This year, in the face of the recurring pandemic and ongoing crisis in the real estate industry, the increasingly complex financial market environment poses new demands on, and challenges to, the development of the asset management industry. With the issue of the Notice on Matters Relevant to Revising the Trust Business Classification (Draft for Comment), service trusts have once again attracted market attention from a fresh perspective, with risk disposal trustee service trusts becoming a particular focus of much heated debate.
NEW CATEGORIES
In the past decade or so, financing trusts and channel-type businesses have been the mainstays of the trust industry, but under the combined pressure of economic restructuring and the financial deleveraging cycle, risks accumulated by such traditional trust businesses are now being exposed at an accelerating pace.
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Merits & Tree Law Offices
Since the issue of the Guiding Opinions on Regulating the Asset Management Business of Financial Institutions, regulators have been calling for the trust business to return to its roots. With the objective of “reducing channel-type businesses, scaling down non-compliant financings, and stepping up disposal of risk assets on and off balance sheets”, trust companies have been actively planning for and exploring the transformation of their business in different directions. Service trusts are consistently posing as an important area of exploration in the industry due to their close alignment with the original purpose of trusts.
The notice expressly divides the trust business into three categories, asset management trusts, asset service trusts and charitable trusts. Of these, asset service trusts are further divided into administrative trustee service trusts, asset securitisation trustee service trusts, risk disposal trustee service trusts, and wealth management trustee service trusts. The risk disposal trustee service trusts are appearing to be particularly important against a backdrop of frequent defaults in the traditional financial business.
As a new product category, risk disposal trustee service trusts are divided into enterprise market-oriented restructuring trustee service trusts, and enterprise bankruptcy trustee service trusts, depending on the method of disposal. Mitigation of financial risks is the perpetual theme of financial tasks, and trust companies can greatly advance risk mitigation efficiency by exploiting their advantages in risk isolation and professional disposal capabilities.
HOW IT IS DONE
Thus far, there is no express basis for service trusts found in laws or regulations. The notice defines an asset service trust as a provider of professional trust services, such as custody, risk isolation, risk disposal, wealth planning and intergenerational inheritance, based on a trust’s legal relationship and on acceptance of entrustment by the settlor, that is tailored to the needs of the settlor. As compared to previous relevant documents, the definition expressly adds “risk isolation and risk disposal”.
To our understanding, the chief purpose of establishing a risk disposal trustee service trust is so that a trust company, on entrustment by and in line with the needs of the settlor, can provide the settlor professional trust services such as “risk isolation” and “risk disposal”.
Although trust products are naturally endowed with risk isolation properties, a trust company should, in the course of setting up a risk disposal service trust, focus on the certainty of delivery of the trust property, the validity of the transfer of title to the trust property, the management, application and disposal of the trust property, and the bearing of risks and liability after the transfer of title to the trust property to achieve the objective of “risk isolation”. From the perspective of the trustee’s management responsibilities and authority, a risk disposal trustee service trust has the characteristics of an affairs management trust.
RAISING QUESTIONS
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Merits & Tree Law Offices
How does a trust company handle the relationship between the trustee’s diligent performance of its duties and the execution of the settlor’s instructions when it holds the trust property directly for the purpose of “risk isolation”? There are also questions about the management of the trust property. Most risk disposal trustee service trusts will involve the transfer of equity of the project company, so how are the claim/debt disputes arising before the transfer of the equity of the project company to be dealt with after the trustee holds the equity on behalf of the service trust? Where the service trust is the sole shareholder of the project company, how is pursuit of the liability of the trust company to be avoided in the event that the legal personality of the project company is denied?
How can balance be achieved between the trustee diligently performing its duties to manage the trust property from a professional perspective and the need for the settlor to exercise actual control over its rights and interests in the trust property? When the settlor delivers the trust property for the purpose of achieving risk isolation, how do we effectively prevent any adverse impact on the service trust arising from title disputes to the delivered trust property, or it being listed as the subject matter of enforcement or bankruptcy?
Evidently, the risk disposal trustee service trust is a complex subject and there is still a long way to go, whether in terms of regulatory documents, or from the perspective of the trustee and settlor clarifying their respective needs and balancing the relationship of all parties. In any case, the rights, interests and needs of the settlor remains the central basis for establishing a risk disposal trustee service trust.
It should be further noted that the raising of funds is not involved, debt business may not be conducted under a trust, entrusted funds may not be used to extend trust loans, and channel services may not be provided for illegal activities. These are the four red lines that a trust company may not cross when engaging in service trust businesses.
Long Haitao and Wu Yang are partners at Merits & Tree Law Offices
Merits & Tree Law Offices
5/F, Raffles City Beijing Office Tower
1 Dongzhimen South Street
Beijing 100007, China
Tel: +86 10 5650 0900
Fax: +86 10 5650 0999
E-mail: haitao.long@meritsandtree.com
yang.wu@meritsandtree.com
