Hong Kong Court of Final Appeal hands down judgment in China Life Trustees v China Energy Reserve and Chemicals Group

Jonathan Hilliard KC appeared successfully before the Hong Kong Court of Final Appeal, leading Laurence Li SC and Sik Chee-Ching, instructed by Grandall Zimmern Law Firm and working together with Kirkland & Ellis LLP.

This was the first case before the HKCFA to consider the important and much debated practical question of the test for whether a Quistclose trust exists. Such trusts are capable of arising where assets are transferred by one person to another to be used only for a specific purpose, and can therefore can in principle arise in a variety of commercial and other contexts. The decision sets out a clear test and guidance that will be important in future cases, along the way dealt with the recent Privy Council decision in Prickly Bay Waterside Ltd, and explains when such trusts can arise in the absence of express restrictions on the purpose for which the funds can be used by the recipient.

In China Life, the China Energy Group, on finding itself in financial difficulty, had paid $120m from a group treasury company into one SPV to meet the bond payments owed by another SPV. The payments were not made onwards to the bondholders and, after the group cross-defaulted, the question was whether the first SPV held the money on Quistclose trust for the treasury company.

The first instance Court and Court of Appeal had both found that no such trust existed on the facts. The HKFCA disagreed, holding that the Court of Appeal had wrongly considered that it was necessary to find an intention in the transferor to retain the beneficial interest.  That was incorrect. The question in each case was whether there was an intention agreed to or acquiesced in by the recipient that the property not be at the free disposal of the recipient but instead only be used for the specified purpose.

Read the full judgment