The PRC's First Trust Law: Trusts Without Chinese Characteristics?

As late as June 2000, drafts of the Trust Law included provisions on trust companies. However, in its final form, the Trust Law is not about trust companies. Officials do not think the time is ripe for such national legislation, and Article 4 of the Trust Law provides that the State Council will promulgate specific measures concerning the organization and management of trust companies. In fact, in January 2001 the People's Bank of China (PBOC) promulgated the Administration of Trust and Investment Corporations Procedures (PBOC Measures) (see China Law & Practice, March 2001).6

Although this is China's first law on trusts, the 1999 PRC, Contract Law includes provisions on entrustment contracts (wei tuo hetong), and there are earlier regulations on trust activity.7 However, no prior statute spelled out the basic parameters of trust relationships, and courts often struggled to determine the right standards to apply.8

Drafting work on the Trust Law was underway as early as 1993, and the Standing Committee of the National People's Congress (NPC) first considered a draft in 1996. The Trust Law includes seven chapters and 74 Articles that focus on the fundamental aspects of trust making and operation.

Although informed by concepts with a long history in common law jurisdictions, the Trust Law is modelled on the adoption of those concepts by other civil law jurisdictions, notably Japan and the Republic of Korea whose trust laws acted as a guide for the drafters.9

From a technical point of view, the law is generally well drafted10, however it still requires detailed implementing rules. Also, the Trust Law retains some of the maddening vague characteristics of PRC legislation - every list of requirements ends with the customary catch-all phrase that amounts to "such other things as we think of later." This provides less certainty than legislation should and leaves the government with potentially unfettered discretion.11

ESTABLISHING A TRUST IN CHINA

A trust, as defined by Article 2 of the Trust Law, is when a settlor (wei tuo ren) entrusts (wei tuo) property rights to a trustee (shou tuo ren) in whom the settlor has confidence, for the benefit of a beneficiary (shou yi ren) or designated purpose (teding mudi), with the property to be managed in the trustee's own name according to the settlor's wishes.12

Establishment of a trust requires a writing that can be a trust contract, a will or another document acceptable under (unspecified) laws or regulations (Article 8). The Trust Law requires that such a writing include basic information to identify the settlor, trustee, beneficiary, trust property and method and manner in which benefits are to be disbursed (Article 9). Failure to adequately specify the property to be put into trust or the beneficiary will cause the trust to be invalid (Article 11).

The trust document may also include matters such as the duration of the trust, the method in which the trust property is to be managed, the arrangements for compensation to the trustee, the method of picking a new trustee and triggers for termination of the trust, but such material is not required (Article 9).

Although a trustee can be either a natural person or a legal person, settlors and beneficiaries can, in addition, be "other organizations established by law," allowing greater flexibility (compare Articles 19 and 43 with Article 24).

TRUSTS WITHOUT CHINESE CHARACTERISTICS?

One notable feature of the Trust Law is that it is largely free of distinctive features. With the exception of a chapter on charitable trusts (see Asking for Permission to Give Away Money: Charitable Trusts in the PRC), the Trust Law in general does not mandate trusts with "Chinese characteristics." The basic definition of a trust, the rights and duties of the parties and other basic aspects of trust law in China will seem familiar to lawyers from other jurisdictions.

Indeed, in other legal contexts, "Chinese characteristics" often amount to restrictions on private activity and government approval requirements. However, the Trust Law establishes no authority to approve the establishment of trusts and requires registration of trust property only when registration is required by other laws or regulations (Article 10). Moreover, trusts can clearly be established for private ends such as the delegation of asset management, inheritance purposes or support in old age. Settlors can undertake all these activities without further government sanction.

Arguably, the Trust Law may simply offload restrictive functions to other laws. For example, while the Trust Law only requires that a trustee be a legal or natural person with civil capacity, the PBOC Measures do place significant restrictions on the establishment of trust companies and inject a government approval requirement. Nonetheless, the Trust Law leaves the creation and execution of trusts largely free of government intervention. Implementing regulations may clarify the intention.

FREEDOM FOR PRIVATE ORDERING

Under the Trust Law, settlors of trusts are allowed considerable flexibility in crafting trust terms. The Trust Law generally provides that the terms in a trust document will trump the default provisions of the Trust Law.

For example, the Trust Law provides for benefits to be equally divided among beneficiaries. The trust document, however, can overrule this default principle and apportion benefits as the settlor wishes (Article 45). The Trust Law also allows a settlor to change beneficiaries as provided in the trust document. Drafters must take care to provide such arrangements; otherwise changing beneficiaries requires beneficiary consent unless the beneficiary has seriously harmed the rights of the settlor or other beneficiaries (Article 51).

TRUST PROPERTY

The Trust Law limits what can go into a trust and who can take assets out of a trust. Under Article 14, "non-circulating" property cannot be put into a trust, and property whose circulation is "restricted" can only be put into trust with permission from "the department in charge." These provisions indicate that trusts are not presently intended as a vehicle for dramatic reform or privatization of SOEs.

Property put into a trust will not belong to the estate of a settlor when the settlor dies nor are trust assets considered assets for liquidation when a legal person is dissolved according to Article 15 (there is an exception if a single person or entity is both the settlor and beneficiary of a trust). Article 37 of the Trust Law provides that a trust is responsible for its own debts but is insulated from a trustee's debts.

Article 12 provides that creditors harmed by the establishment of trusts can ask a People's Court to cancel the trust, though any benefits obtained by good faith beneficiaries prior to revocation of the trust will not be affected. There is a one-year statute of limitations to bring such a suit, running from the time the creditor knew or should have known about the grounds for revocation. Clause 4 in Article 11 also declares, opaquely, that trusts established with the objective of litigation or debt recovery are invalid.

Under Article 17, compulsory measures (qiangzhi zhixing) cannot be brought against trust property unless:

(i) a creditor had a priority claim to the property before it was put into a trust;

(ii) the basis is the repayment of a debt incurred by the trustee in managing the trust property; or

(iii) taxes are imposed on the trust property itself.