A trustee's duty of care

The investors accused SZITIC of “serious fraud in executing the trust contract, and gross misconduct in managing the trust assets”. They requested that the court nullify the contract and asked that SZITIC return their principal and related interest.

Trustee's duty of care

Based on the facts of this case and the investors' claims and cause of action, one of the issues in dispute will likely be whether SZITIC has duly fulfilled its duty of care as trustee when managing the trust assets.

According to PRC law, a trustee shall abide by the provisions in the trust documents and handle the trust business with the best interests of the beneficiary in mind. In managing the trust assets, a trustee shall be careful in performing his duties and fulfil his obligations with honesty, good faith, prudence and efficiency. Where a trustee causes loss to the trust assets due to his departure from his responsibilities or improper handling of the trust business, the beneficiary shall be entitled to ask the trustee to restore the assets to its original state or make compensation accordingly.

The above provisions set out the “good manager's duty of care” under PRC trust law for trustees in principle, but are silent regarding the specific standards for the determination of such duty.

In our opinion, when determining whether a trustee breached the good manager's duty of care in handling the trust business, it is advisable to first look into the provisions regarding such in the trust documents. Then, should that fail, it is advisable to move on to determine whether the trustee's behaviour is proper and reasonable under the principle of the good manager's duty of care.

Regarding the SZITIC case, the investors' claim that SZITIC·Xinpeng Phase I greatly exceeded the investment limit of 10% – as stipulated in the trust contract – is probably a breach by the trustee of the trust documents, for which the resulting loss shall be borne by the trustee accordingly. In contrast, the issues of “operating in full position” or “buying high and selling low” are still to be decided based on whether the trustee has failed the good manager's duty of care.

As there is no definite explanation to the above questions under PRC law, academics in China generally suggest that legal analysis be done on a case-by-case basis. Consideration should be given to the commercial situation surrounding the trustee's conduct, and to cases and statutes on trustee's duty of prudence under common law. On the one hand, trust companies being professional trustees must at least follow the stipulations in the trust documents to meet a higher standard compared to ordinary trustees. On the other hand, because all businesses will face commercial risks, the loss incurred from normal commercial risks – to a degree – should not be borne by the trustees as they are not insurers.

On abnormal transactions, such as buying high and selling low in securities investments, the Supreme People's Court took the following position in a similar dispute over entrusted wealth management:

In securities transactions, the trustee of entrusted wealth management will not be responsible for his poor investment decisions within the normal course of business, as long as he has duly exercised the manager's duty of prudence and due diligence without any egregious mistake. Meanwhile, in determining whether an entrusted wealth management trustee has failed to fulfill his trustee duties, the Court did not simply rely on the mere transaction records of buying high and selling low. It examined various background factors comprehensively, such as the underlying stock market situation as a whole, the term of the wealth management, and the amount of entrusted assets. Prior cases may provide a reference for the courts' attitude towards determining a trustee's good manager's duty of care as applied to the SZITIC case.

There are at times flagrant cases where trustees in wealth management harm the interests of investors by outrightly disobeying the good manager's duty of care. However, cases of investors suing trust companies directly for cause of non-performance of the trustee's duty of care were rare before the SZITIC case arose. Although no formal judgment has yet been announced and we are still waiting to see the court's stance on this case, it would be worthwhile for trust companies to take caution towards risk control measures in similar trust products, given the legal risks of not duly exercising the good manager's duty of care.