10 June 2015
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  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  SGDC 131, Saniah bte Ali v. Abdullah bin Ali  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.