A Research On Mechanisms To Balance The Interests Of Independence Of Trust Assets And The Interests Of Transaction Safety

The topic of this paper belongs to the category of the trust law system,theoretically, legal adjustment to the trust relationship is the common task ofeconomic law and commercial law. On one hand, modern commercial trust’s featuresof "businessman characteristic" and "for-profit" has become more and moreprominent, and correspondingly, the trust relationship also reflects the obviouscharacteristics of the commercial law. on the other hand, trust law belongs to thesystem of financial law, and it also belongs to key field that need to be supervised bythe government, accordingly, the trust relationship inevitably becomes the adjustmentobject of economic law. Theoretical study to the trust law system is very little in thetheory academic circles, however, in practice the trust business has a flourishingdevelopment, consequently, to strengthen the study to the trust law theory has becomethe urgent task of economic law and commercial law.Independence of trust assets is the core of trust laws. It is the isolation effect,separation effect, priority effect, chasing effect, exemption effect, transcendence effectand other characteristics that make trust an assets management tool applied around theworld. The essential reason why continental law countries adopt the trust system isthat it facilitates socialized production and people’s needs for assets management. At the moment, commercial trust has become the mainstream of the trust system, such ascollective investment plans, securities investment trust, real estate trust funds, assetssecuritization and financial derivatives. The development of commercial trust willmake people to focus more and more on transaction safety. Independence of trustassets is targeted at protection of trust beneficiary and this inevitably will result inconflicts with third parties’ interests in transaction safety. This is more clearlydemonstrated in continental legal system. The reason for that is because thecommon law legal system focuses on legal effects rather than analysis of componentsof legal tools due to the fact that the common law legal system is objective-orientatedor effect orientated. On the other hand, the continental law countries adopt an“components-orientated” approach and it focuses on analysis of the components. Assuch, the trust system is very flexible in the common law legal system from in whichit was born but such flexibility is rather limited in continental law countries. There itis critical that there shall be certain healthy mechanisms to balance the interests ofindependence of trust assets and the interests of transaction safety. In other words,whether the trust system will succeed in continental law countries will depend onwhether healthy mechanisms to balance the interests of independence of trust assetsand the interests of transaction safety can be established. This is the reason why thisessay chooses this subject.This essay approach the captioned subject from the perspective of external legalrelationship of the trust because it has a very strong practical implication. The reasonfor that is that on one hand, this is the area where there are the most conflicts betweenthe interests of independence of trust assets and the interests of transaction safety andon the other hand, this also relates to coordination between trust law, property law andother commercial laws. The balance between conflicts of the interests of the trustparties and third parties has always been a complicated and special issue in the trustrelationship. How to handle this issue involves not only the legal policies of acountry but also the coordination with its existing legal system. Therefore research onthis subject has both significant theoretical value and practical implications. The firstfour chapters of this essay devote to the theoretical basis for the establishment of thebalance mechanisms and they are followed by three levels of analysis on therelationship between the trustor and third parties, the trustee and third parties and thetrust beneficiary and third parties from the perspective of the external legalrelationship by using the comparative analysis research method, the historical analysis research method and the empirical analysis research method and other researchmethods based on the reality and existing legal system of our country. This essay triesto develop appropriate measures and proposals that may address insufficiency of ourexisting legislation. At the end of this essay, based on proposals regarding ourcountry’s legislation, we came back to China’s trust practice and pointed out factorsthat affect the establishment of mechanisms to healthy balance between the interestsof independence of trust assets and the interests of transaction safety in our countryand proposed the solution, that is, to adopt a trust registration system as soon aspossible and to improve the refinement of the legislation.The new ideas of this essay include:1. The subject of this essay is new. I have done a search on books, essays andarticles on this subject. So far there is no article that is devoted to this subject. Someof articles address partially this subject but there is no in-depth search and analysis.2. The theory on establishing mechanisms to balance the interests ofindependence of trust assets and the interests of transaction safety as developed in theessay is new. The first four chapters of this essay address the theoretical basiswhich connects independence of trust assets and transaction safety by putting trustlaw in the overall background of commercial laws. This analysis method is creative.On that basis, we further discussed the legal basis for establishing such mechanisms.This involves combination of freedom and order, individual efficiency and overallsocial efficiency, static safety and dynamic safety. This is also creative. In addition, itis also new to include the principle of trust publicity and the principle of good faith inthe framework of such mechanisms.3. The system design with respect to the relationship between each of the trustee,trustor and trust beneficiary and third parties is new. The chapters5to7of this essayaddress relationship between the trustor and third parties, the trustee and third partiesand the trust beneficiary and third parties and consider circumstances where mostlikely disputes will arise. Based on analysis and introduction of legislation of eachcountries this essay points out weakness of the legislation of our country and proposessolutions accordingly. The proposed solutions include system design from theperspective of good faith, consideration and registration and are creative.This essay includes a total of8chapters. The first4chapters are a pandect andmainly address the theoretical basis. The following3chapters focus on the conflicts and balance between the interests of the trustor and third parties, between the trusteeand third parties and between the trust beneficiary and third parties. The last chapter isalso a pandect on issues in relation to the mechanisms on balancing the interests ofindependence of trust assets and the interests of transaction safety in our country andrelevant solutions. Details of this essay are as follows:Introduction-this part of the essay first make an introduction to the backgroundof this subject, that is, the fast development of trust in China and inadequacy of thelegislation. Then it addresses the reason why the author picks up this subject and itsimplications, that is, success of trust in continental law countries depends on whethera health balance mechanism can be established. The subject of this essay not only hasimportant theoretical value but also has significant practical value.Chapter1“The theory of independence of trust assets: the localization of thecommon law trust system by the continental law country”-this chapter is the logicalstart of the research under this essay. It firstly proves that the trust system originatedfrom the confirmation of the English land use rights system by the common law andthen stated that the development of the double ownership theory into the theory ofindependence of trust assets is a result of the localization of the common law trust bycontinental legal system. When comparing the views on nature of the rights in relationto trust in continental legal system, the author is in agreement with the “debt–ownership theory”.Chapter2“The reason for establishment of mechanisms to balance the interestsbetween independence of trust assets and transaction safety”–this chapter is the coreof the research under this essay. It firstly states that independence of trust assets is thebasis of the trust system in continental law countries and then made detailedintroductions on the contents and legal effect of the trust assets independence theory.Following that, this chapter addressed the reason for the establishment of the balancemechanism. This chapter suggests that the primary targeted legal interests of thetrust system are the interests of the trust beneficiary. This is consistent with the viewthat the theory of independence of trust assets is the basis of the trust legal system incontinental law countries. In the meantime, as a part of commercial laws, trust lawshall protect transaction safety. Therefore the most important task of the trust law is toestablish balance between the interests of independence of trust assets and theinterests of transaction safety. Chapter3“Legal basis for establishing balance mechanisms between trust assetsindependence and transaction safety”–This chapter firstly points out that theestablishment of the balance mechanism between trust assets independence andtransaction safety is in line with the combination of multiple legal values and thenstudies the combination of freedom and order, individual efficiency and overallsocial efficiency as well as static safety and dynamic safety.Chapter4“System design about establishing balance mechanisms between trustassets independence and transaction safety”-This chapter suggests that the principle ofgood faith and the principle of trust publicity are the two cornerstones of the balancemechanism between independence of trust assets and transaction safety. The authorbelieves that the trust publicity system is not only an important system with respect tothe balance between independence of trust assets and transaction safety but also animportant system design of the localization of trust system by continental lawcountries based on their legal tradition. The trust publicity system also has thefunction of protecting the interests of good faith third parties and the trust beneficiaryas well as the independence of trust assets. In addition to the trust publicity system,the commercial legislation of all the countries also emphasizes the understanding anduse of the good faith principle. This is because the good faith principle not onlyrepresents justice of the law but also reflects protection of dynamic transaction safety.Traditional civil and commercial laws focus on protection of ownership and otherproperty rights. Where property rights are in conflict with other rights, the laws tendto protect the “static” property rights. However, with the development of the marketeconomy and growth of commercial transactions, people pay more and more attentionto transaction safety and order. Therefore where conflicts between “static” propertyrights and interests of good faith third parties arise, the law now tends to protect theinterests of good faith third parties. The same happens to the trust system. Whereindependence of trust assets is in conflict with transaction safety, interest of good faiththird parties typically supersede the interests of the parties to the trust. For example, itis a universal principle that the interests of good faith third parties supersede the trustbeneficiary’s rights to rescission. Although the rules may be different from countryto country, the principle is always the same.Chapter5“Conflicts and balance between interests of trustors and third parties”–This chapter is one of three major line of thinking under this essay and it coversdefects in possession of the trust assets by the trustors, creditors’ rights on trustors to rescission, creditors’ rights on trustors of subrogation. With respect to the defects inpossession of the trust assets by the trustors, the author does not agree to the principleof succession which applies in most countries. The author is of the view that goodfaith trust with consideration that benefit third parties may defeat owners of property.This view is also new. With respect to creditors’ rights on trustors to rescission, theauthor does not agree to the legislation of most countries. The author is of the viewthat creditors’ rights on trustors to rescission cannot defeat good faith trusts withconsideration that benefit third parties. The author is also of the view that relevantlaws shall be refined so far to change rules that are vague and also to include relevantrules on declaration of bankruptcy. Furthermore, the author for the first time proposesthat with respect to collective trust plans, the law shall pay more attention to stabilityof the plans and shall restrict the use of rights to rescission.Chapter6“Conflicts and balance between interests of trustees and third parties”-this chapter is one of the major lines of thinking under this essay and it coverstrustees’ liabilities towards third parties as well as set-off and mixture of liabilitiesbetween trustees and third parties. In the processing of discussing these issues, thischapter focuses on details of relevant laws and regulations. It points out inadequacy ofthe existing legislation and proposes particular solutions to deal with such problems.This is also new. For example, with respect to trustee’s liabilities towards third parties,this chapter points the adequacy of the existing legislation. First of all, the existinglegislation is not very clear on the values it intends to protect. Secondly, our existingtrust laws do not take into account the trust registration system which has beenuniversally adopted by continental law countries. Therefore this article creates asystem on supplementary liability and rights to claim that apply where trustees default.Where there is a set-off between the liabilities of trustors and third parties, theinadequacy of our existing trust laws mainly includes:1) the laws tend to protect theinterests of independence of trust assets and the interests of the trust beneficiary butdo not provide sufficient protection to transaction safety.2) the provisions of the lawslack flexibility. The author suggests that to make the laws more flexible and to followthe principle of contract freedom.Chapter7“Conflicts and balance between interests of trust beneficiary and thirdparties”-this is another major line of thinking under this essay and it involves therelationship between trust beneficiary and buyers of the trust assets as well as therelationship between trust beneficiary and their creditors. With respect to the first relationship, this article makes quite a few creative proposals following discussionwhether the trust has been registered, whether there is a good faith involved, whetherthere is consideration for the sale and purchase of the trust assets. With respect to thesecond relationship, the author suggests that China may introduce some special typesof trust to meet needs of the market, well established principle in the common lawcountries.Chapter8“Issues concerning balance mechanism between independence of trustassets and transaction safety in China and solutions”-the chapter is the foundation ofthis article. The purpose of the study on this subject is eventually to serve China’strust industry. This article points out four obstacles that prevent us from establishingthe balance mechanism in China, that is, unclear trust rights system, the lack oftrustee’s responsibilities, the lack of a trust registration system and primitiveness ofthe legislation. The author suggests that we shall establish a clear trust rights system,improvement of supervising system on trustee’s responsibilities, a trust registrationsystem as soon as possible and refine the existing legislation.The last chapter is a conclusion of this article.This article “A Research on Mechanisms to Balance the Interests ofIndependence of Trust Assets and the Interests of Transaction Safety–From thePerspective of the External Legal Relationship of Trust” includes a total of8chaptersin addition to the chapter of introduction and the chapter of conclusion. The first fourchapters focuse on the theoretical basis. Of these four chapters, Chapter1“The theoryof independence of trust assets: the localization of the common law trust system bythe continental law country” is the logistic start of the entire essay. Chapter2“Thereason for establishment of mechanisms to balance the interests betweenindependence of trust assets and transaction safety” is the core of the theory under thisessay. Chapter3“Legal basis for establishing balance mechanisms between trustassets independence and transaction safety” is the core of the theory. Chapter4“System design about establishing balance mechanisms between trust assetsindependence and transaction safety” is the core of the theory. The above fourchapters constitutes the pandect of this article. The following three chapters goes intodetails of the theory which is an extension of the theory to the trust practice. The threechapters focus on balance of the interests between trustors and third parties, trusteesand third parties and trust beneficiary and third parties. The last chapter “Issuesconcerning balance mechanism between independence of trust assets and transaction safety in China and solutions” is a summary of the article. It also proposes solutions topractical issues in the trust practice in China. This chapter is the foundation of thisarticle.