Use of reorganisation service trusts in bankruptcy

By Ren Guobing and Lin Shulan, Jingtian & Gongcheng

Since its debut in the bankruptcy reorganisation case of Bohai Steel Group in 2016, the trust mechanism has routinely appeared in high-profile bankruptcy reorganisations such as that of Tewoo Group, Founder Group and HNA Group, for the purpose of effectively balancing the interests between the parties and smoothly proceeding with the reorganisation. This article will explore the legal aspect of the trust mechanism in bankruptcy reorganisation service.

Effectively joining the function of trusts and the demand for bankruptcy reorganisation. During the reorganisation of mega corporations, reorganisation investors are often unwilling or unable to acquire all assets of the target company. If non-core assets that cannot be taken on by investors are to be hastily sold off, the value of such assets will become seriously impaired, which damages the creditors’ interests. The disposal of non-core assets may also affect the whole process of bankruptcy reorganisation.

Ren Guobing
Jingtian & Gongcheng

This problem can be swiftly resolved by the unique nature of trusts: the independence of trust property means that non-core assets may be independent from core assets after being placed under trust, and used exclusively for debt repayment; establishment of a trust does not require prior approval, which speeds up the reorganisation procedure; the flexibility of the benefit distribution mechanism in trusts makes it possible for the proceeds from disposal of trust property to be flexibly distributed to various creditors according to different types of creditors’ rights after the non-core assets are placed under trust; the legal structure of trusts for third-party benefit leaves the trust property to be held and disposed of by a trustee outside the bankruptcy reorganisation relationship on behalf of the trust, ensuring balanced interests for all parties to the bankruptcy reorganisation.

EffectivelyCommon trust structures in bankruptcy reorganisation projects. In practice, enterprise reorganisation is generally divided into sale, subsistence, liquidation and pre-reorganisation before judicial reorganisation. This article will briefly analyse the establishment of reorganisation service trust with non-core assets in typical cases of reorganisation by sale.


The assets and debts of the reorganised enterprise before the establishment of a trust are generally collected under the name of an SPV company, which sets up the trust as the trustor. It should be noted that the PRC Trust Law provides trustors with relatively high authority, such as revoking the trust and dismissing the trustee. Thus, when structuring the trust, attention should be paid to the trustor’s authority during the trust’s existence with consideration of the project status.


The trust industry of China operates under a licensing regime, and for the establishment of a trust company, approval and a financial licence should be obtained from the China Banking and Insurance Regulatory Commission. Where trustee qualification is concerned, in principle, trust companies having obtained trust licences can generally become trustees of reorganisation service trusts.


At present, the trustor serves as the initial beneficiary in the majority of reorganisation service trusts. Creditors obtain trust shares and become beneficiaries by signing with the trustor an agreement on debt repayment with trust share. When the creditor obtains the beneficiary right, the creditors’ rights against the trustor (debtor) are considered paid off.

Duration of trust

The duration of trust is generally set according to the assets to be disposed of. Before the trust expires, the beneficiaries’ meeting may decide to extend the duration of trust according to the status of asset disposal. Using a trust usually provides more time, as the assets to be disposed of can be cashed in in a stable manner and distributed to creditors continuously.

Setting of beneficiary rights

Lin Shulan
Jingtian & Gongcheng

Corresponding to the creditors’ rights being classified into creditors’ rights secured by property, ordinary creditors’ rights and inferior creditors’ rights, beneficiary rights are divided into preferential trust shares, ordinary trust shares and inferior trust shares. It is worth noting that the structural arrangement of a reorganisation service trust is different from that of general investment and financing trust, which is based on entire trust properties. In reorganisation service trusts, proceeds from trust properties are divided into specific proceeds (i.e., the proceeds from disposal of property corresponding to preferential trust shares) and non-specific proceeds (i.e., all proceeds other than the specific proceeds).

The specific proceeds should be preferentially and exclusively distributed to the corresponding preferential beneficiaries. Preferential distribution will be made to each creditor with property security with respect to the proceeds from the collateral over which it has security right before the trust is established. Such structural arrangements enable the creditor secured with original property (i.e., preferential beneficiaries) to receive preferential repayment from the proceeds of disposal of its original collateral through the hierarchical setting of the beneficiary rights, and the preferential distribution of trust interests corresponding to specific property stipulated in the trust contract to override the preferential repayment from the disposal proceeds of security interest provided by law, further demonstrating the flexibility of trust structures.

Trust governance arrangement

The governing bodies of reorganisation service trusts generally include the beneficiaries’ meeting and the management committee. A beneficiaries’ meeting, which comprises all creditors who have been allocated trust shares, is the highest authority and supervisory body of the trust operation, entitled to decide on all major matters of the trust. Generally, the beneficiaries’ meeting sets up a management committee, which is the decision-making and executive body that manages trust affairs according to the resolution and authorisation of the beneficiaries’ meeting. Members of the management committee are generally nominated by creditors. Considering the role of the original management in managing the underlying assets, the committee may include debtors as members when appropriate.

EffectivelyBankruptcy reorganisation service trusts during the trust industry transformation. With the transition period of new asset management regulations coming to an end, how better to serve the real economy is simultaneously the driving force and source of business for the accelerated transformation of the trust industry. The active participation of trust companies in enterprise bankruptcy reorganisation is a good example of trusts serving the real economy, fulfilling their original purposes. Great expectations await the reorganisation service trusts, while we also look forward to regulators issuing regulatory guidelines for the service trust business, including reorganisation service trust, as early as possible.

Ren Guobing is a partner and Lin Shulan is an associate at Jingtian & Gongcheng


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