A Comparative Legal Study On Commercial Trusts

In China, the word "Trusts" is indeed a neology, and before the ChineseTrusts Law was promulgated in 2001, there was even no legal definition of trusts.Anyhow, the practice itself goes beyond its theories and legislations. Backto late 1970s, trust investment companies have experienced rapid growth overa short period of two decades, extending and spreading to various fields ofour economic lives. They have made remarkable contributions to economicactivities, like promoting reform on the old financial market, dispersingrisks of the traditional banking credit system, developing new financingchannels, facilitating the shaping and developing of Chinese stock market,attracting foreign investments and technologies, expediting the internationalcollaborations and so on. But on the other hand, they have also inflictedcertain negative influence and even small-scale economic turmoil on thenation.Starting from year 1982, the Chinese authorities have continuously madethe efforts in regulating the trust industry and made 5-time of regulationcampaign on the trust investment companies which used to be nicknamed as the "bad boys". In Oct 2001, Trust Law was enacted. It is the first legislation in China on legal guidelines and principles for the development of trustindustry. Cheered by this breakthrough, people started to hope the new lawcould help to restore the lost "trust" of the public on the trust firms.However, the expected outcome seems to have not yet arrived. Why the trustinvestment companies in China are still staggering on their way, even withthe rules of the game set in the laws? Is it because there are some muddy areason the way? What are the possible defects in our legislation of trust laws?Are we having an insufficient or even vain supervision on the trust firms'operations?To answer all these questions, this dissertation, based on resources fromboth home and abroad, employing methods of case study, comparison analysisand comprehensive review, makes a creative effort to dig out the root causesfor the current "distrust" problems in the Chinese trust investmentcompanies, to give some distinctive opinions on some controversies in thetrusts industry, and also to propose solutions and suggestions from a legalpoint of view.The dissertation is comprised of six chapters with a total of about 280,000words.The first Chapter-"The Legal Interpretation & Features Study onCommercial Trust", mainly serves the purpose of clarifying the trusts concept,and argues trusts is indeed an institution based on its credit. To achievethat purpose, the beginning of this chapter is devoted to the introductionof some basic concepts and features of trusts. It is also pointed out thatthe concept of trusts in our country is a bit different from that in others,as the ownership of the trust property is not transferred to the trustee. Afterthat, a detailed analysis is made on commercial trusts' classification, functions and their differences from other similar institutions. Trusts hassome distinct advantages like bankruptcy remote, fiduciary obligations, taxscheming and flexibility to avail it to the society. At last, by a study onthe relationship between credit and trusts, the author comes to a conclusionthat trusts has three layers of credibility, which comes from both internaland external relationships as well as the institution itself. In modern society,the credit of trustee has developed from moral degree to legal degree, andhas external features indicating certain personality, propriety andinformation. The approach that the law takes upon credit tends to be motivating.It demands trust institution to strengthen the preventive capacity of creditrisks, improve governance structure and bear liabilities for losing credit.The second Chapter is the "Comparative Research of Trustee's Credit inCommercial Trust". The main purpose of this chapter is to study how trustsconstructs the internal credit relationship among trusts parties, which mainlyinvolves the credit that the Trustee shall have for the settlor and thebeneficiary. Based on credit characteristics, this chapter analyzes andcompares the different credit requirements that Chinese law has imposed ontrust investment companies and fund management companies. It points out thatthese requirements can somehow reflect the trustee's credit. However, it alsohas some drawbacks. For example, the property requirement of credit law cannotstop the occurrence of credit risk, due to insufficient relationship betweencorporate governance and risk control. While the Information requirement, dueto the time-lag, the cost, authentic issues and enforcement ineffectivenessmay also not completely reflect the credibility of trustees. In order toprevent the lose of credit, when it stress the external features of trustee'scredit, the law shall also adopt other approaches to restrain the trustee'sact. The most common approach is to impose strict penalty for the trustee'sunfaithful acts and to refrain him from being dishonest and unfaithful or violating the law, which can be categorized as "reverse-motivating".Therefore, this chapter continues to compare the trustee's obligations andresponsibilities, and finds out the double-channeled feature of trustee'sobligations towards the settlor and the beneficiary, while the trustee is onlyresponsible for the beneficiary in the common law system; Trustee'sobligations in our country are very general, while the trustee's obligationsin common law are very detailed and specific. Moreover, the core of trustee sobligations in common law is fiduciary, namely, the trustee shall serve loyallyand prudently in the best interest of the beneficiary. The trustee cannot seekany of his own interests, which reflects the spirit of equity; In addition,common law's treatments on a trustee's obligations are stricter than thatof Chinese law. With regard to the moral aspect of a trustee, this chapterillustrates the influence of moral hazards, and the complementarities betweenmoral and legal standards. It further suggests that the Chinese courts,self-disciplined institutions actively take part in the promotion of highmorality and integrity.Chapter three is the "Study of Building up the External Credit of TrustParties and the Trusts institution". The main purpose of this Chapter is toanalyze how trusts institution builds up the external credit, which mainlyexplores on the interests balance between trust parties and the third parties.If trusts rules overlook the legitimate interests of the third parties overthat of the settlor and the beneficiary, the trust parties will abuse theirpower and trusts institution as well to escape obligations or obtain unlawfulinterests, which will results a social distrust toward trusts. The externalcredibility of the trusts institution will be mainly displayed by its rulesmade pertaining to the stableness and independence of trust property and tothe trace of the trust property. This chapter first gives out an analysis onthe relationship between the negative rights and the stability of the trusts formation, and the allocation of rights and obligations of trust parties andtheir third parties thereof. Institutional deficiency is discovered in theChinese trusts rules and the interests of a third party acting in good faithhave not been well protected. In order to maintain the external credibilityof trusts, this chapter also intends to illustrate the legal origin of andthe requisites to constitute the bona fide possession rule. By comparison,causes of the aforesaid deficiencies are clarified and improvement measuresthereof are recommended. Also for protecting the interests of a third partybona fide, the last section herein makes an analysis on the public recordingsystem of the country. Further to refuting the viewpoint claiming no publicrecord is needed for trusts, this section proposes to improve public recordingfunction of present trust law, in particular, the manner and rule of publicrecord, authority thereof and determination of the party responsible forfiling the public record.Chapter Four is the "Study on the Credit of Trust Companies in China"By case studies, this chapter is to conclude that improving the governanceof trustees will be the key to various problems of trust companies in China.The bankruptcy case of Guangdong International Trust Company and the trustcase of JinXin Trust Company are analyzed First, where the typical reasonsare found for the lacking in credit in trust companies, and trustee governanceis concluded to be the key role in regulating conducts of trust companies.By enforcing trustee governance, unfaithful conducts could be prevented withregards to related transactions, double agenting, information disclosure,trustees' responsibilities, due care, credibility supervision and so on. Thischapter also points out the poor credit of trust companies relates directlyto the inconsistency of their business scope to their business mode, especiallyreflecting in the trust product of pooled fund, trustees are more likely tobe in bad faith. As such, to strengthen the governance of trustees is also essential to trust companies in business development and expansion. Aftercomparing the business scope of foreign trust companies or similarorganizations, this chapter concludes that the trust companies in China shouldnot play a bank role nor run a comprehensive business, although they have veryclose relations to banks in history. Business scope of trust companies shouldbe mostly in trust business, covering civil trust, court-appointed trust,public welfare trust and trust related commission business. Eventually,through analysis and comparison on foreign trust supervision authorities andcontents, this chapter reaches a conclusion that trust supervision authoritiesshould act in an safe and market-oriented way to motivate compliance.Chapter Five is the "Study on the Credit of the Trustee of Chinese StockInvestment Funds" As with the previous ones, this chapter also sets thearguments on the ground of facts to analysis the current situations andproblems in the administration and supervision of funds management companiesin China through a number of cases. By comparing the different interpretationsof stock investment funds in different countries' laws and also the differentcredit models applied, the emphasis is eventually put on the fact that thetrustee's fiduciary duties are a key feature of stock investment funds, nomatter what credit models are applied. In turn, the author lists out some commonunfaithful practices in the industry, including the "black-curtain"phenomenon & "soft dollar agreements" in the fund industry. Such studiesthen consequently lead to one of the solutions for effective prevention ofunfaithful acts of fund managers-to enhance the governance of trustee.Currently, the Chinese stock investment funds industry has already establisheda set of trustee's governance mechanisms, tike join trusteeships, independentdirectors, compliance offices, fund unit holders meeting, informationdisclosure, external surveillance and so on. However, there are various issuesand problems in the actual execution of such rules and regulations. Therefore going to the end of this chapter, it is proposed that effective reinforcementof the governance mechanisms is a must to improve the credit level of thetrustees of stock investment funds.Chapter Six is the "Study on International Coordination and DomesticDevelopment of Trust". This chapter introduces and analyzes the legalcoordinations of international trusts practice and forecasts the trend of thedomestic trust industry and evaluate the domestic trust industry as a whole.This chapter analyzes the Convention on Application and Recognition of Trustin the process of coordination in connection with jurisdiction, legalapplication and recognition, pointing out the fact that trusts has becomeinternationally recognized and is the reflection of economic globalizationin legal field. Under this background, this chapter evaluates the industrycondition and credit guarantee system of commercial trusts in China, and, byconfirming the performance of the trust industry, concluding out threeelements of the guarantee system, that is, external characteristicrequirements on credit, trustee duty and responsibility requirement andtrustee governance. In the end, this chapter forecast the trends anddevelopments of commercial trusts in China based on the presumption that thetrustee credit is guaranteed.In term of the structure of this paper, chapter one to three emphasize onthe basic theory of trust and trustee credit; chapter four to chapter fiveare based on the practice of business trust in China, making verification,interpretation and supplementation from a practical perspective on theabovementioned theory. Chapter six analyzes the trend of trust from domesticperspective and international perspective respectively. The whole paper isbased on trustee credit and makes practical analysis through theoreticalresearch for the purpose of applying theory in practice and using practice to directing theory.Commercial trusts is a meaningful topic in practice. Theoretical researchshould not only arrive at logical completeness but also be helpful to practiceand satisfy the need for practice. This dissertation attempts to make thefollowing breakthroughs beyond the previous research findings:1. Based on accurately comparison on trust legal systems of severalcountries and experiences and lessons of China's trust system, the authormakes and analyzes the view point that trust is based on credit. The authoranalyzes three elements of the trust credit, i.e. internal credit, externalcredit of the trust parties and the credit of the trust institution, and basedthe whole paper on the trustee credit as a red line.2. According to the strong pragmatic feature of commercial trusts, theauthor have extensively studied the foreign counterparts, and analyzed thecredit problem in the country's trust investment companies and fundmanagement companies. The author raised a series trust governance proposalssuch as credit features, fiduciary duty and responsibility, ethic code, aswell as governance issues. In addition, the author pointed out that all ofthese measures should be combined to achieve optimum results.3. As our country runs specialized finance industry, trustees such as trustinvestment companies and fund management companies are monitored separately.The author, based on the theory of trusts, and with a view to foreign Laws,analyzes the products features of both trust companies and fund managementcompanies and proposes that our country's trust and fund industry to beregulated uniformly.4. Other creativities of this dissertation can be traced in differentplaces, such as the analysis of trusts recording system.It is never an easy job to write a doctor's dissertation. This study is to no exception. The main difficulties encountered in the research are asfollows:1. Trusts belongs to equity law category in the common law jurisdiction,which is old, complicated and has no systemic codification. The study of trustsis quite a challenge to scholars in the common law jurisdiction, and certainlyis much harder for scholars in other jurisdictions. In addition, due to legalcultural differences, in the study of non common law scholars, mistakes areinevitable. In order to correctly understand common law trusts, first handmaterials such as laws and regulations, case laws are necessary. This makesthis dissertation more difficult to write.2. Nevertheless the commercial trusts develop very fast worldwide, thespecialized and systematic study on the subject is still not sufficient. Thishappens not only in those continental law countries with less foundation oftrust history, but also happens in common law countries. Thus, the study ofcommercial trusts is often far behind the date.3. The coverage of commercial trusts is quite extensive, yet verycomplicated. Therefore, the study of commercial trusts not only requires thestudy on legal subjects such as civil law, commercial law, economy law, foreignlaw, law history, law theory, but also the study on non law subjects suchas institutional economy, finance, sociology. This increases the scale ofdifficulty.