Hong Kong: Guarding Against The Creation Of Statutory Trusts When Assigning Life Insurance Policies As Collateral

Last Updated: 12 June 2015
Article by Tow Lu Lim and Jenny Yu
Most Read Contributor in Hong Kong, October 2018

Keywords: statutory trusts, life insurance policies, collaterals

Section 13 of the Married Persons Status Ordinance Cap 182 (MPSO) of Hong Kong creates a statutory trust in favour of beneficiaries who are the spouse or children of the life insured. Any insurance monies payable under the policy belong to the trust and are not subject to the insured's debts. This means a lender who takes on a collateral assignment of a life policy subject to a statutory trust should beware – the trust's interests may prevail and if so, the lender may not be able to enforce the life policy as security.

Life Policies as Collaterals and Section 13 MPSO

It is common for financial institutions to accept certain life insurance policies as collateral for loans so that upon death of the life insured or default of the loan, the policies proceeds are used to satisfy the debts owing by the insured. Usually, this is done by way of a collateral assignment of the life policy which purports to provide the lender with the rights and benefits under the life policy so that it can use the policy proceeds to satisfy the debts.

Section 13 of the MPSO does not sit comfortably with the modern trend of using life policies as collateral (which is common among private banking clients). Section 13 provides that if the life policy is expressed to be for the benefit of, or by its express terms purport to confer a benefit upon, the spouse or children of the insured, then a statutory trust is created in their favour. This means if the insured's spouse or children are designated as beneficiaries (or by its express terms purport to confer a benefit), a statutory trust is created in their favour.

Section 13(3) provides that so long as the trust remains unperformed, the insurance monies do not form part of the insured's estate or are subject to the insured's debts. The insured may appoint a trustee or in default of appointment, the life policy is immediately vested in the insured and his personal representatives in favour of the beneficiaries.

The legal title of the life policy vests in the trustee, who owes fiduciary duties to the beneficiaries and must exercise powers under the policy in the best interests of the beneficiaries. Therefore, the insured does not have complete freedom to deal with the policy as he sees fit. In the case of re Fleetwood's Policy [1926] Ch. 48, the insured (who was also the trustee) could not surrender the policy as this was not in the best interests of the beneficiary. If the insured surrendered the policy, he must hold the proceeds on trust for the beneficiary.

The insured therefore also cannot assign the life policy as collateral, as doing so is not in the best interests of the statutory trust and the beneficiaries. If the insured assigns the life policy to a lender, the assignment is not binding on the beneficiaries. Further, the assignment is subject to all prior equities (Section 9 Law Reform and Consolidation Ordinance Cap 23) and is therefore subject to the statutory trust. The lender therefore obtains no effective rights over the policy proceeds. Should the policy proceeds be paid to the lender, the lender may be liable as a constructive trustee and accountable to the beneficiaries. Accordingly, a life policy subject to a statutory trust may be a defective security for a lender.

There are also risks for an insurer in paying to the assignee lender. The payment is in breach of the statutory trust and the insurer may be liable for assistance in breach of trust. Further, Section 13(7) provides that the insurer obtains a release by payment to the trustee or the insured's personal representatives (if no trustee appointed). The insurer may obtain no proper release by paying to the lender.

The purpose of Section 13 is clear – to protect the insured's life policy from his creditors for the benefit of his spouse and children. It is an archaic provision and has its origins from Section 11 of the Married Women's Property Act 1882 (UK), a statute which is more than 100 years old! While the rationale of Section 13 was valid 100 years ago, it does not reflect modern day practicalities, especially if the life policy is used as collateral.

What to Do?

There may be ways to resolve the problems of using a life policy with a statutory trust as collateral. If the statutory trust is revoked, it no longer affects the assignment to the lender and the lender's rights. Arguably, if the policy contains a right to change beneficiaries, the insured may remove the spouse or children as beneficiaries and thereby revoke the trust (there was no such right in re Fleetwood).

However, some of the Singaporean cases suggest that once the statutory trust is created, it cannot be revoked without the consent of all beneficiaries (CH v. CI [2004] SGDC 131, Saniah bte Ali v. Abdullah bin Ali [1990] SLR 584). This will however be a problem if some of the beneficiaries are minor and are incapable of providing consent.

There are no Hong Kong cases on the nature of the statutory trust and whether it is revocable without the consent of all beneficiaries or not. On the one hand, the purpose of Section 13 is to protect the insurance proceeds from creditors. However, on the other hand, the purpose of assigning the life policy to the lender as collateral is to use the life policy for borrowings. Section 13 MPSO seems to defeat the commercial purpose of the assignment. It also deserves to mention that Singapore has now changed its law.

Given the lack of Hong Kong authority on Section 13, insurers and lenders are minded to beware of the implications of Section 13 both in payment of insurance proceeds to assignees and in accepting life policies as collateral.

Originally published 10 June 2015

Visit us at www.mayerbrownjsm.com

Mayer Brown is a global legal services organization comprising legal practices that are separate entities (the Mayer Brown Practices). The Mayer Brown Practices are: Mayer Brown LLP, a limited liability partnership established in the United States; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales; Mayer Brown JSM, a Hong Kong partnership, and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

© Copyright 2015. The Mayer Brown Practices. All rights reserved.

This article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein. Please also read the JSM legal publications Disclaimer.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions