Lack of Segregation Not a Bar to the Creation of a Trust

On 1 February 2024, the Hong Kong High Court in Hip Hing Construction Company v Hong Kong Airlines Ltd [2024] HKCFI 370 considered whether, and to what extent, segregation of funds is a necessary condition for the creation of a trust in respect of such funds.

In the Honourable Madam Justice Mimmie Chan’s judgment, her ladyship held that while segregation is normally an indicator of a trust, the mingling of funds is not fatal to the creation of a trust, and the Court should look at all the circumstances as there may be other indicators of the trust ([46]).


The Plaintiff (Hip Hing Construction Company) sought  a declaration that the Defendant (Hong Kong Airlines) held HK$56,321,000 as retention monies on trust for the Defendant, pursuant to the standard form building contract (i.e. Clause 32.5 of the General Conditions of the Standard Form of Building Contract (2005 Private Edition)) entered into between them. As a winding-up petition had been presented against the Defendant in 2022 and a subsequent scheme of arrangement and restructuring plan became effective in 2023 ([8]), the declaration of a trust over the retention monies would mean that the retention monies would need not to be shared in the general pool of the Defendant’s assets with other creditors ([9]) and the Plaintiff could claim them in their entirety.

Has a trust over the retention monies  been created?

For the creation of a trust, there must be certainty of intention, certainty of subject matter, and certainty of object. While there is no dispute that the sum of HK$56,321,000 had never (prior to this action) been paid into any segregated bank account of the Defendant nor segregated from the rest of the Defendant’s receipts and funds held ([6]), the question before the Court was whether the lack of segregation would mean that the trust failed for lack of certainty of the subject matter.

The problem of the lack of certainty of subject matter often arises with fungible property (such as shares, monies). If the transferor is free to select the relevant property from any source, then the transferee cannot possibly acquire an ownership interest in any particular bulk, as the situation would be one of an intended transfer of property which is completely unidentified until the transferor makes the necessary choice. Until such identification, it would be impossible for the transferee to obtain a property interest at all ([61]).

Having considered two of conflicting lines of authority[1], the Court concluded that the lack of segregation is not an absolute bar to the creation of a trust, and each case must be decided on its particular facts, taking into account the nature of the asset which is claimed to be the subject matter of the trust, and whether and how it can be identified with certainty ([14]). Madam Justice Mimmie Chan noted  that although in the following cases segregation was lacking, there were other factors present which were sufficient to identify the subject matter with certainty:

  • In Re CA Pacific Finance Ltd [1999] 2 HKLRD 1, relating to the collapse of a securities brokerage, although there were no numbered certificates issued and no earmarking of relevant scrip by number or otherwise, there were strict requirements at each level of the CCASS clearing system to show what securities were held for whom and the quantities of each type of securities held for the account of each client was recorded by the broker ([17]);
  • In Re Gatecoin Ltd [2023] 2 HKLRD 1079, relating to the insolvency of a cryptocurrency exchange platform, the internal ledgers clearly recorded the contributions of cryptocurrency by each account holder and the proportionate share of the undivided bulk to which each account holder was entitled could be identified with certainty ([29]);
  • In Re Hsin Chong Construction Co [2021] 5 HKLRD 212, relating to the insolvency of a contractor, the employer had a “stringent” project accounting system and the retention money could be easily ascertained. For example, there was evidence on how payment was made by the employer, how the retention money had been set aside as capital commitment in the bank account since the commencement of the project[2], how the retention money was maintained throughout, and that the retention money of each nominated subcontractor could be identified clearly at any time ([43]).

Coming back to the present case, as the Plaintiff could only identify the retention monies as all the money in any and all bank accounts of the Defendant, and there was no other evidence before the Court , to show that the location of the retention monies could be identified with more particularity, (for example in one specific bank account, or several bank named accounts, there could not be any certain or identifiable subject matter to be impressed with the trust ([48]).


Parties are advised to be vigilant in safeguarding their interests in ensuring that trust property is preserved in face of any insolvency risk of the counterparty. Especially for fungible property, proactive measures are encouraged, whether by means of contracting (to insert an express obligation to produce proof of segregation) or applying to the court (as the case maybe) at an early stage.

See full judgment here.

[1] The conflict is between segregation being a necessary requirement for the existence of a valid trust versus segregation being only an indicator of the creation of a trust and the absence of which is not fatal ([13]).

[2] Conventionally retention monies are to be kept in a completely separate trust fund for the benefit of another if they are to be impressed with a trust (MacJordan Construction Ltd v Brookmount Erostin Ltd [1994] CLC 581, 586).

22 February 2024
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