suggested that like other offshore trusts, the offshore trusts of the Cook Islands, Niue and Samoa raise questions as to whether they are really ‘trusts’ at all (to the extent that the settlor does not intend the assets to really leave his control): they may be either ‘illusory’ or ‘shams’. To return to the metaphor at the beginning of the chapter, these are blooms which are questionable, and they should be closely scrutinised.



213 Hofri-Winogradow,

‘Stripping of the Trust I’ (n 96) 558–59.

380

20 Identifying an Asia-Pacific Private International Law of Trusts RICHARD GARNETT*

I. Introduction The chapters in this collection consider trusts and trust-like forms in the Asia-Pacific region, examining the extent to which they resemble or have diverged from the traditional English model. In keeping with the comparative theme of such a study it is appropriate to address the situation where trust transactions or disputes cross international boundaries. Private international law or conflict of laws is the body of rules that applies to cases which contain a foreign element and considers three main questions: (i) whether the adjudicating court or ‘forum’ has jurisdiction and is willing to exercise jurisdiction; (ii) if so, what law should be applied; and (iii) whether the forum should recognise and enforce a judgment of another country. This chapter will concentrate on the issues of applicable law and jurisdiction ((i) and (ii) above)1 and a provisional assessment will be made of the extent to which such rules have led to increased recognition of cross-border trusts in the Asia-Pacific region. In wholly domestic cases differences between national laws on trusts, torts or contracts are normally only a matter of comparative curiosity but if a transaction crosses national boundaries, then the differing legal conceptions can come into conflict. Private international law rules, while not uniform across countries, are reasonably well settled in the areas of contract and tort. Trusts, however, pose a much greater challenge given that, historically at least, they are a legal form known only to common law jurisdictions. While some civil law jurisdictions have adopted analogous structures, few have the depth and versatility of the common law institution. Perhaps not surprisingly,

* Professor, Melbourne Law School, University of Melbourne. 1 An examination of the rules on recognition and enforcement of foreign judgments on trusts is beyond the scope of this chapter, but it is notable that such judgments (even where not for a monetary sum) are included in the recent Convention of 2 July 2019 on the Recognition and Enforcement of Judgments in Civil or Commercial Matters: hcch.net/en/instruments/conventions/full-text/?cid=137. A willingness of courts to recognise and enforce foreign judgments on trusts certainly opens the way for transportation of trust effects across international boundaries. There have, however, been few such cases in practice.

382  Richard Garnett the development of bespoke private international rules for trusts has been a slow process and one confined almost entirely to common law countries.2 The lack of equivalent principles in civil law states has therefore created a problem for global recognition of common law trusts, an issue that is also noticeable in the Asia-Pacific region. For the purposes of analysis in this chapter, the English common law model of a trust will be generally used, that is, the form where legal title to property is held by a trustee on behalf of a beneficiary with such property forming a separate fund in which the beneficiary has an equitable or beneficial interest. A living or inter vivos trust, in express form, is established by the owner of the property (the settlor) unilaterally declaring him or herself trustee of the property or the settlor transferring property to a third party to hold as trustee. Alternatively, the settlor may make provision for a trust in his or her will (a testamentary trust) to take effect upon the testator’s death. As will be seen, the private international law principles for inter vivos and testamentary trusts are similar but not identical. Given the general absence of private international law principles on trusts in civil law countries in the Asia-Pacific region, the focus in this chapter will be on the ­applicable rules in common law jurisdictions such as Australia, Hong Kong, Malaysia, New Zealand and Singapore. The strong influence of English decisions in this area has meant that there is a considerable uniformity of rules across these jurisdictions, although some divergences exist. The issue of applicable law will first be discussed, followed by jurisdiction.

II.  Applicable Law A.  Express Trusts On the topic of applicable law for express trusts, there is a divide between those AsiaPacific jurisdictions that have adopted the 1985 Hague Trusts Convention3 (Australia and Hong Kong) and the remainder that retain the common law rules. Since, however, the Convention is regarded as consistent with the common law on almost all points,4 the two sets of principles will be considered together. Also, since the United Kingdom has been a party to the Convention almost since its inception, English decisions on the instrument are also instructive. One purpose of the Convention is to clarify and unify the applicable law rules on express trusts in common law countries. A further purpose is to facilitate the recognition

2 A Briggs, Private International Law in English Courts (Oxford University Press 2014) 762–63; China, however, is a rare exception: a civil law country that has created applicable law rules for express trusts. See Law of the PRC on Application of Laws in Civil Relations With Foreign Elements (2010) art 17 discussed in Lingyun Gao, ‘Comments on the Chinese Law of Conflict of Laws Applicable to Trusts: In Comparison with the US Law and the Hague Convention’ (2014) 7 Fudan Journal of the Humanities and Social Sciences 483. 3 The Convention on the Law Applicable to Trusts of 1 July 1985, 1664 UNTS 311. 4 Briggs (n 2) 764 fn 140; for an analysis of the common law position prior to the Convention, see A Wallace, ‘Choice of Law for Trusts in Australia and the United Kingdom’ (1987) 36 International & Comparative Law Quarterly 454.

Private International Law  383 of common law trusts in civil law jurisdictions.5 Also, the Convention’s drafters, by not limiting the scope of trusts to the English common law form, presumably intended to encourage the use of trusts on a global basis. The Convention was implemented in Australian law in section 6 of the Trusts (Hague Convention) Act 1991 (Cth) and in Hong Kong in the Recognition of Trusts Ordinance (Cap 76). Under article 21 of the Convention, any Contracting State may reserve the right to apply the Convention only to trusts whose validity is governed by the law of a Contracting State. Neither Australia nor Hong Kong has made such a reservation and so both are required to recognise trusts regardless of whether they are governed by the law of a Contracting State. Such a position considerably widens the scope of operation of the Convention in those jurisdictions in respect of both other countries in the AsiaPacific region and globally. The scope of the Convention is covered in Chapter 1. Article 1 provides that the Convention specifies the law applicable to trusts. The term ‘trust’ is defined in article 2 as ‘the legal relationship created – inter vivos or on death by a person, the settlor, when assets have been placed under the control of a trustee for the benefit of a beneficiary or for a specified purpose’. Further, a trust has the following characteristics – (a) the assets constitute a separate fund and are not part of the trustee’s own estate; (b) title to the trust assets stands in the name of the trustee; and (c) the trustee has the power and the duty … to manage, employ or dispose of the assets in accordance with the terms of the trust.

It is generally accepted that the above definition includes the situation where a settlor transfers property to a trustee to be held on behalf of beneficiaries and where a settlor declares him or herself trustee of the property for beneficiaries (self-declaration of trust). In both cases assets ‘have been placed under the control of a trustee’. The definition in article 2 also goes beyond the traditional English law trust in certain ways. First, non-charitable purpose trusts appear to be included. Second, while the requirement that ‘the assets constitute a separate fund’ is designed to insulate the trust from challenges by creditors or heirs of the trustee, the beneficiary need not be granted a proprietary interest in the trust property that binds third parties. The beneficiary may have only a personal right against the trustee. Such an ‘obligational’ trust exists in some civil law jurisdictions.6 The clear intention of article 2, therefore, is to require a court of a common law jurisdiction, such as Australia or Hong Kong, to recognise a trust under the Convention even where the form does not comply with its domestic law notions of the institution.7 In that way, the Convention has the effect mentioned above of indirectly expanding

5 It is surprising that no civil law states or jurisdictions in the Asia-Pacific region have adopted the Convention. In the case of China, which has enacted its own bespoke choice of law rules for trusts (see Gao (n 2)), accession to the Convention may be considered unnecessary but for jurisdictions such as Japan, Korea and Taiwan the omission is harder to explain. 6 D Hayton, ‘The Increasing Significance of Conflicts of Laws Issues’ (2014) 20 Trusts & Trustees 1069, 1070. 7 D Hayton, ‘Reflections on the Hague Trusts Convention After 30 Years’ (2016) 12 Journal of Private International Law 1, 4.

384  Richard Garnett and exporting wider conceptions of trusts throughout the region. The rise of new, investor-friendly trusts in offshore jurisdictions that, for example, limit the rights of beneficiaries both to the trust property and in enforcing the trust, will further present Australian and Hong Kong courts with interesting recognition problems under the Convention. Article 3 provides that the Convention applies only to trusts created voluntarily and evidenced in writing. The aim of this provision is to confine the scope of the Convention to ‘express trusts’ as they are known in common law jurisdictions and generally to exclude constructive and resulting trusts. A constructive trust, however, that arises from a specifically enforceable contract in respect of the sale of land may be included as it would be evidenced in writing.8 Other constructive trusts, such as those imposed on a defaulting fiduciary, are almost certainly excluded as they arise from operation of law rather than voluntarily. In Hong Kong, however, the position is more complex as the legislature has followed the UK Parliament in extending the scope of the Convention9 to trusts created ‘by virtue of a judicial decision whether in Hong Kong or elsewhere’ and to ‘any other trusts arising under the law of Hong Kong’. While such provisions on their face seek to expand the operation of the Convention, it is unclear whether all constructive trusts are included. For example, a constructive trust imposed as a ‘remedy’ can be seen to have been created by judicial decision, whereas an institutional constructive trust may not be, as the court may be simply declaring the existence of something that has arisen by circumstances in the past.10 Interestingly in the Hong Kong and English cases concerning applicable law and constructive trusts, the Convention has been largely ignored, which possibly suggests a reluctance to extend its provisions beyond the field of express trusts.

i.  The Applicable Law: Determination and Scope The key provisions of the Convention relating to applicable law are found in articles 6, 7 and 8. Article 6 provides that a trust shall be governed by the law chosen by the settlor, which choice may be express or implied. Normally an express choice of law in the trust instrument will be obvious (‘this trust is governed by the law of Victoria’) but in determining whether an implied choice has been made the court may examine the instrument as well as the broader circumstances of the case. Article 6 closely approximates the position at common law.11

8 L Collins and J Harris (eds), Dicey, Morris and Collins, The Conflict of Laws, 15th edn (Sweet & Maxwell 2012) [29-006]. 9 Recognition of Trusts Ordinance (Cap 76) (1990) s 2(3). 10 Collins and Harris (n 8) [29-007] citing Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669, 716. See Ying Khai Liew, ‘Reanalysing Institutional and Remedial Constructive Trusts’ (2016) 74 Cambridge Law Journal 528. 11 Augustus v Permanent Trustee Company (Canberra) Ltd (1971) 124 CLR 245.

Private International Law  385 There have been several decisions in Australia and England concerning the principle of implied choice in article 6 and the factors to be considered.12 In Gorgeous Beauty Ltd v Liu,13 an English court, in the context of an inter vivos trust, found an implied choice of English law where the declaration of trust was in the English language,14 used English legal style and the assets of the trust were in the UK. Presumably, however, the language factor would be less significant where the conflicting legal systems were both common law countries in which English was the official language. The location of the trust assets, however, has been a significant factor in other cases,15 particularly where the property is immovable or a movable16 or where, in the case of a testamentary trust, this place coincided with the settlor’s domicile.17 The place of administration of the trust has also been regarded as an important factor,18 such as where a special purpose vehicle company is established in a country to hold the trust property.19 The inclusion of an exclusive jurisdiction clause in an inter vivos trust is also highly relevant.20 Importantly, article 6(2) also provides that if a law chosen under the article does not provide for trusts, the choice will not be recognised and article 7 must be used to select the applicable law. This provision is one of the few restrictions in the Convention on settlor autonomy in choice of the applicable law. Note however, similar to contracts, there is no requirement that the chosen law has any geographical connection with the trust. This last point is highly significant and allows, for example, a settlor to choose the law of an ‘offshore jurisdiction’ to govern its trust even where the settlor, trustee and beneficiary have no connection with that jurisdiction. This issue is discussed further below.21 It is possible, however, that the common law is more restrictive in this regard and does not allow ‘a free choice of law to govern a trust of foreign land’.22

12 For a criticism of the concept and a suggestion that the factors relied upon to discern an implied choice are better considered under art 7 (where no choice has been made): see Briggs (n 2) 768. 13 Gorgeous Beauty Ltd v Liu [2014] EWHC 2952 (Ch) [319]. 14 This point was also relied upon in JSC VTB Bank v Skurikhin [2019] EWHC (Comm) 1407 [208]–[209]. A Malaysian court gave weight to Indian terminology in a settlement in determining the governing law: Barkath Ali bin Abu Backer v Anwar Kabir bin Abu Backer [1997] 2 CLJ Supp 295 (common law). 15 Lindsay v Miller [1949] VLR 13; JSC VTB Bank v Skurikhin (n 14). 16 Sim Hok Khun v Henry Budi Harsono [2012] SGHC 256 [24]; Ochi v Trustees Executors Ltd [2009] NZHC 2477 [54] (both common law decisions). 17 Re Constantinou (dec’d) [2013] 2 Qd R 319. 18 Saliba v Falzon [1998] NSWSC 302; Chellaram v Chellaram [1985] Ch 409; Lindsay v Miller (n 15) (both common law). 19 Trisuryo Garuda Nusa Pte Ltd v SKP Pradiksi (North) Sdn Bhd [2017] 2 SLR 814 (Sing CA) (common law). 20 Attorney-General v Jewish Colonisation Association [1901] 1 KB 123 (common law). 21 See below, II.A.iii. 22 Briggs (n 2) 764 n 140, citing Re Piercy [1895] 1 Ch 83. That author supports the common law view given the degree of control that the lex situs and the courts of that country have over the property; see also Briggs (n 2) 767 n 143. cf Wallace (n 4) 471–72, who argues that the settlor’s freedom to choose the governing law also extends to this case.

386  Richard Garnett Article 7 addresses the situation where no law has been chosen. In such a case the trust shall be governed by the law with which the trust is most closely connected, which is effectively identical to the common law rule.23 In resolving this question, the court shall have regard to the following non-exhaustive factors, with no particular priority or order: a. b. c. d.

The place of administration of the trust as designated by the settlor.24 The location of assets of the trust.25 The place of residence or business of the trustee.26 The objects of the trust and the places where they are to be fulfilled.

Courts have concentrated on factors (a) to (c) above, and typically referred to more than one element in reaching their conclusion on applicable law. Other criteria, however, such as the residence of the settlor27 and the beneficiaries28 have also been influential.29 If application of the above criteria under article 7 would point to the law of a non-trust country, then the trust will fail. A court cannot therefore ignore the objectively most closely connected law (pursuant to which the trust would be invalid) in favour of the (validating) law of a trust jurisdiction.30 This principle places some limit on the capacity of a court to ‘impose’ a trust on civil law parties and jurisdictions. Article 8 deals with the important issue of the scope of the governing law of the trust. Specifically, such law applies to the validity of the trust and beneficial dispositions in the trust, its construction, effects and its administration. The governing law also extends to issues such as the capacity to act as trustee, the rights and duties of trustees (including fiduciary obligations), the power to remove trustees, the liability of trustees to beneficiaries, the variation and termination of the trust and distribution of the trust assets. The validity of beneficial dispositions in a trust has arisen in the context of the rules against perpetuities and accumulations of income. Such rules are considered as matters 23 Chellaram v Chellaram (No 2) [2002] EWHC 632 (Ch). 24 Re Carapiet [2002] EWHC 1304 (Ch) [12]; Re Dion Investments Pty Ltd [2013] NSWSC 1941 [22]; Ballard v Attorney-General [2010] VSC 525 [42]; Perpetual Executors & Trustees Association of Australia Ltd v Roberts [1970] VR 732 (common law). 25 In the case of land, this is particularly influential; Re Dion Investments (n 24) [22]; Hutchinson v Bank of Scotland Pty Ltd [2012] QSC 28; Schechter v The Commissioners for HM Revenue and Customs [2017] UKFTT 189 (TC) [118] (2), (5); Tod v Barton [2002] EWHC 264 (Ch) [36]. One commentator, by contrast, has suggested that this criterion be deleted from the Convention on the basis that at the time of creation of an inter vivos trust, the assets are often ‘only of nominal value’ and with testamentary trusts, the assets can be located in more than one jurisdiction: see Hayton, ‘Reflections on the Hague Trusts Convention’ (n 7) 13. 26 Hutchinson v Bank of Scotland Pty Ltd (n 25); Ballard v Attorney-General (n 24) [42]; Perpetual Executors & Trustees Association of Australia Ltd v Roberts (n 24) (common law); Schechter v The Commissioners for HM Revenue and Customs (n 25) [118] (3); Re Carapiet (n 24); Re Dion Investments (n 24); Soo v Soo [2016] NSWSC 1666 [16], [18]. 27 Re Carapiet (n 24) [12]; Soo v Soo (n 26) [16], [18]. 28 Hutchinson v Bank of Scotland Pty Ltd (n 25); Soo v Soo (n 26) [16], [18]. 29 Compare the position under Chinese law where, in the absence of choice by the settlor, the law of the place where the trust assets are located or the law of the place where the trust relationship is established shall apply: see Gao (n 2). For criticism of this ‘fixed connecting factors’ approach, see Huan Fang Du, ‘The Choice of Law For Property Rights in Mainland China: Progress and Imperfection’ in J Basedow and KB Pissler (eds), Private International Law in Mainland China, Taiwan and Europe (Mohr Siebeck 2014) 116. 30 Collins and Harris (n 8) [29-023], citing Berezovsky v Abramovich [2010] EWHC 647 (Comm) [183]. The same principle exists at common law: Jugoimport-SDPR v Westacre Investments Inc [2016] 5 SLR 372 (Sing CA).

Private International Law  387 going to the validity of the trust.31 The validity of the transfer of the beneficial interest in a trust to a third party is also governed by the applicable law.32 The common law principles on the scope of the applicable law are very similar to article 8, with one exception.33 First, it was clear at common law that the essential validity of a trust is governed by the applicable law of the instrument.34 On the question of variation of a trust, however, some courts applying common law principles of private international law have held that a court can order the variation of a trust under the rules of the forum even where such an order was not permitted under the applicable law.35 The better view, however, is that this approach should not be available under either the Convention or the common law given the clear nexus between variation and the trust instrument itself.36 Of course, if legislation of the forum requires application of local law on variation to all trusts, regardless of their governing law (see article 16 below) then local law may be preserved.

ii.  Limitations on the Applicable Law The law applicable to the trust however does not have unqualified operation, under either the Convention or the common law. Articles 15, 16, 48, 11(d) and 4 provide important exceptions to the governing law. Article 15 provides that the Convention does not prevent the application of the provisions of the law designated by the (choice of law) rules of the forum insofar as those provisions cannot be derogated from by voluntary act, relating in particular to the following matters: (a) (b) (c) (d) (e)

the protection of minors and incapable parties; the personal and proprietary effects of marriage; succession rights … especially the indefeasible shares of spouses and relatives; the transfer of title to property and security interests in property; and the protection of creditors in matters of insolvency.

The aim of article 15 is ‘to preserve the mandatory effect of the rules of law designated by the (forum’s choice of law rules) for matters other than trusts’.37 Such rules seek to ‘prevent property being given away in sham [trust] transactions before insolvency, divorce or death … to defeat creditors, heirs and spouses’.38 A common situation in which the article has been invoked is in matters of succession to property. The generally

31 Saliba v Falzon (n 18). 32 JSC VTB Bank v Skurikhin (n 14). 33 For a time, it was suggested that a different law applied to questions of administration from that governing other matters concerning the trust. The better view, however, is that the applicable law of the trust also applies to this question: Chellaram v Chellaram [1985] (n 18) 432. 34 Collins and Harris (n 8) [29-051]; Augustus v Permanent Trustee Company (n 11). 35 Re Ker’s Settlement Trusts [1963] Ch 553; Faye v Faye [1973] 1 WAR 66; Salkeld v Salkeld (No 2) [2000] SASC 296 [26]. 36 C v C [2015] EWHC 2699 (Ch); Tod v Barton (n 25) (English law applied as the applicable law of the trust). 37 Tod v Barton (n 25) [42]; Akers v Samba Financial Group [2017] AC 424 [40]. 38 Hayton, ‘Reflections on the Hague Trusts Convention’ (n 7) 6.

388  Richard Garnett accepted choice of law rules for passing of title to property by will are, in the case of personal property, the law of the domicile of the testator at death, and in the case of land, the lex situs of the property. So, if there are ‘forced heirship’ provisions under those laws, that is, rules that provide for minimum allocations of property to the testator’s children, they must be applied regardless of the law governing the trust. A similar analysis would be made under common law principles. A second situation under article 15 is where an application is made to the forum court to vary a divorce settlement, containing a trust, under the law of the forum. Such laws are considered to have mandatory effect and apply regardless of the applicable law of the trust.39 In that situation article 8(2)(h) of the Convention is overridden by­ article 15. From the point of view of common law analysis, application of forum law here would likely be seen as an instance of the operation of an overriding mandatory rule. Such a principle is defensible as a measure to prevent assets being ‘put beyond the reach of the [forum’s] courts and a former spouse’.40 Article 16 is a more general overriding mandatory rules provision, and states that ‘the Convention does not prevent the application of those provisions of the law of the forum which must be applied even to international situations, irrespective of rules of conflict of laws’. Unlike in the area of contracts, overriding mandatory rules of the forum have had little operation in trusts matters. Article 18 provides that the provisions of the Convention may be disregarded where their application would be ‘manifestly incompatible with public policy’. The public policy exclusion is well accepted in private international law, but in most areas it is rarely applied, and this has especially been the case with trusts. The authors of Dicey, Morris and Collins, however, suggest two cases of possible application. The first is where a trust is created over land in the forum but is governed by a law that has no or insufficiently strict rules against perpetuities or remoteness of vesting.41 The second situation is in the case of a foreign non-charitable purpose trust or a trust where beneficiaries have no rights to the trust property or to enforce the trust. Examples of such trusts may be found in several offshore jurisdictions, such as the Cayman Islands. Yet, it is arguable that an aim of the Convention, expressed in article 2, was to provide for recognition of a wider range of trusts beyond the traditional English model. If the doctrine of public policy was used to exclude other trust forms, then the goal of enhanced global recognition of trusts would be defeated. Simply because a foreign rule of trusts is ‘fundamentally different from a rule of English trust law … is not of itself a reason to find it contrary to English public policy’.42 A ‘self-settled spendthrift trust’ or a trust whose purposes were criminal under the law of the forum or infringed fundamental human rights stands in a different position.43 This approach would also likely apply in common law countries such as New Zealand, Singapore and Malaysia that have not adopted the Convention.

39 C v C [2004] EWCA Civ 1030 [30]–[31]. 40 Briggs (n 2) 770. 41 Collins and Harris (n 8) [29-035]. 42 D Russell, ‘The Recognition, Administration and Enforcement of Foreign Trusts’ (2013) 87 Australian Law Journal 699, 705. This author also suggests that a highly generous or even non-existent perpetuity period should not attract the public policy exclusion. 43 D Hayton, ‘Thoughts on Future Trust Developments’ (2016) 22 Trusts & Trustees 1002, 1004–05.

Private International Law  389

iii.  Matters Outside the Scope of the Convention The applicable law identified under articles 6 and 7 of the Convention is further qualified by articles 11(d) and 4. Article 11(d) provides that the trust assets may be recovered when the trustee in breach of trust has mingled trust assets with his or her own property or has alienated trust property. However, the rights and obligations of any third party holder of the assets shall remain subject to the law determined by the choice of law rules of the forum.

So, for example, an action may be brought against a trustee for dissipation of trust property under the law specified in articles 6 and 7 of the Convention. The rights, however, of any third party recipient of the trust property are governed by the law selected pursuant to the forum’s applicable law rules for transfer of property. In English common law jurisdictions, the relevant rule is the lex situs for both movable and immovable property. This point was recently reaffirmed by the UK Supreme Court in Akers v Samba Financial Group,44 where a settlor declared itself trustee over shares in Saudi Arabia and then transferred the shares to a third party in that country. The trust was governed by the law of the Cayman Islands. The Court noted that the law of Saudi Arabia would determine whether the effect of the transfer was to defeat the beneficiaries’ interest, that is, whether the third party would take free of such interests. Once again, the common law position is likely to be similar. Article 4, one of the most difficult provisions in the Convention, represents a ­potentially greater ‘carve out’ from the instrument’s provisions. Article 4 provides that the Convention ‘does not apply to preliminary issues relating to the validity of wills or of other acts by virtue of which assets are transferred to the trustee’. The first point to note is that the validity of the instrument that creates the trust, such as the will or deed, is excluded from the scope of the Convention. While the validity of deeds creating inter vivos trusts is rarely challenged, questions concerning the formal and essential validity of wills arise occasionally. In English common law jurisdictions, for immovable property, the essential validity of a will is governed by the lex situs of the property while for movable property, the law of the place of the testator’s domicile is applied. If the will is shown to be invalid, then the trust contained in the will also fails. Another matter that is excluded from the Convention under article 4 is where the settlor transfers property to the trustee to constitute the trust. The issue of whether the transfer was valid to pass title to the trustee is governed by the forum’s applicable law rules for transfer of property. As noted earlier, this rule will be the lex situs of the property in the case of immovables and movables. If the transfer does not validly pass title in the property, then the trust also fails. Similarly, questions as to the capacity of the settlor to transfer property to the trustee or whether the trustee has capacity to receive property are referred to the lex situs of the property.45 In the case of testamentary trusts, the same rule applies for immovable property46 but the law of the domicile of the testator is applied to his or her capacity to



44 [2017]

AC 424 [40]. and Harris (n 8) [29-014]–[29-016]. 46 Re Hernando (1884) 27 Ch D 284. 45 Collins

390  Richard Garnett dispose of movables.47 This issue is to be distinguished from the question of the capacity of the settlor to create the trust which, as noted above, is referred to the applicable law of the trust under article 8. The position at common law is again similar to that under the Convention.48 Interestingly, Singapore has departed from this position to expand the capacity of foreign settlors in the case of trusts closely connected with Singapore.49 Under the legislation a settlor is deemed to have capacity to create a trust or transfer movable property inter vivos on trust if he or she had capacity under the law of Singapore, the law of his or her domicile or nationality, or the proper law of the transfer. This provision only applies, however, if the settlor is not a citizen or domiciliary of Singapore, where the trust is expressly governed by Singapore law and all trustees are resident in Singapore. Trusts of immovable property remain subject to the general rule. Where, however, the transfer is valid to pass title to the trustee under the law applicable to the transfer then the fact that such law does not recognise the institution of a trust does not necessarily affect the trust’s validity, where two conditions are satisfied. The first is where the law applicable to the trust recognises the trust and the second is where any proceedings to enforce the trust are brought in a jurisdiction that also recognises the institution. In such a case, the provisions of the trust may be enforced by a personal action in equity by a beneficiary against any trustee resident in the forum under the ancient principle from Penn v Lord Baltimore.50 If however, the trust, once ‘launched’, is invalid under the law applicable to the trust, then enforcement in the forum is not possible.51 These principles have been recognised in many cases involving express trusts, both in the context of the Convention and under common law doctrine.52 In Akers v Samba Financial Group,53 a declaration of trust was held valid despite the assets of the trust being in a country that does not recognise the distinction between legal and equitable interests (Saudi Arabia). The court noted that such a trust could be enforced by an action in England.54 The UK Supreme Court considered that this conclusion conforms with the purpose of the Convention which ‘was to provide for the recognition of trusts in jurisdictions which did not know the institution’.55 In the Asia-Pacific region, the matter was recently considered by the Singapore Court of Appeal in Trisuryo Garuda Nusa Pte Ltd v SKP Pradiksi (North) Sdn Bhd.56 There, the Court had to consider an action to enforce an express trust over shares in an Indonesian company. Indonesian law does not recognise the institution of the trust and 47 Re Lewal’s Settlement Trusts [1918] 2 Ch 391. 48 Re Pearse’s Settlement [1909] 1 Ch 304. 49 Trustees Act (Chapter 337) (2005) s 90. 50 Penn v Lord Baltimore (1750) 1 Ves Sen 444; this doctrine is discussed more fully below under section III ‘Jurisdiction’. 51 Hague Trusts Convention, art 8. 52 See, eg, Akers v Samba Financial Group (n 37); Hiralal v Hiralal [2013] NSWSC 984 [170]; Re Dion Investments Pty Ltd (n 24) [12]. 53 Akers v Samba Financial Group (n 37). 54 ibid [21]–[34], [39]. 55 ibid [39] (Lord Mance), [102] (Lord Collins). See also Schechter v The Commissioners for HM Revenue and Customs (n 25). 56 [2017] 2 SLR 814.

Private International Law  391 would not permit such a claim. Where, however, the trust was governed by Singapore law there was no bar to the trust being enforced in the courts of that country. If the result were otherwise then, in the words of the court: A plaintiff seeking to hold a Singapore trustee to account would be effectively left without a remedy as the claim would be barred in [the non-trust country]. Singapore law recognises trusts and allows Singapore individuals and companies to act as trustees. It would be invidious for the Singapore courts to refuse their aid to parties who have situated their transactions in Singapore on the basis of Singapore law solely because the assets affected in the trust are foreign assets.57

As Harris notes, the conclusion that a trust may exist over assets in a non-trust jurisdiction is essential for the workability of international trusts.58 Such workability is enhanced by the accompanying Penn v Baltimore principle which paves the way for expansion of common law trusts into civil law countries, a development with strong relevance for the Asia-Pacific region as can be seen from the Trisuryo case above. The Penn v Baltimore principle however cannot assist where the trust is invalid under its governing law and neither can the courts of the non-trust jurisdiction give effect to the instrument unless, for example, that state is a party to the Convention. In Akers v Samba Financial Group, the UK Supreme Court also appeared to accept in obiter that a declaration of trust by a settlor falls outside the scope of article 4, and so is governed by the Convention.59 The reason for this conclusion was that a declaration of trust does not involve a transfer of assets to a trustee. Consequently, in the context of a declaration of trust, the law of the location of the property is rendered largely irrelevant in constituting the trust. Assuming the declaration is valid under the law applicable to the trust, that is the end of the matter. This conclusion has been criticised on the basis that a declaration of trust over assets and a transfer of assets to a trustee ‘functionally … serve the same purpose’,60 in the sense that they both are preliminary steps in the creation of the instrument. If Akers is correct on this point, then conceivably a settlor could declare him or herself trustee over assets in a foreign country which he or she could not have transferred to a third party under the lex situs. The restrictions on alienability under the law of the place of the assets could be circumvented. This conclusion has further interesting implications for a settlor in a common law Asia-Pacific jurisdiction wishing to create a trust over assets in a civil law country.

B.  Constructive and Resulting Trusts As noted earlier, trusts created by operation of law do not fall within the scope of the Convention and so remain governed by common law principles of private international

57 ibid [95]. 58 J Harris, ‘The Hague Trusts Convention after Akers v Samba’ (2018) 24 Trusts & Trustees 346, 349. 59 [2017] AC 424 [38]. 60 J Heydon and M Leeming, Jacobs Law of Trusts in Australia, 8th edn (LexisNexis 2016) 625. See also Clark and Whitehouse Ntrs [2012] CSOH 55.

392  Richard Garnett law. While there are no clear and universally accepted applicable law rules for constructive and resulting trusts, most courts and commentators focus on ‘the basis of the claim which is alleged to give rise to the trust’.61 According to this view, once the underlying obligation giving rise to the alleged trust is identified (whether it be tort, contract or property) then the relevant governing law rule for each category will determine whether a trust exists or should be declared.

i.  The Australian Approach For many years, however, the position under Australian law was different. Australian courts adopted the view that whenever an equitable right or remedy was invoked, the law of the forum applied without exception.62 While the expressed rationale for application of forum law was that equity acts in personam on the conscience of the defendant, in practice this approach was parochial and facilitated forum shopping by claimants. Fortunately, this view appears to have been rejected, or at least qualified, in more recent decisions.63 So, in Paramasivam v Flynn,64 the court noted that while traditionally Australian courts applied their own law to determine whether an equity exists between the parties, this approach should not apply where the basis of the obligation was a contract between the parties governed by foreign law. Further, in the case of an action for breach of fiduciary duty the court should have regard to the law of the country where the relevant breach occurred as part of ‘the factual circumstances’ in determining whether such a relationship existed or was breached. More recently, in Murakami v Wiryadi,65 the court had to consider an application for a constructive trust over land in New South Wales. The court endorsed the view in Paramasivam noting that in deciding whether a trust should be imposed, the primary focus should be on the underlying relationship between the parties. In that case the basis of the claim for the constructive trust was an implied marital contract governed by Indonesian law. Consequently, Indonesian law would be relevant in the decision to award a trust, although the ultimate decision on remedy would be for Australian law as the law of the forum.66

61 Collins and Harris (n 8) [29-077]. 62 National Commercial Bank v Wimborne (1978) 5 BPR 11,958, 982. 63 For an argument, however, that forum law should be applied to breach of fiduciary duty cases on the basis of public policy, see B Chen, ‘Foundations of Choice of Law in Fiduciary Obligations’ (2014) 10 Journal of Private International Law 171. 64 Paramasivam v Flynn (1998) 90 FCR 489, 503. 65 Murakami v Wiryadi [2010] NSWCA 7. 66 Forum law was, however, applied (without much explanation or justification) to determine whether a resulting trust existed in relation to foreign land in Damberg v Damberg (2001) 52 NSWLR 492. Contrast the decision in Whung v Whung (2011) 258 FLR 452 [198], where the lex situs was applied.

Private International Law  393

ii.  The Dominant Asia-Pacific Model By contrast, the prevailing view in the other Asia-Pacific common law jurisdictions is to identify the relevant obligation and then apply the choice of law rule for such obligation to the question of whether a constructive or resulting trust should be ordered.67 So, for example, a trust may arise in the context of a property transaction such as when a couple make contributions to the purchase price or improvements of a home, but legal title is vested in only one of them. In such a case, a common intention constructive trust or resulting trust may arise in favour of the contributing party, which is regarded as ‘institutional’. According to most judicial and academic authority, the availability of such a trust is determined by the lex situs of the property. In terms of AsiaPacific authority, both New Zealand68 and Australian69 decisions support this view. In Schumacher v Summergrove Estates Ltd,70 the New Zealand Court of Appeal considered that the alleged trust in this situation was ‘proprietary in nature’ as it ‘rest[ed] upon no antecedent obligation such as a contract or fiduciary duty’.71 The lex situs accordingly was applied. Another category of case where a constructive trust may arise is where there is a specifically enforceable contract. Here the law governing the contract determines whether a trust will be ordered.72 A different situation arises where the constructive trust is alleged to arise out of unjust enrichment or restitution, such as where a fiduciary uses his or her position to obtain an unauthorised profit or receives a bribe. In this case the applicable law rule for unjust enrichment applies: which will, in the case of a contract, be the governing law of the contract; in the case of a transaction concerning land or other property, the lex situs of the property; and in other cases, the law of the jurisdiction where the enrichment occurs. Similarly, where a company director acts in breach of his or her fiduciary duty, the law of the place of incorporation should determine whether a trust is ordered.73 In the area of bribes, there is Singapore authority that supports the view that the place of enrichment is the place where the bribe was received by the defendant. In Thahir Kartika Ratna v Pertamina,74 Pertamina, an Indonesian state-owned company contracted with two German companies for the provision of equipment on a development project. Thahir was an employee of Pertamina and allegedly received bribes from the German companies. Upon Thahir’s death, Pertamina sought to recover the bribes from his estate. The Singapore Court of Appeal found that the claim was not based in

67 See, for the two leading analyses of the issue, TM Yeo, Choice of Law for Equitable Doctrines (Oxford University Press 2004) and A Chong, ‘The Common Law Choice of Law Rules for Resulting and Constructive Trusts’ (2005) 54 International & Comparative Law Quarterly 855. 68 Schumacher v Summergrove Estates Ltd [2014] NZCA 412. 69 Piatek v Piatek [2010] QSC 412. 70 [2014] NZCA 412; the possible decision to the contrary in Lightning v Lightning Electrical Contractors (unreported, English CA, 23 April 1998) is doubted by many commentators, see Chong (n 67) 865, 875–83. 71 Schumacher v Summergrove Estates Ltd (n 68) [38]. 72 Luxe Holding Ltd v Midland Resources Holding Ltd [2010] EWHC 1908 (Ch). 73 Heydon and Leeming (n 60) 626. 74 Thahir Kartika Ratna v Pertamina [1994] 3 SLR (R) 312.

394  Richard Garnett contract but amounted to unconscionable conduct in equity. Consequently, the law to be applied was the place where the bribe was received, which was Singapore, where the deceased’s bank accounts were located. An Australian court also took a place of receipt approach to a constructive trust claim based on knowing receipt of trust property by a betting company that received moneys misappropriated by an employee from his employer.75 In another case of misappropriation of property,76 a Hong Kong court applied the lex situs of the shares or alternatively the place of receipt (which were both Hong Kong) in determining whether a constructive trust should be imposed. In Zhang Caikui,77 the defendant established a share ownership scheme on behalf of a group of employees in Mainland China consisting of shares in a Hong Kong company. He then created a discretionary trust over the shares, governed by the law of the British Virgin Islands, that curtailed the employees’ rights. A constructive trust was ordered under Hong Kong law in favour of the employees, primarily on the basis that the matter concerned title to property in Hong Kong.78

iii.  Adaptation of the Remedy A number of decisions in Hong Kong have adopted a principle first suggested in Dicey, Morris and Collins79 and then applied by the English courts80 for addressing the situation where the requirements for a constructive trust are established but the foreign law of the obligation does not recognise the concept. It was noted earlier under express trusts that where the applicable law of a trust is a country that does not know the institution, then the claimant beneficiary’s case for relief in the forum must fail. In the area of constructive trusts, however, courts have devised a creative strategy for preserving such relief for claimants: to search for an analogous cause of action and remedy under the foreign law, and then order a constructive trust where such parallel rights exist. The Hong Kong Court of First Instance applied this principle in Falcon Private Bank v Borry Bernard Edouard Charles Ltd.81 There, a Swiss bank, Falcon, mistakenly made payment to the Swiss account of an English company, Bawa, which then transferred the funds to a third party, Borry, in Hong Kong. Falcon sought a constructive trust against Borry as a knowing recipient in the breach by Bawa, which was granted under Hong Kong law, which was the place of receipt or enrichment.82 In reaching this conclusion the Court accepted that a relevant ‘foundation’ of a primary breach of trust on the part of Bawa was required to hold Borry liable as knowing recipient. The problem, however, was that Swiss law did not recognise the concept of

75 K & S Corporation Ltd v Number 1 Betting Shop Ltd [2005] SASC 228 [113]–[114]. 76 張才奎所託管中國山水投資有限公司股份及另一人 v. 張才奎及另一人 (Zhang Caikui’s Shares of China; Shanshui Investment Co Ltd v Zhang Caikui) [2015] HKCFI 776. 77 ibid. 78 ibid [87], [92]. See also, for a comparable New Zealand example, Americhip Inc v Dean [2015] NZHC 700. 79 Collins and Harris (n 8) [34-049]. 80 Kuwait Oil Tanker Co SAK v Al Bader [2000] 2 All ER (Comm) 271. 81 Falcon Private Bank Ltd v Borry Bernard Edouard Charles Ltd [2012] HKCFI 1039. 82 ibid [142], [143].

Private International Law  395 constructive trusts. But, the Court said, this did not matter where it could be shown that Bawa may be liable in contract or unjust enrichment under Swiss law, and such causes of action were the equivalent of liability as a constructive trustee under Hong Kong law.83 The Court approved the statement from Dicey, Morris and Collins,84 that [t]he appropriate analysis is to ask, whether under the lex causae, the defendant owes obligations which would impose on him under that law a liability to disgorge a benefit. If so, an English court would hold him liable as a constructive trustee when giving remedial effect to the substantive right arising under the lex causae.

The Hong Kong Court of Final Appeal in First Laser Ltd v Fujian Enterprise (Holdings) Co Ltd85 expressly approved the above analysis. First Laser involved a defendant who entered into an agreement for the sale of shares in two Mainland Chinese companies to the plaintiff. The shares were not sold because governmental approval in China was not granted. The defendant then sold the shares to a third party and the claimant sued the defendant for breach of contract and a constructive trust. The claim for the constructive trust was to restore the benefit of an enrichment with the relevant obligation arising in connection with a contract. Consequently, the law governing the contract (Mainland China, which was also the lex situs of the shares) determined whether a constructive trust should be awarded. Expert evidence showed that Chinese law did not recognise constructive trusts, but this was not a problem if it imposed analogous obligations to disgorge a benefit or fiduciary duties. If such principles existed, then a constructive trust could be imposed under Hong Kong law, with remedial effect being given to the foreign substantive right.86 The evidence of Chinese law, however, on compensation for fault in the case of invalid contracts did not reveal principles of liability analogous to those under Hong Kong law for disgorging a benefit.87 No constructive trust could therefore be awarded.

III. Jurisdiction The second major enquiry in private international law relevant to trusts is jurisdiction. Jurisdiction has two aspects: personal and subject matter. Personal jurisdiction refers to the capacity of a court to exercise its power over a particular defendant, while subject matter jurisdiction refers to the court’s power to determine the matter in dispute at all.

A. Principles To establish personal jurisdiction in trusts matters, all common law jurisdictions in the Asia-Pacific region employ similar, but not identical, principles. First, there is personal

83 ibid

[144]. See also the further proceeding at [2014] HKCFI 473 [33]. and Harris (n 8) [34-049]. 85 First Laser Ltd v Fujian Enterprise (Holdings) Co Ltd (2012) 15 HKCFAR 569. 86 ibid [66]. See also Hong Jing Co Ltd v Zhuhai [2011] HKCFI 1235 [78]. 87 (2012) 15 HKCFAR 569 [70]. 84 Collins

396  Richard Garnett jurisdiction under common law rules, which allows a forum court to adjudicate where the defendant is served with process while present in the territory of the forum. Second, there is statutory or extended personal jurisdiction where jurisdiction is based on service of process on a defendant resident outside the forum and the plaintiff ’s cause of action has a connection with the forum and the forum is otherwise appropriate for trial. The relevant grounds for statutory jurisdiction are not uniform across Asia-Pacific countries but fall into two groups. All common law jurisdictions in the Asia-Pacific permit service of originating process on a trustee of property who is outside the jurisdiction for execution of written (express) trusts if the trust is to be executed under the law of the forum.88 Most jurisdictions also permit service where the claim is for a constructive trust and the alleged liability of the person to be served arises out of an act that was done in the jurisdiction.89 As noted earlier, the forum court must also be an ‘appropriate forum’ to resolve the matter; and this will normally be required to be proven in an application for leave to serve the defendant outside the forum or on an application by the defendant for a stay or dismissal of proceedings against it. This requirement is expressed in two different ways in the five Asia-Pacific jurisdictions considered in this chapter. In all four jurisdictions apart from Australia, the English forum non conveniens test from the Spiliada case90 is applied.91 Such a test requires a court to decline to adjudicate where a foreign court is a more appropriate forum. Such a court is considered the natural forum or the jurisdiction with which the action and the parties have their most real and substantial connection. It is determined by application of connecting factors such as the location and residence of the parties and witnesses and the law governing the cause of action. Once a more appropriate forum elsewhere has been shown to exist, then the burden rests on the claimant to show that it would be denied justice or suffer a loss of ‘a legitimate personal or juridical advantage’ if the matter is not heard in the forum court. Australian law, by contrast, has taken a different path. An Australian court will only decline jurisdiction where it would be a ‘clearly inappropriate forum’ for trial,92 that is, the proceedings in Australia would be ‘oppressive in the sense of seriously and unfairly burdensome, prejudicial and damaging or vexatious in the sense of productive of serious and unjustified trouble and harassment’.93 The experience of the Voth test in Australia is that, as compared with Spiliada, it favours claimants over defendants in jurisdictional disputes, because of its requirement that the defendant show vexation and oppression.

88 See, eg (for Australia): Victorian (General Civil Procedure) Rules 2016 r 7.02(f); Singapore Rules of Court O 11 r 1(j); Hong Kong Rules of the High Court O 11 r 1(j); New Zealand High Court Rules r 6.27(f); Malaysian Rules of Court O 11 r 1(E). 89 See, eg, Australia: Victorian Rules r 7.02(l); Singapore, O 11 r 1(o); Hong Kong, O 11 r 1(p); New Zealand, r 6.27(l). Not all of the defendant’s conduct has to occur within the forum: Nabb Brothers Ltd v Lloyds Bank International (Guernsey) Ltd [2005] EWHC 405 (Ch) [83], [86]. Note that Malaysia and some States and Territories in Australia have not adopted this rule. 90 Spiliada Maritime Corporation v Cansulex Ltd [1987] 1 AC 460. 91 For New Zealand, see Club Mediterranee v Wendell [1989] 1 NZLR 216; for Singapore, see Rickshaw Investments Ltd v Nicolai Baron von Uexkull [2007] 1 SLR (R) 377; for Hong Kong, see The Adhiguna Meranti [1987] 2 HKC 126; for Malaysia, see American Express Bank Ltd v Mohamad Toufic Al-Ozeir [1995] 1 CLJ 273. 92 Voth v Manildra Flour Mills Pty Ltd (1990) 171 CLR 538. 93 Regie Nationale des Usines Renault SA v Zhang (2002) 210 CLR 491, 521.

Private International Law  397 There have been only a few Australian cases on appropriate forum and trusts, however, and so it is difficult to assess the impact of Voth in this area. In terms of subject matter jurisdiction, it was noted earlier that a court in a common law jurisdiction has the power to grant equitable in personam relief in respect of trusts over foreign land and property under the Penn principle. Such relief may include compelling a trustee to fulfil its obligations, enforcing the trust, or even determining if an express trust exists.94 The principle also extends to the granting of constructive and resulting trusts in respect of foreign land or other property where there is an alleged breach of a fiduciary relationship, fraud, or other unconscionable conduct in the eyes of equity.95 Under the principle, jurisdiction exists over any person such as a trustee or a fiduciary, who owes the relevant obligation and is present in the forum for service. Furthermore, jurisdiction exists even if the governing law of the trust or the obligation said to give rise to the trust is foreign,96 although such foreign law may have to be applied to determine the merits of the claim and may, in certain circumstances, defeat it.97 The decisions on jurisdiction and trusts will now be considered, with the most sensitive case of foreign land first.

i.  Foreign Land Applying the Penn principle, English courts have shown a clear willingness to enforce trusts in relation to foreign land, even where foreign law governs the trust.98 The status of this approach in the Asia-Pacific region is unclear, however, as there are decisions in both New Zealand and Singapore that reveal a surprising reluctance to accept jurisdiction in such circumstances. If this trend continues, then it would certainly limit the degree to which beneficiaries can assert their rights in trusts in the region. A good example of this situation is the decision of the New Zealand Court of Appeal in Schumacher v Summergrove Estates Ltd.99 This case involved a plaintiff claiming that land in Ireland was held on institutional constructive trust for her, based on contributions to the property she had made during her marriage. It was accepted by the parties that the New Zealand court had both personal and subject matter jurisdiction to hear the matter, but the Court nevertheless declined to hear the matter on the basis that Ireland was the more appropriate forum. The Court first noted that disputes over land in foreign countries should ordinarily be decided in the courts of the situs of the land as that was where the sovereign state

94 Couzens v Negri [1981] 1 VR 824; Singh v Kaur Bal [2008] WASC 62. 95 Deschamps v Miller [1908] 1 Ch 856. 96 See J Wass, ‘The Court’s in Personam Jurisdiction in Cases Involving Foreign Land’ (2014) 63 International & Comparative Law Quarterly 103. 97 First Laser Ltd v Fujian Enterprises (Holdings) Co Ltd (2012) 15 HKCFAR 569 [72]; Shanshui Investment Co Ltd v Zhang Caikui (n 76) [84]; Hiralal v Hiralal (n 52) [170]. An example would be where an express trust was governed by a foreign law that invalidated the trust. The position of constructive trusts, however, is more nuanced, see II.B.iii above. 98 Chellaram v Chellaram [1985] (n 18); Bharmal v Bharmal [2011] EWHC 1092 (Ch). 99 [2014] NZCA 412.

398  Richard Garnett had power over the property. Second, the applicable law was the lex situs of the property, Ireland. Ireland was also the place where the claimant performed the work that supported her trust claim. Next, and importantly, expert evidence of Irish law showed that any decision of a New Zealand court granting a constructive trust would not be enforceable in Ireland, as it concerned title to and possession of land in the latter country. Singaporean courts have been similarly reticent to exercise jurisdiction in trust cases involving foreign land. In Eng Liat Kiang v Eng Bak Hern,100 the plaintiff sought a declaration that the defendant held lands in Malaysia on express or resulting trust for him. The Court first noted that the Penn principle applied in Singapore and that a court has general subject matter jurisdiction to determine equitable claims in relation to foreign land.101 The Court, however, added a qualification to the rule: it does not apply if the law of the place where the property is situated prohibits the enforcement of the forum decree.102 (This point had also been made in Schumacher earlier in the context of the discretion to exercise jurisdiction.) Here, however, there was no evidence that a Malaysian court would not recognise a trust over Malaysian land granted by a foreign court, and so Singapore jurisdiction was unaffected. The defendant nonetheless was successful in persuading the Singapore court that Malaysia was a more appropriate forum. The key factors were that the land was situated in Malaysia and the law governing the action was Malaysian.103 Further, while a Singaporean court could make an in personam order binding the parties to the litigation, a Malaysian court could make an in rem decree binding the land itself.104 Such connections with Malaysia outweighed the links with Singapore, specifically the fact that both plaintiff and defendant were Singapore residents and nationals.

ii.  Local Land Where, however, a trust is invoked in relation to land in the forum, common law courts in the Asia-Pacific region appear more willing to adjudicate. In Murakami v Wiryadi,105 the New South Wales Court of Appeal declined an application to stay proceedings where a constructive or resulting trust was sought in relation to land (and some movable property) located in New South Wales. The constructive trust claim, as discussed earlier, was based on an implied marriage contract governed by Indonesian law even though it pertained to land in the forum. Yet the fact that foreign law may govern the cause of action did not mean that an Australian court was a ‘clearly inappropriate forum’ under the Voth test. Here the content of the foreign law was clear and the only matters in dispute were factual, relating to identification of the relevant property. The fact that land in Australia was involved was also likely influential. Similarly, in Piatek v Piatek,106 a stay was refused in the context of a claim for a constructive trust in relation to land in the forum based on financial and other

100 Eng

Liat Kiang v Eng Bak Hern [1995] 2 SLR (R) 851. [12]. [15]–[16]. 103 ibid [26]. 104 ibid [28]. 105 [2010] NSWCA 7. 106 [2010] QSC 412. 101 ibid 102 ibid

Private International Law  399 contributions by the claimant. What was particularly significant for the Queensland court was that Queensland law would apply to the claim as the lex situs of the property and that Polish courts would have no jurisdiction to determine ownership of foreign land. The claimant therefore had only one forum in which to vindicate its rights.107 The New Zealand Court of Appeal reached a similar outcome in Americhip Inc v Dean,108 although this case involved a claim for a constructive trust arising from a breach of fiduciary duty where an employee embezzled funds and invested them in land in New Zealand. Key factors in the Court accepting jurisdiction were the presence of land in New Zealand, that the defendant was domiciled in that country, and that a New Zealand court would not recognise a Chinese judgment relating to ownership of land in New Zealand. Again, as in Piatek, it would be ‘contrary to the interests of justice’ to deny the claimant access to the only forum in which recovery was possible.109 By contrast, an interesting example of a decision where a court declined to exercise jurisdiction despite a trust being asserted in relation to land in the forum was Yzerman v Schofield.110 There, both plaintiff and defendant had strong connections with the foreign country (England) and significantly, unlike Piatek and Americhip, the foreign court would have subject matter jurisdiction to grant equitable relief in relation to the land under the Penn principle.111 Of course, this outcome was only possible because the foreign court in question was in a common law country and had the same rule allowing subject matter jurisdiction in equitable claims. If a civil law country were involved, this result would be less likely, unless evidence of an analogous form of jurisdiction could be adduced. Likewise, in Christie v Foster,112 the New Zealand Court of Appeal very recently declined jurisdiction in the case of a constructive trust claim in relation to land in New Zealand. Not only were there significant connections with the foreign country, but related proceedings were already on foot there.113 Once again, it was accepted that the foreign court could exercise jurisdiction in relation to claims concerning land in New Zealand.114 The Yzerman and Christie cases therefore represent useful examples of international cooperation in cross-border trust litigation where courts repose confidence in each other to ensure that no denial of justice occurs. This theme will be referred to again below. Obviously, however, where there is only one forum in which recovery can be obtained, then a court has a duty to adjudicate or else injustice would result.

107 ibid [123], [126], [133]. 108 Americhip Inc v Dean [2014] NZCA 380. 109 In a subsequent hearing of the matter, the High Court confirmed this view, noting also that New Zealand law governed the claim as the lex situs and enforcement of any judgment would be required in that country: Americhip Inc v Dean [2015] (n 78) [56], [74]. 110 Yzerman v Schofield [2011] WASC 200. 111 ibid [67]. 112 Christie v Foster [2019] NZCA 623. 113 ibid [123]–[127]. 114 ibid [119]–[120].

400  Richard Garnett

iii.  Property other than Land Where property other than land is involved, the jurisdictional position for trusts in AsiaPacific countries is more nuanced and fact-specific, although again courts have tended to defer to the location of the assets of the trust, both because this will normally also be the place of the governing law and the best location for enforcement for claimants.115 One more general proposition, however, that can be identified is that where the law of the forum would recognise a trust but the law that would be applied in the foreign court would not, then the forum court should normally exercise jurisdiction. This observation makes an interesting comparison with the position of applicable law and express trusts, noted earlier, where courts applying the Hague Trusts Convention have generally refrained from choosing a law that would validate a trust over one that would not. It seems that in the context of jurisdiction, where no international instrument controls their decision-making, common law courts feel freer to uphold trusts and protect the interests of beneficiaries where possible. There are three decisions of Asia-Pacific common law courts that support this argument: one each in Singapore, New Zealand and Malaysia. In Trisuryo Garuda Nusa Pte Ltd v SKP Pradiksi (North) Sdn Bhd,116 an alleged express trust was created over shares in an Indonesian company, with the property to be held by a special purpose Singapore company. In proceedings brought by the beneficiary of the alleged trust, the Singapore Court of Appeal chose to exercise jurisdiction, primarily due to the weight of connections with Singapore, including the fact that Singapore law governed the trust. In addition, however, the Court was influenced by the fact that under stage 2 of Spiliada, the claimant would be denied justice in an Indonesian court because the institution of the trust was not recognised under that country’s law.117 An apparently similar approach and result is evident in the recent decision, Ivanishvili v Credit Suisse Trust Ltd118 where the Singapore Court of Appeal again refused to stay an action for breach of an express trust, where the trust was governed by Singapore law and there were strong connections with that country.119 The court noted that Singapore courts ‘are the most well-placed to decide issues of Singapore trust law’ compared with ‘Swiss courts operating in a civil law jurisdiction with no substantive doctrine of trusts’.120 It may be questioned however whether the Court was correct in bracketing Switzerland with Indonesia in its unwillingness to apply foreign trusts law, given that Switzerland is a party to the Hague Trusts Convention. Indeed, the dissenting judge in Ivanishvili, Chao Hick Tin SJ, noted that ‘there [was] no assertion that there will be any … great difficulties in applying Singapore law in a Swiss court’.121 115 See, eg, K & S Corporation Ltd v Number 1 Betting Shop Ltd (n 75) (bank accounts in the forum, jurisdiction exercised); Shanshui Investment Co Ltd v Zhang Caikui (n 76) (competing beneficial entitlements to shares in the forum, jurisdiction exercised); Sim Hok Khun v Harsono [2012] SGHCR 1 (shares in the foreign country, jurisdiction declined); compare Hiralal v Hiralal (n 52) (foreign law applicable to trust claim but such law not shown to be different to the law of the forum). 116 [2017] 2 SLR 814. 117 ibid [102]. 118 Ivanishvili v Credit Suisse Trust Ltd [2020] SGCA 62. 119 ibid [108], [115]. 120 ibid [110]. 121 ibid [154].

Private International Law  401 Similarly, in Ochi v Trustees Executors Ltd,122 a New Zealand court allowed a matter to continue in the courts of that country, in part because the alternative forum (Japan) did not recognise an oral declaration of trust and would have regarded the settlor’s promise to confer property rights on the claimant as an unenforceable oral promise of a gift. Once again, this was a case where the claimant had only one genuine forum in which it could obtain redress: the country where the trust could be enforced.123 Lastly, a Malaysian court124 declined jurisdiction in the case of a charitable trust created by a settlor in India on the ground that the property would fall under the jurisdiction of the religious courts in Malaysia and so the trust would fail. By contrast, in the New Zealand phase of the Ivanishvili litigation,125 the claim for breach of an express trust, governed by the law of Prince Edward Island and later, New Zealand, was not required to be litigated in New Zealand, as Switzerland was a party to the Hague Trusts Convention and could admit the claim. The New Zealand court seemed less swayed by the argument that only a common law court could properly determine trust matters. The court also had to consider claims for constructive trusts based on unjust enrichment and breach of fiduciary duty. While such claims were not known to Swiss law, equivalent causes of action and remedies existed which could be relied upon by the claimant in respect of the alleged losses.126 While the form of the claims would be different, the substance and outcome would be materially the same. Had no relief at all been available in the foreign country, the position would likely have been different.127 The approach of the New Zealand court in Ivanishvili is consistent with the earlier cases where the courts’ concern was to protect trust and beneficial interests from nonrecognition in foreign courts. Courts have taken an approach that emphasises substance rather than form, and so where relief exists under the law of a non-trust country that approximates to that of a common law court, particularly in terms of remedial outcomes, then the interest in comity and respect for foreign tribunals should prevail. It could almost be said that the trust interest is indirectly enforced in such a case. Where, by contrast, the foreign court would neither enforce the trust nor provide adequate alternative relief, then jurisdiction is properly retained in the forum. The approach of the Singapore Court of Appeal in Ivanishvili, however, seems insufficiently ‘trusting’ of the foreign court, particularly where there was no evidence that the foreign court would not apply Singapore trusts law and there were substantial connections with the foreign country. It is interesting to note the parallel here with the cases discussed above under applicable law where Hong Kong courts awarded constructive trusts for unjust enrichment where they were satisfied that equivalent relief existed under the foreign law of the cause of action. In a similar manner in the area of jurisdiction, New Zealand courts have been

122 [2009] NZHC 2477. 123 Of further relevance was a related proceeding in New Zealand with which the matter could be consolidated: ibid [57]. 124 Barkath Ali bin Abu Backer v Anwar Kabir bin Abu Backer (n 14) (HC Mal). 125 Ivanishvili v Credit Suisse AG [2018] NZHC 1755. 126 [2018] NZHC 1755 [149]. 127 ibid [148].

402  Richard Garnett willing to stay their proceedings where they are satisfied that the foreign court would award broadly comparable forms of redress to a trust claim with no major loss of rights to claimants. In both such situations an approach of substantial justice is detectable, with courts aiming to protect the trust interest and beneficiaries where possible.

iv.  Jurisdiction Clauses In commercial contracts, parties often seek to limit the risk of being sued in unforeseen and undesirable locations by including a jurisdiction clause, which stipulates in advance where litigation is to occur. The use of jurisdiction clauses in trust deeds is a more recent phenomenon, but for reasons of space, only a brief outline of the topic will be provided here. A jurisdiction clause in a contract or trust deed is typically enforced by a party seeking a stay of court proceedings in the forum that is brought in breach of the clause. In the area of commercial contracts, common law courts typically distinguish between exclusive and non-exclusive jurisdiction clauses, with the former not only identifying one country’s courts for adjudication but precluding suit in all others.128 Similar principles appear to apply in the trust context, according to the advice of the Privy Council in Crociani v Crociani.129 The court there accepted that a settlor may include an exclusive jurisdiction clause in an express trust, but a distinction exists between an exclusive jurisdiction clause and a ‘forum of administration’ provision. A forum of administration clause refers to the place where the trust should be administered in the sense of having its affairs organised. Such a provision would not preclude litigation in another country’s courts, unlike an exclusive jurisdiction clause. For an exclusive jurisdiction clause to be found, the word ‘courts’ should be used.130 Also, if the clause is intended to have a wider scope than to cover simply matters of trust administration, broader language should be used as in ‘the courts of Hong Kong shall have exclusive jurisdiction over all disputes in relation to the deed’. Consequently, in the Ivanishvili litigation discussed earlier, the Singapore Court of Appeal held that a clause providing that ‘the courts of … Singapore shall be the forum of administration [of the trust]’ was intended only to refer to the court or jurisdiction which would ‘settle disputes arising in the day to day administration of the trust’, not disputes between trustees and beneficiaries.131 Finally, the Privy Council in Crociani held that even where an exclusive jurisdiction clause was included in a trust deed, a beneficiary would have a stronger right to resist enforcement of the clause compared with a party to a commercial contract.132 While in the case of a commercial contract an exclusive jurisdiction clause is likely to have been freely bargained, in the case of a trust deed the settlor effectively imposes the provision



128 Global

Partners Fund Ltd v Babcock & Brown Ltd (in liq) (2010) 79 ACSR 383. v Crociani [2014] UKPC 40. 130 ibid [20]. 131 Ivanishvili v Credit Suisse Trust Ltd [2020] (n 118) [76], [79]. 132 [2014] UKPC 40 [35]–[37]. 129 Crociani

Private International Law  403 on a beneficiary. Also, the court has an inherent jurisdiction to supervise and intervene in the administration of trusts to protect the interests of beneficiaries.

IV. Conclusion This chapter has sought to identify some key themes in the private international law jurisprudence of common law jurisdictions relating to trusts in the Asia-Pacific region. What is noticeable is that courts seek to enforce trusts, where possible, whether they be express, constructive or resulting. The Hague Trusts Convention has certainly assisted in this process by providing a very broad, non-common law-centric definition of a ‘trust’ as well as a valuable structure for recognition of such instruments. Courts have also shown a willingness to enforce express trusts even where the property the subject of the trust is in a non-trust jurisdiction. In the area of constructive trusts Hong Kong courts, in particular, have granted such orders even where the law of the obligation knows no such institution or remedy, provided that analogous rights and obligations exist. This spirit of international comity is preferable to the approach previously taken in Australia where equitable rights and remedies were governed almost exclusively by the law of the forum. In the area of jurisdiction, courts have normally deferred to the courts of the situs of the property where foreign land is involved; but in the case of local land or other property, they have been much more flexible and nuanced in their approaches. So, where a claimant has effectively only one forum in which to vindicate its rights, then a stay of forum proceedings will be refused. Where, however, the foreign court will provide adequate rights and remedies to the claimant, although different in form from those of the forum, the forum may be more willing to decline jurisdiction as no injustice is caused. The overall picture, therefore, is that Asia-Pacific common law jurisdictions have taken strong steps to uphold trust and beneficiary interests in cross-border litigation, which suggests that the trust institution itself is in a healthy condition.

404

INDEX applicable law see choice of law asset protection trusts, 67, 68, 354, 365, 368–71, 372, 375–8, 379 Australia: beneficiary principle, 4, 31–2, 35–8 charitable trusts, 21, 281, 360 colonial history, 3 common law heritage, 2 conflict of laws, 13, 382 choice of forum, 396–7, 398–9 constructive trusts, 392, 393, 394, 398–9 land, 398–9 constructive trusts conflicts of law, 392, 393, 394, 398–9 remedial, 101, 154 discretionary powers, 21–4 administration right, 4, 19–20, 23, 24–34 exhaustive, 22 non-exhaustive, 22 objects, 22–4 use, 21–2 English law and, 3–4 equitable ownership, 21–2 express trusts enforceability, 37 features, 28–9, 30–2 GDP ranking, 2 Hague Trust Convention and, 372, 382, 383 right to due administration access to information, 26 chance of property benefit, 27–8 derivative proceedings, 25–6 discretionary powers, 4, 19–20, 23, 24–34 equitable relief, 25, 34–5 fiduciary powers, 32–3 intentions, 33–4 objects’ rights, 28–34 opportunistic objects, 34–5 replacement of trustees, 26–7 standing, 33 suspending entitlement to trust property, 28–30 standing, 33, 281

Bangladesh: benami, 158 British colonialism, 155–6 charitable trusts, 155–6, 157, 159–60, 168, 172 company law, 162–3 constructive trusts, 156 criminal breach of trust, 167–8 development organisations, 172–3 employment law gratuity funds, 165–6 pension funds, 166 profit participation, 166–7 provident funds, 164–5 trusts and, 164–7 welfare funds, 167 enemy property, 171 escrow, 163 fiduciary duties, 162–3 fund management, 163–4 GDP ranking, 2 Hindu trusts law, 170–2 Indian law of trusts and, 160–1 legal pluralism, 14 National Savings Scheme, 173 Prize Bonds, 173 special purpose religious trusts, 172 statute law, 5–6 testamentary trusts, 157 trusts, 7, 155–73 certainty, 158 company law and, 162–3 criminal breach, 167–8 definition, 155, 156–7 employment law and, 164–7 English law and, 7, 158, 159–60 fund management, 163–4 Hindu endowments, 170–2 jurisdiction, 155–6 Trusts Act (1882), 156–8 benefits, 161 drawbacks, 162 waqf, 157, 159, 168–70 benami, 7, 124, 125, 149, 150–1, 158

406  Index Bowring Treaty (1855), 295, 296 Buddhism, 110, 176, 179 Canada: matrimonial property, 154 perpetuity rule, 367 remedial constructive trusts, 101 unjust enrichment, 154 Cayman Islands, 388 charitable trusts see also waqf Australia, 21, 281, 360 Bangladesh, 7, 159–61, 168, 172 beneficiary principle, 35–6 charitable purposes, 159, 160–1 China, 10–11, 271–89 conflict of laws, 401 English trusts, 10, 15, 155, 159–60, 281 Hindu endowments, 170–2 Hong Kong, 65–7 India, 124, 160–1 Japan, 222–3, 225 offshore trusts, 363, 364–5, 367 onshore trusts, 359–60 perpetuities, 367 Sri Lanka, 179, 180 Taiwan, 15 Thailand, 304, 308–9 China see also Hong Kong banking regulators, 284 charitable trusts, 10–11, 16, 271–89 categories, 271 charitable undertakings, 277–8 effecting settlors’ wishes, 278–81 institutional objectives, 276–81 introduction, 272, 273, 276 preventing abuse, 277 private law concerns, 284–6 public law concerns, 286–8 public participation, 286 public v private law, 11, 272–3, 275, 276–81, 282–3 public welfare trusts and, 273–5, 282–3, 285 recording, 284–5 regulatory framework, 283–8 settlors’ powers, 279–80, 282–3 specialised regulators, 284 standing, 280–1 supervision, 280, 287–8 terminology, 274–5 civil law, 57 commercial trusts, 216, 276 Confucianism, 60 cy-près schemes, 271, 277, 278

forced heirship, 71 GDP ranking, 2 hereditary landholding, 59–63 English law and, 61–3 HNWI entrepreneurs, 69–70 Hong Kong financial hub, 66–74 implied trusts and, 9, 395 investment funds and, 337 Ming Dynasty, 59 public welfare trusts, 271–2 charitable trusts and, 273–5, 282–3, 285 settlors’ powers, 9, 279 trust law genealogy, 2 trust purposes, 9 choice of forum: chattels, 400–2 common law, 395–6 constructive trusts, 397 foreign land, 397–8 jurisdiction clauses, 402–3 land, 397–9 local land, 398–9 overview, 395–403 principles, 395–7 choice of law: constructive trusts, 391–5 Australian approach, 392, 394 dominant model, 393–4 Hong Kong, 394–5 creditor protection and, 387 declarations of trust, 390, 391 determination connections, 386 express trusts, 384–6 geographical connection, 385 language, 385 settlors’ choice, 384 variation of trusts, 387 divorce and, 388 express trusts, 382–91 forced heirship and, 388 Hague Trust Convention, 382–91 limitations, 387–8 mandatory rules and, 388 marriage and, 387 overview, 382–95 perpetuities and, 388 property transfers, 390–1 protection of minors and, 387 public policy and, 388 scope, 386–7 sham trusts, 387–8 spendthrifts trusts, 388 succession rights, 387 validity of trusts, 390–1

Index  407 conflict of laws see choice of forum; choice of law; private international law Confucianism, 5, 60, 97, 105–16, 119 constructive trusts: applicable law, 391–5 Australian approach, 392, 393, 394 dominant model, 393–4 Hong Kong, 393–4 Australia see Australia Bangladesh and, 156 China and, 9, 395 choice of forum, 397 classes, 80–6 common intention, 100, 101, 102–3, 111–14, 152 Hague Trust Convention and, 384 Japan and, 9, 224–5, 229 Malaysia see Malaysia matrimonial property, 151–4 New Zealand, 40, 50–4, 153–4, 393, 399 Pakistan, 149–54 Philippines, 7–8, 181–94, 198–9 private international law and, 13, 391–5 remedial trusts, 91–2, 93, 100–1, 154 Singapore, 87, 88, 111–16, 393–4 Sri Lanka, 7–8, 181–94 Cook Islands: accumulations, 367 English law, 356 international trusts, 369 offshore trusts, 2, 13, 353, 355, 356–7 asset protection, 369–71, 375–8 charitable purposes, 364 massive discretion, 365 protectors, 362–3 Saunders v Vautier and, 367–8 settlors’ control, 362–4 spendthrift trusts, 365 trustee exemption clauses, 366 origins of trusts, 368 perpetuities and, 367 self-government, 356 tax haven, 356 cy-près schemes, 171, 271, 277, 278

English law: Australia and, 3–4 Bangladeshi law and, 7, 158, 159–60 benchmark, 14–15 certainty of trusts, 158 charitable trusts, 159–60, 281 conflict of laws, 382 choice of law, 385, 391 foreign land, 397 forum non conveniens, 396 jurisdiction clauses, 402 constructive trusts, 84, 87, 88, 89–90, 93 common intention, 101, 152 matrimonial property, 152–3 unjust enrichment, 152 Cook Islands and, 356 definition of trust, 14–15, 134–6, 315, 322, 383 dual ownership, 3–4, 7, 12, 127, 131, 138, 139 history of trust law, 10, 314–15 Hong Kong and, 3–4, 61–3 illusory trusts, 48–9 implied trusts, 99–100, 105–8 Indian law and, 124–40 Law Commission, 107–8 legal v equitable ownership, 181 Malaysian law and, 3–4, 5, 77, 78, 94–5 New Zealand and, 3–4 Samoa, 358 Saunders v Vautier, 73, 230, 231, 367–8 settlors’ control, 374 sham trusts, 375 Singapore and, 3–4 Sri Lanka and, 6, 7–8, 175, 177, 190 Thai law and, 297 Thai trust law and, 12, 294, 298–9, 300–2, 306–7, 309–11 transplanting trust law, 123 trustees’ duty of care, 72 unit trusts, 217 uses of trusts, 15 women’s property, 106–8 escrow, 163 estoppel, 54

discretionary trusts: Australia see Australia Hong Kong, 64–5 New Zealand, 39–55 uncertainty, 39 Draft Common Frame of Reference (2009), 1, 247 dual ownership, 3–4, 7, 12, 127, 131, 138, 139

fideicommissum, 178, 183 fiduciary duties: Australia, 32–3 Bangladesh, 162–3 company directors, 84 Japan, 228–9 Malaysia, 84, 88 New Zealand, 47 original concept, 88 Sri Lanka, 188

East Asian Institute, 110 East India Company, 124

408  Index Financial Action Task Force, 234 forced heirship, 71, 221–2, 234, 354, 388 forum non conveniens, 396 France: agency, 331 fiducie, 247 guardianship, 334 Siam and, 295–6, 297 Vietnamese law and, 330, 331, 334, 335 gender see women German law, 331, 334, 358 Hague Trust Convention (1985): choice of law, 382–91 determination, 384–6 excluded matters, 390–1 limitations, 387–8 mandatory rules, 388 property transfers, 390 public policy and, 388 scope, 386–7, 390–1 third party transfers, 390 constructive trusts and, 384, 391 cross-jurisdiction perspective, 1 definition of trust, 225, 383 express trusts, 384 membership, 233, 372, 382, 383, 384, 388, 400 offshore trusts, 372 validity of trusts, 390–1, 400 Hanafi school, 169 Hong Kong: 21st century, 66–74 anti-Bartlett clauses, 72 charitable trusts, 66–7 corporate trusts, 66–7 financial hub for mainland China, 66–74 offshore settlor-directed trusts, 68–9, 73–4, 75 pension schemes, 66–7 pre-IPO trusts, 69–74 private trusts, 66–7 settlor control, 71–4 trust categories, 66–8 1842–1970s non-charitable perpetual trusts, 61–3 trust history, 58–63 1970s-80s economic boom, 63–6 charitable trusts, 65–6 offshore trusts, 64–5 private family trusts, 63–5 ancestral worship, 62–3 Asian Tiger, 58 Chinachem Charitable Foundation, 66

colonial history, 3, 58–63 common law, 57, 58–9 conflict of laws, 13, 382 constructive trusts, 384, 394–5, 401, 403 customary law applicability, 59 hereditary landholding, 59–63 Tsos and Tongs, 59–63 discretionary trusts, 64–5 English law and, 3–4, 61–3 financial centre, 57 GDP ranking, 2 Hague Trust Convention and, 372, 382, 383, 384 National Security Law, 57, 74 offshore trusts, 64–5, 67–9, 73–4, 75 one country, two systems, 57 perpetuities, 59, 60, 61–3 Po Leung Kuk trust, 65 Singapore and, 104 Stock Exchange, 70 trust history, 4–5, 57–75 21st century, 66–74 1842–1970s, 58–63 1970s-80s, 63–6 Tung Wah Hospital, 65 illusory trusts: comparative law, 48–50 New Zealand, 44–5, 49 implied trusts see also constructive trusts China and, 9, 395 East Asia and, 9 English law, 99–100, 105–8 India, 192 Japan, 9, 224–5, 229 meaning, 99–100 Philippines, 197–9 Singapore, 5, 99–116 Sri Lanka, 7–8, 181–94 India: Bangladeshi law of trusts and, 160–1 benami transactions, 124, 125 charitable trusts, 124, 125, 160–1 colonial judicial attitudes, 128–9 GDP ranking, 2 implied trusts, 192 Indian Trusts Act (1882), 133–40 case law, 138–40 definition of trust, 133–6, 140, 141 modern debates, 140–1 origins and innovations, 134–8 Pakistan and, 149–50 Sri Lanka and, 175, 180

Index  409 substantive rules, 137–8 updating, 162 pension funds, 162 statute law, 5–6 trust law transplant, 6–7, 123–41 19th century colonial origins, 124–9 codification debate, 129–33 trust-like devices, 124–5, 128, 149 waqf, 124, 125, 132, 160 Indonesia: banking, 313 definition of trust, 313 Dutch colonialism, 319 GDP ranking, 2 land law, 318–22 building rights, 320 customary law, 318–19 Employment Creation Law, 328 foreigners, 327–8 leasing, 321–2 nationality, 319 ownership, 319 trust like devices, 313–14, 315–17, 322–8 use rights, 320–1 waqf, 315–17, 326–7 legal pluralism, 14 matrimonial property, 145–6 property law, 317–18 trust like devices, 11–12, 313–14 foreigners, 327–8 land transactions, 313–14, 315–17, 322–8 Institute of East Asian Philosophies, 110 International Consortium of Investigative Journalists, 375 International Monetary Fund (IMF), 2 Iran: matrimonial property, 146 Islam: customary law, 145 divorce, 146–7 Hanafi school, 169 Kaikuli, 179 matrimonial property, 179 Pakistani family law and women, 7, 143–54 personal law, 144, 146–7 Sri Lanka, 176 Thesawalamai, 178, 179 waqf, 7, 124, 125, 132, 157, 159, 160, 168–70, 313, 315–17, 326–7 women’s rights to matrimonial property, 144–6, 151–4 Isle of Man, 374 Japan: anti-terrorism, 234 beneficial interests, 225–6

breach of trust, 229–30 charitable trusts, 222–3, 225 choice of law, 233 colonialism, 216 commercial trusts, 215, 216–19 creation of trusts, 223–5 declaration of trusts, 223 definition of trust, 15, 225 employee benefit trusts, 218 family trusts, 215, 220–1 forced heirship, 221–2, 234 GDP ranking, 2 history of trusts, 2, 9–10, 216–20 implied trusts and, 9, 224–5, 229 independence of trust property, 226–8 international trusts, 232–4 abuse prevention, 234 recognition, 233–4 investment trusts, 217 joint accounts, 233 land trusts, 218 lifetime gifts, 220 loan trusts, 217 modification of trusts, 230–1 money laundering, 234 money trusts, 217 non-charitable purposes, 225, 234 pension trusts, 217–18 private purpose trusts, 9 public welfare trusts, 271 real estate trusts, 218, 224 securitisation, 218–19 security trusts, 219 spendthrift trusts, 231–2, 234 successive beneficiaries trusts, 219–20 termination of trusts, 230 testamentary trusts, 223 Trust Act (1922), 215, 216 Trust Act (2006), 215, 219–20 trust contracts, 223–4 trust purposes, 9, 215 trustees bankruptcy, 227 conflicts of interest, 228–9 death, 227 fiduciary duties, 228–9 will substitutes, 219–20 jurisdiction see choice of forum Law Commission, 107–8 legal pluralism, 12, 14 limitation periods: delaying running of time, 92–4 Malaysian constructive trusts, 5, 77–95

410  Index Malaysia: colonial history, 3, 77 conflict of laws, 13, 382 choice of forum, 398 choice of law, 388 foreign land, 398 constructive trusts class 1, 80, 82–6 class 2, 80–2 classes, 80–6 directors’ misappropriation, 83–4 directors’ unauthorised profits, 87–9 fraud, 80–2, 84–6, 92–4 IMDB saga, 77–8 Limitation Act s 22(1), 84–6 limitation periods, 5, 78–9, 80–94 proprietary claims against 3rd parties, 89–91 remedial trusts, 91–2, 93 English law and, 3–4, 5, 77, 78, 94–5 GDP ranking, 2 Hague Trust Convention and, 388 limitation periods, 78 constructive trusts, 5, 78–9, 84–94 delaying running of time, 92–4 matrimonial property, 145 Privy Council appeals and, 77 Singapore and, 98, 104, 108–9 matrimonial property: constructive trusts, 151–4 Indonesia, 145–6 Islam, 144–6, 179 Pakistani law, 143–54 Ming Dynasty, 59 money laundering, 209–10, 224, 234, 358, 376, 379 Nauru: offshore trusts, 355 Netherlands: colonialism, 319 New Zealand: bundle of rights, 46 colonial history, 3 common law heritage, 2 conflict of laws, 13, 382, 388 choice of forum, 397, 399, 401–2 constructive trusts, 393, 399 foreign land, 397–8 local land, 399 constructive trusts, 40, 50–4 applicable law, 393 choice of forum, 399 reasonable expectations, 153–4 Cook Islands and, 356 English law and, 3–4 estate duty, 41 estoppel, 54 family trusts, 40

GDP ranking, 2 gift duty, 41 Hague Trust Convention and, 388 insolvency, 42 Law Commission, 42, 43 misuse of trusts, 4, 41–3 Niue and, 357–8 recent trust developments, 40 Samoa and, 358 threats to trust principles, 43–54 accountability gaps, 43–50 extensive powers, 43–50 illusory trusts, 44–5, 49 powers as property, 46–8 third party contributions to trust property, 50–4 trust principles, 4, 39–55 basic principles, 52–3 threats, 43–54 Trusts Act (2019), 3, 42, 75 trusts landscape, 40, 41–3 unjust enrichment, 54 Niue: accumulations, 367 New Zealand territory, 357–8 offshore trusts, 2, 13, 353, 355 asset protection, 371 charitable purposes, 364–5 massive discretion, 365 overview, 357–8 protectors, 363 Saunders v Vautier and, 368 settlors’ control, 362–4 spendthrift trusts, 365 trustees’ duties, 366–7 perpetuities and, 367 OECD, 357 offshore trusts: asset protection trusts, 354, 365, 368–71, 372, 379 certainty of objects, 360 charitable purposes, 364–5, 367 contractualisation, 361 Cook Islands see Cook Islands downsides, 13, 354 enforcers, 353, 361–4, 373 forced heirship and, 354 Hong Kong, 64–5, 68–9, 73–4, 75 illusory trusts, 361–2 increase, 354 jurisdictions, 2 map, 355 massive discretion, 364–5 Nauru, 355 Niue see Niue

Index  411 onshore trusts and differences, 361–72 trust history, 359–61 ‘onshoring,‘ 375–8 orphan structures, 353–4, 364 overview, 13–14, 353–79 perpetuities and, 367, 388 private international law, 354 firewalls, 371–2 protectors, 353, 361–4, 373 trustees and, 363 public policy and, 13, 372 Red Cross trusts, 354, 364, 368, 373 Samoa see Samoa Saunders v Vautier and, 367–8 settlors’ control, 361–4, 373–4 sham trusts, 375 South Pacific concepts, 359–72 spendthrift trusts, 365, 368–71 structures, 353–4 tax avoidance, 354 Tonga, 355 trust principles and, 372–8 trustee exemption clauses, 365–7 use, 359 whether really trusts, 372–5, 379 Ong Teng Cheong, 110 Pakistan: benami, 149, 150–1 constructive trusts, 149–54 women’s inheritance rights, 150, 151 women’s rights to matrimonial property, 151–4 distributive justice, 16 GDP ranking, 2 legal pluralism, 14 statute law, 5–6 trust law, 149–51 trust-like devices, 149 women and Muslim family law, 7, 143–54 inheritance rights, 150 women’s rights to matrimonial property, 144–7 constructive trusts, 149–54 divorce, 146–7 Islamic law, 144–6, 151–4 Muslim personal law, 146–7 private contracts, 148 Panama Papers, 354, 358 Paradise Papers, 354–5 perpetuities: Australia, 29 Bangladesh, 157, 169 choice of law and, 388 conflict of laws and, 386–7, 388 Hong Kong, 59, 60, 61–3

offshore trusts, 367, 373, 388 Sri Lanka, 180 Thailand, 11, 308–9 Vietnam, 332 Philippines: constructive trusts, 7–8, 181–94, 198–9 corporate trusts, 202–8 Anti-Dummy Law, 203 competition law, 212 Foreign Investment Negative List, 202 gift checks, 211 money laundering, 209–10 nationality, 203–4 one-person corporations, 208 qualifying shares, 205–6 real estate investment, 211–12 sale of shares, 206 securitisation of assets, 210–11 taxation, 206 trust receipts, 208–9 trustees in liquidation, 207–8 voting trusts, 207 express trusts, 196–7 formalities, 199–200 foreign investment regulation, 202–4 GDP ranking, 2 implied trusts, 197–9 legal influences, 6 notorisation of trust agreements, 200 offshore trusts, 201 prescription, 197 Securities and Exchange Commission, 204, 205, 210 special purpose trusts, 210–11 statute law, 5 trustees licences, 200–1 liquidation, 207–8 trusts agreements, 199–200 concept, 195 corporate settings, 202–8 definition, 196 nationality, 203–4 overview, 196–9 taxation, 201–2 uses, 8, 195–212 Principles of European Trusts Law (1999), 1 private international law: applicable law see choice of law choice of forum, 381, 395–403 common law jurisdictions, 382 constructive trusts, 391–5 effect, 13–14, 381–403 express trusts, 382–91

412  Index Hague Convention see Hague Trust Convention issues, 381 land, 397–9 offshore trusts and, 354 firewalls, 371–2 Quebec: security trusts, 247 Red Cross trusts, 354, 364, 368, 373 Roman law: fideicommissum, 178, 183 Samoa: accumulations, 367 English law and, 358 German colony, 358 New Zealand control, 358 offshore trusts, 2, 13, 353, 355 asset protection, 369–71 charitable purposes, 364–5 massive discretion, 365 overview, 358–9 protectors, 363–4 Saunders v Vautier and, 368 settlors’ control, 362–4 spendthrift trusts, 365 trustees’ duties, 366 perpetuities and, 367 secret trusts, 80, 82, 95 security trusts: France, 247 Quebec, 247 South Korea, 10, 237–49 sham trusts: illusory trusts and, 44–5 Singapore: additional buyer’s stamp duty, 99 Builds to Order (BTOs), 97–8 citizenship education, 109 colonial history, 3, 98, 103 common law heritage, 2 conflict of laws, 13, 382 choice of forum, 397, 398, 400 choice of law, 390–1, 393–4 foreign land, 397, 398 jurisdiction clauses, 402 Confucianism, 5, 97 implied trusts and, 105–16 renaissance, 119 constructive trusts, 87, 88 applicable law, 393–4 bribery, 393–4 common intention, 111–14 family unit basis, 111–16 demographics, 117 English law and, 3–4

family values common intention constructive trusts, 111–14 maintenance of parents, 118 presumption of advancement, 113–16, 117–18 sustainability, 116–18 trusts and, 16 GDP ranking, 2 gender inequality constitutional inequality, 116 implied trusts and, 102–5, 113–16 Hague Trust Convention and, 388 HDB residential property, 97–8 Hong Kong and, 104 implied trusts, 5, 99–102 common intention, 101, 102–3, 111–14 Confucian family values, 105–16 gender inequality, 102–5, 113–16 independence, 98, 108–9 Malaysia and, 98, 104, 108–9 moral education, 109–10 same-sex relations, 117 Temasek Holdings, 343–4 values, 5, 97, 108–118 Women’s Charter, 103–5, 113–16, 117 society: trusts and, 16 South Korea: bankruptcy and trusts, 237–49 asset-partitioning, 240–4 bankruptcy orders, 237, 242 civil law trusts, 238–40 independence, 239 commercial trusts, 216 creation of trusts, 238–9 debtor rehabilitation orders, 237 asset-partitioning and, 241–4 form v substance, 244–8 definition of trust, 15, 238 GDP ranking, 2 implied trusts and, 9 private purpose trusts, 9 public welfare trusts, 271 security trusts bankruptcy and, 10, 237–49 scenario, 241–2 termination of trusts, 241 trust law genealogy, 2 trust purposes, 9 Soviet Union, 330 spendthrift trusts: choice of law, 388 Cook Islands, Niue and Samoa, 365 Japan, 231–2, 234 offshore trusts, 365, 368–71 United States, 231, 368–9

Index  413 Sri Lanka: Buddhism, 176, 179 charitable trusts, 179, 180 colonial history, 6, 176–7 constructive trusts, 7–8, 181–94 definition, 181 overview, 183–4 demography, 176 English law and, 6, 7–8, 175, 177, 190 GDP ranking, 2 historical reception of trusts, 177–80 1917 Trusts Ordinance, 180 early years, 178–80 Roman-Dutch law, 178 history, 176–7 implied trusts, 7–8, 181–94 advantages by fiduciaries, 188 advantages by qualified owners, 189 casus omissus, 180, 192–3 legal v equitable ownership, 181–3 notice of existing contracts, 189–90 purchase of trust property, 190 resulting trusts, 184–6 secret creditor advantage, 190 Strong v Bird, 188 transfers for illegal purposes, 187 transfers under rescindable contracts, 187–8 undue influence, 188 unlisted circumstances, 190–2 independence, 177 Islamic law, 176 partnership law, 182 religious trusts, 179 resulting trusts, 184–6 automatic, 186 presumed, 184–6 Roman-Dutch law, 175, 176, 178, 183 special laws, 177 statute law, 5–6 Trusts Ordinance (1917), 175, 180 implied trusts, 184–94 living instrument, 193–4 Switzerland, 103–4, 400 Taiwan: analogical thinking, 255–6, 266–8 charitable trusts, 15 civil law: trusts and, 255–8, 270 commercial trusts, 216 definition of trust, 15, 256, 258 GDP ranking, 2 implied trusts and, 9 legal system, 251–2 name-borrowing arrangements

abuses, 253 assessment, 262–70 civil law and, 255–8 contractual freedom, 260, 263–4, 265, 270 debate, 258–62 evolution, 254 external relationship, 260–2 family asset planning, 253 internal relationship, 259–60 issues, 252 legal nature, 254, 258–9, 263 legal principles and, 255–6 legal problems, 259–62 meaning, 10, 252 overview, 10, 251–70 practice, 253 public notice, 268–9 public policy and, 10, 252, 255, 263–6 registration and, 257, 268–9 tax planning, 253 third-party effect, 265–6, 267–8 title-ownership consistency and, 255, 256–8, 263–5, 267, 269 trusts and, 254, 258–9, 266–8 Trust Act (1996), 251 trust law, 2, 251–2 trust purposes, 9 trust registration, 257, 268–9 trustees: property disposal, 257, 258 Temasek Holdings, 343–4 Thailand: adverse possession of land, 310 Bowring Treaty (1855), 295, 296 CCC prohibition of trusts aversion to English trust law, 300–2 case law, 306–7 economic concerns, 302–3 exception, 300 non-retrospectivity, 305–6 section 4, 306–7 section 1686, 300–3 charitable trusts, 304, 308–9 English law and, 297 France and, 295–6, 297 GDP ranking, 2 legal pluralism, 14 trust case law, 303–11 categories, 304 certainty of objects, 307–8 creation of trusts, 307–8 English law and, 309–11 legal principles, 305–9, 310–11 non-retrospectivity, 305–6 perpetuity, 11, 308–9 precedents, 311

414  Index trust law, 11, 293–4 cases, 303–11 English law and, 12, 14, 294, 298–9, 300–2, 306–7, 309–11 history, 294–9 trust law history, 294–9 1855 emergence, 295–8 extraterritoriality, 295–8 Siamese trusts (1855–1935), 298–9 Tonga, 355 UNCITRAL, 345 undue influence, 188, 198 unit trusts, 217 United Kingdom see also English law Bowring Treaty (1855), 295, 296 colonialism, 3, 6, 14, 98, 155–6, 177 Singapore and, 98, 103 Thailand and, 294–9 Victorian values, 5, 97, 102, 106, 110–11 United States: Cook Islands and, 356–7, 375–8 definition of trust, 134–5, 368 Federal Trade Commission, 376 New York Civil Code, 133, 134, 135, 136 offshore trusts and asset protection, 375–8 perpetuity rule, 367 securitisation, 219 spendthrift trusts, 231, 368–9 uses of trusts, 15 unjust enrichment, 54, 92, 93, 101, 152, 154, 229, 370, 393, 395, 401 uses of trusts, 15 Victorian values, 5, 97, 102, 106, 110–11 VietFund Management Company, 331 Vietnam: bankruptcy, 339–40, 345–7 CMSC, 343–5

Coco Bay project, 342–3 commercial development, 330–1 French law and, 330, 331, 334, 335 fund management companies, 331 GDP ranking, 2 legal development, 329–31 property management agency, 331–3 civil law, 331–6 commercial law, 336–43 credit institution trustees, 338–40 foreign investors, 340–3 guardianship, 334–5 insolvency, 345–7 interest-sharing investments, 340–3 securities investment funds, 336–8 sham investments, 340–1 state capital, 343–5 trusts and, 13, 329–49 usufructuary and surface rights, 335–6 recommendations, 347–9 SCIC, 343–5 tourism, 341–3 trust like devices, 12 waqf, 7, 124, 125, 132, 157, 159, 160, 168–70, 313, 315–17, 326–7 women: Confucian family values, 105–16 English property law, 106–8 matrimonial property constructive trusts, 150–4 Islamic law, 144–6, 179 Pakistan, 7, 144–8 Pakistan: inheritance rights, 150, 151 Singapore cultural inequality, 102–5, 111–16 Victorian values and, 102, 106 World Trade Organisation (WTO), 330