A Research On Trust Of The Right To Return On Assets

On December6,2013, the case of Kunshan Federation International, which hasdrawn much attention of financial circle, real estate circle, and legal professions, wasadjudicated by Shanghai High People’s Court with its final judgment. The court, bythe principle of ‘Substance over Form’, dismissed the appeal and affirmed the originaljudgment. Thereby, Kunshan Chungao Investment Development, Ltd (Chungao), thedefendant, had to pay the plaintiff, Anxin Trust&Investment Co., Ltd (Anxin)106million yuan of principle of priority and14million yuan of default interest. Also, thefinal judgment confirmed that Anxin owns a priority right, according to the mortgageagreement concluded with Chungao, to be paid from the mortgaged property. Thiscase not only made the trust of the right to return on assets a hot topic, but alsounfolded this new and widely-used trust model; it also triggered the author’s interestto carry out research on this topic.The trust of the right to return on assets is a kind of property rights trust, itbelongs to commercial trust. In brief, it is a trust relationship established throughtransfer the right of specific assets income between the trustor and the trustee. Inrecent years, following the encouragement of regulatory authorities to financialinnovation, numerous trust companies, one after another, have launched a variety oftrust products to which the right to returns on specific assets is the object ofinvestment. The business of such trust shortly gained its popularity; however, sharplycontrast to this popularity, there is no uniform and profound cognition to this kind of trust, neither theoretically or practically. This paper, by starting its research from thetrust dispute between Anxin and Chungao, and combining basic legal principles oftrust law, will try to analyze and discuss trust-related legal issues, clarify the conceptof the trust of the right to return on assets, shed some lights on the legal relationshipbetween parties, and explore the fundamental reasons of its initiation. Meanwhile, bydiscussing the operation of trust in Kunshan Federation International this paper willalso attempt to analyze some current eye-catching legal issues regarding this trust inChina, and then disclose the legal risks in such trust and accordingly provide effectiveprecautionary measures to these risks.There are four chapters in this paper which are demonstrated as below:Chapter one: The case of Kunshan Federation International. The first chapter willanalyze the case of Kunshan Federation International and demonstrate its two basicissues, which are (1) what is the nature of this case, and (2) whether the mortgageagreement is valid or not. As to the first issue, the parties’ dispute focus on whether itis a case regarding financial loan contract or that regarding commercial trust; as to thesecond issue, the parties’ dispute is about whether Anxin could exercise its right to themortgage agreement and therefore enjoy the right to be paid in priority. Secondly, byanalyzing the Court’s decision as to the issues mentioned above, the author found thatChinese judicial practice, on the one hand, has been confirmed the legality of the trustof the right to return on assets, on the other hand, has been recognized the validity ofmortgage guarantee in the trust.Chapter two: Overview of the regime for the trust of the right to return on assets.The second chapter will firstly explain the concept of the trust in detail. Essentially,the trust is a kind of trusts of properties, it is a legal act in which the trustor, with thepurpose of management and financing of legal and non-monetary assets, transfers theright to return on assets, through presell or sell, to the trustee who manages, utilizes,and supervises the trust assets, and also distributes trust benefits to the beneficiary ofthe trust. Secondly, this chapter will analyze two main legal relationships in the trust,namely the trust legal relationship and the legal relationship of agency. Thirdly, thischapter will summarize the legal nature of the trust of the right to return on assets, and discuss its reason of initiation. Finally, this chapter will compare the trust model in thecase of Kunshan Federation International and traditional assembled funds trust,analyze their similarities and differences.Chapter three: legal issues of the trust of the right to return on assets. Thischapter will analyze the legal rationale and basis of viewing the right to return onassets as a kind of trust property. According to the natures or requirements of trustproperty, which are certainty, independence, and transferability, there are two schoolof thoughts as to whether the right to return assets can be set as a trust property. Thepositive scholars characterized this right as a kind of ‘future credit’ by which theyproved the validity of the trust; the negative scholars consider that the right to returnon assets did not satisfy the three requirements of trust property, and thereforeprejudices the safety of transaction. The author, however, supports the positivescholars’ opinion. On the other hand, this chapter will focus on the financingsignificant function about transfer the right of benefit to the trust of the right to returnon assets. By analyzing the concept, conditions, and limits of transfer the right ofbenefit, demonstrate three financing functions of such transfer in the trust which are(1) financing function of direct transfer the right of benefit,(2) financing function ofphased transfer the right of benefit through repurchase, and (3) financing function ofhierarchical transfer the right of benefit. Actually, transferring the right of benefit, aspecial financing method, is the foundation of the trust established in the right ofassets income.Chapter four: legal risks behind the trust of the right to return on assets andprecautionary measures to these risks. This chapter will analyze the legal risks behindthe trust including the risk of legality of the trust property, the risk of trust registration,the risk of compliance of the utilization of trustor’s funds, and the risk ofnoncompliance of trustee to fiduciary duties. The author will provide two methods toavoid these risks, on the one hand, macroscopically improve the trust registrationsystem and establish detailed publicity regulations of trust registration; this will notonly protect legal interests of parties of the trust, but also enhance the supervision ofthe trust business. On the other hand, microcosmically strengthen risk management capacity of parties of the trust especially that of the trust institutions, take precautionsbefore, during, and after the trust in order to effectively lower the risks in this trust.