On 22 May 2019, the Hong Kong Court of First Instance handed down a lengthy judgment in the high profile Madam Lo v HSBC Trustee case. As well as grabbing the headlines, the case raised novel points of law which the judge had to grapple with. The result was full vindication for the trustee.


The case concerned a family trust settled in 1984 (“the Trust“).  It was a conventional discretionary trust. As is common, there was a letter of wishes which set out the wishes of the de facto settlors, Mr and Madam Lo. The beneficiaries of the Trust are family members, including Mr and Madam Lo’s nine children. The primary asset in the Trust is an approximately 33% shareholding in a Hong Kong listed company called Great Eagle Holdings Limited (“Great Eagle“).

Mr Lo passed away in 2006. The proceedings were brought by Madam Lo, who is 99 years old.

Madam Lo’s core complaint against the trustee appeared to be that it had not followed various instructions and/or letters of wishes issued by Madam Lo from early January 2016 onwards. The first of these letters sought to make specific changes to the then subsisting  letter of wishes signed by both Mr and Madam Lo in 1988. Later documents signed by Madam Lo sent to the trustee sought variously (i) the distribution of the entire Trust fund (then worth approximately HK$6 billion) to Madam Lo or such entity as she may direct; (ii) the removal of certain beneficiaries and putting them in the Excluded Class so that they could never benefit from the Trust; and (iii) the acquisition of further shares in Great Eagle.

Faced with these requests and discord between beneficiaries, the trustee proposed a restructuring proposal which was refined following consultation with the beneficiaries. Very shortly thereafter, Madam Lo commenced proceedings.

The issues in the case evolved as the case went along, but the judge summarised them into six core issues. The first two were whether (i) there was a “common understanding” that the trustee would administer the Trust in accordance with Madam Lo’s written requests/instructions; and (ii) representations made by the trustee gave rise to a legitimate expectation on the part of Madam Lo.  The next two related to alleged breaches of duty arising from the trustee’s decision not to buy further Great Eagle shares. The final two related to Dr KS Lo (a beneficiary of the Trust and the Chairman and Managing Director of Great Eagle).  Madam Lo claimed the trustee was in a position of conflict as a result of being trustee of a separate trust settled by Dr KS Lo. She also alleged that the trustee improperly favoured Dr KS Lo’s interests.  Madam Lo failed on all counts.

Common Understanding

The common understanding claim failed because the judge found it to be an impermissible attempt to contradict the express terms of the Trust deed by parol evidence and subsequent conduct.  He also found that Madam Lo specifically accepted that the Trust was a valid discretionary trust (and not a sham). Indeed, her breach of duty claims relied on the Trust being valid. Further, the common understanding was unsupported by the documentary and witness evidence and the judge found the whole concept of a common understanding inherently improbable.

Legitimate expectation

The prospect of legitimate expectation applying in the trusts context stems from a short reference in the Scott v National Trust decision from 1998: “So I am inclined to think that legitimate expectation may have some part to play in trust law as well as in judicial review cases“. Madam Lo’s argument was that she had legitimate expectations that the trustee would seriously consider her requests as a primary consideration in the exercise of its powers, comply with her requests unless there is a “very good reason” not to do so, and provide full and proper explanation for any refusal to comply.

The context in the Scott case was the potential application of rules of natural justice to trusts. The suggestion is that there may be occasions when trustees would be obliged to give a beneficiary an opportunity to make representations to them before they decide on a particular matter, if the trustees were intending to depart from a previous longstanding course of conduct. Madam Lo sought to take that idea further beyond procedural fairness. She claimed that she had legitimate expectations that ought substantively and substantially to influence the trustee’s consideration of the exercise of its discretionary powers. The judge found there was no basis for this. He went on to quote from authorities which discouraged the importation of public law principles into trusts law.

Decision not to buy Great Eagle shares

Madam Lo requested that the trustee buy further shares in Great Eagle.  She felt that this would accord with an alleged purpose of the Trust and would maintain the Trust’s “controlling” shareholding in Great Eagle which was being allegedly “threatened” by Dr KS Lo.  She felt the trustee’s failure to buy further shares was a breach of duty and she took exception to the trustee’s suggestion that acquiring further shares would be inappropriate in light of “concentration risk” i.e. that the Trust fund was over-exposed to Great Eagle shares already. Madam Lo also faced the further hurdle of demonstrating that any breach was deliberate (i.e. “wilful“) or if not positively deliberate then so seriously and obviously wrong that the trustee was “grossly” negligent.

The judge found that there had been no breach of duty. He found Madam Lo’s complaints that the trustee had not given a “full and proper explanation” to be contrary to the longstanding principle that trustees exercising discretions are not obliged to disclose their reasons for taking a particular decision. He further found that an allegation of wilful default or neglect involves an allegation of dishonesty and Madam Lo had failed to plead her allegations properly in this regard.

Not an alleged purpose of the Trust

The judge was not willing to accept the idea that the purpose of the Trust required these Great Eagle share purchases and said determining the purpose was an objective exercise. He held that it was not a purpose of the Trust to preserve a controlling shareholding in Great Eagle. Indeed, he went further and found that the Trust had not had a controlling shareholding since July 2004 when a restructuring meant that the Trust’s shareholding was reduced from over 50% to around 33%. There was no detailed analytical evidence showing how the 33% shareholding was said to be controlling and the trustee’s witnesses did not consider that the Trust held a controlling shareholding in Great Eagle: There was also no mention of the Great Eagle shares in the Trust deed or the letters of wishes issued prior to 2016. Although a shareholding of less than 50% might theoretically be controlling, it was inherently improbable for it to have been the intention of the parties that the trustee would have continuously to monitor and assess whether the Great Eagle shares held by the Trust were of sufficient size to command actual control. That exercise involves highly complex and sophisticated analysis of corporate data on a day-to-day basis, and there was nothing from the Trust deed or any of the surrounding circumstances at the time of the establishment of the Trust which would indicate that such a role was intended for the trustee. Madam Lo also failed to show that the Trust’s shareholding had any premium value over the market price.

No alleged threat

The idea of Dr KS Lo being an alleged “threat” to the Trust’s shareholding arose from Dr KS Lo’s personal acquisition of shares. However, the judge dismissed this suggestion. Dr KS Lo had (as a matter of public record) been buying shares on the open market for decades and it helped the Trust and Lo family together maintain control of Great Eagle. It also allowed for major transactions to be considered and approved without the need for shareholders’ meetings. The Trust and members of the Lo family have long been recognised as a concert group by the Hong Kong Securities and Futures Commission (SFC). The judge found the allegation of threat to be “entirely contrived and unjustified“.

Concentration risk

Madam Lo made two points in relation to concentration risk: (i) the trustee acted unreasonably, grossly negligently, and in wilful breach because concentration risk was simply an irrelevant factor which the trustee should have ignored; and (ii) concentration risk was not actually a reason that lay behind the trustee’s refusal to purchase more Great Eagle shares. However, the judge accepted that the trustee had good reason to be concerned about concentration risk and this was necessitated by its general duty of prudence (even though the Trustee Ordinance in Hong Kong does not contain an express requirement to consider diversification of investments, unlike for example the Trustee Act 2000 in England).  It was wrong to say that in Hong Kong trustees are generally not required to take into account the desirability of diversifying their investments. It did not matter that Clause 12(a) of the Trust deed permitted the trustee to invest the whole of the Trust fund into a single asset.  An investment which is permitted is not necessarily a prudent one.

Alleged conflict of interest and favouring

Madam Lo claimed that the trustee had placed itself in a position of conflict of interest by acting as trustee of both the Trust and a discretionary trust of which Dr KS Lo was the founder (“the KSL Trust“). The judge quoted the well-known test in Boardman v Phipps i.e. whether the reasonable man looking at the relevant facts and circumstances of the particular case would think that there was a real sensible possibility of conflict. The judge concluded there was no actual or potential conflict in the trustee’s acceptance and continuation in office as trustee of Trust and the KSL Trust.  Part of the reasoning arose from the way the KSL Trust had been set up. The Great Eagle shares held in the KSL Trust structure were not held by the trustee directly, but rather through two BVI subsidiary companies. The KSL Trust deed provided that the trustee was obliged to leave the administration, management, and conduct of the business and affairs of those two BVI companies to their directors and officers. Further, the trustee was proscribed in any dealing with such company by a requirement that it may only do so in accordance with the direction of the protector of the KSL Trust (who was Dr KS Lo himself). The KSL Trust deed goes further and expressly provides that the two BVI companies are each to be regarded as a “special company” and are not subject to any investment review (such as concentration risk review) by the trustee. Consequently, there was no real sense of incompatibility between the duties owed under the two trust structures. The judge concluded the allegation of conflict was “fundamentally misconceived“. The judge further held that the disclosure in publicly available documents of the two trusts’ holdings in Great Eagle meant that Madam Lo was aware of the position and she should be taken to have given informed consent to it.

Having reviewed the arguments put forward by Madam Lo in relation to the alleged favouring of Dr KS Lo when making decisions, the judge concluded that there was no basis for this allegation.  Instead, a detailed examination of the circumstances in which the trustee dealt with Madam Lo’s letters showed that the trustee acted “carefully and properly in response to a delicate, difficult, and mercurial situation“.


Madam Lo’s novel claims around common understanding and legitimate expectation were rejected in favour of orthodox trust law principles. Trustees can take comfort the Hong Kong Court’s approach and the exoneration of the trustee. Equally, the decision will give reassurance to trustees who act as trustee of multiple trust structures. However, the decision also demonstrates the benefit of having provisions in trust deeds which carefully restrict the power of the trustee in relation to investments.

Most professional trustees are aware of the need to consider diversification and this decision underscores that principle, even where Hong Kong statute contains no express provisions to that effect.

Note: Herbert Smith Freehills act for three beneficiaries of the Trust, including Dr KS Lo.


Richard Norridge
Richard Norridge
Partner, Head of Trust & Estates Disputes & Head of Private Wealth – Asia
+44 20 7466 2686