The Features Of The Trust IN China(2)

III. The trust in China

China introduced the trust principles from common law jurisdictions and made its own statute in the framework of civil law system. The trust is defined in the Trust Law of China as the act, in which “the settlor, on the basis of confidence on the trustee, entrusts certain property rights it owns to the trustee and the trustee manages or disposes of the property rights in its own name in accordance with the intentions of the settlor and for the benefit of the beneficiary or for specific purposes. ”[1]The definition involves two elements: entrustment of property rights to the trustee and the trustee’s management or disposal of the property rights. The trust in China has the following features:

A. “Entrustment” of the trust property

The most significant feature in China’s trust definition, compared with those in common law jurisdictions, is in abandoning the term “transfer” in favor of “entrustment”. In Chinese law, “entrustment” is not a unique legal term for establishing a trust; it is typically used for creating an agency relationship[2](or a mandate) where the agent acts in the name of the principal with the responsibility taken by the latter and the transfer of property to the agent is not required.

The term of “entrustment” rather than “transfer” has proven controversial both as to what it means and the desirability of its consequences. Though the main intention of “entrustment” is to better protect the interests of the settlor and the beneficiary, without the risk of ownership infringement by the trustee, it is problematic actually.

First, without the transfer of ownership, how can the trustee manage or dispose of the property rights in its own name?

Second, “entrustment” means the settlor retains ownership and simply enter into a “trust contract” with the trustee to establish a trust, thus difficult practicalities will arise in these trusts. For example, the trustee’ management is greatly influenced, for every time the trustee seeks to deal with the assets, he will have to prove his authority to do so by producing the trust instrument and (perhaps also) the settlor’s authorization; Besides, If the settlor abuses the ownership, the benefit of the beneficiary will be easily violated, which defeat the very purpose of the trust.

Third, if the trust is only the repeat of the agency (or the mandate), which has been stipulated in relevant statutes in China, then is it necessary to introduce such an institution from common law jurisdictions?

Notwithstanding the absence of expressed wording, it has been argued that ownership of the trust property is, in substance, vested with the trustee. For example, the trust property is defined as property “obtained” by the trustee on the establishment of the trust,[3]and the trustee is required to “transfer” trust property to those entitled upon the termination of the trust.[4]The Trust Law also stipulates that the trust property differs from other properties of the trustee.[5]

B. Segregation of the trust property

The importance of the segregation of the trust fund is recognized by China. In China, the trustee must manage the trust property and his inherent property separately and keep separate accounts, and must manage the trust property of different settlors separately and keep separate accounts.[6]Segregation of the trust property is also reinforced by other provisions:

1. The trust property differs from the property owned by the trustee and shall not be deemed as the inherent property of the trustee or become part of the inherent property. If the trustee dies or disbands or terminates as a result of being canceled or being declared bankrupt according to law, the trust property shall not be deemed as his heritage or liquidation property.[7]

2. Trust property shall not be enforced except under any of the following circumstances:

1) The creditor has already gotten the priority of compensation from the trust property before the trust is established and exercised the right according to law;

2) The debts incurred from the trustee's handling of the trust affairs and the creditor requires the debts to be paid off;

3) The taxes that the trust property are due; and

4) Other circumstances provided by law. (Edited by /www.trustlaws.net/)

If the trust property is enforced against the provisions of the preceding paragraph, the settlor, trustee or beneficiary has the right to make an objection to the people's court.[8]

3. The creditor's right obtained by the trustee through the management, utilization and disposition of the trust property must not offset the debt caused by his inherent property. The creditor's right and the debt caused when the trustee manages, utilizes and disposes the trust property of different settlors must not offset each other.[9]

As mentioned above, segregation of the trust property is also the core principle of China’s Trust Law. Though tracing process and the constructive trust is not expressed stipulated in the Trust Law, such mechanism is represented in some provisions whereof, for example, if the transferee accepts the trust property though he is fully aware that it is against the purposes of the trust, he shall return the trust property or make compensation, and if the trustee takes advantage of the trust property to seek profits for his own, the profits he obtains shall be brought into the trust property.[10]

At the same time, the trust registration is stipulated as the alternative of tracing process and the constructive trust. Of course, the function of the trust registration in segregating the trust property is not powerful and complete, which has some loopholes and cannot parallel with the mechanism in common law jurisdictions.

C. Trustee’s duties

The Trust Law of China elaborates in the provisions on trustees’ duties. Generally, the trustee shall fulfill his duties and perform the obligation of being honest, trustworthy and cautious, and managing effectively.[11]In addition, the trustee shall abide by the provisions of the trust documents and handle the trust affairs for the utmost interests of the beneficiary.[12]Also, such specific duties are imposed on the trustee, as the prohibition of self-dealing,[13]to manage and account separately, [14]to handle the trust affairs in person,[15]to keep records and to report,[16]to keep confidence,[17]and that the profits he obtains through taking advantage of the trust property to seek profits for his own shall be brought into the trust property.[18]

According to the above provisions, the duties on the trustee are generally the same as those imposed in common law jurisdictions. Also the duties are big and specific and can be enforced easily, which provide the great check to the trust. But this formulation still falls short of the comprehensive plethora of duties established in common law jurisdictions, for example, it is unclear whether the duty also embraces the rule against unauthorized profits from the use of the trustee’s position.

D. Involvement of the settlor

Different from the detachment position of the settlor in common law jurisdictions, the settlor in China is in the important position from the establishment to the termination of the trust. The settlor enjoys wide and great rights that are commensurate with those of the beneficiary, for example, objection to the illegal enforcement of the trust property,[19]adjustment of the management methods,[20]removal of the trustee,[21]termination of the trust,[22]and to apply to the court for withdrawing and to ask the trustee(transferee) to revert the trust property or make compensation.[23]

The design of the involvement of the settlor suggests a conception of trust obligations as arising from the “contractual” undertaking by the trustee towards the settlor for the benefit of the beneficiary as a third party; under such a view, the trust is a tripartite relationship whereby the settlor as a contracting party has rights to enforce the trust contract.

Though the settlor’s involvement in trust is to better monitor the trust assets and the trustee and thus realize the benefit of the beneficiary as intended by the legislature, it may go to the contrary. With so big power but so little duties,[24]the settlor not only influences the efficient management of the trustee, but is inclined to infringe the benefit of the beneficiary. As the settlor owns almost the same rights as the beneficiary except that of beneficial enjoyment, when the conflict arises between the settlor and the beneficiary, or even when the settlor violates the benefit of the beneficiary, how can the beneficiary guarantee or protect his benefit?

IV. Conclusion

When the trust is transplanted from the common law jurisdictions, China, as a civil law country, should understand the culture of the trust in common law jurisdictions and solve the compatibility of civil law concepts with common law trust principles. Maybe it is wise to introduce the trust institution as a whole, for obviously principles and technical provisions from common law jurisdictions don’t match the old mechanism in civil law jurisdictions, and may cause great conflicts and hinder the utmost utilization of the trust. We can find such conflicts in the trust registration and the settlor’s rights, let alone the misleading definition of the trust. Accordingly, China should amend the Trust Law in light of common law doctrine and introduce the principles of dual ownership, equitable tracing, and detachment of the settlor to the greatest degree.(Edited by /www.trustlaws.net/)

The following propositions are provided for reference:

1. The concept of the trust is to allow the trustee to efficiently manage the trust assets vis-à-vis the outside world as if he is a real owner, but to do so for the benefit of the specified purposes or persons. The most effective and convenient mechanism to grant the trustee such powers of administration is to transfer ownership of the trust assets to him, whilst imposing duties on him to prevent his abuse of ownership. Of course, coexistence of legal title and equitable title is not possible for civil law jurisdictions, so the right of the trustee and the beneficiary need not be identified expressed in China like in common law jurisdictions.

2. To realize the true segregation of the trust assets, tracing process and the constructive trust should be formally established, rather than the innovation of the trust registration. On the other hand, considering the bona fide doctrine in civil law jurisdiction, tracing process and the constructive trust should be used limited to the transferee of non-bona fide.

3. The detachment of the settlor is an important feature of the trust in common law jurisdictions, which proves necessary for the governance of the trust relations and the balance of rights and obligations of all parties to the trust. So China’s Trust Law should abolish the provisions granting wide rights to the settlor, while allowing trust papers to grant such rights as exception. (Thank ellenshen for this study!<trustlaws.net>)

NOTE:

[1] China’s Trust Law, art. 2.

[2] See General Principles of Civil Law of China, Order No. 37 of the President of the People’s Republic

of China, 1998, arts. 64 and 65.

[3] China’s Trust Law, art. 14.

[4] China’s Trust Law, art. 41.

[5] China’s Trust Law, art. 16.

[6] China’s Trust Law, art. 29.

[7] China’s Trust Law, art. 16.

[8] China’s Trust Law, art. 17.

[9] China’s Trust Law, art. 18.

[10] China’s Trust Law, art. 22, 26 & 49.

[11] China’s Trust Law, art. 25.

[12] China’s Trust Law, art. 25.

[13] China’s Trust Law, art. 28.

[14] China’s Trust Law, art. 29.

[15] China’s Trust Law, art. 30.

[16] China’s Trust Law, art. 33.

[17] China’s Trust Law, art. 33.

[18] China’s Trust Law, art. 26.

[19] China’s Trust Law, art. 17.

[20] China’s Trust Law, art. 21.

[21] China’s Trust Law, art. 23.

[22] China’s Trust Law, art. 50.

[23] China’s Trust Law, art. 22.

[24] the China’s Trust Law does not subject the trustee to any duties like a trustee is.