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wise to be wary when investing overseas

09 December 2019
Nicole Treacey
Read Time 3 mins reading time

As the Australian economy weakens and interest rates reach record lows, investors are seeking out alternative investments offshore in order to increase their returns.

But do investors or their advisors really understand the inherent risk involved?

The recent decision of Zhang Hong Li and others v DBS Bank (Hong Kong) Limited and others [2019] HKCFA 45 is an example of what can often be an illusion of the “greener pastures” of offshore investment.

The case was essentially a question about the enforceability of an “Anti-Bartlett” clause contained in a trust deed. The Hong Kong Court of Appeal ultimately upheld that the clause was enforceable, resulting in the trustee avoiding liability for losses sustained by the trust.

anti-bartlett clauses

Many offshore trusts are set up for the purpose of saving tax, so are common in lower tax jurisdictions. These trusts will then buy assets like shares in companies which then perform high-risk investments. This results in the trustee delegating the trustee’s authority to the company.

An Anti-Bartlett clause purports to then absolve the trustee of any obligation to supervise or make enquiries of the operation of the companies of which the trust owns shares. This has the result of allowing the investment company to partake in high-risk and speculative investments, and the trustee’s “high level supervisory duty” is not required, except in the case of known misconduct.

The interpretation has not necessarily been consistently applied. There have been examples of a Court deciding that, despite the terms of the trust deed, a trustee still has an obligation to apply appropriate risk management strategies to ensure that anyone they have delegated authority to will act prudently. The trustee in some jurisdictions therefore still has an overriding duty to protect the assets of the trust.

There are also other issues that investors and advisors need to be aware of such as enforceability of overseas judgments and the systems of law generally which restrict actions against trustees generally.

position in australia

Trust laws in Australia arise from a combination of statute and common law, and one of the paramount duties of a trustee is to preserve trust property. This has resulted in examples of a trustee being sued by investors for failing to exercise this duty to the required standard, particularly in cases where high-risk investments have caused the loss.

In most cases, a trustee can only delegate power where the trust deed allows it, and even if it does, it still has an overriding duty to supervise and preserve trust property.

cautionary tale

Investors and their advisors should ascertain exactly what the terms of an investment are, and not assume that the protections offered in Australia will apply. This may mean seeking advice on the underlying structure before proceeding to avoid surprises in the event of a downturn.

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wise to be wary when investing overseas

09 December 2019
Nicole Treacey

As the Australian economy weakens and interest rates reach record lows, investors are seeking out alternative investments offshore in order to increase their returns.

But do investors or their advisors really understand the inherent risk involved?

The recent decision of Zhang Hong Li and others v DBS Bank (Hong Kong) Limited and others [2019] HKCFA 45 is an example of what can often be an illusion of the “greener pastures” of offshore investment.

The case was essentially a question about the enforceability of an “Anti-Bartlett” clause contained in a trust deed. The Hong Kong Court of Appeal ultimately upheld that the clause was enforceable, resulting in the trustee avoiding liability for losses sustained by the trust.

anti-bartlett clauses

Many offshore trusts are set up for the purpose of saving tax, so are common in lower tax jurisdictions. These trusts will then buy assets like shares in companies which then perform high-risk investments. This results in the trustee delegating the trustee’s authority to the company.

An Anti-Bartlett clause purports to then absolve the trustee of any obligation to supervise or make enquiries of the operation of the companies of which the trust owns shares. This has the result of allowing the investment company to partake in high-risk and speculative investments, and the trustee’s “high level supervisory duty” is not required, except in the case of known misconduct.

The interpretation has not necessarily been consistently applied. There have been examples of a Court deciding that, despite the terms of the trust deed, a trustee still has an obligation to apply appropriate risk management strategies to ensure that anyone they have delegated authority to will act prudently. The trustee in some jurisdictions therefore still has an overriding duty to protect the assets of the trust.

There are also other issues that investors and advisors need to be aware of such as enforceability of overseas judgments and the systems of law generally which restrict actions against trustees generally.

position in australia

Trust laws in Australia arise from a combination of statute and common law, and one of the paramount duties of a trustee is to preserve trust property. This has resulted in examples of a trustee being sued by investors for failing to exercise this duty to the required standard, particularly in cases where high-risk investments have caused the loss.

In most cases, a trustee can only delegate power where the trust deed allows it, and even if it does, it still has an overriding duty to supervise and preserve trust property.

cautionary tale

Investors and their advisors should ascertain exactly what the terms of an investment are, and not assume that the protections offered in Australia will apply. This may mean seeking advice on the underlying structure before proceeding to avoid surprises in the event of a downturn.