Holding Funds in Trust in China
January 31, 2003 | BY
clpstaff &clp articles &On July 18 2002, the same day that the Administration of the Business of Holding Funds in Trust of Trust and Investment Companies Tentative Procedures…
On July 18 2002, the same day that the Administration of the Business of Holding Funds in Trust of Trust and Investment Companies Tentative Procedures (the Tentative Procedures, promulgated by the People's Bank of China) became effective, the first domestic trust plan appeared in Shanghai. The plan, structured by Shanghai AJ Trust & Investment Co., Ltd to help in funding the Shanghai Outer Ring Tunnel Project, launched the appearance and development of a new trust mechanism whereby individual investors are able to inject money into the city's infrastructure projects and other capital-intensive projects. According to the Tentative Procedures, the "business of holding funds in trust" is that in which a grantor, based on his/her confidence in a Trust and Investment Company (TIC), entitles the TIC in its own name to manage, use and dispose of the funds owned by the grantor according to his/her will and for the interests of beneficiaries or for some specific purpose. Also, the Tentative Procedures specify that the TIC can accept the entrustments of two or more grantors and collectively manage, use and dispose of the trust money in accordance with the management methods determined by the grantors or by the TIC on the grantors' behalf. The aforesaid trust plan for the Shanghai Outer Ring Tunnel Project was designed and structured based on the provisions of the Tentative Procedures.
In order to protect the individual investors in trust plans, the Tentative Procedures set out the following:
1. The TIC shall neither represent nor warrant the profitability of the trust funds, nor guarantee the minimal yield.
2. The TIC shall not conduct any sales promotions via newspapers, periodicals, television, broadcasting or other mass media.
3. In the event that the TIC collectively manages, uses and disposes of the trust funds, the trust contracts contained in one collective plan shall not be more than 200, and the trusted value in each single contract shall not be less than Rmb50,000. The PBOC reaffirmed recently that the trust money being collectively managed, used or disposed of under the same scope of use constitutes one collective trust plan. This means that the TIC shall not breach the restriction of 200 trust contracts in a single collective trust plan.
4. The trust contracts shall stipulate the disclosure of the risks.
5. The individual investors shall sign the risk descriptions in relation to the management and use of the trust money while executing the trust contracts, which shall include: (i) the loss induced in the course of managing and using the trust money by the TIC in accordance with the trust documents shall be undertaken by the trust assets; and (ii) that the TIC shall compensate for losses in the event it violates the stipulations of the trust documents in managing, using and disposing of the trust money. And the trust assets shall cover the uncompensated damages.
Since the promulgation of the Tentative Procedures, many TICs have launched "collective trust plans", which are involved in the areas of infrastructure projects, real estate development, education, etc. Individual investors have been very active in these plans. However, so far individual investors entering into trust contracts are at the initial stage of establishing a legal relationship for the trust, and new legal issues may arise along with the progress of these collective trust plans. For example, how are the grantors to supervise the trustee's acts of managing, using and disposing of the trust money? When the TIC violates its obligations, how can the grantors and/or beneficiaries seek relief under the Trust Law, including the right to demand that the trustee change the management of the funds, the right to revoke the dispositions of the trust assets by the trustee and the right to discharge the trustee? In the collective trust plan, if a single grantor or beneficiary exercises the above rights, what pressure will be brought to bear on other grantors and beneficiaries? None of these questions has a clear answer yet. Trust relationships in China are still at a preliminary stage, and whether the statutory rights of the parties in a trust, especially the rights of the grantors and beneficiaries, will be judicially protected still needs to be proven in practice.
By Julian (Shilin) Zhu
Zhong Lun Law Firm
Shanghai
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