I. Introduction

A trust can be an effective and useful structure for wealth planning – there is no doubt that this still remains true. It appears, though, that the case of La Dolce Vita Fine Dining Co Ltd v Zhang Lan and others and another matter [2022] SGHC 278 has shaken some confidence in the usage of trusts, in particular for asset protection purposes.

In our view, such concerns are unfounded for those who are genuine in their intentions to set up a trust. This is a case on point: where the Court has found that the trust structure supposedly created could not be upheld as there was no intention to set up a trust.

In this client alert, we will set out the relevant background facts of this Singapore High Court case, discuss the Court’s findings, and highlight the key takeaway in relation to how a genuine trust should – or should not – be operated to prevent a “pierce-through” situation such as that in Mdm Zhang’s case.

II. Background Facts

Mdm Zhang Lan (Mdm Zhang), is a citizen of St Kitts and Nevis who settled a Cook Islands family trust – The Success Elegant Trust – for the benefit of her son and his children and remoter issue on 3 June 2014 (the Trust). At the time, she was the sole director and owner of the sole share in Success Elegant Trading Limited (SETL), a company incorporated in the British Virgin Islands. On 4 June 2014, she transferred the share to the Trustee, namely, AsiaTrust Limited, a Cook Islands trustee – in other words, the SETL share became trust property. She was also replaced as director by ATP Directors Limited, an affiliate of AsiaTrust Limited, on 3 March 2015.

Subsequently, judgment creditors of Mdm Zhang (the Plaintiffs) sought to enforce arbitration awards against Mdm Zhang, and obtained registration orders in Singapore on 11 November 2020. The Plaintiffs then sought to enforce the said orders via the appointment of receivers over the moneys and securities held in SETL’s Deutsche Bank and Credit Suisse bank accounts (the Bank Accounts), on the alternative grounds either that Mdm Zhang is the beneficial owner of the moneys in the Bank Accounts or had effective control over the Bank Accounts tantamount to ownership in equity.

One of the key issues which arose was whether Mdm Zhang beneficially owned the moneys in these Bank Accounts, and therefore whether the Plaintiff could appoint receivers of the Bank Accounts. While effective control may evidence an equitable interest, receivers may only be appointed over property if the judgment debtor (in this case Mdm Zhang) has an equitable interest, such that there is an enforceable right in relation to the property that a receiver upon appointment may exercise in the debtor’s stead.

III. Court’s Findings

The Court found that while Mdm Zhang had indeed set up the Trust and transferred ownership of SETL to the Trustee, she had not intended to relinquish her beneficial interest in the moneys in the Bank Accounts. Instead, she continued to conduct herself as though the moneys in the Bank Accounts were personally hers, even after the transfer and after a new director had been appointed for SETL.

In assessing the evidence, the Court found that there was both direct and indirect evidence of Mdm Zhang’s intentions to retain beneficial ownership of the moneys in the Bank Accounts. For example, she was the sole signatory of the Bank Accounts and had unfettered operation of the Bank Accounts, and could freely transfer or withdraw money held in the Bank Accounts. Further, Mdm Zhang identified herself as the beneficial owner of the assets of the Bank Accounts. On the facts, Mdm Zhang had retained beneficial interest.

The Court inferred that Mdm Zhang wished to protect her funds from potential claims without giving up her ability to make use of those funds for her own benefit, and even after setting up the Trust, she still considered herself free to make use of the moneys in the Bank Accounts. She had never intended to give the moneys away to SETL.

Therefore, the Court held that Mdm Zhang was still the beneficial owner of the moneys in the Bank Accounts, and it was also just and convenient for the receivers to be appointed in aid of satisfaction of the judgments.

IV. Key Takeaways

This case illustrates what happens when a trust is not properly operated. Although Mdm Zhang had set up a Trust and divested assets to said Trust, she failed to relinquish control of said assets and behaved as though the assets were still hers. It was thus clear to the Court that she had no intention to divest the assets and create a trust in favour of the beneficiaries. In so behaving, she had overstepped the boundaries of her role as Settlor of the Trust. Therefore, no genuine trust existed to protect those assets from her judgment creditors.

When setting up a trust, the 3 certainties must be fulfilled: (a) certainty of intention to create a trust; (b) certainty of subject matter, being the assets of the trust; and (c) certainty of objects, being the beneficiaries. Fundamentally, it is important to answer the question, “does the settlor have an intention to create a trust?” This is a question of fact and the Court would look at the evidence to determine the settlor’s intention. If the settlor does not have a genuine intention to create a trust, then regardless of what documents are executed and entities set up, there would not be a genuine trust created. Such a trust could potentially be exposed as a “sham” structure and would not afford any protection from creditors.

When setting up a trust, one must ensure that they understand what it means to set up a trust, as well as its consequences. A trust should be set up with genuine intentions. Otherwise, the settlor may risk the trust being seen as a “sham”, or be “pierced through”, as was the case in Mdm Zhang’s matter.

V. Conclusion

It is untrue that trusts are no longer effective for asset protection and wealth preservation. If set up and operated properly, a legally valid trust structure can be effective for wealth planning and asset protection. Do note that a trust structure needs to be respected – the settlor must be reminded that if he does not respect his own structure, it is unlikely that anyone else, including the Court, would do so. We strongly recommend that legal advice be sought to ensure that trusts are legally valid, and properly set up and operated.

Please feel free to reach out to any of our key contacts should you have any questions or concerns.