News in the Chinese sensationalist media sent a shuddering ripple across many estate planners in China and Hong Kong concerning the viability of offshore trusts: a receiver had been appointed over bank accounts held in the name of a BVI company owned by Ms Zhang Lan's Cook Island family trust, as part of debt enforcement efforts to collect on the personal debts of Ms Zhang, a judgement debtor, in the recent 2022 Singapore High Court case of La Dolce Vita Fine Dining Company Limited vs Zhang Lan and ors [2022] SGHC 278.
The celebrated Chinese restaurant chain entrepreneur's legal trouble stemmed from sale of her founder stake in the multi-billion RMB valued South Beauty Group to CVC Capital (who established the plaintiff La Dolce Vita) for US$254 million in 2013. The plaintiff successfully sued Ms Zhang for fraud and misrepresentation damages of US$142 million. This led to US court attachment orders to her New York apartment and art works, registration of judgment debt against her assets in Hong Kong and Singapore, including bank account freeze orders and receiver appointments on two bank accounts titled in the name of a BVI company Success Elegant Trading Limited (SETL). SETL was owned by Asiaciti, a trustee of Ms Zhang's offshore family trust – which she created for the benefit of her son and other family members and transferred her SETL shares to the trustee in 2014.
The Singapore High Court examined the correspondences between Ms Zhang's lawyers and bankers, her tax filings as well as the amount and timing of her bank account withdrawals, concluding that she was the de facto beneficial owner of the bank accounts even if she was not legal owner of SETL, and that it was "just and convenient" to appoint receivers over the bank accounts to satisfy her personal judgement debt. The Singapore court relied primarily on her ability to direct the withdrawal of US$35 million from one bank account within days of a freezing order (ultimately linked to the purchase of New York apartment in her name) and unexplained attempts to transfer more money from the other bank account.
Notwithstanding that SETL was legal owner by the trust, the Court found that she maintained beneficial ownership over accounts in view of conduct and actions.
It is noteworthy that the validity of the Cook Island trust was never challenged and did not have to be considered by the Singapore Court – counsel did not make any submission challenging the trust's validity. The issues to be decided were whether a receiver may be appointed over the bank accounts and whether Ms Zhang was the beneficial owner of the account moneys. Her decision to set up the trust to protect her assets from liabilities from the business sale was not actually impugned and neither was the trust's ownership of the SETL disputed.
The case should not be seen as an attack on offshore trusts as perhaps the media would have many believe. The reality was that Ms Zhang undermined her own family trust through her own actions by misusing trust property for personal motives. There was insufficient separation and independence between her personal business circumstances and trust administration – she was the sole authorised signatory and operator of the bank accounts and was not accountable to the trustee. It was not a stretch to find she retained beneficial ownership of the accounts even as she purported to relinquish legal ownership of the account holder (SETL). Contrary to popular commentary, the Zhang Lan trust was not invalidated or destroyed by the Court.
However, the line of trust asset challenge is well trodden case law and is in fact nothing new.
The cardinal rule that a settlor should separate their personal business from the trust and resist having excessive control over the distribution of trust property is worth reiterating. While the motive of protecting assets from lawsuits, creditor claims and residual liabilities is entirely legitimate, its timing can be crucial, leading to adverse influences. A trust should be set up when all is well in the best of circumstance and not when dark clouds are closing in on the horizon. While reserved power trusts in a strong offshore jurisdiction like Bermuda, the Cayman Islands and the BVI, with their protective "trust firewall" legislation, do uphold the settlor's power to give directive and have veto influence over the trustee's discretion and administration, where they go too far override the checks and balances put in place to safeguard the trust property from its intended purpose under the trust deed. In these circumstances, safety cannot be guaranteed from settlor's claimants and litigants.
All the more important for there to be thorough and robust professionalism in trust governance and careful consideration of the scope and nature of decision-making powers given to each persona in the trust structure, especially on the power of appointment, advancement and distribution.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
