Ownership of trust property

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The concept of a trust is often referred to as the most famous creature of equity – that body of law that has its unique roots in common law jurisdictions (for a discussion about equity and its historical origins, see China Business Law Journal volume 3, issue 5: Law or equity?). The concept of a trust has been adopted by many civil law jurisdictions, and by other jurisdictions whose traditions are closer to the civil law system than the common law system. Since 1985, the concept has been the subject of a multilateral treaty, the Hague Convention on the Law Applicable to Trusts and on their Recognition.

The utility and success of the concept of a trust in private property arrangements and commercial transactions (such as investment funds, secured lending and securitisation) have been so great that comparative trust law has emerged as a fast-growing area of academic study. When the term is used generically across jurisdictions, however, it would be more accurate to describe a trust by reference to the outcomes that it produces, such as the holding and management of property by one party for the benefit of other parties, or for an object or purpose permitted by law, than by reference to the doctrinal methodology by which those outcomes are achieved.

Perhaps the greatest difference between the doctrinal methodology adopted by common law jurisdictions and that adopted by other jurisdictions arises in relation to the question of ownership of trust property. In common law jurisdictions, the concept of a trust is based on the recognition of dual (or split) ownership; namely, the recognition of legal ownership of the trust property by the trustee and equitable ownership by the beneficiaries.

It is dual ownership that underpins the essential features of the trust as it is recognised in common law jurisdictions, including the fiduciary duty owed by the trustee to the beneficiaries and the independence (often referred to as the bankruptcy remoteness) of the trust property from the claims of creditors in the event of the trustee’s bankruptcy or insolvency (for a discussion about the difference between bankruptcy and insolvency, see China Business Law Journal volume 4, issue 10: Bankrupt or insolvent?).

In civil law jurisdictions, by contrast, dual ownership is unable to find a place in the doctrinal methodology for a trust as a result of the traditional adherence to notions of patrimony in civil law jurisdictions, and the absolute and indivisible nature of ownership.

The inability of the law to recognise dual ownership has not, however, been an obstacle to the introduction of trust law in China, or in civil law jurisdictions from which China has borrowed in constructing its relatively young legal system.

In A Better Understanding of Common Law Ownership of Trust Property and its Introduction in China Through Comparative Studies (World Publishing Guangdong 2019), the author, Zhang Ruiqiao, sets out “to provide a better understanding of the dual ownership of trust property, to develop the best way the trust can be incorporated into Chinese law, and propose amendments to Chinese legal regime”.

Of particularly interest is that the purpose of the book is not just to reform and plug gaps in the trust law of China, but also to contribute to “a reassessment of dual ownership of the trust in common law, and to the manner in which it can best be renovated and understood in order to meet the needs of economic globalisation and the development of international finance”.

In this highly readable and concise (198-page) book, the author achieves her objective in a way that should appeal not only to readers who have an interest in Chinese law, but also to readers who have an interest in comparative trust law generally. Consisting of five parts, the book provides a brief overview, explores the common law trust and its concept of dual ownership, surveys the introduction of trusts into civil law, outlines the emergence of the trust in mainland China, and concludes by analysing how the outcomes of dual ownership as recognised in common law jurisdictions might be achieved in China, and recommending reforms for this purpose, either by legislative amendment or judicial interpretation. The annexures to the book contain a copy of the Trust Law of China, a table of cases and a table of legislation.

As outlined in part IV of the book, the emergence of trust institutions and trust business in modern China – as distinct from the law governing the concept of a trust – can be traced back to the establishment of the first China trust and investment company, China International Trust and Investment Corporation (CITIC) in 1979.

It took 21 years, and eight years of drafting, however, for the Trust Law of China to be promulgated in 28 April 2001. In the intervening period, various challenges and irregularities arose in relation to the operation and activities of trust institutions, including the bankruptcy of the Guangdong International Trust and Investment Corporation (GITIC), which was placed into liquidation by the People’s Bank of China in 1998.

As one of the many foreign lawyers who acted for creditors of GITIC at the time, I remember the significance of this historic event well. In the following year, I acted for the Dalian International Trust and Investment Corporation in the first international debt restructuring of an “ITIC”.

The promulgation of the Trust Law of China, Zhang Ruiqiao suggests, made China “one of the first socialist and civil law jurisdictions to have introduced a domestic law of trust”. One question, however, has been left unanswered by the Trust Law – a question that has challenged practitioners and academics ever since its promulgation: Who owns trust property? The root of the ambiguity in relation to this question lies in article 2 of the Trust Law, which provides as follows:

Trust in this Law refers to the act by which the settlor, on the basis of trust in the trustee, entrusts property rights 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.

Unlike the trust law in other jurisdictions such as Japan and Taiwan, the term “entrust” was chosen by the legislators in mainland China over the use of the term “assign” or “transfer” (for a discussion about the use of these terms, see China Business Law Journal volume 3, issue 7: Transfer or assign?).

Zhang Ruiqiao suggests that this was not an oversight but instead a conscious decision on the part of the legislators, who at the time were primarily concerned with regulating collective investments, which generally involve the transfer of property to the trustee by investors, and did not see the need to make express provision for the ownership of trust property, or turn their minds to the limitations that were subsequently caused by this ambiguity.

The lack of an answer to this fundamental question, however, has impeded the trust from realising its full potential in China, and has resulted in a trust operating more in the nature of a contractual arrangement than in the nature of a proprietary arrangement. As noted by Zhang Ruiqiao, it is difficult to see how a trustee can obtain any independent control of the trust property and manage efficient trust administration without having the ownership of property. The settlor’s retention of the ownership requires the trustee to seek the settlor’s consent and co-operation in every disposition of the trust property.

In arriving at her recommendation as to how this gap should be plugged, Zhang Ruiqiao undertakes a comprehensive survey of the experience in civil law jurisdictions including Germany, the US state of Louisiana, South Africa, Scotland and Canada’s Quebec province.

Ultimately, part V of the book recommends that China retain the concept of unitary ownership and adopt the binary system of real rights and personal claims. In other words, Chinese law would not recognise dual ownership, but instead recognise the following essential elements of a trust:

. Trust property is owned by the trustee, which would allow for the convenient and efficient management of the trust property by the trustee;

. The trustee has fiduciary duties to the beneficiaries, which would ensure that the administration of the trust by the trustee is in the best interests of the beneficiaries; and

. The beneficiaries have a special claim against the trustee, which would enable them to assert claims and obtain legal remedies in respect of the trust property.

This book makes a persuasive case for the adoption of reforms along these lines.

This article is adapted from a book review to be also published in the Australian Journal of Asian Law.

葛安德 Andrew Godwin

A former partner of Linklaters Shanghai, Andrew Godwin teaches law at Melbourne Law School in Australia, where he is an associate director of its Asian Law Centre. Andrew is currently on secondment to the ALRC as special counsel to assist with its inquiry into corporations and financial services regulation. Andrew’s new book is a compilation of China Business Law Journal’s popular Lexicon series, entitled China Lexicon: Defining and translating legal terms. The book is published by Vantage Asia and available at www.vantageasia.com