Viewpoint... Xinhua Trust Bankruptcy-Is the domestic family trust still worth entrusting?

Published:

2022-08-10

On July 6, 2022, the CBRC published on its official website the Approval of the Bankruptcy of Xinhua Trust Co., Ltd., agreeing that Xinhua Trust would enter into bankruptcy proceedings in accordance with the law. On the same day, the Fifth Intermediate people's Court of Chongqing ruled to accept the bankruptcy liquidation application of Xinhua Trust Co., Ltd. The news of the bankruptcy of Xinhua Trust has attracted great attention in China's financial circles. Since the implementation of the Bankruptcy Law in 2007, Xinhua Trust as a trust company into bankruptcy proceedings is the first case, but in fact as early as July 2020, the CBRC in accordance with the law to implement the Xinhua Trust takeover. During this period, Xinhua Trust also openly recruited investors to participate in the restructuring, but until the expiration of the takeover period, Xinhua Trust has not found a suitable investor, and its eventual bankruptcy liquidation is not without warning. In 2018, the CBI clarified the definition of "family trust" for the first time with Trust "No. 37" and its functions in property planning, risk segregation, asset allocation, children's education, family governance, and public welfare (philanthropy) undertakings. Since then, the family trust business has ushered in a period of rapid development in China. Especially in recent years, as the global neo-crown epidemic continues to ferment, the international situation is unpredictable, and the long-term downward trend of economic development, more and more domestic high net worth families have begun to pay attention to the domestic family trust business, hoping to use trust tools to plan, protect and pass on family wealth. In the case of China's domestic family trust started late and the supporting system is not perfect, the news of Xinhua trust bankruptcy undoubtedly makes them have a huge crisis of trust in the safety of setting up family trust in China. This paper will discuss the security of setting up a family trust in China from a legal perspective, and how to avoid the transmission of the trustee (trust company)'s own risk to the family trust risk. How to protect the property safety of family trust in the 1. of our country's law. Many people think that the law of trust system in China is not perfect, and there is no legal protection for the establishment of family trust in China, which is a misunderstanding. China's "Trust Law" has been promulgated and implemented for more than 20 years, relevant administrative regulations, departmental rules and industry norms have been issued one after another, and the basic legal system of trust has been established. At present, China's legal level is how to protect the safety of trust property, mainly reflected in the following aspects: 1. Independence of trust property Modern trust originated from the "benefit system" in England, which is a unique legal system originated from the common law system. The property rights of the trust system are clearly different from the concept of property rights ("one property, one right") in the Civil Code, which places more emphasis on the separation of ownership and interests of property. The uniqueness of the trust system lies in the "independence of the trust property", that is, once the trust is established, the trust property becomes an independent property: it is neither the property of the principal, nor the inherent property of the trustee itself, nor the property of the beneficiary. Therefore, the most basic function of the trust is "risk isolation", the creditors of the principal, trustee and beneficiary parties can not claim to be paid off from the trust property, the trust property is completely independent of the main body of the profit and loss. 2. Limited nature of trust property management China's Trust Law and the Measures for the Administration of Trust Companies have made clear restrictions on the management of trust property by trustees (trust companies). After the settlor entrusts the property right to the trustee, the trustee must manage the trust property in the best interests of the beneficiary, and his right to manage the trust property is restricted by the law and the trust documents. Concentrated performance in the following areas: 3. Trust property may not be enforced. The Trust Law provides for the independence of trust property, and the creditors of the principal, trustee and beneficiary parties cannot claim settlement from the trust property, which means that the trust property is generally not enforceable by the judiciary. However, Article 17 of the Trust Law also provides for some exceptions in which judicial organs can enforce trust property, which can be summarized into four types: 1. The debts borne by the trust property before the trust is established; 2. The debts arising from the handling of trust affairs; 3. The tax burden borne by the trust property itself; 4. Other circumstances stipulated by law. The law also gives the principal, trustee or beneficiary the right to object to the people's court for the enforcement of trust property in violation of Article 17 of the Trust Law. Article 95 [Litigation preservation of trust property] of the Minutes of the National Court Conference on Civil and Commercial Trials further clarifies that the people's court shall strictly examine the parties' application for preservation measures against the trust property and the beneficiary's right to income, and shall not be permitted for non-statutory reasons. If the preservation measures are not in conformity with the provisions of the law and have been taken, the preservation measures shall be lifted immediately. 4. Bankruptcy Protection First, based on the independence of the trust property, the trust property is not the inherent property of the trust company and does not fall within the scope of the trust company's property, so the property of the family trust will not be included in the scope of the bankruptcy estate. Second, a family trust will not be terminated by the bankruptcy of the trust company. Third, after the bankruptcy of the trust company, it may select a new trustee in accordance with the provisions of the law or the trust documents to handle the transfer of trust property and trust affairs. 2. how to avoid trustee (trust company) risk transmission to family trust risk. Although the Trust Act provides for the protection of trust property, it is not foolproof. After the new capital management rules in 2018, breaking rigid payments has become inevitable, and the trust industry is at a key node to accelerate and deepen its transformation. In recent years, trust products have exploded, especially non-standard real estate trusts, which are greatly affected by the regulation of the real estate market and the downturn of the industry. Will the trust company misappropriate the property of the family trust when facing the huge debt crisis? Is the trust property invested in the trust products with relatively high risks in the management process? After the trust company goes bankrupt, how to select a new trustee? How to transfer the trust affairs and trust property? Such problems will bring great risks to the family trust. Domestic family trusts started late, the initial development is relatively extensive, the establishment process lacks professional guidance and planning, which inevitably lays hidden risks for family trusts. Then, in the establishment and operation of the family trust, how to avoid the subsequent transmission of the trustee's own risks to the family trust, we believe that more attention needs to be paid to the following aspects: (I) establishment link 1, pay attention to the selection of trustees. The shareholder background of China's trust companies is mostly central enterprises, local governments and large financial institutions, and most of the trust companies are subject to the dual supervision of the CBRC and the state-owned assets system, with strong wind control and management capabilities, but management loopholes are not ruled out. In recent years, there have been many cases of trust companies being punished for compliance issues. Choosing a reliable trustee is definitely not only as simple as looking at the shareholder background and asset scale, but also needs to examine the compliance, risk control ability, business composition, service ability and other aspects of the trust company from a professional perspective. Multi-dimensional comparison, especially the optimization of business structure and the key direction of business development after the new asset management regulations, is the key to judge the future development of trust companies. 2, pay attention to the design of the architecture. The financial nature of China's trust industry gives trust companies a strong asset management function, and most institutions guide clients to set up family trusts to pay more attention to asset management rather than legal structure design. Different client types have different needs and purposes for setting up family trusts, requiring targeted planning and design. For customers with enterprise inheritance needs, it is necessary to comprehensively sort out and adjust the equity structure and corporate governance structure of family enterprises, balance the relationship between ownership and management rights, and make tax arrangements and tax planning in advance for trust property or trust income enjoyed by beneficiaries, so as to avoid rights disputes and management confusion when family enterprises continue. For clients who value the need for risk isolation, the need to focus on planning the architectural design of family trusts that are punctured by judicial review. 3, pay attention to the drafting of trust documents. As most of the domestic family trusts are still in their infancy and have not yet experienced storms, many institutions still provide customers with standardized and formatted trust texts, the content is basically copied from the general provisions of the Trust Law, the practicality of the entire trust documents is relatively poor, the future is prone to disputes and difficulties. Just as Xinhua Trust entered the bankruptcy process today, the customers of Xinhua Trust may not have any specific terms agreed in advance in his trust documents on how to select the new trustee, who will select the new trustee, whether the new trustee can fully accept the rights and obligations of the trustee in the original trust documents, and who has the authority to adjust the relevant contents according to what procedures. Moreover, replacing the trustee only after the original trustee has gone bankrupt can put the family trust at a great disadvantage. Therefore, it is particularly important to list the necessary provisions in the drafting of the trust document and set up the corresponding trigger clause. When the trustee's operations or creditworthiness are adversely affected, having a complete trust document that can initiate the replacement process as soon as possible will be more conducive to protecting the interests of the entire family trust and beneficiaries. (II) management link 1. Pay attention to the supervision and protection of family trusts. Article 64 of the Trust Law stipulates: "Public trust shall have a trust supervisor." But the law on whether a family trust should have a supervisor (or "protector") does not make a mandatory requirement. Generally speaking, the supervisor is generated by the provisions of the trust document and is responsible for supervising and inspecting the trustee's handling of the trust affairs and the state of the property. In order to safeguard the interests of the beneficiaries, when necessary, the supervisor may file a lawsuit or carry out other legal acts in his own name. However, in reality, many family trusts do not have monitors, or do have monitors but do not have effective monitoring mechanisms. When the principal is alive, he can basically act as an inspector and supervise the operation of the family trust. However, in the event of the death or incapacity of the settlor, some trust documents are not fully disclosed to the beneficiaries, and without the supervision of the trust supervisor, the family trust will fall into a supervisory vacuum (although there is a corresponding regulatory authority, the intensity of supervision does not touch every specific trust matter). Moreover, if the trustee's own business is in great trouble, it is also very easy to produce moral hazard and make irregularities, thus endangering the property safety of the family trust. 2, pay attention to the revision of the trust documents. At the beginning of the drafting and establishment of the trust document, due to various factors such as imperfect legal support and the actual operation of the principal, it is impossible to achieve perfection. With the continuous improvement of laws and regulations and supporting policies, the initially drafted trust documents will inevitably lag behind the future system, and may even conflict with it. Then for the trust documents leak fill, timely update, add and delete, perfect is the inevitable requirement. The core purpose of setting up a family trust by customers is to "keep wealth and keep family business forever". However, with the passage of time, the types of trust property may continue to be enriched, the number of family members will continue to increase, and the internal and external operations of the family business will inevitably change, Then family trust customers will inevitably have new requirements in investment, taxation, identity planning, family business equity optimization and other aspects. Early trust documents may not be able to meet the long-term needs of the continued inheritance of family wealth, so the necessary exposure and flexible interface must be left at the beginning of the structure design and trust document drafting, leaving room for future changes, as well as the necessary rules for the revision of trust documents. Conclusion The event of Xinhua Trust entering bankruptcy proceedings will inevitably make high net worth customers distrustful of domestic family trusts, but there is no doubt that the CBI's approval of Xinhua Trust's bankruptcy will have a positive impact on accelerating the transformation of trust companies, reshaping the image of the industry and strengthening internal and external supervision. The establishment of a family trust, whether in or outside the country, cannot be perfect once and for all. In the process of establishment and management of family trusts, only by doing a good job in the selection of trustees, risk prevention, internal supervision, and effective compliance with governance rules can the short-term and long-term goals of family trusts be achieved.

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