The Trustees’ Duty To Avoid Secret Profits

It is the merit of Equity Law that its evolvements depend upon the experiencerather than the logical reasoning. The Trust itself is the accumulated wisdom from thepast few centuries. English trust law has long focused on the trustees’ duties, amongwhich the duty to avoid secret profits, as part of the duty of loyalty, has also long beenstrictly stick to. As Lord Herschell pointed out in Bray v Ford,“human beings aremore easily swayed by interest rather than duty and thus prejudicing those they arebound to protect”. The recent cases, however, have fuelled the long standingacademic criticism about the stringent rule and will be central in helping to interpretthe new legislation, remaining a fundamental resource in the understanding of theno-secret profits rule in years to come. Yet it is suggested that the duty to avoid secretprofits, especially for trustees, should move towards stricter liability.To justify this position, the first two parts of this research paper will do threethings. The first section will document the origination of trust of English law and thatof our country, consider the general rule of fiduciary duty, its purposes especially itseconomic character. The study in this part will provide useful criteria to evaluate theevolving English law. Meanwhile, the first part will chart the rise of the no-secretprofits rule, examining cases dealing with it and attempt to categorize those decisions. Understanding how the court turned away from the traditional equity rule in the pastwill help to show what could happen in the future. Finally, section2will develop thecentral argument of this research paper that the movement of rejecting the strict rulein the recent years does go so far and that the no-secret profits rule should still berigidly applied.Given the well-established English trust law and its recent developments withrespect to the no-secret profits rule, section3of this research paper is set to throw aninsight to the differences of no-secret profits rule between England trust law and thePRC one via the study of completeness of law and the comparison between thecommon law and civil law. As to the existing PRC law regarding the trustees’ duty toavoid secret profits, positive and negative analysis will be critically made afterwards.Further, the fact that the loyalty duty of directors is more delicately defined in theCompany law of our country drives the last part of this section to explore the co-goingproblems of the Company law in the hope that such discussions might be of use to theproposed amendment of PRC trust law.Cesare Beccaria, the prestigious Italian jurist, published his best-known treatiesOn Crimes and Punishments in1976. The book was the first full-scale work to tacklecriminal sanction, namely what is the optimal enforcement and what is the optimalsanction to deter men from committing the potential crimes. As a result, section4ofthis research paper attempts to justify this stance: it is necessary to employ theno-secret profits rule as part of the macro-prudential regulation in financial markets.Three points advocating this position are listed as follows.(1) From the standpoint ofeconomic approach of optimal law enforcement, either the active enactment of lawconducted by courts or the negative one by regulators has fatal shortages respectively.Their co-existence in the modern world reflects the need to draw on each other’scomparative advantages and mutual benefit. Through immense periods of time,numerous decisions of English courts gave birth to the no-secret profits rule. It isadvisable that this judicial rule shall be exercised directly by authorities in terms ofthe financial regulation.(2) From the standpoint of actual problems in the financialmarket of our country, the huge amount of remuneration paid to the fund companies is allowed in the trust contracts whereas, under such a context, the interests of fundcompanies are suspected to be in conflict with those of beneficiaries, undermining theproperties of fund holders (the protection of financial consumers can be regarded as aparticular instance of the protection of private properties). If an event with widespreadand severe economic and social consequences keeps on repeating itself, the onus issurely on the authorities to change something. Sadly, the authorities such as ChinaSecurities Regulatory Commission turn their back on the problem which put thepublic on a more vulnerable position. If the beneficiaries in our country could sue thefund companies on the grounds that they go against their duty to avoid the secretprofits, an ever-lasting prosperity of the commercial trust in our country shall beavailable. Further, with the wider scope of judicial interference as proposed, thereference and implant of commercial-judgment rule of American company law mightbe of use to safeguard the discretion of professional trustees.(3) From the experienceof global regulatory counterparty such as the UK Financial Service Authority (FSA),a combination of principles-based and rules-based approach has yield brilliantregulatory outcomes. So far FSA has published three pieces of initial audit report,whose courage of introspection and reform set a good example to the authorities ofour country.