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?).
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