Trust Law in Asian Civil Law Jurisdictions : A Comparative Analysis 9781107248496, 9781107023123

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TRUST LAW IN ASIAN CIVIL LAW JURISDICTIONS a comparative analysis

The reception of the trust in civil law jurisdictions has generated considerable conceptual debate internationally and in East Asia. In Trust Law in Asian Civil Law Jurisdictions, the authors:

• provide a detailed comparative examination of trust laws in Asian civil

law jurisdictions from both operational and theoretical perspectives; • discuss the reception of the trust laws in Japan, South Korea, Taiwan and China and the challenges facing them; • engage in in-depth comparative inquiries as to how these Asian legal systems resolve questions pertaining to the trust; and • evaluate the distinctive features of Asian trusts and how they are moulded to suit the civilian legal frameworks within which they are situated. The analysis intersects with the Trento trust project in Europe, but also differs from it by providing valuable perspectives on the ‘Asian’ approaches to trusts for researchers in Asia and the Anglophone world at large. lusina ho is Harold Hsiao-Wo Lee Professor in Trust and Equity at The Faculty of Law of the University of Hong Kong. rebecca lee is Associate Professor at the Faculty of Law of The University of Hong Kong.

TRUST LAW IN ASIAN CIVIL LAW JURISDICTIONS A Comparative Analysis

Edited by LUSINA HO and REBECCA LEE

c a m b r i d g e u n i v e r s i t y p re s s Cambridge, New York, Melbourne, Madrid, Cape Town, Singapore, São Paulo, Delhi, Mexico City Cambridge University Press The Edinburgh Building, Cambridge CB2 8RU, UK Published in the United States of America by Cambridge University Press, New York www.cambridge.org Information on this title: www.cambridge.org/9781107023123 © Cambridge University Press 2013 This publication is in copyright. Subject to statutory exception and to the provisions of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press. First published 2013 Printed and bound in the United Kingdom by the MPG Books Group A catalogue record for this publication is available from the British Library Library of Congress Cataloguing in Publication data Trust law in Asian civil law jurisdictions : a comparative analysis / Edited by Lusina Ho, Rebecca Lee. pages cm ISBN 978-1-107-02312-3 (Hardback) 1. Trusts and trustees–Asia. I. Ho, Lusina, editor. II. Lee, Rebecca, editor. KM216.L39 2013 346.5050 9–dc23 2012047171 ISBN 978-1-107-02312-3 Hardback Cambridge University Press has no responsibility for the persistence or accuracy of URLs for external or third-party internet websites referred to in this publication, and does not guarantee that any content on such websites is, or will remain, accurate or appropriate.

CONTENTS

List of contributors vii Table of cases ix Table of statutes, statutory instruments, international conventions xiii and international documents Preface xxix

part i 1

Overview

Introduction

1

3

lusina ho and rebecca lee

2

Reception of the trust in Asia: an historical perspective

10

lusina ho and rebecca lee

3

Trust law in Japan: inspiring changes in Asia, 1922 and 2006 27 makoto arai

4

Trust law in South Korea: developments and challenges

46

wu y ing-chieh

5

Trust law in Taiwan: history, current features and future prospects 63 wang wen-yeu, wang chih-cheng and shieh jer-shenq

6

Trust law in China: a critical evaluation of its conceptual foundation 80 lusina ho, rebecca lee and jin jinping

part ii 7

Case studies: hypothetical scenarios

Case 1: Creating, managing and terminating the 101 management relationship v

99

vi

contents

8

Case 2: Protecting ring-fenced assets against incompetence of the asset manager 138

9

Case 3: Protecting ring-fenced assets against disloyalty of the 156 asset manager

10

Case 4: Distribution of property in the insolvency of the owner 178

11

Case 5: Protecting ring-fenced assets from the insolvency of the asset manager 209

12

Case 6: Misappropriation and unauthorised disposition by the asset manager 225

part iii 13

Conclusion

257

Emerging principles of Asian trust law lusina ho and rebecca lee

Index

279

259

CONTRIBUTORS

an sung-po Professor, Law School, Chonnam National University, South Korea makoto arai Professor, Faculty of Law, Chuo University, Japan lusina ho Harold Hsiao-Wo Lee Professor in Trust and Equity, Faculty of Law, University of Hong Kong jin jinping Associate Professor, Peking University Law School, China yujiro kishimoto Professor, Graduate School of Law, Ritsumeikan University, Kyoto, Japan rebecca lee Associate Professor, Faculty of Law, University of Hong Kong shieh jer-shenq Professor, Department of Law, National Chung-Cheng University, Taiwan wang chih-cheng Professor, Department of Law, National Chung-Cheng University, Taiwan wang wen-yeu Professor, College of Law, National Taiwan University, Taiwan wu ying-chieh Research Professor of Law, Legal Research Institute, and Part-time Law Lecturer, Korea University

vii

viii

list of contributors

Contributors to the case studies Japan South Korea Taiwan

China

Hong Kong

Yujiro Kishimoto An Sung-Po Wu Ying-Chieh Shieh Jer-Shenq (Chapters 7–9) Wang Chih-Cheng (Chapters 10–12) Wang Wen-Yeu (Chapters 10–12) Lusina Ho Rebecca Lee Jin Jinping Lusina Ho Rebecca Lee

TABLE OF CASES

Australia Breen v. Williams (1996) 186 CLR 71

165

China Bankruptcy Case of Zhengzhou Yaxiya Wucai Shopping Centre Co. Ltd, Case No. 14 of 2003, Supreme People’s Court (9 June 2003) 201 Beijing Haidian Science & Technology Development Co. Ltd v. Shenzhen Xinhua Jinyuan Touzi Fazhan Youxian Gongsi and others, Case No. 14 of 2007, Chongqing High People’s Court (19 March 2007) 88 Yanxin Co. Ltd v. Huabao Trust and Investment Co. Ltd, Case No. 201 of 2004, Shanghai High People’s Court (25 November 2004) 83 Yanxin Co. Ltd v. Huabao Trust and Investment Co. Ltd, Case No. 226 of 2004, Shanghai Intermediate People’s Court (16 March 2005) 83

England and Wales American Cyanamid Co. v. Ethicon Ltd [1975] AC 396 131 Attorney General v. Sands (1668) Hardr. 488 15 Barclays Bank v. Quistclose Investments Ltd [1970] AC 567 33, 103, 189 Barlow Clowes International v. Vaughan [1992] 4 All ER 22 223–4 Barnes v. Addy (1874) LR 9 Ch. App. 244 274 Bartlett v. Barclays Bank Trust Co. Ltd [1980] 1 Ch. 515 135, 148, 155, 269 Bhullar v. Bhullar [2003] EWCA Civ 424; [2004] 2 BCLC 241 165, 171, 268 Bishopsgate Investment Management Ltd (in Liquidation) v. Homan [1995] Ch. 211 255 Boardman v. Phipps [1967] 2 AC 46 166, 171, 268 Bray v. Ford [1896] AC 44 165, 268 Bristol & West Building Society v. Mothew [1998] Ch. 1 207, 268 Clayton’s Case (1816) 1 Mer. 572 223 CMS Dolphin Ltd v. Simonet [2001] EWHC (Ch) 4159; [2001] 2 BCLC 704 165, 268 Copeman v. Gallant (1716) 1 P Wms 314; 24 ER 404 264 El Ajou v. Dollar Land Holdings Plc [1994] 2 All ER 685 274

ix

x

table of cases

FHR European Ventures LLP v. Mankarious and others [2013] EWCA Civ 17 166 Fletcher v. Fletcher (1844) 4 Hare 67 119 Foskett v. McKeown [1998] Ch. 265 255 Foskett v. McKeown [2001] 1 AC 102 231, 239, 253, 276 Garnac Grain Co. Inc. v. HMF Faure and Fairclough Ltd [1968] AC 1130 194 Gibbon, Re (1882) 45 LT 756 129, 150 Grupo Torras SA v. Al-Sabah [1999] CLC 1469 274 Hallett’s Estate, Re (1880) 13 Ch. D 696 224, 275 Higginbottom, Re [1892] 3 Ch. 132 150 Hillier v. Barker Booth & Eastwood [2005] UKHL 8; [2005] 1 WLR 567 207 Industrial Development Consultants Ltd v. Cooley [1972] 1 WLR 443 165, 268 Kay’s Settlement, Re [1939] Ch. 329 120 Kelly v. Cooper [1993] AC 205 207 Knight v. Knight (1840) 3 Beav. 148 207 Learoyd v. Whiteley (1887) 12 App. Cas. 727 135, 148, 269 Lister & Co. v. Stubbs (1890) LR 45 Ch. D 1 271 Lupton v. White (1808) 15 Ves 432 194 Marshall, Re [1914] 1 Ch. 192 131 McPhail v. Doulton [1971] AC 424 91 Milroy v. Lord (1862) 4 De GF & J 264 120 Montgomerie v. United Kingdom Mutual Steamship Association [1891] 1 QB 370 206 Murad v. Al-Saraj [2005] EWCA Civ 959; [2005] All ER (D) 503 166, 272 Oatway, Re [1903] Ch. 356 224, 276 Paul v. Constance [1977] 1 WLR 54 112 Pennington v. Waine [2002] EWCA Civ 227; [2002] 1 WLR 2075 119, 262 Pryce, Re [1917] 1 Ch. 234 120 Regal (Hastings) Ltd v. Gulliver [1942] 1 All ER 378 165, 271–2 Rose, Re; Rose v. Inland Revenue Commissioners [1952] Ch. 499 119, 262 Sandeman’s Will Trusts, Re [1937] 1 All ER 368 131 Saunders v. Vautier (1841) 4 Beav. 115; 49 ER 282 41, 61, 129, 136, 150, 155, 230, 231 Sichel’s Settlements, Re [1916] 1 Ch. 358 129, 150 Sinclair Investments (UK) Ltd v. Versailles Trading Finance Ltd and others [2011] EWCA Civ 347; [2011] 3 WLR 1153 166, 272 Speight v. Gaunt (1883–84) LR 9 App. Cas. 1 135 Suffolk v. Lawrence (1884) 32 WR 899 136 Turner v. Maule (1850) 15 Jur. 761 129, 150 Twinsectra v. Yardley [2002] UKHL 12; [2002] 2 AC 164 189 Vandervell’s Trusts (No. 2), Re [1974] Ch. 269 112 Wheeler and De Rochow, Re [1896] 1 Ch. 315 129, 150 Whiteley, Re (1886) 33 Ch. D 347 148 Wight v. Olswang (No. 2) [2001] CP Rep. 54 148

table of cases

xi

Hong Kong C.A. Pacific Finance Ltd [2000] 1 BCLC 494 223–4 Kao, Lee and Yip v. Koo [2003] 3 HKLRD 296 166, 272 Tang Kai-chung v. Tang Sik-shang [1970] HKLR 276 14 Tang Kam-wah and others v. Tang Ming-yat and another [2003] 1 HKC 532 14 Tang Man Sit v. Capacious Investments Ltd [1996] AC 514 171 Typhoon 8 Research Ltd v. Seapower Resources International Ltd [2002] 2 HKLRD 660 189

Japan Imperial Court Case No. (O) 398 and 521 of 1923 (22 May 1926) 244 Supreme Court Case No. (A) 5403 of 1952 (5 November 1954) 179 Supreme Court Case No. (O) 485 of 1954 (19 December 1957) 33 Supreme Court Case No. (O) 146 of 1963 (24 January 1964) 179 Supreme Court Case No. (O) 1044 of 1968 (7 June 1973) 244 Supreme Court Case No. (Ju) 1671 of 2000 (17 January 2002) 33, 103 Supreme Court Case No. (Ju) 1172 of 1999 (21 February 2003) 179 Supreme Court Case No. (Ju) 1584 of 2010 (17 November 2011) 32

Jersey Federal Republic of Brazil and the Municipality of São Paulo v. Durant International Corporation and Kildare Finance Ltd [2012] JRC 211 255

New Zealand Attorney General for Hong Kong v. Reid [1994] 1 AC 324 268, 271

South Korea Constitutional Court Case No. 99Hun-Ka18 of 2001 14 Supreme Court Case No. 2007da63997 (24 June 2010) 53, 106 Supreme Court Case No. 92da20163 (27 May 1993) 174

Taiwan High Court Case No. 362 of 2005 75 High Court Case No. 343 of 2007 76 High Court Case No. 76 of 2009 75 High Court Case No. 299 of 2009 76 High Court Case No. 181 of 2010 153 High Court Case No. 181 of 2012 142 Kaohsiung District Court Case No. 1073 of 2001

78

xii

table of cases

Supreme Court Case No. 42 of 1977 65 Supreme Court Case No. 272 of 1985 69 Supreme Court Case No. 572 of 2000 75 Supreme Court Case No. 1119 of 2000 75 Supreme Court Case No. 1871 of 2002 75 Supreme Court Case No. 1054 of 2003 75 Supreme Court Case No. 1954 of 2003 75 Supreme Court Case No. 500 of 2006 71 Supreme Court Case No. 41 of 2009 77 Supreme Court Case No. 544 of 2009 70 Supreme Court Case No. 990 of 2009 75 Tainan District Court Case No. 2133 of 2003 78 Tainan District Court Case No. 115 of 2005 78 Taipei District Court Case No. 115 of 2007 78 Taipei Shiling District Court Case No. 39 of 2007 78

TABLE OF STATUTES, STATUTORY INSTRUMENTS, INTERNATIONAL CONVENTIONS AND INTERNATIONAL DOCUMENTS

International Conventions and Documents Common Core of European Private Law Project 1995 7 Hague Convention on the Law Applicable to Trusts and on their Recognition 1985 4 Principles, Definitions and Model Rules of European Private Law, Draft Common Frame of Reference, Book X (Trusts) 2009 4, 260 art. X-1:201 262 art. X-1:202(1) 265 art. X-1:202(2) 263 art. X-1:203 262 art. X-6:101(2) 268 art. X-6:109(1) 269 art. X-7:201 272 art. X-7:202 272 art. X-7:203 272 Principles of European Trust Law 1999 4, 48

Statutes and Statutory Instruments China Administration of Trust and Investment Companies Procedures 2002 Civil Procedure Law 1991 147 Company Law 1994, 3rd revision 2005 144 art. 148 163 art. 149 90, 163 Contract Law 1999 11, 83 art. 2 203 art. 11 111 art. 49 240 art. 54 230 art. 58 243

xiii

111

xiv

table of statutes

art. 60 118, 170 art. 64 110, 119 art. 74 95 art. 96 229–30 art. 107 118, 170 art. 113 118, 146 art. 196 217 art. 396 85, 109, 161, 215–16 art. 399 109, 162, 215 art. 402 109, 186 art. 403 186 art. 406 177 art. 411 110 art. 414 162, 186 art. 423 176, 193 Enterprise Bankruptcy Law 2006 185 art. 38 188, 220, 246 art. 109 187 General Principles of Civil Law 1986 art. 59 246 art. 63 161, 186, 202, 215 art. 64 85, 161, 185 art. 65 85 art. 117 96, 175–6 Guarantee Law 1995 art. 2(2) 187 art. 6 187 art. 89 186 Guidelines for the Risk Management of Personal Financial Management Services Provided by Commercial Banks 2005 216 Interim Measures for the Administration of Commercial Banks’ Personal Financial Management Services 2005 215 Judicial Interpretation of the Law of Guarantee 2000 art. 115 186 art. 116 187 Law of Succession 1985 art. 17 83 Law on Securities Investment Funds 2003, revised 2009, see Securities Investments Funds Law Law on Tort Liability 2010 96 art. 2 97 art. 6 97, 274

table of statutes

xv

art. 15 96 art. 19 96 Measures for the Administration of Individual Foreign Exchange 2006 art. 17 216 Measures for the Administration of Operation of Securities Investment Fund 2004 111 Measures for the Administration of Securities Investment Fund Management Companies 2012 111 Measures for the Administration of Trust and Investment Companies 2002 (repealed) 18, 80 Measures for the Administration of Trust Companies 2007 18, 80, 143 art. 7 26 art. 25 163 Measures for the Administration of Trust Companies’ Trust Plans of Aggregate Funds 2007 18, 80, 111, 143 art. 2 219 art. 3 220 art. 5 219 art. 6 219 art. 11 221 art. 30 221 art. 31 221 art. 32 221 Measures for the Administration of Trust Companies’ Trust Plans of Aggregate Funds 2002 (repealed) 80 Measures for the Pilot Supervision and Administration of the Securitisation of Credit Assets of Financial Institutions 2005 18 Notice of the General Office of China Banking Regulatory Commission on the Relevant Issues for Commercial Banks to Provide Overseas Financial Management Services on Behalf of Clients 2006 216 Property Law 2007 11 art. 2(3) 95 art. 20 95 art. 37 175–6 art. 106 239–40 Provisions on Some Issues concerning the Trial of Enterprise Bankruptcy Cases of the Supreme People’s Court 2002 art. 71 193 Securities Investment Funds Law (Revised Draft) 2011 18 Securities Investment Funds Law 2003, revised 2009 18, 111, 143, 218–19 Tentative Measures for the Administration of Trust Companies’ Trust Plans of Aggregate Funds 2002 (repealed) 18

xvi

table of statutes

Trial Measures for Enterprise Annuities Funds 2004 18 Trial Measures for the Management of Enterprise Annuities Fund 2004 18 Trust Law 2001 12, 80 art. 2 93, 108, 110, 134, 185, 263 art. 3 109 art. 6 85, 111 art. 7 85, 111, 205 art. 8 82, 84, 111, 117 art. 8(3) 111 art. 9 82 art. 9(3) 111 art. 10 23, 84, 117–18, 221 art. 11(1)–(4) 85 art. 11(1) 111 art. 11(4) 111 art. 11(5) 85, 111 art. 13 83 art. 14 85, 88, 96, 228, 276 art. 15 87–8, 94, 266 art. 16 88–9, 94, 110, 193, 265, 266 art. 17 88, 94, 110, 266 art. 17(2) 89 art. 18 88 art. 19 85, 111 arts. 20–23 110 arts. 20–29 134 art. 20 89, 146, 268 art. 20(2) 146 art. 21 84, 134 art. 22 94–5, 138, 145–6, 154, 164, 170, 235, 238, 240, 242, 246, 252, 276 art. 22(1) 92, 96 art. 23 92, 127, 147, 154, 228–9, 248 art. 24 85, 111 art. 25 119, 128, 143, 145, 154, 162–4, 170, 266–7, 269 art. 25(1) 89–90 art. 25(2) 89 art. 26 88, 90, 96, 162–4, 171, 229, 235, 238, 249, 252, 255, 269, 273, 276 art. 27 162, 177, 252, 255, 269 art. 28 88, 90, 162, 269 art. 29 89, 220, 268 art. 29(5) 110 art. 30 85, 89, 110

table of statutes art. 33 89–90, 268 art. 34 89, 93–4 art. 35 90 art. 37 249 art. 39 248, 254 art. 39(3) 194, 221 art. 39(5) 127 art. 40 110, 147, 194, 229, 254 art. 41 229, 254 art. 43 85, 93 art. 48 94 art. 49 89, 92, 95, 134, 145, 268 art. 50 194, 229, 248 art. 51(1), (2) 92 art. 53 126, 194 art. 54 110, 127, 194, 249 art. 55 128 art. 58 128

England and Wales Insolvency Act 1986 s. 283(3)(a) 264 Trustee Act 1925 112 Trustee Act 2000 47 s. 3 135 Trusts of Land and Appointment of Trustees Act 1996 s. 19 129 s. 19(2) 129 s. 19(3) 129 s. 25(5) 129 Variation of Trust Act 1958 41

France Civil Code

11

Germany Civil Code

11, 46

Hong Kong Bankruptcy Ordinance 1931, amended 2005 s. 38(8) 188

xvii

xviii

table of statutes

Code of Unit Trusts and Mutual Funds 2010 para. 4.1 223 para. 4.2 222 para. 4.3 222 para. 5.2 223 App. G 223 Securities and Futures Ordinance 1989, amended 2002 s. 114 112 Sch. 1, Part 1, s. 1 222 Trustee Ordinance 1925 111 s. 24(4) 131 s. 37 128, 149, 155 s. 42 129, 149–50 Sch. 2 135

India Trust Act 1882 16, 20, 27, 46

Japan Adult Guardianship Act 2000 Civil Code 1896 art. 99 195–6 art. 121 38 art. 415 172 art. 416(2) 139, 173, 244 art. 537 102 art. 549 113 art. 550 113 art. 560 189, 197 art. 643 156 arts. 643–55 102 art. 644 167 art. 646(2) 102 art. 656 179 art. 709 38, 274 arts. 839–41 42 Companies Act 2005 art. 309 39 art. 324 39 art. 528(2) 121

20

table of statutes Financial Instruments and Exchange Act 1948 103–4 art. 29 103, 209 art. 43-2 103 Secured Bond Trusts Act 1905 16 Trust Act 1922 12, 15, 27, 46, 79 art. 1 113 art. 23 40 Trust Act 2006 12, 28, 48 art. 2 102 art. 2(1) 28 art. 2(3) 29, 38 art. 2(10) 41 art. 2(12) 43 art. 3 28, 102 art. 3(i) 112–13, 262 art. 3(iii) 267 art. 14 23, 30 art. 16(1) 38, 226, 247 art. 18(1) 250 art. 18(3) 210 art. 21(1) 31 art. 21(1)(v) 31 art. 21(1)(ix) 31 art. 21(2) 31 art. 21(2)(i) 31 art. 21(2)(ii) 31 art. 21(2)(iii) 31 art. 21(2)(iv) 31 art. 23(2) 30 art. 25 103 art. 25(1) 31, 265–6 art. 27 239, 245, 247 art. 27(1) 37, 225, 232, 237, 242, 274, 276 art. 27(2) 37 art. 28(ii) 36 art. 28(iii) 36 art. 29 150, 173 art. 29(1) 19 art. 29(2) 19, 138, 210, 267 art. 30 19, 34, 36–7, 157, 167, 269 art. 31 269 art. 31(1) 34, 157

xix

xx

table of statutes art. 31(1)(i), (ii) 36, 173 art. 31(1)(ii) 36 art. 31(2)–(5) 34 art. 31(6)–(7) 37, 272 art. 32(2) 19 art. 32(i), (ii) 36 art. 33 35 art. 34 35, 268 art. 34(1) 210, 265 art. 35 35, 272 art. 36 35, 268 art. 37 35, 268 art. 38 35, 268 art. 39 35, 268 art. 40(1) 36, 151, 232 art. 40(1)(i) 36, 138, 210 art. 40(1)(ii) 36, 138 art. 40(2) 151 art. 40(3) 36, 173 art. 40(4) 210 art. 44 37 art. 44(1) 151 art. 48(1) 31 art. 49 31 art. 52 31 art. 54(1) 120 art. 58(4) 120–1, 139, 151 art. 58(5)–(7) 121 art. 62 139, 151 art. 92 39 art. 105(1) 39 art. 106(2) 39 art. 107(1) 39 art. 107(2) 39 arts. 108–11 39 art. 113(1) 40 art. 113(2) 40 art. 113(3) 40 art. 113(4) 40 art. 114(1) 40 arts. 123–30 42 art. 125(1) 42 art. 126 271

table of statutes art. 126(1) 43 art. 130(1)(ii) 271 arts. 131–7 42 art. 132(1) 42 art. 133(1) 43 arts. 138–44 42 art. 138(1) 43 art. 139(1) 43 art. 140(1) 43 art. 149 41 art. 149(3)(i) 132 art. 151 41 art. 155 41 art. 163(ii) 267 art. 164 113 art. 164(1) 226, 247 art. 165 121 art. 166(1) 30 art. 177 121 art. 184(1) 121–2 arts. 185–213 44 arts. 194–8 44 art. 207 44 art. 216 30 art. 216(1) 31, 43 art. 217(1) 43 art. 225 43 art. 232 31 arts. 258–61 271 art. 258 271 art. 258(1) 21 art. 258(4) 21 art. 258(8) 21 art. 259 271 art. 260(1) 271 art. 269(2) 271 Trust Business Act 2004 art. 3 26, 104, 209 Trust Business (Regulation) Act 1922 15

Quebec Québec Civil Code 1994 263 art. 1261 262 art. 1278 262

xxi

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table of statutes South Africa

Trust Property Control Act 1988 s. 1 262

South Korea Act on Charitable Trusts 21 Asset-Backed Securitisation Act 1998, amended 2010 17 Civil Code 1958 46 art. 103 57, 169 art. 104 198 art. 390 139, 141, 152, 174 art. 393 158, 168, 174 art. 539 104, 114 arts. 539–42 104 art. 554 115 art. 555 115 art. 557 115 art. 680 104, 114 arts. 680–92 105 art. 681 139–40, 151, 158 art. 683 122 art. 684 122 art. 689 114, 122–3, 152, 226 art. 750 274 Civil Execution Act 2002 art. 48 191 Commercial Code 1962, amended 2011 art. 93 180 art. 101 105, 190 art. 103 190 arts. 101–13 105 art. 397 159 Debt Rehabilitation and Bankruptcy Act 2005 art. 407 191 Enforcement Decree of the Financial Services and Capital Markets Act 2010 art. 104 211 Financial Investment Service and Capital Markets Act 2010, amended 2012 17, 56, 106 art. 6(1) 56 art. 6(1), (5) 107

xxiii

table of statutes art. 8(1) 56 art. 9(18)(i) 212 art. 12 107, 211 art. 46 140–1 art. 64 140, 212 art. 74(1) 180 art. 75(5) 180–1 art. 79 212 arts. 96–101 107 art. 96(1) 139–40, 151 art. 96(2) 140 art. 97(2), (4) 133 art. 102 140, 152, 212 art. 189 212 art. 246 212 Foreigner’s Land Acquisition Act 2008 art. 3 50 Real Estate Investment Trust Act 2001, amended 2007 17 Real Estate Real Name Act 1995 14 Real Name Financial Transaction Act 1982 14 Secured Bond Trusts Act 1962, amended 2010 17 Securities Investment Trust Business Act 1969, amended 2002 Trust Act 1961 12, 46 Trust Act 2011 12, 48 arts. 1–8 48 art. 2 48, 105, 262 art. 3 49 art. 3(1)(i) 49, 105 art. 3(1)(ii) 49, 105 art. 3(1)(iii) 21, 49, 105 art. 3(2) 49, 267 art. 4 23, 213 art. 4(1) 51 art. 4(2) 51, 265 art. 4(4) 23 art. 6 50 art. 7 50 art. 8 50 art. 16(3) 57, 124, 141, 152 art. 21(1) 124, 141 art. 21(2) 124, 141 art. 22 53, 106

17

xxiv

table of statutes

art. 24 52–3, 106, 158, 181, 212, 266 art. 25 52, 266 art. 27 52, 106, 226, 232–3, 276 art. 29 51, 250 art. 31 55 art. 32 53, 116, 140, 152, 267 art. 32 (proviso) 54, 57 art. 33 54, 116, 152, 158, 212, 270 art. 34 152, 159, 212, 270 art. 34(1)(i) 54 art. 34(1)(ii) 54 art. 34(1)(iii) 54 art. 34(1)(iv) 54 art. 34(2) 57 art. 34(2)(i) 54 art. 35 55, 152 art. 36 54, 152, 158–9, 168, 212, 270 art. 37 55, 152, 174, 211–12, 268 art. 37(1) 181 art. 38 211 art. 39 55, 268 art. 41 55 art. 41(proviso) 56 art. 42 55 art. 43 141 art. 43(1) 56, 59, 174, 211, 233, 251 art. 43(3) 56, 152, 159, 168, 272, 274 art. 45 57 art. 46 56 art. 47 56 art. 47(1)(proviso) 56 art. 56(1) 58 art. 56(2) 58 art. 57 58 art. 58(1) 58 art. 59 47 art. 60 47 art. 62 53 art. 63 57 art. 64 58 art. 65(1)(i) 58 art. 67(1) 271

table of statutes art. 68(1) 21 art. 75(1) 58, 233, 237, 239, 241, 242, 274, 276 art. 98(1)(i) 60, 123 art. 98(1)(ii) 61 art. 98(1)(iv) 61 art. 98(1)(vi) 61, 123 art. 99 61, 116, 123 art. 99(1) 116 art. 99(2) 61, 226 art. 99(3) 123, 226 art. 99(4) 116 art. 100 123 art. 101(i) 61 art. 101(ii) 61 arts. 106–13 47 art. 114 53 Trust Business Act 2008 art. 3(1) 26

Taiwan Banking Act 1931, amended 2011 63 art. 3(3), (19) 64 Ch. 6 64 Bankruptcy Law 1993 art. 82 182, 213 art. 110 183, 185, 192, 201, 254 Budget Act 1932 art. 4 64 Civil Code (Code of Civil Procedure) 1930, amended 2007 art. 67 251 art. 103 198 art. 171 63 art. 177 169 art. 184 274 art. 215 244 art. 216 175, 234 art. 348 199 art. 408 116 art. 478 182 art. 528 181 art. 602(1) 181–2 art. 603 181

xxv

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table of statutes

art. 758 73, 191 art. 812 251 art. 813 251 art. 873(2) 70 Company Act 1929 art. 248 64 Deed Tax Act 1940 66 Equalisation of Land Rights Act 1954 66 Estate and Gift Tax Act 1973 66 Financial Asset Securitisation Act 2002 17, 66–7 House Tax Act 1943 66 Income Tax Act 1943 66 Land Tax Act 1977 66 Protection of the Rights of Physically and Mentally Disabled Citizens Act 2009 art. 83 18 Real Estate Securitisation Act 2003, amended in 2009 17, 66, 67 Securities and Exchange Act 1988 art. 18(2) 64 Securities Investment Trust and Consulting Act 2004 17, 66, 107 art. 5(10) 108 art. 7 161, 169 art. 17 153 art. 58 153 art. 113 153 Senior Citizens Welfare Act 2009 18 art. 14 17 Trust Enterprise Act 2000, amended 2008 17, 65, 67, 107 art. 2 26, 108 art. 22 160–1, 169 art. 25 160 art. 27 160 art. 33 26, 108 art. 43(1) 214 art. 48 26, 108 Trust Law 1996 12, 63 art. 1 107, 116, 182 art. 2 71 art. 4 23, 72–3, 184 art. 6(1) 77 art. 6(3) 78 art. 8 183 art. 9 71, 78, 262 art. 9(1) 228

table of statutes art. 9(2) 79, 228, 233, 248, 252, 254, 276 art. 10 72, 74, 266 art. 11 72, 74, 183, 192, 201, 234, 265–6 art. 12 72, 74 art. 12(1) 77, 183 art. 13 72 art. 14 72 art. 18 238 art. 18(2) 235, 244, 277 art. 22 75–6, 141, 153, 159, 169, 267 art. 23 78, 125, 142, 169, 174, 234, 252, 273 art. 24 74, 265, 268 art. 24(1) 200, 213 art. 24(2) 214 art. 24(3) 213 art. 31 125, 268 art. 32 125 art. 34 69, 76, 160, 269 art. 35 76–8, 160, 174, 269, 272 art. 35(2) 160, 273 art. 36(2) 125, 126, 142, 153 art. 36(3) 125, 142, 183 art. 45(1) 182 art. 45(2) 183 art. 50 125 art. 62 183 art. 63(1) 227, 248 art. 63(2) 126, 227 art. 64 124, 133 art. 64(2) 126 art. 65 185 art. 65(1) 124 art. 68 125 Trust Tax Act 67 Value-added and Non-value-added Business Tax Act 1988 66

United States California Civil Code 1872 16, 46 Restatement (Third) of Trusts 2003–2012 19, 48 Uniform Trust Code 2005 19–20, 27, 48 s. 303 25 s. 305 25

xxvii

PREFACE

The trust is an institution that lies at the heart of the common law system. It is also a dynamic device that provides the foundation for a wide variety of personal and commercial arrangements in the common law world. In Asia, the utility of the trust in the modern business environment has prompted civil law jurisdictions – pioneered by Japan – to introduce the trust into their domestic laws as early as the 1920s. The process was, however, not swift. On the one hand, there were conceptual challenges in understanding the nature of the trust from a civil law point of view and in accommodating the trust within indigenous civil law concepts. On the other hand, there were also practical concerns arising from the use of the trust, such as fears of tax evasion. Last but not least, there were added difficulties due to language barriers in understanding relevant English-language materials in an area of law that is predominantly derived from judicial decisions. Nevertheless, almost a century after the Japanese innovation in 1922, most civil law jurisdictions in East Asia have enacted a trust statute of some form. Plenty of books on the domestic trust laws of many civil law jurisdictions in Asia have been written, and much research has been carried out in these jurisdictions on how best to approach this novel institution. Yet most published materials are written in their respective native languages, which renders cross-jurisdictional comparison difficult. The aim of this book is to fill the gap of a comparative study of Asian trust laws. We believe that a book on comparative trusts in major Asian civil law jurisdictions published in English will provide invaluable insights to trust researchers in Asia and beyond. Our hope is to bring about a dialogue between trust lawyers in common law and civil law jurisdictions. Accordingly, the approach of the book is descriptive, analytical and comparative. We have sought to provide an account of the major features of the trust laws in selected Asian civil law jurisdictions, and to highlight the controversies they encounter in transplanting the trust. At the same xxix

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time, we have also attempted to provide focused cross-jurisdictional comparisons through examining the legal response of the law of each jurisdiction to concrete and specific legal issues that are raised in hypothetical scenarios. In this regard, we are greatly indebted to Professors Michele Graziadei, Ugo Mattei and Lionel Smith (see M. Graziadei, V. Mattei and L. Smith, Commercial Trusts in European Private Law (Cambridge/New York: Cambridge University Press, 2005) for kindly permitting us to adapt the common core methodology and follow the case studies in their Trento trust project closely (albeit adding alternative scenarios where necessary). We hope this will in turn facilitate comparison between Asian and European jurisdictions. This book could not have been produced without the collective effort and enthusiastic support of the expert contributors from Japan, South Korea, Taiwan and China. We are extremely grateful to them for their thorough research, engaging discussions and tireless efforts. We have benefited tremendously from their generous sharing of knowledge and expertise with us. We are also grateful to Han Lulu, Chen Min, Bill Wong, Michelle Suh and Eva Yu for research assistance. We sincerely thank Finola O’Sullivan and her team at Cambridge University Press for their patience and coordination. We also gratefully acknowledge the financial support from the Research Grants Council of Hong Kong (GRF Award No. H744107). It has been almost five years since the present book project was first conceived. During this period our two babbling babies have grown into talkative pre-schoolers. It has been a challenging journey, and we are grateful for the support and encouragement we gave each other. Needless to say, we also thank our families for their unconditional love and patience. We have sought to state the law as at 15 August 2012. For ease of reference, we have also added the country prefix (and year of enactment where necessary) to the name of the relevant statutes under examination (for example, Japanese Trust Act, as opposed to Trust Act) even though these often do not form part of the official name of the statutes. Lusina Ho and Rebecca Lee University of Hong Kong

PART I Overview

1 Introduction lu s i na h o a n d re b e c c a l e e Background The trust is one of the most popular legal institutions for wealth management in common law jurisdictions. In recent years, there has been a significant burgeoning of interest in the reception of the trust in civil law jurisdictions, which has fuelled enthusiasm in the comparative study of trusts around the world.1 Several reasons account for this development, but two of them are more prominent. In the first place, the trust has been seen as a useful and flexible tool for asset management. There was thus a desire amongst some civil law jurisdictions to use the trust to enhance their financial infrastructure.2 Secondly, the trust has been increasingly seized upon by wealthy individuals who own assets in multiple jurisdictions for holding family wealth and making succession plans in a taxefficient way. Settlors whose domicile is in civilian jurisdictions that practise forced heirship rules have also been drawn by the perceived advantage of offshore trusts to oust these rules. Even if a civil law jurisdiction does not intend to transplant the trust, its legal system will still need to devise rules to determine whether and how to recognise it. While the transplantation and recognition of this uniquely common law institution into a civil law setting is a fascinating subject, it has also perplexed lawyers in both worlds.3 Civil law jurisdictions in Europe have 1

2

3

See e.g., Maurizio Lupoi, Trusts: A Comparative Study (Cambridge: Cambridge University Press, 2000); Alon Kaplan (ed.), Trusts in Prime Jurisdictions (3rd edn, London: Globe Law and Business, 2010); Charles Gothard (ed.), The World Trust Survey (Oxford: Oxford University Press, 2010); David Hayton, The International Trust (3rd edn, Bristol: Jordans, 2011). Sarah Worthington, ‘The commercial utility of the trust vehicle’ in David Hayton (ed.) Extending the Boundaries of Trusts and Similar Ring-fenced Funds (The Hague/New York: Kluwer Law International, 2002). Some of the difficulties have been explored in, for example, Vera Bolgar, ‘Why no trusts in the civil law?’ (1953) 2 American Journal of Comparative Law 204; Tony Honoré, ‘On fitting trusts into civil law jurisdictions’, available at users.ox.ac.uk/~alls0079/chinatrusts2.PDF

3

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overview

begun to look more closely at these issues in the 1980s, culminating in the conclusion of the Hague Convention on the Law Applicable to Trusts and on their Recognition in 1985.4 The Hague Trusts Convention enables individual states to recognise overseas trusts by laying down a framework for the resolution of conflicts of laws between common law and civil law jurisdictions. Subsequently, the Principles of European Trust Law 1999 set forth the core principles for domestic trusts.5 Most recently in 2009, following the Action Plan of the European Commission in 2003 to devise a Common Frame of Reference to harmonise European Private Law, Book X, entitled ‘Trusts’, of the Draft Common Frame of Reference was published. It contains detailed provisions about all aspects of the trust, which can function as an optional instrument for adoption by potential settlors.6 These European efforts have shown that the trust is not an exclusive institution for common law jurisdictions. Rather, it can be understood in civilian terms, and the legal structure of the trust can be replicated, albeit with appropriate modifications in civil law jurisdictions, which know no distinction between common law and equity.7 In Asia, Japan pioneered the reception of the trust in as early as 1922. The Japanese Trust Act was adopted as part of South Korean law during the Japanese occupation from 1910–1945, and thereafter by a separate Korean Trust Act in the 1960s. Interest in the trust, however, has lain

4

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(last accessed 15 August 2012); Tony Honoré, ‘Obstacles to the deception of trust law? The examples of South Africa and Scotland’ in Alfredo Mordechai Rabello, (ed.), Aequitas and Equity (Jerusalem: Hebrew University of Jerusalem, 1997); James Koessler, Is There Room for the Trust in a Civil Law System? The French and Italian Perspectives (1 March 2012), available at http://ssrn.com/abstract=2132074. See generally, Jonathan Harris, The Hague Trusts Convention: Scope, Application and Preliminary Issues (Oxford: Hart Publishing, 2002). D.J. Hayton, S.C.J.J. Kortmann and H.L.E. Verhagen (eds.), Principles of European Trust Law (The Hague: Deventer, 1999). Christian von Bar and Eric Clive (eds.) Principles, Definitions and Model Rules of European Private Law: Draft Common Frame of Reference (DCFR) (Oxford: OUP/Sellier, 2010). For commentaries on this project, see Alexandra Braun, ‘Trusts in the draft Common Frame of Reference: the “best solution” for Europe?’ (2011) 70 Cambridge Law Journal 321; Stephen Swann, ‘Book X (Trusts) of the DCFR’ (2011) Edinburgh Law Review 462; Kenneth Reid, ‘Constitution of trust: a Scottish perspective’ (2011) Edinburgh Law Review 467; Ben McFarlane, ‘An English perspective: two cheers for Book X’ (2011) Edinburgh Law Review 467; Alexandra Braun, ‘An Italian perspective’ (2011) Edinburgh Law Review 475; Serf van Erp, ‘A Dutch perspective’ (2011) Edinburgh Law Review 479. Note also the proposed Directive of the European Union on Protected Funds: S.C.J.J. Kortmann et al., Towards an EU Directive on Protected Funds (Devanter: Kluwer, 2009). Cf. George Gretton, ‘Trusts without equity’ (2000) 49 International and Comparative Law Quarterly 599.

introduction

5

dormant until the past decade or so, probably due to the enactment of the trust laws in Taiwan in 1996 and China8 in 2001, as well as reforms of the trust laws in Japan and South Korea in 2006 and 2011, respectively.9 These jurisdictions see the practical advantages of the trust in facilitating the development of financial products that suit the fast-changing pace of the modern investment market. The recent spate of reforms in Japan and South Korea, in particular, saw the adoption of features traditionally absent in the trust concept. These developments have rekindled discussion of long-standing theoretical issues, such as the nature and essential elements of the trust relationship,10 the necessity and desirability of granting legal ownership to the trustee, the utility of the concept of patrimony to the trust,11 and the nature of the beneficiaries’ rights vis-à-vis personal creditors and transferees of the trustee.12 Resolution of these issues is particularly important for civil law jurisdictions to overcome perceived difficulties in transplanting the trust, such as the principle of indivisibility of ownership and the numerus clausus principle that restricts the creation of new property rights. In addition, civil law jurisdictions in Asia tend to apply the trust in a variety of complex commercial and financial instruments regardless of the lack of support in domestic legal infrastructure, and may consequently put strain on the trust and other related laws. In light of these general questions about the nature of the trust, as well as specific issues arising from the reception of the trust in Asian civil law jurisdictions, the present book aims to achieve three goals, which will be dealt with in Part I, Part II and the Conclusion of this book: (1) Part I provides an overview of the background and reception of the trust in Asia, and identifies the major and distinctive features of trust laws in civil law jurisdictions in East Asia which bear great 8

9 10

11

12

For the purpose of this book, China or the People’s Republic of China (PRC) is used to mean mainland China excluding Hong Kong and Taiwan (and Macau). For details, see Chapters 3 and 4. See e.g., Tony Honore, ‘Trusts: the inessentials’ in Joshua Getzler, (ed.), Rationalizing Property, Equity and Trusts: Essays in Honour of Edward Burn (Oxford: Oxford University Press, 2003); Lupoi, Trusts (note 1 above), pp. 223–35. Pierre Lepaulle, Traité théorique et practique des trusts en droit interne, endroit fiscale international (Paris: Rousseau et Cie, 1932); Kenneth Reid, ‘Patrimony not equity: the trust in Scotland’ (2000) 8 European Review of Private Law 427; Lionel Smith, ‘Trust and patrimony’ (2009) 28 Estates, Trusts and Pensions Journal 332. D.M. Waters, ‘The nature of the trust beneficiary’s interest’ (1967) 45 Canadian Bar Review 217; A.W. Scott, ‘The nature of the rights of the “cestui que trust”’ (1917) 17 Columbia Law Review 269.

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overview

resemblance in terms of socio-economic conditions to one another (namely, Japan, South Korea, Taiwan and China). (2) Part II seeks to compare, by way of hypothetical scenarios, the trust laws and operational experiences of the civil law jurisdictions in Asia to those in common law jurisdictions (in particular Hong Kong). (3) The Conclusion draws upon the unique features of Asian civil trust laws and considers how they reflect the Asian attempt to accommodate the trust within indigenous legal doctrines in civil law. It will conclude by examining whether a set of ‘Asian’ principles of trust law can be discerned, and how far, if at all, they can provide a useful reference for European jurisdictions considering the adoption of the trust.

Structure and methodology Part I Chapter 2 outlines the reception of the trust in Asia, and highlights recent trends in the development of trust law in this region with a view to identifying both the theoretical issues it faces in transplanting the trust, on the one hand, and the practical issues arising from the predominantly commercial application of the trust, on the other. This general overview will be substantiated by four chapters (Chapters 3–6), each of which deals with a civil law trust jurisdiction in Asia. The jurisdiction-specific chapters will provide focused analysis on the historical developments of the trust, major and unique features of the trust law, and latest reforms in each of the jurisdictions under survey. These jurisdictions are Japan, South Korea, Taiwan and China, and they are considered in the chronological order in which the trust was first received. These four civil law jurisdictions are chosen for study in the book primarily because they are all civil law jurisdictions in East Asia that have enacted trust statutes, and they also resemble each other in terms of cultural background and socioeconomic conditions. Needless to say, practical constraints on resources do not permit encompassing all civil law jurisdictions in Asia.

Part II Part II is an empirical baseline study that provides cross-jurisdictional comparison on a common set of specific legal issues. It posits a set of hypothetical case scenarios and examines the legal responses of each of

introduction

7

the Asian jurisdictions to the specific issues raised in them. This methodology will help supplement the general survey in Part I by providing a focused study of the similarities and differences of the trust laws in these jurisdictions at a more concrete and hopefully meaningful level. This approach draws inspirations from, and hence follows closely, the Trento trust project. In 1995, Professors Ugo Mattei and Mauro Bussani launched a comparative law study project based in Trent known as ‘The Common Core of European Private Law’.13 The project made use of hypothetical fact patterns to study several areas of private law. The Trento trust project was part of the common core project. It focused on commercial trusts, and studied the extent to which there are common underlying trusts principles in European legal systems.14 The present book has chosen to adopt the Trento scenarios, and has only supplemented but not altered them by including a few additional variations of facts. In this way, not only will the present book provide a comparative study of the approaches within Asia, it will also enable comparative inquiries between these Asian and European jurisdictions on a common range of specific legal issues. Specifically, the hypothetical scenarios in Part II examine the operational experiences of the trust pertaining to the protection of the segregated trust funds from trustee incompetence, disloyalty or insolvency in the Asian civil law jurisdictions under review. The position of Hong Kong is also briefly considered to provide a contrast with the common law position. Six hypothetical scenarios are devised. The hypothetical scenarios are designed to bring out the similarities and differences between common law and civil law trusts and hence the doctrinal challenges in introducing the trust into civilian jurisdictions. The organisation of the hypothetical scenarios is as follows: • Case 1 deals with the creation of a trust. Apart from illustrating the formal and substantive requirements for establishing a trust, there will be specific focus on fundamental questions as to the relationship between trust and other analogous devices in civil law, and the necessity of transfer of ownership of trust property to the trustee.

13 14

For details, see www.common-core.org/ (last accessed 15 August 2012). The results were published in Michele Graziadei, Ugo Mattei and Lionel Smith, Commercial Trusts in European Private Law (Cambridge/New York: Cambridge University Press, 2005).

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overview

• Cases 2 and 3 deal with the duties of trustees and the remedies for breach therefor. Questions such as whether there exists a fiduciary obligation of loyalty, and the scope of remedies for a breach of trust (e.g., compensation, disgorgement, restoration alongside civil law remedies such as annulment) will be discussed. • Cases 4 and 5 address the effect of insolvency of the trustee on the trust fund, and raise questions such as the extent to which the segregation of the trust fund can sufficiently protect the beneficiaries. • Case 6 is concerned with personal remedies against third party transferees of funds obtained in breach of trust. In order to keep the project within reasonable bounds, the hypothetical scenarios examine only the use of trusts (and analogous devices) in the commercial sphere. We have also omitted from the scope of the project the use of the trust as a device for the transfer of wealth within the family, devolution of property upon death and for charity purposes.15 There are undoubtedly challenges involved in the current methodology. Because of the language and terminological differences across the five jurisdictions under consideration, much effort is needed to avoid being lost in translation. For example, the same legal term ‘rescission’ or ‘compensation of loss’ involves significantly different rules between common law and civilian jurisdictions. Conversely, divergent legal terms and English translations that have been recognised by their indigenous jurisdictions might actually refer to the same concept. What is called the ‘bare trust’ in common law exists as ‘nominal trust’ in South Korea and ‘borrowed-name trust’ in Taiwan. There is also established trust terminology in Asian civil law jurisdictions, such as the ‘self-benefit trust’ (viz. a trust whereby the sole settlor is also the sole beneficiary of the trust), which may not have received special attention let alone designated terminology in common law jurisdictions. Notwithstanding these obstacles, the scenario-based approach to comparative study adopted in the present book has a number of advantages. First and foremost, by extracting the legal responses of the respective jurisdictions to a common set of concrete facts that raise legal issues at a specific level, one may better appreciate the similarities and differences between these jurisdictions at a more precise level. For example, the same set of facts may give rise to a trust in some jurisdictions but mandate or agency in others. 15

The Trento trust project also omits these areas from its scope: Graziadei et al., Commercial Trusts (n 14 above), p. 34.

introduction

9

There may also be different views within the civil law systems. Contrasting approaches at the fundamental level of the legal category adopted to analyse the same fact pattern shed light on how extensive the scope and operation of the trust in different jurisdictions is in practice. Secondly, the scenario-based approach makes it easier to appreciate that even in civil law soil, the transplanted trust can perform most of the functions that a trust achieves in common law, and often in much the same way, without any harm to its civil law environment. This will help understand the essential features of a trust and the conceptual basis of the Asian civil law trust, as will be addressed in Part III.

Part III The unique features of Asian civil law trusts and the way their laws respond to the hypothetical scenarios will likely prompt reflections about the common features of a classic English trust: are all the features commonly found in an English trust essential to the existence and sustenance of a trust? Bearing in mind the conceptual difficulties in transplanting a trust into civil law jurisdictions and the distinctive features of the Asian civil law trust as identified in previous Parts of the book, the Conclusion examines the core concept behind the trust, and seeks to set forth its essential features. It will argue that Asian civil law trusts do meet the essential requirements of a trust, and that the omission of some common elements of the English trust, as well as the inclusion of elements traditionally not associated with it, have not done any injustice to the integrity of the trust concept. In the final analysis, it is hoped that the depth and variety of legal perspectives presented in the reports will enhance the understanding of the trust concept and its practical operation, and with it the development of a widely if not universally acceptable template for devising a coherent trust concept that can also accommodate permutations necessary for the context in which it is applied.

2 Reception of the trust in Asia: an historical perspective lus i na h o a n d re b e c c a l e e

Introduction The aim of the present chapter is to provide an historical overview of the reception and development of the trust institution in the four Asian civil law jurisdictions under review, namely Japan, South Korea, Taiwan and China. An understanding of the motives and socio-economic background behind the reception of the trust in these jurisdictions will help understanding of the black-letter provisions of existing statutes. Equally, an appreciation of the future needs of these societies will help set directions to shape the development of the trust to meet these needs. The trust is a flexible and popular mechanism used widely in common law jurisdictions to manage property relations, commercial transactions and community affairs. It also divides English law from continental European systems in the legal form typically used by their inhabitants for tax planning, asset management, passing wealth to future generations and keeping it within the family, managing charitable giving, structuring collective investment schemes, and providing insolvency protection in commercial transactions, to name but a few. Ironically, partly as the result of imperialism two centuries ago, the same divide is replicated in present day East Asia. Depending on the accidents of history, the legal systems in these jurisdictions follow those of either their former imperial rulers or the country that held the most sway over their legalpolitical enlightenment. For example, on one side of the divide falls Hong Kong, Singapore and Malaysia, which have inherited the common law system – and through it the trust – from their former British sovereign. On the other side one finds Japan, Taiwan, South Korea and China, all of which adopt the civil law system, albeit as the result of varying, but connected, histories. Amongst East Asian jurisdictions, Japan was the first to adopt its own Civil Code. The Meiji Restoration of 1868 catapulted Japan from 10

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agricultural feudalism to democratic constitutional monarchy with a civil law system based on the Prusso-German model.1 The Meiji Civil Code 1898 drew primarily upon the German Civil Code, albeit there were influences from the French Civil Code, and the final product was the result of a comparative study of these two European codes.2 Significantly, the chapters on obligations and property in the Meiji Civil Code were almost entirely foreign, whereas those on family and succession reflected existing Japanese rules at the time. The Japanese Civil Code was extended to Korea during the Japanese occupation in 1915–1945, and also to occupied Taiwan during 1895–1945. When Taiwan was handed back to China after the end of the Second World War in 1945, the Nationalist government at the time applied the Civil Code that it had drafted for China but had not been able to implement due to political turmoil and warfare in China. Due to the influence of Japan, this Code likewise took considerable reference from the German Civil Code, and continued the comparative approach of drawing from the Civil Codes of Switzerland, France and Japan.3 The Taiwanese Civil Code remained in place, albeit with subsequent revisions, when the Nationalist government retreated to Taiwan after having been defeated in mainland China by the Communist Party in the civil war in 1949. The People’s Republic of China that was established in mainland China that year adopted a Socialist legal system that followed the Soviet Union and former Eastern European countries. Nonetheless, Soviet civil law was substantially influenced by the German Civil Code, and so was the Chinese General Principles of Civil Law 1986. These General Principles resemble the General Part of the German Civil Code, as China is still in the process of drafting a full Civil Code. Although China had promulgated a Contract Law in 1999 and a Property Law in 2007 with increasing borrowing from Anglo-American law, the German conceptual framework with respect to property remains dominant. Consequently, despite their different trajectories, Japan, Taiwan, South Korea and China converge in the adoption of German-based Civil Codes, and with it the absence of the trust in their private law regimes. Interestingly, all of these four East Asian civil law jurisdictions have shown considerable 1

2

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At the time, there was trade and diplomatic exchange between Japan and Prussia, leading to the Treaty of Amity, Commerce and Navigation 1861 between these two nations: see generally, Louis M. Cullen, A History of Japan 1582–1941: Internal and External Worlds (Cambridge/New York: Cambridge University Press, 2003). Tsung-Fu Chen, ‘Transplant of Civil Code in Japan, Taiwan, and China: with the focus of legal evolution’ (2011) 6 National Taiwan University Law Review 389, 397. Ibid. 401.

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audacity, pragmatism and innovation in transplanting the common law trust into their civil law environments. Perhaps because they have had a long history of conducting comparative studies of Western legal systems for the purpose of transplanting useful concepts into their domestic systems, they have gone further than their European counterparts in many respects. Japan spearheaded the reception of the trust in civil law Asia by enacting the Japanese Trust Act in 1922,4 which was extended to Korea during the Japanese occupation of Korea. After the end of colonial rule, South Korea also enacted its own Korean Trust Act 1961,5 followed by Taiwan in 19966 and China in 2001.7 All three subsequent trust legislations drew heavily upon the Japanese Trust Act 1922, while Japan itself was dissatisfied with the limitations of its first trust legislation, and enacted a revised Japanese Trust Act in 2006.8 The Japanese Trust Act 2006 incorporates many features traditionally not found in the common law trust.9 The Japanese reform sparked off a spate of trust law reforms and the drafting of second-generation trust laws in Asia. For example, South Korea enacted the Korean Trust Act 2011,10 which is modelled closely upon the new Japanese statute. Taiwan followed suit by announcing the reform process in 2009. There is as yet no news of the revision of the Chinese Trust Law, albeit considerable demands to do so. This brief survey shows that despite being latecomers to the family of domestic trust jurisdictions, these four Asian jurisdictions have taken great strides in coming to grips with the trust concept and seeking to modernise it to suit their local needs. In light of this, the present chapter seeks: first, to consider the common themes in the past reception, present application and future development of the trust in these jurisdictions; and secondly, to identify the theoretical and practical challenges facing 4 6

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5 Act No. 512 of 1922. Trust Act of the Republic of Korea, Act No. 900 of 1961. Trust Law of the Republic of China, promulgated on 26 January 1996; amended on 30 December 2009 (hereafter ‘Taiwanese Trust Law’) (official trans. Ministry of Justice, Taiwan), available at http://law.moj.gov.tw/Eng/LawClass/LawAll.aspx?PCode=I0020024 (last accessed 15 August 2012). Trust Law of the People’s Republic of China, Order No. 50 of 2001 (hereafter ‘Chinese Trust Law’) (official trans. National People’s Congress), China, available at www.npc.gov. cn/englishnpc/Law/2007-12/10/content_1383444.htm (last accessed 15 August 2012). Trust Act of Japan, Act No. 108 of 2006 (hereafter ‘Japanese Trust Act 2006’ or the ‘2006 Act’) (official trans. Ministry of Justice, Japan), available at www.japaneselawtranslation. go.jp/law/detail/?id=1936 (last accessed 15 August 2012). For details, see Chapter 3. Trust Act of the Republic of Korea, Act No. 10924 of 2011 (with effect from 26 July 2012) (hereafter ‘Korean Trust Act’).

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the reception of the trust so as to evaluate the extent to which the Asian responses can illuminate the international scene. It would be premature, however, to offer any definitive judgment as to the merits or demerits of the Asian response, without first considering the detailed jurisdiction-byjurisdiction and scenario-by-scenario reports in the next eleven chapters. The aim of the present chapter is accordingly more modest, to highlight the common themes and problems in the reception of the trust so as to foreshadow discussion in the following chapters. Concluding observations will be provided in Chapter 13 of the book.

Asian experiences of the trust Indigenous devices of nominee holding Although the Anglo-American trust was not introduced into the Asian civil law jurisdictions under consideration until some eighty years ago, rudimentary tenets of the trust can be found in property-holding devices used in dynastic Korea and China. During the Chosan Dynasty, Korean farmers entrusted land to landlords in order to mitigate tax, as landlords were not subject to heavy taxes. The motivation and basic technique behind these arrangements is no different from the English use that later became the trust, namely, the appointment of a titular owner to conceal the beneficial owner from the incidence of tax or other mandatory rules. During the Japanese occupation, local Koreans utilised the so-called ‘nominal trust’ to circumvent unjust measures of the Japanese rulers to expropriate land. When the Japanese government occupied Korea, it provided a short period for all rural land to be reported and registered only in the name of natural or legal persons; after a brief registration period, unregistered land would fall into state ownership. This drove clans who used to hold rural land but were no longer eligible to do so due to lack of legal personality to register their land in the name of a few members of the clan on behalf of the others.11 By way of contrast, no regulatory catalyst was involved in the emergence of the customary trust in China. In Chinese customary law, it was common for the patriarch of a clan to set aside communal land for the purpose of worshipping ancestors or maintaining venues for communal activities for members of the clan. The members were all male descendants of the clan at any given time; each of them had a life interest in the land as tenants in common, 11

See generally Kim Sang Yong, ‘The legal construction, problems and control by public law of the name trust’ (1996–97) 30 Comparative Law Review 67 (in Japanese).

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subject to the terms of the arrangement. For the convenience of management, the land was registered in the name of a manager who was under the duty to consult members with regard to decisions pertaining to the land and to execute the members’ resolution accordingly.12 This way, the manager functioned as a titular owner and nominee, and perhaps also a trustee in so far as he took active steps in managing the property. Although the analogy is not exact, these customary arrangements have been treated by judges in Hong Kong as trusts.13 Even beyond feudal times the nominal trust has been widely used. This involves the opening of bank accounts or purchase of real estate or shares under the names of others so as to conceal the identity of the real owner. Unfortunately, the motivation behind nominal trusts is often dishonest, such as real estate speculation, tax evasion and circumvention of legal restrictions. For example, there is widespread practice in Korea, Taiwan and China for foreigners – usually the diaspora – to circumvent local restrictions on foreign land or share ownership by appointing a friend or relative at home to act as the registered owner. The parties had been entering into what they called ‘trust contracts’ even before the enactment of the trust statutes.14 In South Korea, nominal bank account trusts have even been exploited for more sinister purposes of laundering money and bribing politicians.15 The courts in Korea and Taiwan have considered the legality and nature of these trusts on several occasions.16 Korea has gone further to enact the Real Name Financial Transaction Act 1982 and Real Estate Real Name Act 1995 to regulate nominal trusts. As this brief account shows, the nominal trust in Asia shares broadly the same motives and content as the early English use or trust. After all, any mechanism that helps circumvent prohibitions in an effective manner will be of universal appeal. While the English Court of Chancery embraced the trust by focusing on the duty of the titular owner to honour

12

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14 15

16

Stephanie Chung, ‘Chinese tong as British trust: institutional collisions and legal disputes in urban Hong Kong, 1860s–1980s’ (2010) 44 Modern Asian Studies 1409. Tang Kai-chung v. Tang Sik-shang [1970] HKLR 276, 304; Tang Kam-wah and others v. Tang Ming-yat and another [2003] 1 HKC 532. See M. J. Merry, ‘Are t’sos really trusts?’ (2011) 42 HKLJ 669. See Chapter 5, text to notes 1–2. Kim Tong Hyung, ‘Seoul to combat borrowed-name accounts’, Korea Times, 28 October 2010, available at www.koreatimes.co.kr/www/news/biz/2010/10/123_75340.html (last accessed 15 August 2012). See Chapter 5, text to note 11; Constitutional Court of Korea Case No. 99 Hun-Ka 18 of 2001.

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his promise, and shaping it into a legitimate tool for the fiduciary management of property, the same had not happened in Asia. Seen in the context of the Asian experience, there is a grain of truth in the remark that a trust has as its parents ‘fraud and fear’, and as its nurse ‘a court of conscience (equity)’.17

Reception of the trust for asset management Since the four Asian jurisdictions received through their civil law systems Germanic concepts of property law, it is in theory open to them to use trust-like devices such as the fiducie or treuhand. Having said that, these instruments are closely tied to family and cultural practices, and so did not take root in Asia. Moreover, in the first few decades of the twentieth century, there were more urgent issues of political instability, warfare and the basic struggle for survival in Asia for people to be concerned about devising mechanisms to preserve family wealth. The select few who had the means mostly preferred to keep their wealth in real estate and corporate ownership. This may account for the lack of demand for, and the absence of innovation of, trust-like devices in the family context. There was thus a limited range of legal vehicles in Asia that could ringfence assets transferred to a manager to be administered on behalf of a person or purpose. Perhaps the combination of its political stability and burgeoning economy placed Japan well ahead of its Asian counterparts in learning about the Anglo-American trust. It enacted the Secured Bond Trusts Act 1905 to issue bonds in international financial markets in order to raise funds for infrastructure projects back home. Trust companies also burgeoned to meet the growing demand of wealthy individuals for alternative avenues of investment beyond real estate and company shares. Unfortunately, the label ‘trust’ was attached to these companies to signify faith and confidence placed in them rather than to operate trust services as traditionally understood in the Western world. In reality, they offered essentially deposit-taking and money-lending businesses with fixed rates of interest, and by the 1920s suffered from poor management and irregularities. Accordingly, the Japanese Trust Act 1922 and the Trust Business (Regulation) Act 1922 were enacted to regulate these trust companies. Their combined aim was to define the concept of the trust so as to 17

Attorney General v. Sands (1668) Hardr. 488, 491.

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overview

delineate the proper scope of trust business for these companies. The Japanese Trust Act drew heavily from the Indian Trust Act 1882 and the California Civil Code 1872, as there was a paucity of codified principles of the common law trust at the time. Interestingly, perhaps due to its lineage in these two pieces of legislation, the Japanese Trust Act itself was broadly drafted and arguably used the private express trust for individuals rather than the commercial trust as the paradigm. By further providing that only licensed trust banks were permitted to conduct trust business, there was a rudimentary framework for the provision of professional trust services to private clients. Nonetheless, it was not the civil or private trusts that had fuelled the growth of the trust industry. As the Japanese economy flourished after the Second World War, the trust banks began to focus mainly on commercial trust activities, such as pension trusts or loan trusts to raise funds for infrastructure projects, and, at the turn of the last century, asset securitisation. The Japanese experience of the reception of the trust not only inspired South Korea, Taiwan and China, but also repeated itself at least in Taiwan and China, where the initial driving force behind the new law was precisely to regulate trust and investment companies.18 Korea’s history differed slightly, in that the Japanese Secured Bond Trusts Act 1905 and Japanese Trust Act 1922 were extended to Korea, although they were enacted in 1962 and 1961, respectively, less than a decade after the establishment of the Republic of Korea in 1953. The Japanese influence on the three subsequent statutes was so prevalent that, save for some exceptions in China, they all closely resemble the Japanese Trust Act 1922 and, it goes without saying, each other.

Reinventing the trust As these Asian jurisdictions took turns to enjoy the industrial boom, there were two prominent socio-economic trends that impacted on the evolution of trust law. First, as the scale of their economies grew and business conglomerates sought to establish a foothold in international markets, demands for raising and investing capital also grew rapidly. There was heightened fascination with collective investment vehicles and new forms of financial products for large-scale investment projects. These trends brought about renewed appreciation of the utility of the 18

See Chapter 5, text to notes 1–6; and Chapter 6, text to note 5.

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trust in developing financial instruments, but also frustration with the inherent constraints of the trust paradigm introduced in the early nineteenth century. The perception of trust prevailing at the time was that of a family friend who used his spare time to manage the landed estate of a singular patriarch for the purpose of preserving it across generations. Such a paradigm has long been overtaken by the growth of professional trustees investing a wide portfolio of assets in modern investment conditions, and the use of trust to ring-fence assets pooled from a fluctuating group of investors with conflicting interests. Secondly, side by side with economic development is the widespread accumulation of wealth from the industrial boom, ageing populations, and increasing need for the elderly to plan for their own retirement and succession rather than to rely on financial support from their offspring, as was the case in traditional Confucian societies. These changes in social conditions reinforce calls for enhancing the trust law for utilisation in the family context. Given the open-ended nature of the trust legislation in these jurisdictions, it is possible to supplement it by detailed regulatory rules for practically every major area of its application. South Korea, for example, enacted the Secured Bond Trusts Act 1962,19 Securities Investment Trust Business Act 1969,20 Asset-Backed Securitisation Act 1998,21 Real Estate Investment Trust Act 2001,22 and Financial Investment Services and Capital Markets Act 2009,23 not to mention the regular amendments it made to these Acts to suit changing financial circumstances and market needs. In a similar vein, in Taiwan, there was a flurry of legislative activities after the enactment of the Taiwanese Trust Law in 1996. These include the Trust Enterprise Act 2000, Financial Assets Securitisation Act 2002, Real Estate Securitisation Act 2003, and Securities Investment Trust and Consulting Act 2004, to name but a few. Although the focus thus far has been on the improvement of financial regulations such as these, some recent enactments in Taiwan hint at the broadening of trust application. For example, article 14 of the Senior Citizens Welfare Act 2009 provides not only that local authorities should encourage senior citizens to protect their property by placing it in trusts, but also that the property of an elderly person who has been declared by a court to be incapable of managing their own property and who has no one 19 21

22

20 Last amended 2010. Last amended 2002. Last amended 2010; see Lee Mee Hyon, ‘Securitisation in Korea’ (2002) 2 Journal of Korean Law 101. 23 Last amended 2007. Last amended 2011.

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overview

duty-bound by law to support him will be transferred to and managed by an approved trust company.24 A similar provision can also be found in article 83 of the Protection of the Rights of Physically and Mentally Disabled Citizens Act 2009. Thus far, however, implementation of these provisions has been slow. Trust companies do not see it as their top priority to develop individual discretionary accounts for senior citizens as a client group, nor has the general public developed the inclination or sense of security to transfer its wealth to professional trust companies.25 China has adopted a similar approach of enhancing laws and regulations that are connected to the Chinese Trust Law, albeit most if not all of the legislative activities centred around its commercial application. The Chinese Trust Law 2001 was promulgated in tandem with the Measures for the Administration of Trust and Investment Companies 2002,26 Tentative Measures for the Administration of Trust Companies’ Trust Plans of Aggregate Funds 2002,27 Securities Investment Funds Law 2003, Trial Measures for Enterprise Annuities Funds 2004, Trial Measures for the Management of Enterprise Annuities Fund 2004 (for occupational pension schemes), and Measures for the Pilot Supervision and Administration of the Securitisation of Credit Assets of Financial Institutions 2005. The two Measures with respect to Administration of Trust Companies and Trust Plans of Assembled Funds were revamped in 2007 to strengthen the governance structure of these companies and investor protection measures of these trust plans. The Chinese government also initiated reform of the Securities Investment Funds Law in 2009 and issued the first consultation draft on the revisions in 2011.28 The proposed amendments will extend the Securities Investment Funds Law to privately-placed equity funds, which have mushroomed in China in the past decade despite the absence of regulatory endorsement. Thus far, the 24

25

26 27

28

Senior Citizens Welfare Act of the Republic of China (official trans. Ministry of Justice, Taiwan), available at http://law.moj.gov.tw/Eng/LawClass/LawContent.aspx?PCODE= D0050037 (last accessed 15 August 2012). Lee Rui-Jin and Hung kuo-Cheng, ‘Ying-er qiao shidai jingzhi anquan baozhang – caichan xintuo shizheng yanjiu’ [‘The protection of the economic security of the baby boomer generation: … an empirical study of the property trust’] (2009) 125 Shequ fazhan jikan [Community Development Quarterly] 128. Repealed and replaced by Measures for the Administration of Trust Companies 2007. Repealed and replaced by Measures for the Administration of Trust Companies’ Trust Plans of Aggregate Funds 2007. Securities Investment Funds Law (Revised Draft) 2011, available in Chinese at www.npc. gov.cn/npc/xinwen/lfgz/flca/2012-07/06/content_1729072.htm (last accessed 15 August 2012).

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emphasis of the Chinese trust industry has been on securities investment funds and the use of collective capital trusts to raise funds to finance infrastructure or other investment projects. In the near future, legislative improvements will likely focus on these specific applications rather than the general trust statute. At least for Japan, the strengthening of regulatory rules is still inadequate in overcoming the inherent limitations of the trust. The revised Japanese Trust Act was passed in 2006 to enable wider utilisation of the trust in modern financial environments and in the family context for inheritance transfers.29 Three major themes can be discerned from the 2006 Act of Japan: they are the refinement, corporatisation and deregulation of the trust regime. Some of these initiatives bring the Japanese provisions into line with standard common law principles, while others take them beyond the orthodox parameters of the common law trust. In relation to the refinement of trust provisions, the new Act provides a better rationalisation of the trustee’s duties, by distinct and separate stipulation of the duty to comply with the terms of the trust,30 duty of care31 and duty of loyalty.32 This is a big step towards bringing Japanese law on a par with standard principles in common law trust. The 1922 Act, for example, merely stipulates the duty to act as a reasonable manager and lays down a few disparate prohibitions that may be, but are not explicitly, rationalised on the basis of the no-conflict principle. With regard to the duty of loyalty, there is also a shift from absolutist prohibitions on certain types of activities altogether to prima facie prohibitions that can be displaced by express terms in the trust, beneficiaries’ consent upon full disclosure, and proof that it is in the interest of the beneficiaries.33 The 2006 refinements reflect a much greater appreciation of the common law principles than can be seen in the previous 1922 Act. This might be due, in great part, to the wide availability of comprehensive codes of judge-made principles of the common law trust, such as the US Restatement (Third) of Trusts and the US Uniform Trust Code. As to corporatisation, the Japanese Trust Act 2006 introduces a myriad of features that permits a trust to be governed in much the same way as a

29

30 32

For academic literature in Chinese, see e.g., Yang Linkai, ‘Jinrong Weiji zhong dui Xintuo Zhidu de Falv Sikao – yi Riben xin Xintuofa xiangguan zhidu bianqian wei zhongxin’ [‘Rethinking the trust system in a state of financial crisis: from the perspective of the new Trust Act of Japan’] (2010) 18/19 Shangshifa Lunji [Commercial Law Review] 113. 31 Japanese Trust Act, art. 29(1). Ibid. art. 29(2). 33 Ibid. art. 30. Ibid. art. 32(2).

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corporation. For example, it is now possible for trustees to enjoy limited liability, multiple beneficiaries of a trust to have beneficiaries’ meetings and make decisions in the meetings by majority voting, and trusts to issue bonds or merge or divide just like in the case of companies. To enhance the protection of the beneficiaries in collective investment schemes, the 2006 Act introduces third parties who can play specialised roles in monitoring the trustees. These include the trust supervisor who can exercise almost all of the rights of an existing beneficiary in the supervisor’s own name and on behalf of the beneficiary; the trust caretaker who can exercise all of the rights of a beneficiary who does not exist at the time in question in the caretaker’s own name on behalf of the beneficiary; and a beneficiary agent who can exercise the rights of an existing beneficiary in the latter’s name and on his behalf. Last but not least, it is now possible to establish trusts that can issue certificates of beneficial interest, which can be assignable as security on the Stock Exchange. With this innovative step, the beneficiaries’ rights now look more like shareholders’ rights. In terms of deregulation, the new Japanese Trust Act has relaxed numerous aspects of the previous law to facilitate the wider application of the trust in estate planning and securitisation. First, to encourage the use of trust in succession planning, the new Act affirms the validity of successive giving (the so-called ‘sequential beneficial trust’). This involves the grant of property right to successive interests, say, by giving the life interest to one party and the remainder to another. Successive gifts are well recognised in property law principles in common law jurisdictions, so it would not be necessary for any trust statute in common law (such as the Indian Trust Act and California Civil Code) to expressly provide them. However, the lack of the concept of fee tail in Japanese civil law and the presence of forced heirship rules have long rendered the validity of successive gifts uncertain in Japan. It was unclear how local law could recognise the temporal division of property interest, and whether subsequent gifts to be made upon the death of a life beneficiary will be void for depriving the entitlement of his heirs and hence infringing forced heirship rules.34 Secondly, the new Act permits a sole settlor to declare his intention to act as sole trustee for itself as 34

Japan introduced an Adult Guardianship Act (Seinenkoken) in April 2000 to enable guardians to be appointed to manage the assets of the incapacitated elderly. However, the system has not been widely used. Amendments to the Japanese Trust Act that pertain to the family context are also limited in light of the problem of the ageing population in Japan.

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sole beneficiary (the so-called ‘self-declared trust’, jiko shintaku). This new form of trust is intended to allow originators of securitisation plans to declare themselves as trustees during the promotion period, and hence save the cost and time involved in engaging a corporate trustee or setting up a special purpose vehicle. Thirdly, the Japanese Trust Act 2006 also expressly recognises the validity of the private purpose trust, which again is considered useful for trust-holding in modern financial markets.35 As a safeguard measure, such trusts must be monitored by a ‘trust caretaker’.36 Significantly, given the heated debates surrounding the private purpose trust and its continued invalidity in domestic common law jurisdictions, the step taken by Japan is both bold and controversial. Equally, a trust such as the self-declared trust, where the sole trustee is also sole beneficiary, is bound to stir up discussion as to whether it involves an efficacious trust. The same themes informed the revamp of the Korean Trust Act in 2011. Practically all of the Japanese amendments were adopted in the Korean Trust Act 2011,37 albeit with some minor tinkering as to scope and wording. To facilitate a wider application of the trust, the new Act also relaxes previous restrictions on the types of property that can be held under trust. It is now possible for trusts to hold rights in debts, intellectual property rights, and mixed types of property. Whereas previous restrictions hindered estate planning and private family trusts because different trusts would need to be set up in relation to different types of property, it is now possible for an individual to transfer all his assets into a single trust, and receive regular distributions from the trust. The Ministry of Justice is also in the final stage of drafting a new Act on Charitable Trusts, which will provide a relatively less cumbersome alternative to the use of charitable foundations.

The Asian trust challenge As the first generation of trust statutes is being reviewed if not replaced in Asia, there are both theoretical and practical challenges in nurturing and 35

36 37

Japanese Trust Act, art. 258(1): ‘A trust with no provisions on the beneficiary (including no provisions on the method for specifying a beneficiary; the same shall apply hereinafter) may be created by the method set forth in Article 2, item (i) or item (ii)’. Japanese Trust Act, art. 258(4) and (8). These include the self-declared trust (Korean Trust Act, art. 3(1)(iii)) and the private purpose trust (Korean Trust Act, art. 68(1)).

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sustaining the growth of the transplanted trust in foreign soil. This part will enumerate these challenges.

Theoretical and technical obstacles Most of the theoretical obstacles to the reception of the trust in Asian civil law jurisdictions stem from the perceived incompatibility of the trust with civil law property concepts, and are therefore universal to civil law countries beyond Asia. These include the absolute nature of ownership; the doctrine of numerus classus; the necessity of formality and public notice for a right to be enforceable against third parties; the absence of some key trust components in indigenous law (such as the duty of loyalty); and the existence of local rules that are applicable to the trust scenario but yield different results, to name but a few. A brief examination of these obstacles is in order. There has long been much-laboured concern about the apparent incompatibility between absolute ownership and numerus classus in civil law, on the one hand, and dual (legal and equitable) ownership in common law, on the other. The Asian trust statutes have shown that there is no need to resolve this issue, for an efficacious trust can be put in place by, first, granting the right to control the trust property (that is to manage and to dispose of it) to the trustee; but secondly, restricting his right by the rights of the beneficiary (or those acting on his behalf) against the trustee to exercise his specific property rights for the benefit of the beneficiary or for a purpose approved by law; and thirdly, ring-fencing the trust property from the compulsory execution of parties other than the trust creditors. In Asia, this is typically achieved by requiring the transfer of ownership of the trust property to the trustee, and subjecting him to the duty to exercise his ownership rights for the benefit of the beneficiary or the designated trust purpose. The Chinese statute, however, shies away from the grant of ownership and merely refers to the entrustment of the settlor’s property right to the trustee, thus raising the question as to what property rights, if at all, must be vested in the trustee for a trust to be established.38 Equally, since both the Chinese and the latest Japanese statutes allow ownership of the trust property to be retained by the settlor, in the former without also imposing trusteeship duties on him and in the latter in circumstances that permit him to be sole settlor, trustee and beneficiary, they present considerable risks to the integrity of the trust 38

See Chapter 6, text to notes 17–24; Chapter 13, text to notes 10–11.

reception of the trust in asia

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property. The key to determining whether these approaches conflict with the core trust concept depends on evaluating the safeguards these statutes put in place to prevent abuse by the respective settlors.39 The emphasis of civilian jurisdictions on the discoverability of property rights through registration is grounded in sound principle, but also damaging to the attractiveness offered by the trust. After all, the trust grew out of the need to circumvent formalistic legal rules by concealing substantial ownership from titular ownership; once substantial ownership is made public by registration, the trust is stripped of its best trick. Be that as it may, the Asian trust statutes consistently require the trust to be registered if its subject matter involves registrable property.40 This is an inevitable compromise that has to be made if the trust were to be rationalised within the property regimes in civil law. Where the property is not registrable, the Taiwanese Trust Act and Japanese Trust Act 2006 are silent as to whether the trust is unenforceable against third parties, whereas the Korean Trust Act 2011 provides that it is enforceable against third parties only if the trust property is identifiable by separate accounting and management.41 Given the disparity of rules between registrable and non-registrable property, trusts of non-registrable property such as funds, and commercial trusts where there is less need for privacy, such as pension and investment trusts, will enjoy an advantage over family trusts established for the purpose of succession or tax planning, where privacy is more likely to be a premium and real estate is typically involved. Another possible theoretical obstacle is where local rules on certain important aspects of the trust (such as the duty of loyalty) are absent, or where there are already applicable local rules, albeit which operate differently from the corresponding rules in common law. These local rules include, for example, rules of substitution; remedial rules for breach of duties by trustee; tortious rules pertaining to the liability of third parties that interfere with the trust relationship; or rules for nullifying unauthorised dispositions of trust property to third parties. These differences call for sensitivity in accommodating the trust within existing legal rules in the civil law systems, or express stipulation of new duties and remedies where necessary to reinforce the efficacy of the trust, but none 39 40

41

See Chapter 3, text to notes 5–6; Chapter 6, text to notes 17–24 and 46–51. Japanese Trust Act, art. 14; Korean Trust Act, art. 4; Taiwanese Trust Law, art. 4; Chinese Trust Law, art. 10. Of the four jurisdictions, the Chinese rules are the most rudimentary, if not incomplete. Korean Trust Act, art. 4(4).

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of them present insuperable hurdles to introducing the trust. Having said that, to achieve the maximum benefit of the trust, care needs to be taken in receiving those common law rules that might have proven to be practically useful in making the trust a success – the remedy of account of profits might be a case in point. The Asian statutes provide useful examples as to how the gaps can be filled and local remedies or liabilities can be incorporated into the trust statutes.42

Practical obstacles and the Asian solution The Asian jurisdictions have come a long way in embracing the trust; indeed, it might be said that the naturalisation of the common law trust as a unique Asian entity has just begun after the spate of revised trust statutes in Asia. As these developments unfold, a few observations may be made. First, for the transplanted trust to take root if not also flourish in Asia there must be a clear understanding as to what makes the trust concept so successful in common law, and a realistic appreciation of the requirements and limitations in replicating the legal environment in civil law Asia. For example, the success of the English trust in the family context is due in great part to the willingness of the court to give directions to the trustee and to execute the trust as and when necessary; the notion of trusteeship as an office similar to the role of guardians, administrators or executors;43 the preservation of the independence of the trustee in exercising his ownership rights for the benefit of the beneficiaries; and the tension between the trustee and beneficiaries so as to provide a check and balance in their power relationship. Accordingly, even though it is the most pragmatic and sensible technique to introduce the inter vivos trust through a contract, care should be taken not to see the trustee’s duties as purely a matter of contractual agreement between him and the settlor. Reference to the statutory duties applicable in civil law to other offices such as statutory guardians and administrators will also be useful. Secondly, while the intricacies of common law trust principles can be discerned from case law, they may not feature prominently in codified trust rules which are more accessible to a civilian lawyer. Care must also be taken in borrowing codified rules out of their context. For example, 42 43

For detailed discussion, see Chapter 10 (Case 4). M.J. de Waal, ‘In search of a model for the introduction of the trust into a civilian context’ (2001) 12 Stellenbosch Law Review 63.

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while the Uniform Trust Code may provide for the appointment of ‘representatives’ to represent the interest of existing or unborn beneficiaries,44 these rules are not unique to trust, and simply a convenient replication of the powers of guardians or legal representatives in relation to wards who happen to be beneficiaries. While there is no harm in setting these rules forth in an Asian trust statute, as in the Japanese Trust Act 2006, it is a considerable logical leap to elevate these representatives to the role of ‘protectors’ in a private purpose trust, as the Korean Trust Act 2001 seems to have done. This is because the objection to the private purpose trust lies precisely in the lack of a beneficiary who is sufficiently motivated to monitor the trustee and hence maintain the tension, or checks and balances necessary in a trust. Even if a protector or enforcer is appointed and vested with the power to monitor the trustee, the need remains to put in place legal provisions to monitor the enforcer, or to give him sufficient motivation to act vigilantly. Thirdly, the trust is a pervasive institution in common law. In practically every context where it is invoked, there are detailed rules of operation, whether in the form of statute or case law. One might see, for example, specialist jurisprudence in pension law, succession law, charity law, guardianship, and regulatory rules in financial services. On top of these are concomitant legal concepts in property law, the law of remedies and insolvency law. While it is relatively easy to lift specific rules pertaining to the trust concept and codify them in a trust statute, transplantation of the system of laws pertaining to the trust is a mammoth task, and probably not feasible at a stroke by one piece of legislation. If the civil law jurisdictions wished to adopt the trust for a wide range of purposes, a more realistic approach might be to supplement a basic trust statute with concrete legislation for each context within which it applies, and to limit the scope of such specialist legislation to the relevant context. This will best cater for different and perhaps sometimes conflicting needs. For example, while it is useful to imbue collective investment trusts with corporate features such as beneficiaries’ meetings and majority decisionmaking power, these are irrelevant, if not inappropriate, for family trusts. Fourthly, thus far the Asian experience has shown that there are strong commercial incentives in the use of the trust for pension trusts and collective investment schemes. Demand for the use of domestic trusts to organise succession planning has remained lukewarm. After all,

44

Uniform Trust Code 2005 (US), ss.303, 305.

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well-to-do individuals who have the advice of international tax and family planners will most likely take their trusts offshore, whereas the general populace is not able to afford the services of trust companies who hold the exclusive licence to conduct trust business. If the Asian jurisdictions are intent on developing the trust in this context, a range of legal and regulatory measures are needed beyond the enactment of the trust statute. These include, among other things, tax incentives, relaxation of the current restriction that only licensed financial institutions (such as trust companies) may conduct trust business,45 and the development of support organisations to help lay or gratuitous trustees.

Conclusion The common law trust has slowly evolved over more than 500 years into a refined, subtle and also fluid instrument. It began its life, in England at least, as a simple conveyancing device to circumvent tax liability. As most of its existing principles were developed in the context of landed property and succession disputes in previous centuries, the common law courts are grappling with the challenges of adapting these rules in the modern financial environments in which the trust is used. By way of contrast, the Asian jurisdictions took hold of the trust from the opposite end. The initial conditions of its reception were not ideal. The earliest Asian statute – which provided a model for the later ones – was drawn from two statutes that contained broad-brush provisions and were based on the family trust as a paradigm. It was primarily utilised, however, to regulate commercial trusts in the banking and financial spheres. This plunged the courts and the profession in at the deep end with little guidance from the law. However, as the recent amendments and developments of the Asian trust and trust-related statutes show, there has been greater appreciation of the fine details of trust principles, and also willingness to experiment with new permutations of the trust. While it would be preposterous to dismiss these new innovations simply on the basis of their lack of orthodoxy, the following chapters will examine them in closer detail, in the hope of assessing how far, if at all, they can illuminate debates about similar issues in English and offshore trust law. 45

Japanese Trust Business Act 2004, art. 3; Korean Trust Business Act 2008, art. 3(1); Taiwanese Trust Enterprise Act, arts. 2, 33 and 48; Chinese Measures for the Administration of Trust Companies 2007, art. 7.

3 Trust law in Japan: inspiring changes in Asia, 1922 and 2006 ma koto a r ai

Events leading up to the enactment of the new Trust Act Japan is a civil law jurisdiction with its private law regime derived from the German and French Civil Codes. The Trust Act of Japan was first enacted in 19221 to regulate the growing number of poorly managed trust (shintaku) companies in the 1920s, most of which operated what was in substance loan businesses in the name of trust.2 It adopted a definition of trust modelled upon the California Civil Code and Indian Trust Act, and very much had civil affairs such as the management of individuals’ assets in mind. The definition was intended to distinguish between trust and non-trust business, so as to allow only those operating the former to trade as ‘trust’ companies. However, the trust system grew to centre mainly around commercial trust activities of trust banks, such as loan and pension trusts, particularly after the end of the Second World War. In recent years, demand for investment and finance schemes in the commercial trust sector has grown, whilst the advent of an increasingly aged society has led to the area of civil affairs experiencing a rise in expectations about family trusts, the aims of which are asset management and inheritance transfers. Despite these changing socio-economic needs, for more than eighty years after its enactment in 1922, no substantial amendments were made to the Japanese Trust Act. It was against this background that the Japanese government started to consider the review and modernisation of the Japanese Trust Act 1922, and in September 2004 the Minister of Justice consulted with the 1 2

Act No. 512 of 1922 (hereafter ‘Japanese Trust Act 1922’ or the ‘1922 Act’). Makoto Arai, ‘Japan’ in Alon Kaplan (ed.), Trusts in Prime Jurisdictions (3rd edn, London: Globe Law and Business, 2010), p. 233 at pp. 234–9.

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Legislative Council of the Ministry of Justice about a review of the Law. The Council established a subcommittee on the trust law, and proceeded with their deliberations. The results of these deliberations were decided upon by the Legislative Council in the form of ‘The Outlines on Revision of the Trust Act’ in February 2006, and relayed to the Minister of Justice.3 In March 2006, a draft Japanese Trust Act and supplementary bill based on the outlines was submitted to the 164th ordinary session of the Diet. After continued deliberation, the new Japanese Trust Act4 was enacted at the 165th extraordinary Diet session on 15 December 2006, and came into force in September 2007. The present chapter will provide a brief overview of the main features of the Japanese Trust Act, with particular emphasis on and analysis of the new features introduced in the 2006 amendment.

Features of Japanese trust law Japan was probably the first amongst East Asian civil law jurisdictions to enact a trust statute. The techniques it used to accommodate the common law trust concept in a civil law framework had subsequently become the model for other trust laws in Asia. The amendment of the Japanese Trust Act in 2006 has also been closely studied in Taiwan and South Korea in their recent reviews of trust legislation.

Creation of trust Article 2(1) of the Japanese Trust Act 2006 defines a trust as an arrangement in which a person ‘administers or disposes of property in accordance with a certain purpose (excluding the purpose of exclusively promoting the person’s own interests …) and conducts any other acts that are necessary to achieve such purpose’. A trust is established by any of the following methods stipulated in article 3: (1) entering into a ‘trust agreement’ with the trustee; (2) making a will; or (3) manifesting an intention to set up a trust as evidenced by notarial deed, other document or electromagnetic record, for a person to assume the duties of a trustee. 3

4

See information from the website of the Japan Trust Association, available at www. shintaku-kyokai.or.jp/trust/trust01_07_06.html (last accessed 15 August 2012). Trust Act of Japan, Act No. 108 of 2006 (hereafter ‘Japanese Trust Act 2006’ or the ‘2006 Act’) (official trans. Ministry of Justice, Japan), available at www.japaneselawtranslation. go.jp/law/detail/?id=1936 (last accessed 15 August 2012).

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Significantly, neither of these two provisions expressly stipulates, as in the earlier 1922 Act, the necessity for the settlor to transfer trust property to the trustee in order to establish a trust. Still, it is implicit in the 2006 Act that ownership of the trust property is vested in the trustee, unlike in agency or mandate. This is because article 2(3) defines trust property as ‘any or all property which belongs to the trustee and which should be administered or disposed through a trust’. In merely stipulating that ownership of trust property is vested with the trustee, but not the need for a transfer of trust property to him, the 2006 Act enables a settlor to declare himself as trustee (without transferring trust property to himself). This is a novel step for Japan. In fact, the 2006 Act renders Japan unique in the world in not prohibiting (and hence permitting) a sole settlor to declare himself as sole trustee to manage trust property for himself as sole beneficiary. There are several reasons for this bold change. First, as part of the Japanese government’s policy to deregulate the financial market and facilitate the securitisation of assets, the new ‘self-declared’ trust allows the originator of a securitisation plan to declare itself sole trustee and beneficiary of the underlying assets during the promotional period for soliciting investors. This alleviates the licensing procedures and expenses involved in appointing a third party financial institution, usually a trust bank, to act as trustee of the secured assets. Secondly, the law drafters hope to provide a simple mechanism for the use of trust in the family context, whereby a parent may declare himself trustee of his assets for the benefit of incapacitated children. The trust fund will provide maintenance for the children free from the risk of the parent’s bankruptcy. The introduction of the self-declared trust has, however, been controversial. It is unclear, for example, what procedural steps need to be taken to enable third parties to distinguish trust property from the trustee’s own property. Where non-registrable movables are concerned, it is particularly difficult in practice to identify which is the trust property. There are also risks of abuse of such a mechanism to defraud creditors, and the doctrinal conundrum in having a sole beneficiary enforce obligations owed to itself as sole trustee. To address some of these concerns, the new Act requires the self-declaration to be manifested in a notarial deed and provides for its automatic termination one year beyond its establishment if no other beneficiaries have been appointed into the trust. Creditors of the settlor will also be able to enforce their claims in relation to the trust property if the settlor creates the trust with the knowledge that it will harm the interests of creditors, unless there are beneficiaries under the

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self-declared trust, and all or some of them did not know that the creditors’ interests have been harmed.5 The court also has discretion to terminate a self-declared trust the existence of which is unallowable from the perspective of ensuring public interest.6 The adequacy of these measures remains to be seen. In any event, as a result of the sub-prime mortgage crisis shortly after the enactment of the 2006 Act and downward adjustment of the securitisation market, the self-declared trust has rarely been used.

Registration and the segregation of trust assets While there is no general requirement to register a trust as such, if the trust property is of a type that is registrable before any right over such property can be asserted against third parties, the fact that it is subject to a trust must be registered before such a trust can be asserted against a third party.7 Registration should be made with the relevant authority for registering such assets. More specifically, if the trust is a limited liability trust, it must comply with special provisions in the new Japanese Trust Act for its registration.8 The Japanese Trust Act provides for the segregation of the trust property from those of the trustee in the following manner. On the trustee’s bankruptcy, the trust property will not be included in the 5

6

7

8

Japanese Trust Act, art. 23(2): ‘where a trust has been created by the method set forth in Article 3, item (iii), if the settlor has created the trust with the knowledge that it would harm settlor’s creditor(s), … a person who holds a claim against the settlor (limited to cases where the settlor is a trustee) which has arisen prior to the creation of the trust may commence an execution, provisional seizure, provisional disposition or exercise of a security interest, or an auction …; provided, however, that this shall not apply where there are beneficiaries at the time in question, and when all or some of those beneficiaries did not know, at the time when they became aware that they had been designated as beneficiaries or when they acquired beneficial interests, of the fact that the creditor would be harmed’. Ibid. art. 166(1): ‘(1) In the following cases, when the court finds the existence of a trust to be unallowable from the perspective of ensuring the public interest, it may, at the petition of the Minister of Justice, the settlor, the beneficiary, a trust creditor, or any other interested party, order the termination of the trust: (i) where the trust was created for an unlawful purpose; or (ii) where the trustee has committed an act that goes beyond or abuses the trustee’s power’. Ibid. art. 14: ‘With regard to any property for which the acquisition, loss, and modification of any right may not be duly asserted against a third party unless it is registered, the fact that such property belongs to the trust property may not be duly asserted against a third party unless the fact that the property is under the trust is registered’. Ibid. art. 216.

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trustee’s bankruptcy estate.9 Implicit in this rule is that the trustee’s personal creditors cannot claim against the trust property. However, the Japanese Trust Act stops short of providing for a general rule to the converse, namely, that the trustee is only liable to use trust property to satisfy trust claims. In other words, a trust creditor has the right to enforce his claim against the personal assets of the trustee, which right is particularly useful if the trust fund has been exhausted but the trustee is solvent. Article 21(1) of the Japanese Trust Act sets forth the categories of claims that can be asserted against trust property, which include, inter alia, ‘rights arising in the course of the trust administration’10 and rights arising from an act which is ‘conducted in the interest of the trust property and which falls within the scope of the trustee’s powers’.11 Nonetheless, the sub-article that immediately follows enumerates a much smaller category of trust claims that the trustee is liable (vis-à-vis a third party) to perform only by using trust property.12 These include: distribution claims by beneficiaries;13 trust claims in a limited liability trust, which is an innovation of the 2006 Act and which stipulates in the trust deed for limited liability on the trustee and is registered as such;14 trust claims deemed to be so in pursuance of the Japanese Trust Act (yet there is no explanation as to how this might occur);15 and where there is a prior agreement between the third party and the trustee to this effect.16 The combination of these articles means that, subject to the uncertainty as to trust claims deemed to be performed only by using trust property, the default rule is for the trustee to be liable as against a third party to use his own property to satisfy claims arising in the course of trust administration. Needless to say, the trustee may claim reimbursement from the trust fund,17 and transfer trust property to himself for this purpose, as well as assert a security interest over the trust fund.18 Where the trust property is insufficient to satisfy the claim, he may even terminate the trust if he has given notice to the settlor or beneficiary about the insufficiency and the latter has not yet reimbursed him directly.19 Upon termination, the

9

10 13 15 18

Ibid. art. 25(1): ‘Even where an order for the commencement of bankruptcy is entered against a trustee, no property that belongs to the trust property shall be included in the bankruptcy estate’. 11 12 Ibid. art. 21(1)(ix). Ibid. art. 21(1)(v). Ibid. art. 21(2). 14 Ibid. art. 21(2)(i). Ibid. arts. 21(2)(ii), 216(1), and 232. 16 17 Ibid. art. 21(2)(iii). Ibid. art. 21(2)(iv). Ibid. art. 48(1). 19 Ibid. art. 49. Ibid. art. 52.

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trustee may liquidate the trust and file for bankruptcy of the trust property should there be insufficient funds to meet all trust claims.20 An interesting gap in the matrix of these provisions lies in a situation where the trustee has already used his own funds to meet liability arising in the course of trust administration and is prima facie entitled to a security claim over the trust property for reimbursement, but since the trust property could not find any realistic buyer, it is not practicable to terminate and liquidate it in order to meet this claim. The issue was recently considered in a high profile decision of the Japanese Supreme Court in November 2011.21 In this case, the Hyogo Prefecture Government transferred ownership of land to a trust bank on trust to raise funds for developing an amusement park. The park was built but operated at a loss, so much so that there were no funds in the trust account to meet tax and other expenses incurred in maintaining the park. The trustee discharged these liabilities with about JPY 8 billion (about US$100 million) of its own property. However, it was unable to obtain reimbursement from the trust fund, which was in the red, or to liquidate the trust property to meet its claim, as there was no buyer for the unprofitable amusement park. The trustee accordingly sued the prefecture government directly for reimbursement and succeeded in the Japanese Supreme Court, on the ground that the latter was the sole beneficiary of the trust fund and should reimburse the trustee for liability arising from it. Interestingly, if this were decided at common law, the trustee would not have been able to recover the expenses from the beneficiaries directly. This is because the trustee’s claim and its ensuing lien are enforceable only against the trust fund. However, given that article 52 of the Japanese Trust Act already allows the trustee to serve notice to require the settlor or beneficiary to reimburse him directly in order to avoid his termination of the trust and subsequent liquidation of trust property, it is but a short step to allowing a trustee who has already paid out of his own pocket to recover the reimbursement from the sole beneficiary directly.

Implied or inferred trusts? Although the methods stipulated in the Japanese Trust Act for creating trusts do not include the inference or imposition of trust by the court as 20

21

See section 2, chap. VII of the Japanese Trust Act on provisions relating to grounds for commencement of liquidation, distribution of assets, etc. Supreme Court of Japan Case No. (Ju) 1584 of 2010 (17 November 2011).

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in common law jurisdictions, there have been at least two instances whereby the Supreme Court in Japan applied the Japanese Trust Act to arrangements that did not expressly purport to set up a trust. In 2002, the Supreme Court of Japan held that the Japanese Trust Act applied to an arrangement whereby, upon engaging a contractor to construct buildings, a party deposited initial part payments of the construction fee into a separate bank account of the contractor on condition that the latter could only use the funds for the construction project.22 Accordingly, when the contractor went into liquidation, the payor was able to exercise its ownership rights to claw back in full the deposit in the bank account. In this decision, the Court considered the application of the Japanese Trust Act necessary to give effect to the intention of the payor not to take the insolvency risk of the payeecontractor. Such an approach is no different from that adopted in the English House of Lords’ decision of Barclays Bank v. Quistclose Investments Ltd.23 Another decision of the Supreme Court,24 also held that a trust arose along the same lines as the presumed purchase money resulting trust in common law jurisdictions. Here, if a party provides the funds for another to deposit them in a fixed deposit account, the court held that the legal title holder of the fixed deposit merely holds the funds on trust for the payor. While these two instances represent a very limited scope of the judicial imposition of the trust, they do show the court’s willingness to do so in compelling cases where the settlor clearly intends to segregate assets placed in the hands of the trustee from the latter’s own property.

Trustees’ duties The 2006 Act expressly stipulates distinct and separate duties: (1) to administer trust affairs in line with the purpose of the trust;25 (2) to administer trust affairs with the due care of a prudent manager, unless the express terms of the trust provide otherwise;26 and (3) to administer 22

23 24 25

26

See Supreme Court of Japan Case No. (Ju) 1671 of 2000 (17 January 2002), discussed in Makoto Arai, Shintaku-ho [The Law of Trust in Japan] (3rd edn, Tokyo: Yuhikaku Publishing, 2008), p. 190. [1970] AC 567. Supreme Court of Japan Case No. (O) 485 of 1954 (19 December 1957). Japanese Trust Act, art. 29(1): ‘A trustee shall administer trust affairs in line with the purpose of the trust’. Ibid. art. 29(2): ‘A trustee shall administer trust affairs with the due care of a prudent manager; provided, however, that if terms of trust otherwise provide, the trustee shall administer trust affairs with such care as provided for by the terms of trust’.

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trust affairs and conduct any other acts faithfully on behalf on the beneficiaries.27 To reinforce the general prohibition on the duty of loyalty, the Act expressly stipulates prima facie prohibitions of specific instances where conflicts of interest between the trustee and the beneficiary and conflicts of duties owed towards two beneficiaries typically arise. These include misappropriating trust property; commingling trust property with his own property or other trust properties held by him; acting in relation to the trust property with a third party for whom he acts as an agent (i.e., double employment by two principals) or where there would be a conflict of interest between himself, the third party and the beneficiary; and using trust property to secure his personal liability.28 These prima facie prohibitions may be displaced if the terms of the trust provide otherwise; the beneficiaries’ consented to the relevant acts upon material disclosure by the trustee (subject to contrary stipulations in the trust); the trustee himself is in any event entitled to inherit the relevant trust property; or when the circumstances render it reasonably necessary or provide justifiable grounds for the trustee to so act, and such acts will not harm the interest of the beneficiaries.29 It might be worthy of note that the express stipulation of a general duty of loyalty represents a departure from the 1922 Act, which does not provide for this duty. The detailed provisions on exculpating circumstances were also introduced in 2006. Prevalent commentaries on the previous law took the view that the specific prohibitions in the 1922 Act forbade instances whereby a trustee acquires a trust asset at market value or sells his own assets to the trust, in circumstances where the sale was necessary and no other purchaser could be found.30 This line of thought, which completely forbids actions that only technically amount to conflicts of interest between trustee and beneficiary, is so rigid that it actually goes against the interest of beneficiaries.31 The 2006 Act seeks to strike a balance by permitting transactions that are authorised in the trust document in advance or subsequently ratified by the beneficiaries upon full disclosure, or where they are in the interest of the beneficiaries.

27

28 30

31

Ibid. art. 30: ‘A trustee shall administer trust affairs and conduct any other acts faithfully on behalf of the beneficiary’. 29 Ibid. art. 31(1). Ibid. art. 31(2)–(5). Kazuo Shinomiya, Shintaku-ho [The Trust Act] (Tokyo: Yuhikaku Publishing, 2000), pp. 231–6. Masahiro Teramoto, Chikujo-kaisetsu Atarashii Shintaku-ho [The New Trust Act] (Tokyo: Shojihomu, 2007), p. 117.

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This rationalisation of the duty of loyalty has enabled trust matters to be carried out in a more rational and flexible manner than before. Apart from the three duties discussed above (to adhere to the purpose of the trust, to take care, and to act faithfully), the 2006 Act also provides for a range of duties typically found in common law jurisdictions. These include: the duty to act impartially between beneficiaries;32 to segregate trust property;33 to report on the current state of trust affairs and trust property;34 to accede to justified request of beneficiaries for information about other beneficiaries, trust affairs and the trust account;35 and to take care in appointing and supervising agents, as well as reporting defaults to the beneficiaries where circumstances permit the trustee to delegate his duty to a third party.36 Significantly, while two aspects of the above list of duties have long been provided for in the 1922 Act, the 2006 Act has taken progressive steps to modernise the legal provisions in line with current business standards and practice. First, the Act strengthens the trustees’ duty to provide information about trust affairs and trust property by detailed stipulations about the range of documents to be disclosed (balance sheet, profit and loss statements, and all documents specified by Ordinance by the Ministry of Justice); the frequency (at least annually) and specific time limits by which they should be provided; and the length of time during which relevant records should be kept (ten years).37 The new, detailed provisions will make the Act more effective in holding trustees accountable for the performance of their duties. Secondly, the 2006 Act also significantly relaxes the virtually blanket prohibition in the 1922 Act on trustee delegation. Under the previous law, unless provided for in the trust deeds, even in trust matters in which the use of a highly knowledgeable specialist (as in certain foreign capital investments) would be more appropriate than any attempts by the trustee in question to do so, and in cases in which the sending of documents to the beneficiary would be better dealt with by a third party than by the trustee, entrusting matters to a third party was, in principle, impossible.38 However, it was pointed out that in our increasingly specialised modern society this is hardly a realistic rule. This is why the 2006 Act allows trustees to entrust trust matters to third parties in two situations: (1) in the absence of express provisions in the trust deeds, where delegation is ‘appropriate in light of 32 35 38

33 34 Japanese Trust Act, art. 33. Ibid. art. 34. Ibid. arts. 36–37. 36 37 Ibid. art. 38–39. Ibid. arts. 38 and 35. Ibid. art. 37. Shinomiya, Shintaku-ho [The Trust Act] (note 30 above), pp. 236–8.

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the purpose of the trust’; and (2) notwithstanding contrary stipulation in the trust deed, where delegation is ‘unavoidable in light of the purpose of the trust’.39 This expansion of the scope of work that third parties are permitted to carry out has enabled a greater rationalisation of such activities, something which is also expected to be of benefit to beneficiaries.

(Personal) remedies for breach of trust As the trust is a legal arrangement established by juristic acts, remedies under the Civil Code of Japan40 are applicable in so far as they are available. As compared to the sparing provisions in the 1922 Act on trust remedies, the 2006 Act reinforces trust remedies under the Japanese Civil Code by express provisions as follows. First, article 40(1) provides that where the state of the trust property has changed as a result of the breach, the trustee should restore trust property unless restoration is ‘extremely difficult’, requires ‘excessive expenses’ or is rendered inappropriate by special circumstances.41 In such situations, and in any event where the breach has caused loss to the trust property, the trustee must compensate for the loss.42 Secondly, while neither the Japanese Civil Code nor the Japanese Trust Act explicitly provides for a separate liability to disgorge profits in name, it is arguable that the remedy has in practice been provided for. Article 40(3) provides that where the trustee has breached the general fiduciary duty and the specific prohibitions pertaining to it,43 ‘the trustee shall be presumed to have caused a loss to the trust property in the same amount as the amount of the profit obtained by him or an interested party thereof as a result of such act’. Once such profits are deemed to be losses, the 39

40

41 43

Japanese Trust Act, art. 28(ii) and (iii): ‘In the following cases, a trustee may delegate the trust administration to a third party: … (ii) where the terms of trust does not contain any provisions concerning the delegation of the trust administration to a third party, but delegating the trust administration to a third party is considered to be appropriate in light of the purpose of the trust; and (iii) where it is provided by the terms of trust that the trust administration shall not be delegated to a third party, but delegating the trust administration to a third party is considered to be unavoidable in light of the purpose of the trust’. Civil Code of Japan, Act No. 89 of 1896 (hereafter ‘Japanese Civil Code’) (official trans. Ministry of Justice, Japan), available at www.japaneselawtranslation.go.jp/law/detail/? ft=2&re=02&dn=1&yo=civil+code&x=54&y=17&ky=&page=3 (last accessed 15 August 2012). 42 Japanese Trust Act, art. 40(1)(ii). Ibid. art. 40(1)(i). More specifically, Japanese Trust Act, arts. 30, 31(i) and (ii), and 32(i) and (ii).

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trustee becomes liable to compensate for it under article 40(1). Significantly, while all the specific prohibitions involve misuse of trust property, the general stipulation on fiduciary duty in article 30 does not. This makes it possible to interpret it to include broader circumstances, such as misuse of trust position or interception of business opportunity. Once such an interpretation is adopted, bribes and secret profits that do not arise from misuse of trust profits will also be deemed to be the loss of the trust property and can therefore be fully compensated. Thirdly, quite apart from the monetary remedies mentioned above, the 2006 Act also provides for rescission of unauthorised acts on behalf of the trust44 and unauthorised disposition of trust property.45 In relation to unauthorised acts, rescission is available if the third party knew, at the time of the act, that it was conducted in relation to the trust property and knew, or was grossly negligent in failing to know, that the trustee acted ultra vires.46 In relation to unauthorised disposition, rescission is available if there was valid trust registration where applicable, and at the time of disposition the third party knew or was grossly negligent in failing to know that the trustee was acting ultra vires or in breach of his duties.47 Fourthly, the 2006 Act also introduced an injunctive remedy for imminent breach of fiduciary duty, specifically (i) where a trustee has breached the laws or terms of the trust in circumstances where it is likely to cause substantial harm to the trust property; or (ii) where the trustee has failed to perform his duties equitably to all the beneficiaries in circumstances where his acts are likely to cause substantial harm to some of the beneficiaries, then the beneficiary/beneficiaries may seek an injunction to restrain the trustee’s actions.48 44

45

46 48

Ibid. art. 27(1): ‘(1) Where an act conducted by a trustee for the trust property does not fall within the scope of the trustee’s powers, a beneficiary may rescind such act, if all of the following conditions are met: (i) that the other party to the act knew, at the time of the act, that the act was conducted for the trust property; and (ii) that the other party to the act knew or was grossly negligent in failing to know, at the time of the act, that the act did not fall within the scope of the trustee’s powers’. Ibid. art. 27(2): ‘where an act conducted by a trustee to establish or transfer a right for property that belongs to the trust property … does not fall within the scope of trustee’s powers, a beneficiary may rescind such act, if … the other party to the act knew or was grossly negligent in failing to know, at the time of the act, that the act did not fall within the scope of the trustee’s powers’. 47 Ibid. art. 27(1). Ibid. arts. 27(1) and 31(6)–(7). Ibid. art. 44: ‘(1) Where a trustee has acted or is likely to act in violation of laws and regulations or the provisions of the terms of trust, if said action is likely to cause substantial harm to the trust property, the beneficiary may demand that the trustee cease said action’.

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Fifthly, and significantly, where a third party intentionally or negligently assisted a trustee’s wrongful act of breaching his duty, thus infringing the beneficiaries’ rights, the latter may bring an action against the third party in tort, and claim damages for loss.49 Although such a remedy is inferred from the operation of the Japanese Civil Code rather than expressly stipulated in the Japanese Trust Act, it is in substance the claim of dishonest assistance in common law.

Real claims against trust property Although Japanese trust law does not expressly adopt the constructive trust as seen in common law, the beneficiaries can still assert real claims against trust properties held in the hands of the trustee or third parties. As against the trustee, it is clear that both the original settled sum and properties derived from it from time to time, whether lawfully or unlawfully, belongs to the trust property.50 The trust property will not fall within the trustee’s bankruptcy estate. If trust property has been wrongfully transferred to the hands of the knowing or grossly negligent third party mentioned in relation to rescission, as long as such a third party holds the trust property, the beneficiaries can rescind the wrongful disposition. Since rescission takes effect ab initio, as if the transfer has not taken place, the beneficiaries are treated as still having real rights over the trust property. They can then assert a real claim over it and thus claw it back from the third party’s bankruptcy estate in the event of his bankruptcy.51

Transplanting company law features into the trust In a business corporation, the governance of corporate affairs is delegated to a board of directors elected primarily by the corporation’s shareholders. This ensures that the board is responsive to the interests of the shareholders, being owners of the corporation. In a trust, there is no election of the board (trustees) by its owners (the beneficiaries). Notwithstanding so, several features of the new Japanese Trust Act pertaining to 49

50 51

Japanese Civil Code, art. 709: ‘A person who has intentionally or negligently infringed any right of others, or legally protected interest of others, shall be liable to compensate any damages resulting in consequence’. Japanese Trust Act, arts. 2(3) and 16(1). Japanese Civil Code, art. 121: ‘An act which is rescinded is deemed void ab initio; provided, however, that a person with limited capacity to act shall have the obligation to reimburse to the extent that he/she is actually enriched as a result of such act’.

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the internal governance of the Japanese trust are borrowed from Japan’s company law. The most evident ones relate to (a) the new provisions on beneficiaries’ meetings, which permit multiple beneficiaries to make decisions by majority, and thus put trust beneficiaries in the role of shareholders; (b) the new rules on modification, consolidation and division of trusts; and (c) the creation of a new system of trust supervisors, caretaker and beneficiaries’ agents. Besides these rules of internal governance, the introduction of several new types of trusts also makes the differences between trust and corporation less distinct.

(a) Beneficiaries’ meetings The 1922 Act did not provide for decision making by multiple beneficiaries. This has created difficulties because even if it was necessary to alter the trust deed due to circumstances unforeseeable at the time of creation of the trust, it was impossible to do so. The 2006 Act has added new provisions permitting multiple beneficiaries to make decisions by majority at beneficiaries’ meetings. Thus, if a trustee wishes to amend certain terms of the trust deed against the wishes of some of the beneficiaries, he may be able to do so with support from the majority of the beneficiaries under the new Act. Under article 105(1) of the 2006 Act, the beneficiaries’ decisions shall, as a general principle, be made with the unanimous consent of all beneficiaries. However, if the trust deed has expressly provided otherwise (e.g., permitting decision making by a majority vote at the beneficiaries’ meeting), such a stipulation will prevail.52 Except in certain limited circumstances,53 beneficiaries meetings are to be convened by a trustee54 at the request of beneficiaries.55 The procedures for convening beneficiaries’ meetings are set out in articles 108–111 of the Japanese Trust Act, which are very similar to the rules on shareholders’ meetings laid down in the Companies Act of Japan.56 A beneficiary may exercise the voting 52

53

54 56

However, no restrictions can be imposed on the exercise of the beneficiary’s rights (i.e., unanimous consent is not required) set out in art. 92, including the right to file petitions to court; the right to request reports on trust affairs, the right to inspect trust documents, etc.). As set out in Japanese Trust Act, art. 107(2), which involves situations where there may be harm to the trust property and the procedures for convening a beneficiaries meeting at the beneficiaries’ request have not been complied with. 55 Japanese Trust Act, art. 106(2). Ibid. art. 107(1). See e.g., arts. 309 and 324 of the Companies Act of Japan, Act No. 86 of 2005 (official trans. Ministry of Justice, Japan), available at www.japaneselawtranslation.go.jp/law/list/? ft=2&re=02&dn=1&yo=companies&x=27&y=17 (last accessed 15 August 2012).

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rights by proxy,57 which is another new feature in the 2006 Act. Under the 1922 Act, even where a beneficiary was elderly, there was no mechanism to respond to the need for the appointment of a proxy to exercise rights on behalf of the beneficiary. This was seen as inadequate protection of the beneficiary’s interest. A new provision is therefore added to enhance execution of the beneficiary’s rights. Just as in resolutions made at shareholders’ meetings, decisions at a beneficiaries’ meeting are made by a majority vote,58 except for matters such as release of the trustee’s liability for breach of duties, agreement to terminate the administration of affairs by the trust supervisor or beneficiary’s agent, or agreement to modify, consolidate or divide the trust, which requires at least a twothirds majority vote.59 The introduction of beneficiaries’ meetings has enabled beneficiaries to manage trusts in a rational manner, and improved the effectiveness of the beneficiaries’ execution of rights. However, given the large number of beneficiaries involved in business trusts, it is likely that trustees will find the job of organising such meetings very time-consuming and costly. In fact, Japan is probably the only jurisdiction in the world which has transplanted company law rules on shareholders’ meetings to the trust. Now that even internal governance provisions from company law are transplanted to trust law, a legitimate question arises as to what advantages a business corporation has over a (business) trust, particularly in view of the fact that there is no capital requirement in setting up a trust.

(b) Modification, consolidation and division of trusts Under the 1922 Act, apart from modification of the trust approved by court order due to special circumstances,60 no specific provision exists for the modification, consolidation or division of a trust, which was only possible through the agreement of the parties. An exception is introduced 57

58 59

60

Japanese Trust Act, art. 114(1). The beneficiary’s proxy system is applicable to all beneficiaries. Ibid. art. 113(1). Ibid. art. 113(2). Other matters such as material modification to the trust (such as changing the purpose of the trust) may require more than a two-thirds majority vote: for details, see art. 113(3) and (4). Japanese Trust Act 1922, art. 23: ‘When, due to the special circumstances that were unforeseeable at the time of an act of trust, the provisions of the terms of trust concerning the method of trust administration no longer conforms to the interests of the beneficiary, the court may order a modification of the trust at the petition of the settlor, heirs of him, the trustee or the beneficiary’.

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to this rule in the new Japanese Trust Act, which makes it possible to modify/consolidate/divide the trust (a) by agreement between the trustee and beneficiary; or (b) by the trustee’s unilateral exercise of discretion, provided that the modification/consolidation/division is not against the purpose of the trust (and does not affect/conforms to the beneficiary’s interest in (b)).61 The background to the introduction of this exception is the restructuring of the Japanese banking sector in the past decades, which led to mergers of many trust banks in Japan.62 The new provisions enable the trust banks to consolidate63 the trusts to be held by the merged trust bank. In addition, it has been suggested that since there are rules on merger and the break-up of corporations, there should also be similar rules for trusts. Thus, the new rules are enacted to help clarify the relevant procedures and balance the interests of various parties. Yet at the same time, these new rules also reflect the desire to incorporate as many corporate features into the Japanese (commercial) trust as possible. Last but not least, the Japanese provisions on modification, consolidation and division of trusts differ from the concept of variation of trusts in English common law. In common law jurisdictions, one form of variation – more precisely, premature termination – of trusts is provided by the rule in Saunders v. Vautier64 which allows sui juris beneficiaries who amongst themselves are entitled to the whole beneficial interest to put an end to the trust and direct the trustees to hand over the trust property. There also exists a statutory jurisdiction to vary the trust.65 This gives the court power to approve agreements varying or revoking the trust, or varying the trustee’s powers of management of the trust property. The court’s power is exercisable mostly for infant, incapacitated or unborn beneficiaries.

61

62

63

64 65

See Japanese Trust Act, art. 149 (modification); art. 151(consolidation); and art. 155 (division). A recent example is the merger announced in April 2012 of Sumitomo Trust & Banking Co. and Chuo Mitsui Trust Holdings Inc. to become Japan’s largest trust bank, available at http://balita.ph/2009/11/07/sumitomo-trust-chuo-mitsui-to-merge-into-japans-top-trustbank/; http://ajw.asahi.com/article/economy/business/AJ20120402003 (last accessed 15 August 2012). ‘Consolidation’ is defined in art. 2(10) of the Japanese Trust Act to mean ‘consolidation of the whole of the trust properties of two or more trusts that have the same trustee into the trust property of a single new trust’. (1841) 4 Beav. 115; 49 ER 282. See, e.g., the English Variation of Trust Act 1958.

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(c) Creation of a system for trust supervisors, caretakers and beneficiaries’ agent In addition to the trustee who manages the trust property, the new Act has established a system for the appointment of trust supervisors, trust caretakers and beneficiaries’ agents. While the new system will no doubt enhance the beneficiary’s execution of rights, it does so by allowing, in substance, the appointment of three different types of ‘protectors’,66 who play a role somewhat similar to the board of directors of a corporation overseeing the performance of the management on behalf of the shareholders, or in this case, the trustee on behalf of the beneficiaries. Where a beneficiary is already in existence under a trust, the trust deed (or the court, on the application of an interested party) may specify a trust supervisor67 to be appointed. The trust supervisor has the power to exercise the beneficiary’s rights, such as the right to file petitions, demand compensation for breach of trustee’s duties, request reports of trust affairs, etc. as set out in article 92, in his own name on behalf of the beneficiary.68 An example where a trust supervisor may be needed is where a father sets up a trust for his infant children as beneficiaries. While it is possible to appoint a guardian for the infant under the Japanese Civil Code,69 a more direct route is now available under the Japanese Trust Act to protect the beneficiary’s interest. On the other hand, where the beneficiary is not yet in existence, the trust deed (or the court, on the application of an interested party) may appoint a trust caretaker70 instead. The trust caretaker has wider powers compared to a trust supervisor to conduct all acts in or out of court in the trust caretaker’s own name on behalf of a beneficiary in connection with the beneficiary’s rights.71 A trust caretaker may be needed, for example, where a company establishes a pension trust the beneficiaries of which include future employees who are not currently employed. In addition, the trust deed may also designate a person to be the beneficiary’s agent72 (where the beneficiary is also already in existence). The settlor may also be able to appoint a beneficiary’s agent at any time

66

67

68 70 72

For a comparison of their appointment, nature, powers and duties, see Arai, Shintaku-ho [The Law of Trust in Japan] (note 22 above), p. 239. See Japanese Trust Act, arts. 131–7 on the appointment, powers, duties, termination, etc. of a trust supervisor. 69 Ibid. art. 132(1). Japanese Civil Code, arts. 839–41. 71 Japanese Trust Act, arts. 123–30. Ibid. art. 125(1). Ibid. arts. 138–44.

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and for any reason.73 Unlike trust supervisors and caretakers, the beneficiary’s agent does not act in his own name, but merely exercises the beneficiary’s rights on his behalf.74 Needless to say, just as a trustee, all three types of ‘protectors’ are subject to the duty of care of a prudent manager.75

(d) Creation of new types of trusts Apart from the new ‘self-declared’ trust discussed above, the 2006 Act has also established the following new types of trusts, which bear features of a corporation. Limited liability trust The limited liability trust limits the trustee’s liability to the value of the trust assets.76 The trustee will not be personally liable for all the obligations of the trust; rather he is only liable to perform the trust obligations using the trust assets. The trustee’s other assets will be exempt from claims of the trust creditors.77 This amendment was introduced to encourage more people/entities to take on the office of trusteeship. At the same time, in order to protect trust creditors, registration is required to put the public on notice before such trusts will become effective;78 and the distribution of trust assets to beneficiaries is limited.79 The introduction of limited liability trusts as an alternative to corporations ensures that there is an even broader range of business structures for enterprises to choose from. However, thus far, it seems that this new type of trust has not been taken up, apparently because of the strict regulations under the Japanese Trust Act. Beneficial interest security-issuing trust Another innovation under the new Act is the introduction of the beneficial interest security-issuing trust (also known as ‘trust with certificate of beneficial interest’ or 73

74 75

76

77 78

Since art. 138(1) only stipulates that an agent may be designated by the trust deed, it seems that the settlor may also appoint him even after the creation of the trust, in which case the trustee cannot reject the appointment without reasonable grounds. Japanese Trust Act, art. 139(1). Ibid. arts. 133(1) (trust supervisors), 126(1) (trust caretakers), and 140(1) (beneficiaries’ agents). Ibid. art. 2(12): ‘“limited liability trust” … means a trust in which a trustee is only liable to perform all of the obligations covered by the trust property only by using property that belongs to the trust property’. Ibid. art. 217(1). Note that the trustee’s liability in tort is not exempt. 79 Ibid. art. 216(1). Ibid. art. 225.

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‘beneficiary certificates issuing trusts’).80 The trustee will issue certificates of beneficial interests,81 which can be treated as security, and are assignable.82 The rationale for creating this type of trust is to facilitate securitisation and enhance assignability of beneficial interests under a trust. Thus far, the first and only instance utilising the beneficial interest security-issuing trust mechanism is that of the Japan Physical Precious Metals ETFs launched by the Mitsubishi UFJ Trust in 2010, which allows investors (beneficiaries) to trade certificates of beneficiary interest for the respective physical metals on the Tokyo Stock Exchange.83

Applications of the trust Currently in Japan, the trust is applied mainly in the commercial sphere to supplement existing financial products.84 These include, for example: (1) capital trusts, where money is placed with trust banks as trustees to invest either upon investment portfolios devised in advance by the settlor-investor or upon specific investment instructions of the settlor from time to time; (2) pension trusts; (3) loans trusts which pool money from customers into trust funds for investment in loans and securities; (4) collective investment trusts such as real estate investment trusts; (5) non-capital trusts in which settlors settle capital on trust with trust banks for investment, but distributions to beneficiaries are made in the form that they are invested in at the end of the trust period; (6) securities trusts which invest in securities; (7) asset securitisation trusts (of receivables); as well as (8) special purpose vehicle trusts typically used in asset securitisation. Apart from these commercial applications of the trust, it is also possible to establish a trust in non-commercial contexts such as testamentary trusts, charitable trusts, non-profit purpose trusts for civic activities, as well as adult guardianship trusts for disabled individuals and the elderly. Such trusts are, however, less common in Japan than their financial counterparts. With changes in demography and greater 80 82 83

84

81 Ibid. arts. 185–213. Ibid. art. 207. See ibid. arts. 194–8 on the rules of assignment of certificates of beneficial interests. For details, see, e.g., notice issued by the Mitsubishi UJF Trust on 14 June 2010, available at www.mitsubishicorp.com/jp/en/pr/archive/2010/html/0000010535.html (last accessed 15 August 2012). Information about the utilisation of the trust can be obtained from the website of the Japan Trust Association, available at www.shintaku-kyokai.or.jp/html/trustbanks/e-1-2. html (last accessed 15 August 2012).

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awareness in family succession planning, it is hoped that the application of the trust in the family and public (charitable or non-profit) sectors will grow.

Conclusion The earlier Japanese Trust Act was enacted in 1922, at a time when there were only limited commercial trust businesses and hardly any noncommercial usage of the trust. When the new Act was introduced in 2006, it brought significant changes to the trust law regime in Japan. There is little doubt that the new trust law regime has modernised the use of the trust in the commercial sphere. Yet controversies remain with some of the fundamental changes, such as the introduction of ‘selfdeclared’ trusts, which conflict with conventional trust principles, and the transplantation of company law features into the trust at the risk of undermining the distinction between a trust and a corporation. More significantly, as the use of the trust has become more widespread, there is greater demand to utilise the trust beyond its traditional function of property management in the commercial sphere. In this regard, it seems that the new Act fails to spell out specific rules on the use of the trust in the family or other non-commercial contexts. What remains to be seen is whether the new Act is capable of supporting the trust’s more diverse functions, such as preserving or transferring family assets, devolving property upon death, supplementing the adult guardianship system, as well as charitable purposes.

4 Trust law in South Korea: developments and challenges wu y i ng- chieh

Background The Republic of Korea (also known as South Korea) is a civil law jurisdiction with both its private and public law being heavily influenced by the German legal system. The Civil Code of the Republic of Korea,1 which was modelled upon the German Civil Code (i.e., the BGB), was promulgated in 1958 and came into force in 1960. However, when it comes to corporate and financial laws, South Korea has always kept an interest in the laws of common law jurisdictions (especially England and the United States). This has resulted in the enactment of statutes the contents of which are derived from English or US laws. An important example is the law of trusts. The first Korean Trust Act was enacted in 1961. However, in enacting the Trust Act of the Republic of Korea in 1961,2 the government had not directly transplanted the English or US law of trusts. Instead, the Japanese Trust Act 1922 was the main source of reference. The Japanese Act was in essence a codification of English trust principles derived from a body of case law. Perhaps due to constraints in translating case law, drafters of the Japanese Act relied heavily on trust statutes such as the Trust Act of India and the provisions on trusts in the California State Civil Code at the initial stage. Nonetheless, the importance of the Indian Act and the Californian Code diminished in the drafting process. When the Japanese Trust Act was finally promulgated in 1922, common law 1

2

Civil Code of the Republic of Korea (also translated as Civil Act of the Republic of Korea), Code No. 471 of 1958 (hereafter ‘Korean Civil Code’) (official trans. Ministry of Government Legislation, Korea), available at www.moleg.go.kr/english/korLawEng?pstSeq=52674 (last accessed 15 August 2012). Act No. 900 of 1961.

46

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principles in English law were the most important reference material.3 Thus, when South Korea drew upon the Japanese Trust Act 1922 in introducing its own trust statute, it can be said that the English trust was imported into South Korea via Japan. Trusts in South Korea have been used for mainly financial purposes such as financial investment (e.g., unit-trust), the financing of property development projects and asset-backed securitisation, to name but a few. However, the trust has seldom been used for inheritance or charitable purposes, either because no tax benefits can be obtained or Korean lawyers are more familiar with the law of rechtsfähige stiftung or foundation. Most importantly, local culture and legal practice do not favour the use of the trust for other purposes such as family estate planning, succession or charity, for the following reasons. First, the trust was perceived to be imported mainly for the purpose of financial investment. Secondly, Korean people still strongly prefer to leave their property directly to their descendants rather than to transfer it to others (be they a professional trustee, a friend or a relative acting as trustee), as they will need to relinquish control over their assets during their lifetime. Thirdly, for charitable giving, legal forms that involve creating an independent legal entity to hold the particular assets (such as the foundation) are also preferred over one that involves transferring them to another party to be held along with other assets held in their name (such as the trust). This is particularly so since the foundation has been used successfully and prevalently to organise charitable giving. As a result, despite the fact that the Trust Act contains some provisions on family trust4 and charitable trust,5 trust law in South Korea has been considered part of financial law and used mainly for this purpose, despite the fact that the regime can also be used for other purposes. Since the enactment of the Korean Trust Act in 1961, no major changes have been made to it. However, the economy in South Korea has experienced significant growth in the last few decades, and the wealth of the Korean people has increased greatly. This accumulation of wealth fuelled demand for financial investment and asset management. Thus, the South Korean government sought to modernise its trust regime to meet the demands of the development of small-scale investment funds. The impetus for reform was also provided by reform efforts overseas, including the enactment of the English Trustee Act in 2000, the new US 3

4

Yamada Akira, Sintak rippo katei no kenkyu [Study on the Process of Legislation on Trusts] (Tokyo: Keisoshobo Publishing, 1981), p. 97. 5 Korean Trust Act, arts. 59–60. Ibid. arts. 106–13.

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Uniform Trust Code in 2000, the revised Japanese Trust Act in 2006, and the birth of the Principles of European Trust Law in 1999. To avoid falling behind these worldwide trends and developments, the South Korean Ministry of Justice established a trust law reform committee in 2009 to update its Trust Act 1961. The reform committee studied the English trust principles, the Japanese Trust Act 2006, the US Uniform Trust Code and the Restatement of Trust (Third). After twenty-five meetings, the committee submitted a bill on the new trust law to the Congress in 2009. The bill, after some deliberations and revisions, was promulgated in 2011 and came into force on 26 July 2012. The following sections elucidate the new Trust Act 20116 alongside its key features.

Trust Act 2011 General rules Statutory codes or acts in civil jurisdictions tend to set out at the beginning the general rules applicable to all aspects of the relevant law to avoid subsequent repetitions. These general rules usually include the definition, requirements for the establishment of the relevant legal relationship, and general rules on validity or otherwise of the legal relationship. Following this typical configuration, the Trust Act 2011 also starts with a section7 on the general rules. Article 2 of the Korean Trust Act 2011 defines the trust as ‘a legal relation whereby a person who creates a trust [i.e., the settlor] transfers a specified right8… to a person who accepts the trust [i.e., the trustee] on the basis of the confidence reposed in the trustee by the settlor, and 6

7 8

Act No. 10924 of 2011 (with effect from 26 July 2012) (hereafter ‘Korean Trust Act’ or ‘Korean Trust Act 2011’). Translation of the new Korean Trust Act 2011 is the author’s own translation; official or unofficial translation of the new Act is yet to be available at the time of writing. References to the Korean Trust Act in the present chapter are to the revised Korean Trust Act 2011, unless stipulated otherwise. Note also that in civil law countries the year in which an Act comes in force is usually not expressed in the title, however, ‘2011’ is added by the present author in order to distinguish the revised Korean Trust Act, which is the subject matter of this chapter, from the previous one enforced in 1961. Korean Trust Act, arts. 1–8. The specified right may be a personal or proprietary right. However, some personal rights, such as the right to receive salary, the right to receive pension and that to claim consolation money, are not transferrable, and hence cannot be the subject matter of a trust.

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the trustee has to manage, dispose of, administer, develop those rights [i.e., the trust fund], or take steps necessary for the fulfilment of the interests of a specified person [i.e., the beneficiary] or certain purposes [i.e., serving private or charitable purposes]’.9 Article 3 then enumerates three ways in which a settlor can establish a trust, namely, (1) by entering into a trust contract with the trustee (article 3(1)(i)); (2) by making a will (article 3(1)(ii)); and (3) by ‘self-declaration of trust’ (article 3(1)(iii)). The last method is introduced by the Korean Trust Act 2011, and allows the settlor to declare himself trustee of his own assets for ‘others’ (i.e., beneficiaries/investors).10 The relevant declaration of trust must be made by notarial deed.11 Since the settlor also acts as trustee, and cannot be expected to transfer his own property to himself, the self-declaration of trust forms an exception to the requirement that trust funds be transferred to the trustee. Despite concerns that the self-declared trust may be misused by settlors to hide assets from creditors, the legislators decided to import this mechanism from the Japanese Trust Act 2006. They took the view that such trusts would be very useful in enabling investment companies or financial institutions intending, say, to establish securitisation plans to declare themselves trustee for their investors, and hence saving the expense and efforts in appointing another party or establishing a separate special purpose vehicle for this purpose.12 This is a good example showing that the future direction of the trust in South Korea is gearing towards the financial or commercial spheres. It is worth noting that the expression ‘trust contract’ is used in article 3 (1)(i), and in fact, Korean trusts have been considered as a species of contract, unlike their common law counterparts which never treat trusts as a sub-category of the law of contract. However, the Korean approach may raise some serious problems.13 For example, under this contractual approach, if a trustee breaches one of the duties (e.g., duty of care) he owes to the beneficiary under the trust ‘contract’, the underlying nature of his liability is a contractual one. Yet, if the same breach occurs in 9

10

11 12

13

The words included in the parentheses are added by the author for the easy understanding of the article. It should be noted that the trustee cannot be the sole beneficiary; but he is allowed to be one of the beneficiaries (Korean Trust Act, art. 36). Korean Trust Act, art 3(2). Ministry of Justice of the Republic of Korea, Sintakbeop Gaejeongan Haeseol [Annotations of the Amendment Bill of the Trust Act] (Seoul: Ministry of Justice, 2010), p. 31. This could be a problem that exists in every civil jurisdiction that regards the trust as a contractual relationship.

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relation to a trust created by will or self-declaration, it is unclear if the trustee still owes contractual liability despite the absence of a (trust) contract. If he does not, whether contractual liability arises will depend on the mode of establishment of trust, even though the nature of the trustee’s breach is the same. These results seem difficult to reconcile, and pose theoretical challenges to civil jurisdictions that adopt a contractual approach in conceptualising the nature of the trust.14 There are three kinds of prohibited trusts that are either void or voidable. The first is where the trustee holds a right for a beneficiary who is not himself allowed to hold that right;15 such an arrangement is void. For example, according to article 3 of the Foreigner’s Land Acquisition Act of the Republic of Korea,16 a foreigner may be prohibited from acquiring ownership of land in Korea. If trusts of ownership of such lands for a foreigner are valid, the purpose behind article 3 will be frustrated. The second type of prohibited trust is where a settlor transfers rights to a trustee ‘solely’ for the purpose of litigation.17 In South Korean law, litigants are allowed to conduct their case in person in minor cases, but should otherwise appoint a professional lawyer to represent them. It is common, however, for litigants to transfer the rights under dispute to another party to be held on trust, so the latter can represent them in court. This gives rise to a flood of unnecessary litigation and uneven quality in legal representation in court. More seriously, this also undermines the well-established principle in civil procedural law that a case should only be delegated to a qualified lawyer, if it is to be delegated at all. The earlier Korean Trust Act 1961 thus provided that the establishment of a trust ‘solely’ for the purpose of litigation is void. The same provision remains in the Korean Trust Act 2011. The third type of prohibited trust is one whereby a settlor creates a trust to the prejudice of his own creditors,18 either by transferring his rights to a trustee so as to defeat the claims of his creditors, or doing so in anticipation of bankruptcy or insolvency. In the latter context, asset protection is achieved by transferring the debtor-settlor’s rights to the trustee, and hence removing in advance assets that would otherwise be 14

15 16

17

This is only one of the problems arising from the contractual approach. For reasons of space, other problems will not be dealt with in this chapter. Korean Trust Act, art. 7. Foreigner’s Land Acquisition Act of the Republic of Korea, Act No. 9186, 26 December 2008 (official trans. Ministry of Government Legislation, Korea), available at www.moleg. go.kr/english/korLawEng?pstSeq=54774 (last accessed 15 August 2012). 18 Korean Trust Act, art. 6. Ibid. art. 8.

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transferred to his trustee in bankruptcy to satisfy the bankrupt’s debts. Both of these trusts are voidable, and are liable to be set aside by the settlor’s creditors.

Trust fund The trust fund refers to the rights held by a trustee for a beneficiary or for a certain purpose. These rights can be property rights19 or personal rights. Some of them, for example, rights over land, cars, ships, aeroplanes and intellectual property, require registration. If the trust property comprises one of these registrable rights, not only does it have to be registered under the trustee’s name, it should also be shown on the registration book that the right in question is held on trust.20 Upon registration, the trust will be opposable against third parties. For non-registrable rights, article 4(2) of the Korean Trust Act 2011 provides that the trust can be asserted against third parties if the trustee segregates the trust property from his personal assets by managing it separately from his assets and not commingling it with his personal assets.21 If he fails to do so, such as by mixing the trust fund with his personal assets in an indistinguishable mass, the whole property is presumed to be the trust fund. The trustee will need to show evidence to identify his share within the commingled fund, in order for the the mixture to be treated as the combined property of the trust fund and his personal assets in proportion to their contribution.22 Therefore, the trustee must prove his share in the mixture in order to rebut that presumption. Once a trust is established, the trust fund will comprise property representing it from time to time and will be managed by the trustee. For example, if the trust fund comprises land, chattels or shares, they might be substituted with money or bonds acquired with the use of these assets in the course of the management of the trust. Article 27 of the Korean Trust Act 2011 thus provides that the trust fund consists not only of the initial assets held at the time of the establishment of the trust, but 19 20

21

22

The term ‘property right(s)’ is used to describe a right that is opposed to obligations. Korean Trust Act, art. 4(1): ‘With respect to any property that can be registered, the fact that such property is subject to a trust may be asserted against a third party by making a registration thereof ’. Ibid. art. 4(2): ‘With respect to any property that cannot be registered, the fact that such property is subject to a trust may be asserted against a third party when it is identifiable through managing it separately from other properties’. Ibid. art. 29.

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also all the assets acquired in the course of the administration of the trust.23 This is because under the rules of real subrogation, new assets acquired upon the use of the trust fund becomes part of it. In this context, it is submitted that a doctrinal conflict may arise between the application of the principle of real subrogation to trust funds and the personal nature of the beneficiary’s right over the trust fund. The principle of real subrogation applies, for example, to situations involving security interests (e.g., hypothec) in the following manner. While the debtor under the hypothec still has ownership of the land offered as security, the creditor has a security interest, which crucially is a proprietary right over the debtor’s ownership of the land. For the creditor to invoke the doctrine of real subrogation to assert his proprietary security interest over the land over any new assets which are substituted for the land, he must have proprietary right in the original asset, in order that such right can continue over other assets substituted for the original subject matter of his proprietary right. Applying this requirement in the context of trust, for the beneficiary to invoke the principle of subrogation, he must show that as a beneficiary he has proprietary rights in the underlying trust fund. This, however, runs counter to the current orthodox view which treats the beneficiary’s right only as a personal one.24 Once a trust is established, the trustee has two sets of rights under his control: one set of rights representing the trustee’s personal assets which are to be used for his own benefit and another representing the trust fund to be used for the benefit of the trust. Since a trustee is not permitted to use rights held under a trust for his own benefit (except in the case where he is one of the beneficiaries), a trustee cannot off-set his own personal debts against the rights he holds on trust.25 Apart from not being able to take advantage of the trust fund, the trustee’s personal creditors are also prohibited from asserting their claims over the trust fund. Accordingly, when a trustee is declared bankrupt, the trust funds will not fall within

23

24

25

Ibid. art. 27: ‘Any property obtained by the trustee due to management, disposal, operation, development, destruction or damage of the trust property, or other causes, shall fall within the scope of trust property’. It is submitted that the same problem may also arise with respect to trusts in Japan, Taiwan and China where the principle of real subrogation is also invoked. For more details on the Korean law of real subrogation, see Wu Ying-Chieh, ‘Sabeopsang mulsangdaewibeopriedaehan tongiljeok yogeonjeongnibeul wihan sian’ [‘Establishing three general requirements of the doctrine of real subrogation under Korean Private Law’] (2011) Minsabeophak [Korean Journal of Civil Law] 55. Korean Trust Act, art. 25.

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the pool of assets that can be used to satisfy the trustee’s personal debts.26 This is the same as the notion of the ‘independence of the trust asset’ in English law.27 Accordingly, except in relation to debts incurred in the management of the trust, no trust fund can be subject to compulsory execution, provisional attachment, realisation of security, auction, or the grant of an interim injunction.28 It should, however, be noted that as between the beneficiary and the trust creditors (i.e., creditors to whom debts are due in the course of the management of the trust), the beneficiaries’ rights will be subordinated to the claims of these creditors.29 Moreover, trust creditors can even reach as far as a trustee’s personal assets to satisfy their debts, unless the trustee has informed them the transactions in issue were made solely for the trust30 or the trust instrument has limited the trustee’s liability.31

Duties, powers and liabilities of the trustee As in common law jurisdictions, a trustee is subject to certain duties in the course of administration of the trust. These duties serve to compel the trustee to manage the trust fund properly and in accordance with the trust instrument. The first and foremost duty laid down in the Trust Act 2011 is the duty of care,32 which requires the trustee to manage the trust funds in such a way as other people of identical occupation and position 26

27

28

29 30

31 32

Korean Trust Act, art. 24: ‘The trust property shall not be a part of the trustee’s bankruptcy estate, the individual rehabilitation foundation, or the trustee’s private property to which the manager of rehabilitation procedures has right to manage and dispose’. However, since the beneficiary only has a personal right against his trustee and the separate patrimony approach has never been confirmed in practice or by legislation, it remains doctrinally unclear as to why the beneficiary’s position should be preferred vis-àvis the personal creditors of the trustee. Korean Trust Act, art. 22: ‘No compulsory execution, auction for exercise of security right and so on, preservative measure … or administrative disposition on default of national tax and so on shall be made to any trust property. However, this shall not apply in case where it is based on any right arising from a cause already existing prior to the creation of the trust, or in the course of management of the trust affairs’. Korean Trust Act, art. 62. Supreme Court of Korea Case No. 2007da63997 of 2007 (24 June 2010). This is also true in English trusts law: the trustee will have to dig into his own pocket to meet the claims of the creditors even if the claims of those creditors relate to the trusts. The Trust Law Committee has proposed a general reform of the rights of creditors of trustees, see James Penner, The Law of Trusts (6th edn, Oxford: Oxford University Press, 2008), p. 23. Korean Trust Act, art. 114. Ibid. art. 32: ‘The trustee shall administer the trust with a reasonable manager’s duty of care. Where otherwise is provided in the deed of the trust, that prevails’.

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would do if they were placed in the same circumstances, unless such degree of care is expressly modified by the trust instrument.33 The next duty forms the heart of the fiduciary duty of the trustee: the duty of loyalty. The duty of loyalty requires trustees to manage trust rights solely for the interest of the beneficiaries, and not for themselves or others.34 In other words, trustees must act in the interest of the beneficiaries should any conflict of interest arise. Examples of conflicts of interest based on the non-exhaustive list of prohibited acts35 set out in the Act include where a trustee vests trust fund in his own patrimony or offers trust fund to himself acting in his personal capacity as security for the loan he made to the trust;36 vests his own property in trust fund or offers his private property to himself acting as trustee as security for the loan he acting as trustee made to himself;37 manages two trust funds (e.g., trust A and trust B) in a way that favours one over the other by vesting the property of trust A in trust B;38 concludes an agreement with someone for whom the trustee acts as an agent in the course of his management of the trust fund;39 and obtains unauthorised profits or bribes using his position as trustee.40 In all these cases, however, the degree of loyalty required can be modified by express provisions in the trust instrument.41 Where multiple beneficiaries exist, the trustee has to treat them equally. This is known as the duty of impartiality, which is enshrined 33 34 35

36

37

38

39

40

41

Ibid. art. 32 (proviso). Ibid. art. 33: ‘The trustee shall manage the trust affairs for the interest of the beneficiary’. Ibid. art. 34(1)(i)–(iv). This is a new article incorporated into the Trust Act 2011. For more details, see Ministry of Justice of the Republic of Korea, Sintakbeop Gaejeongan Haeseol [Annotations of the Amendment Bill of the Trust Act] (note 12 above), pp. 259–77. Korean Trust Act, art. 34(1)(i): ‘The trustee may not do the following acts in the name of any person: (i) Making the trust property his own property, or attributing any property thereto to his own property’. Ibid. art. 34(1)(ii): ‘The trustee may not do the following acts in the name of any person: (ii) Making his own property the trust property or attributing any property thereto to the trust property’. Ibid. art. 34(1)(iii): ‘The trustee may not do the following acts in the name of any person: (iii) Attributing the trust property of one trust or any property thereto to the trust property of another trust in case where multiple trusts were undertaken’. Ibid. art. 34(1)(iv): ‘The trustee may not do the following acts in the name of any person: (iv) Representing a third person in an act regarding the third person’s trust property’. Ibid. art. 36: ‘No trustee, whether he uses his own name or the name of others, may enjoy any benefits when administering the trust, except in a case where the trustee is one of the beneficiaries’. Ibid. art. 34(2)(i).

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in article 35 of the Korean Trust Act 2011.42 This duty can also be said to be part of the trustee’s duty of loyalty, because it serves to prevent conflicts of interest between beneficiaries by preventing the trustee from preferring one beneficiary to another. Other trustee’s duties worthy of attention include, for example, the duty to administer the trust fund separately from the trustee’s private assets;43 the duty to provide the beneficiary with information concerning the management of the trust;44 and the duty of non-delegation.45 Delegation of the management of the trust was in principle prohibited in most jurisdictions, on the ground that it was only the trustee who was entrusted to manage the trust fund, unless delegation was the only way to benefit the beneficiary. This view, however, has been seen as unrealistic in modern days where delegation has become common practice and in fact promotes the efficient management of the trust. Thus, modern practice in most jurisdictions permits delegation of trust management as a rule rather than an exception. Nonetheless, in drafting the new Act, Korean drafters remained concerned that the power to delegate might be abused. Consequently, article 42 of the Korean Trust Act 2011 preserves the basic rule that prohibits delegation of the trust management, unless the beneficiary’s consent is obtained. Trustees are given diverse powers to enable them to carry out the trust. For example, trustees have the power to hold, control and dispose of the trust fund, or act in other ways necessary to either benefit the beneficiary or achieve certain purposes.46 Unless expressly stipulated otherwise in the trust instrument, the category of permissible investment was limited to certain subject matter, such as stock, bonds, deposit, real estate, and so on.47 Intellectual property rights had never before been included in the scope of permissible investments. The use of a default list of preapproved investments reflects the drafters’ prudential approach in the Korean Trust Act, which was thought appropriate to accommodate lay, gratuitous trustees. However, with the emergence of many new kinds of assets, including intellectual property rights, in the modern investment market, Korean drafters began to recognise the inadequacy of the restrictive approach to trustee’s investment power. Accordingly, where 42

43

44

Ibid. art. 35: ‘Where multiple beneficiaries exist, the trustee has to treat them equally unless otherwise provided by the terms of the trust’. Ibid. art. 37: ‘(1) The trustee shall manage the trust property separately from the trustee’s personal property and make the trust property identifiable’. 45 46 47 Ibid. art. 39. Ibid. art. 42. Ibid. art. 31. Ibid. art. 41.

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qualified professional trustees are concerned, such as when a trust is administered by a commercial trustee who is under the regulation of the Financial Investment Services and Capital Markets Act,48 no such limit is imposed on the permissible scope of investments by the trustee. In any event, the default rule in the Korean Trust Act can be displaced by express investment powers in the trust instrument.49 In exercising these broad managerial powers, a trustee may have to make payment for the benefit of the trust when no trust fund is at hand. In such a case, to promote the efficient management of the trust, a trustee is permitted to make the payment from his own assets and obtain reimbursement from the trust fund later.50 Apart from this, a trustee is in general not entitled to remuneration, unless such a right is conferred on him by the trust instrument,51 or the trust in question is a commercial trust operated by commercial trustees such as fund managers or banks,52 in which case the commercial trustee is entitled to remuneration irrespective of whether it is expressly provided for in the trust instrument. As to the liability of a trustee who fails to perform his duties in such a way that causes loss to the trust, article 43 of Korean Trust Act 2011 stipulates that the trustee is obliged to make good the losses to the trust, which means that he has a personal liability to compensate for the loss of the trust fund;53 and disgorge any profits that he procures through the management of the trust.54 Where the trustee is a company and losses are 48

49 52 53

54

Financial Investment Service and Capital Markets Act of the Republic of Korea (hereafter ‘Korean Financial Investment Service and Capital Markets Act’), Act. No. 10361 of 2010 (official trans. Ministry of Government Legislation, Korea), available at www.moleg.go.kr/ english/korLawEng?pstSeq=54745 (last accessed 15 August 2012). The Act was partly amended by Act No. 10063 of 2012. Commercial trustee means an authorised financial investment business entity that conducts a business on financial investment trust; and the authorisation is given by the Financial Services Commission: Korean Financial Investment Services and Capital Markets Act, art. 8(1). Here, the term ‘financial investment business means activities conducted continuously or repeatedly for the purpose of earning a profit: Korean Financial Investment Services and Capital Markets Act, art. 6(1). 50 51 Korean Trust Act, art. 41 (proviso). Ibid. art. 46. Ibid. art. 47. Ibid. art. 47(1) (proviso). Ibid. art. 43(1): ‘Where there is damage to the trust property due to the trustee’s breach of duties, the settlor, the beneficiary or the other trustee in case multiple trustees exist may request the trustee to restore the trust property. Where the restoration is impossible or impracticable, where the cost of restoration is too high, or where restoration is not appropriate due to special circumstances, the settlor, the beneficiary or the other trustee may claim damages’. Ibid. art. 43(3): ‘Where the trustee is in breach of the duties stipulated in Articles 33–37, even though there is no damage to the trust property, the trustee shall disgorge the whole profit that the trustee or a third party has made due to the breach’. This is a new article

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incurred by it, the company and its directors are under a concurrent liability to pay such compensation.55 Apart from being liable to pay compensation, a trustee may also be removed from office for breach of any duty imposed on him.56 For the sake of completeness, it might be noted that the current Korean Trust Act contains no provisions governing the exemption of trustees’ liability. Although it is permissible to lower the standard of care (proviso to article 32) and loyalty (article 34(2)), it is unclear to what extent this is allowed. However, public policy may render void exemption clauses that seek to relieve a trustee from his intentional, wilful or reckless breach (Korean Civil Code, article 103).

Rights of the beneficiary The independent nature of the trust fund and the trustee’s duties discussed above exist to serve the interests of the beneficiaries. In addition, the beneficiaries themselves can preserve their interests through direct rights against the trustee. The South Korean trust law only provides the beneficiary with a personal right against his trustee.57 Generally, the

55 56

57

incorporated into the Korean Trust Act 2011 and for more details on the disgorgement of unlawful profits, see Ministry of Justice of the Republic of Korea, Sintakbeop Gaejeongan Haeseol [Annotations of the Amendment Bill of the Trust Act] (note 12 above), pp. 339–41. Korean Trust Act, art. 45. Ibid. art. 16(3): ‘If the trustee breaches his duties, or there is any justifiable reason, the settlor or the beneficiary may request the court to dismiss the trustee’. Ibid. art. 63. The concept of dual ownership is not accepted in Korean trusts law, as it is incompatible with the indigenous concept of absolute ownership which requires that no identical ownership can vest in more than one person. For example, if A owns a book, no one can acquire an ownership of that book with exactly the same content as A’s ownership. In other words, if A has full (100 per cent) ownership of a book, then no one is permitted to have ownership of the same book to the same extent as A. It may be possible for A and B to own the book together through the mechanism of co-ownership, although in such a case A and B do not own the book in exactly the same way (e.g., A may own 50 per cent of the book and B may own the other 50 per cent). What absolute ownership means is that no one is allowed to own exactly the same 50 per cent of the book already owned by another person. In short, it is possible to own a thing together by different shares or percentage, but it is never possible for both A and B to have ownership over the same thing which has the same content. By contrast, the concept of dual ownership paints a picture in which, if a trustee has 100 per cent ownership of a book, a beneficiary can also have 100 per cent ownership of that book. Dual ownership is thus incompatible with the concept of absolute ownership. In light of the indigenous concept of ownership, since the trustee is the recognised owner of the trust property, it is not

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beneficiary’s rights arise once the trust is established. However, if the trust instrument gives someone the power to appoint the beneficiary, the beneficiary’s right does not come into existence until the act of appointment when the appointee acquires the right to the beneficial interests.58 In case the beneficiary may not be aware that he has obtained a beneficial interest, the trustee will be under a duty to inform him accordingly.59 Once the trust takes effect, the settlor and the trustee are prohibited from altering the beneficiary’s rights unless otherwise prescribed in the trust instrument.60 A beneficiary is allowed to transfer his beneficial interest whenever he so wishes,61 as long as he informs the trustee of the transfer.62 A beneficiary can also relinquish his beneficial interest by communicating such an intention to the trustee.63 As mentioned above, a trustee is under a personal liability to make good losses incurred as a result of breaching duties imposed by the Korean Trust Act. In addition, the beneficiary is accorded a right to rescind dispositions made by the trustee in breach of trust.64 In common law jurisdictions, dispositions in breach of trust can also be dealt with through the imposition of a constructive trust or personal liabilities upon third parties.

58 61 64

possible for the beneficiary to also have a right of ownership over it. Moreover, when a personal right (e.g., a contractual claim) is included in the trust fund, civil law simply does not embrace such a concept as ‘ownership of contractual/personal right’ in its contract or property law. If a person is a creditor, it would only be appropriate in civil law to conceptualise him as having a personal claim against the debtor, not that he has ownership of his right as creditor against the debtor. The concept of dual ownership is also criticised by distinguished common law lawyers, see William Swadling, ‘Property: general principles’ in Andrew Burrows (ed.), English Private Law (Oxford: Oxford University Press, 2008), ch. 4, pp. 272–4; Tony Honoré, ‘Trusts: the inessentials’ in Joshua Getzler (ed.), Rationalising Property, Equity and Trusts: Essays in Honour of Edward Burn (London: LexisNexis, 2003), pp. 7 and 9. However, it is submitted that it is possible to conceptualise the beneficiary’s right as a new type of proprietary interest that is attached to the rights (either proprietary or personal) held by the trustee. This, of course, needs to overcome the strong attachment civil law has to the principle of numerus clausus. This principle requires that all rights having a proprietary nature must be clearly provided for by law. Commentaries in South Korea have thus far only treated the beneficiary’s right as a personal one. If the present submission is accepted, the nature of the beneficiary’s right will be conceptualised as belonging to the opposite end of the spectrum, and hence unlikely to overhaul the conventional understanding of the beneficiary’s right as a personal right. 59 60 Korean Trust Act, art. 56(1). Ibid. art. 56(2). Ibid. art. 58(1). 62 63 Ibid. art. 64. Ibid. art. 65(1)(i). Ibid. art. 57. Ibid. art. 75: ‘(1) In case where the trustee disposes of trust property in breach of the trust, the beneficiary can rescind the disposition, provided that the other party or the subsequent purchaser knew, at the time of the breach, the disposition was concluded in breach of the trust or could have known the breach through reasonable investigation’.

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However, in South Korea, the so-called ‘third party effect’ of dispositions in breach of trust is not determined by constructive trusts, but by rescission. In other words, the constructive trust mechanism was not imported when the Korean Trust Act was enacted in 1961 or revised in 2012.65 The absence of the constructive trust is, so far, the most distinctive point of divergence between the South Korean and the common law trust. When a trustee disposes of trust funds in breach of trust and the third party transferee is not a bona fide purchaser, the beneficiary is entitled to rescind the disposition. After the beneficiary has exercised his right to rescind, the disposition loses its efficacy retroactively (i.e., ab initio), and ownership in the funds revests in the trustee (or most probably a newly appointed trustee). Accordingly, it should be noted that after the beneficiary exercises his right of rescission, he drops out of the picture. It then falls on his trustee to claim the funds back and account for it to the beneficiary. As a holder of a proprietary right (i.e., ownership of the funds), the trustee is preferred over the personal creditors of the third party transferee in the event of the bankruptcy of the third party. Significantly, even after bankruptcy has intervened, the trustee may still exercise his right of rescission against the administrator in bankruptcy of the third party transferee. Put another way, the administrator in bankruptcy takes subject to the beneficiary’s right of rescission, which accrued at the date of the unauthorised transaction. If the third party transferee is a bona fide purchaser, the right to rescind the disposition does not arise. The beneficiary can only claim damages against the trustee for his breach of trust.66 If the third party transferee who is not a bona fide purchaser has already transferred the relevant property to someone who is a bona fide purchaser, or, say, has dissipated the sale proceeds, the beneficiary can still rescind the initial disposition made between the trustee and the immediate, male fide transferee. This is because one of the bars to common law rescission, resitutio in integrum, does not affect the right to rescind under Korean law. In the Korean law of rescission, there are only two bars to rescission: affirmation and limitation. The beneficiary can still rescind the disposition even though it is not possible for the 65

66

For criticisms of the rescission response, see Wu Ying-Chieh, ‘Sintakbeopsang suikjaui chwisogwon-paereodaim jeonhwanganeungseongeul wihan sogo’ [‘The beneficiary’s right of rescission: towards a new response’] (2011) 38 Anambeophak [Anam Law Review] 199. Korean Trust Act, art. 43(1).

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immediate transferee to restore the original property. In this situation, he will be required to pay damages to the trustee. If the fund is used to generate other profits, the third party transferee is liable to disgorge them to the trustee after the disposition is rescinded by the beneficiary. However, since those profits are not the very funds transferred to the third party, the third party transferee is not a trustee, and those profits are acquired by using another’s property (i.e., at the expense of another) and hence without any legitimate legal justification (i.e., absence of basis), recovery is based on the law of unjust enrichment. Thus, the third party transferee is under an obligation to disgorge those profits. In light of the above observations, it is submitted that constructive trust as adopted in English law is unlikely to take root in South Korea. Two doctrinal obstacles may be considered.67 First, constructive trusts under English law are imposed by court (i.e., by operation of law). However, judges in South Korea are not empowered to invent any new law but only to interpret existing statutes. Thus, the imposition of a trust not prescribed by existing statutes is a virtually impossible task for the courts. Secondly, even if the constructive trust is introduced by legislation, it would then become a statutory trust rather than a constructive trust. Moreover, some constructive trusts give rise to personal liability (e.g., the constructive trust arising from dishonest assistance and trusteeship de son tort), while others give rise to proprietary liability (e.g., the constructive trust imposed on paid vendors of real property, on property acquired by a murderer heir and on misappropriated trust funds). As such, the constructive trust model can hardly fit the current legal dichotomy that broadly divides the private law areas into the law of obligations and the law of real rights. Constructive trust seems to be a bird of two natures to Korean lawyers; they just do not know into which pigeon hole (the law of real rights or the law of obligations) they should wedge it.

Termination of the trust Article 98 of the Korean Trust Act 2011 stipulates a number of grounds on which a trust can be terminated. These include, for example, when the purpose of the trust is achieved or proves impossible to achieve;68 when 67

68

For more details, see Wu Ying-Chieh, ‘Uijesintagui ihae’ [‘Constructive trusts: a civilian approach’] (2012) 18(4) Bigyosabeop [Journal of Comparative Private Law] 1263. Korean Trust Act, art. 98(1)(i): ‘The trust shall be terminated in the following cases: (i) The object of the trust is attained or has become unattainable’.

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more than a year has passed without the trust being accepted by the new trustee;69 when the trust is combined with another trust;70 when the court, under the application of the settlor, trustee or beneficiary, finds the need to terminate the trust for the common good or in the event of an unexpected situation arising;71 or for such other reasons as may be stipulated in the trust instrument.72 The trust can also be terminated by mutual agreement between the settlor and the beneficiary.73 If the settlor is the sole beneficiary of the principal and income of the trust, he is entitled to terminate the trust at any time.74 If there are residual funds at the time of the termination of a trust and the trust instrument does not state to whom they should go, they will vest in the existing beneficiary.75 However, if the existing beneficiary gives up his interests, the right to the residual funds reverts to the settlor or his successors76 under a new trust created by operation of law (i.e., a statutory trust). This is the only instance in South Korean law which reaches essentially the same effect as an ‘automatic resulting trust’ in common law. Having said that, no such trust is imposed over assets already transferred to an intended trustee in relation to a trust that fails initially. If the trust instrument fails to establish a valid trust, the transfer of the property is also void. As a result, ownership of the intended trust assets still remains with the settlor, who can assert his ownership rights over them and claim specific recovery of the very thing transferred. Significantly, such claims are based on the law of real rights and not that of unjust enrichment, for no title has ever been passed to the trustee and hence there is no enrichment. In contrast, the settlor is separately entitled under the law of unjust enrichment to assert an in personam claim against the trustee of a failed trust to disgorge all the profits he made in the meantime. Such a personal claim falls within the law of unjust enrichment.

69 71

72 73

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70 Ibid. art. 98(1)(iv). Ibid. art. 98(1)(ii). Ibid. art. 100: ‘In case where it is apparent that terminating the trust is appropriate in the interest of the beneficiary due to special circumstances unpredicted at the time of the creation of trust, the settlor, the trustee, or the beneficiary may request the court to terminate the trust’. Ibid. art. 98(1)(vi). Ibid. art. 99. It should also be noted that the rule in Saunders v. Vautier (1841) 4 Beav. 115; 49 ER 282 is not found in Korean law. Korean Trust Act, art. 99(2): ‘The settlor and the beneficiary may at any time mutually agree to terminate the trust, except in case where there is no settlor’. 76 Ibid. art. 101(i). Ibid. art. 101(ii).

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Conclusion The present chapter has considered several major themes pertaining to the reception and implementation of the trust in South Korea. It notes the prevalent utilisation of the trust to facilitate a range of investment vehicles rather than to manage assets after death or establish charities. This financeoriented tendency can also be shown by the fact that even self-declaration of trust was adopted mainly for the benefits of investment business entities. This phenomenon will presumably continue for some time. As to the duties owed by the trustee, the Korean Trust Act 2011 incorporated almost all major ones found in England and the United States. However, the law remains silent on two issues: whether the trustee owes a duty of diversification, and how to manage the imbalance between principal and income when different beneficiaries are entitled to these respective portions of the trust fund. It is hoped that these issue will be dealt with in the next revision. As to the trust fund, the most theoretically important problem is as to the legal justifications for the proprietary effect of the trust in bankruptcy situations in a jurisdiction where neither the proprietary nature of the trust nor the doctrine of separate patrimony has been accepted. Until a sound justification is provided, the proprietary effect of the trust will always remain a myth. The chapter also notes the most distinctive feature of Korean trust law vis-à-vis the common law trust, namely its treatment of the consequences of dispositions in breach of trust (i.e., the effect of such dispositions to third party transferees). Instead of imposing a constructive trust, South Korean law affords a right of rescission to the beneficiary, which will likely be preferred in South Korea over the use of the constructive trust model due to the doctrinal conflicts it poses to indigenous legal concepts. It has been over fifty years since the first Korean Trust Act was enacted. It is surprising to find that law schools in this country have rarely taught the subject. Lawyers begin their legal profession without any knowledge of the trust, which hinders the widespread use of the trust. At the same time, the situation is changing rapidly after the Korean Trust Act was revised in 2011. There is greater receptivity of the trust amongst the legal profession due to its utility and flexibility, as well as greater interest amongst law schools and students in studying the subject. It is hoped that these changes will bring about further developments of the trust law in South Korea in the near future.

5 Trust law in Taiwan: history, current features and future prospects wa n g wen - yeu , wan g ch i h - c h e n g a n d s h i e h j e r- s h e n q

History and development of trust law in Taiwan The legal system in the Republic of China (also known as Taiwan) is heavily influenced by the German legal system. As a civil law jurisdiction, there were no codified rules in relation to trusts until the Trust Law of the Republic of China1 came into effect in 1995. The development of a trust law regime in Taiwan can be traced back to as early as the 1950s. In the 1950s, banks in Taiwan were largely state-owned and not open to private establishment. The concept of ‘trust’ first appeared when the government allowed the setting up of ‘trust and investment companies’, which were regulated under the Banking Act,2 to meet the business demand to raise funds from private investors. These companies took ‘trust funds’ which were similar in nature to bank deposits from investors, and provided a guaranteed return on interests and principals upon maturity. The boundary between ‘trust funds’ and ‘deposits’, however, was unclear. Notwithstanding the absence of a trust law before 1995, the language of ‘trust’ can be found in some legislation. For example, article 171 of the Civil Procedure Code3 stipulates that ‘[w]hen a trustee is discharged from his/her 1

2

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Trust Law of the Republic of China, promulgated on 26 January 1996; amended on 30 December 2009 (hereafter ‘Taiwanese Trust Law’) (official trans. Ministry of Justice, Taiwan), available at http://law.moj.gov.tw/Eng/LawClass/LawAll.aspx?PCode=I0020024 (last accessed 15 August 2012). Banking Act of the Republic of China, promulgated on 28 March 1931, amended 9 November 2011 (hereafter ‘Taiwanese Banking Act’) (official trans. Ministry of Justice, Taiwan), available at http://law.moj.gov.tw/eng/LawClass/LawAll.aspx?PCode=G0380001 (last accessed 15 August 2012). Code of Civil Procedure Code of the Republic of China, promulgated on 26 December 1930 (hereafter ‘Taiwanese Civil Code’) (official trans. Ministry of Justice, Taiwan),

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duty under the trust, the proceeding shall be stayed automatically until a new trustee … assumes the action’. Article 3(3) and (19) of the Taiwanese Banking Act empowers the banks to ‘manage trust funds under mandate’ and to ‘conduct businesses related to investment trusts regarding securities’; sixteen provisions were enacted in chapter 6 of the same Act to regulate trust investment companies. In addition, the trust institution was recognised under article 248 of the Company Act,4 which regulates the issue of corporate bonds. The rules on ‘trust funds’ were also found in article 4 of the Budget Act.5 Nonetheless, given the absence of express provisions in the Taiwanese Civil Code or other laws on the definition of trust, it was unclear whether the ‘trust’ was a form of mandate or an ‘unnamed contract’ in law.6 When the government sought to open up the securities market in the 1980s for investment by foreigners and Chinese diaspora overseas through mutual funds, the Securities and Exchange Act7 was amended in 1988 to formally introduce ‘securities investment trust companies’8 which functioned as financial institutions for operating mutual funds.9 Following the enactment of this Act, four securities investment trust companies were established. They proved very successful in drawing investments from abroad, and contributed to further internationalisation of the Taiwanese securities market. However, the Securities and

4

5

6 7

8

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available at http://law.moj.gov.tw/eng/LawClass/LawContent.aspx?pcode=B0010001 (last accessed 15 August 2012). Company Act of the Republic of China, promulgated on 26 December 1929 (official trans. Ministry of Justice, Taiwan), available at http://law.moj.gov.tw/eng/LawClass/LawContent. aspx?pcode=J0080001 (last accessed 15 August 2012). Budget Act of the Republic of China, promulgated on 24 September 1932 (official trans. Ministry of Justice, Taiwan), available at http://law.moj.gov.tw/eng/LawClass/LawAll. aspx?PCode=T0020001 (last accessed 15 August 2012), art. 4: ‘Trust Fund: refers to the Fund managed or disposed in accordance with contractual terms for the interest of domestic and foreign agencies, entities or individuals’. See Shieh Jer-Shenq, Xintuofa [Trust Law] (3rd edn, Taipei: Angle Publishing, 2009), p. 15. Securities and Exchange Act of the Republic of China (hereafter ‘Taiwanese Securities and Exchange Act’) (official trans. Ministry of Justice, Taiwan), available at http://law.moj.gov. tw/eng/LawClass/LawAll.aspx?PCode=G0400001 (last accessed 15 August 2012). Taiwanese Securities and Exchange Act (1988), art. 18(2) (repealed in 2006): ‘the securities investment trust money collected by the securities investment trust enterprise shall be placed separately from the property self-owned by the securities investment trust enterprise and its custody institution. The creditor of the self-owned property of the securities investment trust enterprise and fund custody institution cannot detain or exercise other rights as against the fund asset. The Ministry of Finance shall issue measures of managing the securities investment trust money’. See Wallace Wen-Yu Wang, ‘Corporate versus contractual mutual funds: an evaluation of structure and governance’ (1994) 69 Washington Law Review 927.

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Exchange Act only provided ‘bankruptcy protection’ to funds operated by these securities investment trust companies. It left the details of operation of these companies to executive orders (which do not have the status of legislation) by the Executive Yuan.10 More significantly, the courts had to be relied upon to resolve legal issues involving trusts. A number of judgments were delivered on the basic concept of the trust in the 1970s and 1980s. For example, the Supreme Court of Taiwan had referred to the act of establishing a trust as ‘an act conferring to the trustee a right which is beyond the economic purpose behind it, and which can at the same time only be exercised within the scope of economic purpose for which it is granted. [This is because] from an outsider’s perspective, the trustee is in possession of a right beyond that which was conferred by the settlor; from the internal perspective, the trustee should still be bound by the scope of the right conferred by the settlor’.11 It is perhaps not surprising that these judgments often failed to appreciate the essence of a trust relationship. In view of this, in 1983, the government commenced the drafting of the Taiwanese Trust Law, which was eventually passed in 1995.12 The Taiwanese Trust Law was enacted on 26 January 1996, and provides for the creation, structure, as well as rights and duties of trustees and beneficiaries. It has since become the bedrock and fundamental regulatory scheme for trusts in Taiwan. Ever since its enactment, there has been rapid development of trustrelated laws and regulations. In addition, as part of the government’s continuous efforts to encourage the development of the trust industry, strengthen the supervision and management of trust enterprises, and enhance protection of beneficiaries’ rights, various trust-related laws have been enacted and/or amended. A summary of the major developments since the enactment of the Taiwanese Trust Law is set out below: • Four years after the enactment of the Taiwanese Trust Law, on 19 July 2000, the Trust Enterprise Act13 was enacted. It was not only the

10 11 12

13

The Executive Yuan is the highest administrative organ of Taiwan. See Supreme Court of Taiwan Case No. 42 of 1977. Chen Chun-Shan, Xintuo ji Xintuoyefa Zhuanlun – Lilun yu Shiwu [Discussion on the Trust Law and Trust Enterprise Law: Theory and Practice] (Taipei: Taiwan Academy of Banking and Finance, 2000), p. 19. Trust Enterprise Act of the Republic of China (hereafter ‘Taiwanese Trust Enterprise Act’) (official trans. Ministry of Justice, Taiwan), available at http://law.moj.gov.tw/eng/ LawClass/LawContent.aspx?pcode=G0310027 (last accessed 15 August 2012).

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•

• •

•

•

•

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turning point for the thriving development of business trusts and asset management industry, but it also provided the foundation for rules and regulations promulgated thereunder to supervise the operation of trust enterprises. In order to establish a healthy and robust legal environment for trusts, various tax laws, such as the Income Tax Act, Estate and Gift Tax Act, Land Tax Act, Equalisation of Land Rights Act, Deed Tax Act, House Tax Act, Value-added and Non-value-added Business Tax Act were amended. In 2002, the Supreme Court declared that decisions on trusts decided before the Taiwanese Trust Law took effect shall no longer be applicable. New forms of asset finance and establishment of real estate investment trust (REIT) funds became possible, leading to the creation of a regulatory scheme for asset securitisation in Taiwan. Accordingly, two major pieces of financial law, namely, the Financial Asset Securitisation Act and the Real Estate Securitisation Act, were enacted in 2002 and 2003 respectively. In 2004, regulations for mutual funds were elevated to the status of legislation by the enactment of the Securities Investment Trust and Consulting Act.14 The Act aims to improve the governance structure of securities investment companies, securities investment trust funds, and securities investment consulting firms. The Trust Enterprise Act was amended on 16 January 2008 for seven purposes: (i) to loosen up the restrictions of the operation of trust enterprises; (ii) to exclude the application of certain provisions of the Taiwanese Trust Law and the Company Act, which are in conflict with the characteristics of business trusts, to business trusts; (iii) to adjust the rules of conduct of the trust industry; (iv) to fortify the duty of loyalty owed by the trust enterprises; (v) to supplement the regulatory structure of collective trust funds; (vi) to provide the basis for the formation of a trust fund market; and (vii) to reinforce the governmental supervisory authority on the trust industry. The Real Estate Securitisation Act was amended in 2009. The amendments were made with a view to removing some restrictions on forming REIT funds, strengthening the safeguards for investors’ rights, Securities Investment Trust and Consulting Act of the Republic of China (hereafter ‘Taiwanese Securities Investment Trust and Consulting Act’) (official trans. Ministry of Justice, Taiwan), available at http://law.moj.gov.tw/eng/LawClass/LawContent.aspx? pcode=G0400121 (last accessed 15 August 2012).

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advancing the progress of real estate securitisation, and simplifying the relevant administrative procedures. As a result of these recent enactments and amendments of trust and trust-related laws, the current landscape of trust laws in Taiwan can be divided into three parts as follows: (1) the Taiwanese Trust Law and laws and regulations promulgated thereunder: these govern individual trusts and charitable trusts; (2) the Trust Enterprise Act, Financial Asset Securitisation Act and Real Estate Securitisation Act, as well as laws and regulations promulgated thereunder: these govern business trusts and commercial trusts; and (3) the Trust Tax Act and laws and regulations promulgated thereunder: these govern the design of trust products and the taxation of trusts. Given that the Taiwanese Trust Law is the fundamental law of trusts, and that the Trust Enterprise Act, the Financial Asset Securitisation Act and the Real Estate Securitisation Act are special laws in nature, the latter laws enjoy pre-emptive effects over the Taiwanese Trust Law. This means that when a provision under any of the Trust Enterprise Act, the Financial Asset Securitisation Act, or the Real Estate Securitisation Act is in conflict with any provision of the Taiwanese Trust Law, the former will prevail.

Difficulties encountered in accommodating the trust Conflicts with civilian legal tradition The original legal system in Taiwan was greatly influenced by the German legal system. As a civil law jurisdiction, the Civil Code of Taiwan has adopted the concept of ‘numerus classus’ (viz. the type and content of property rights can only be created by legislation), and upheld the independence and publicity requirement of property acts as essential conditions for effecting changes in property rights. Although the numerus classus principle has been modified in Taiwan and property rights can be created through custom, it is still unclear whether this principle might affect the introduction of trust laws into Taiwan. In this regard, Anglo-American common law distinguishes trust property into legal and equitable title. The trustee acquires legal title over the trust property and is entrusted with the power to administer and dispose of the trust property, whereas the beneficiary acquires the equitable title and enjoys the beneficial ownership of the trust property. There is thus ‘dual ownership’ of the trust property. The core of a trust has

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been summarised in academic commentary as follows. Once a trust relationship is created, the trust property becomes independent from the property of the settlor, the trustee and the beneficiary, and is not available to the personal creditors of all these three parties. The trust property is thereby identified and transformed into an independent entity.15 However, courts in Taiwan did not recognise these concepts before the Taiwanese Trust Law was enacted. They took the view that the trustee had full, undivided ownership over the trust property subject to the (contractual) rights enjoyed by the settlor under the trust arrangement. Accordingly, when the trustee becomes insolvent, the trust property falls within his bankruptcy estate. The rights of the settlor or beneficiary vis-à-vis the trustee is but a matter of the internal relationship between them and the trustee, and hence not exigible against the latter’s personal creditors. For the same reason, his personal creditors may apply to the court to enforce their claims against the trust property. While this interpretation is capable of meeting the requirements of ‘numerus classus’ and ‘unity in ownership doctrine’ as well as ensuring security of transactions with third parties, it is different from the core concepts of a trust in common law.

Tax evasion and fraud against creditors The use of the trust as a tool for asset-stripping and tax evasion is not uncommon. When the trust was first introduced into Taiwan, there were suspicions that it would be used to hive off assets to defraud creditors or to evade tax. These led to misunderstandings of the real function of trust, and hampered the promotion of the trust concept.

Misconceptions about trust: example of hypothecation transactions Even before the enactment of the Taiwanese Trust Law, courts in Taiwan had been trying to reconcile the conflicts between the trust law and indigenous system in various judgments, and such efforts continued after the enactment of the Taiwanese Trust Law. This can be illustrated by the concept of ‘hypothecation’ in Taiwan. The person who sets up a security of hypothecation will have been hypothecated with the rights of the subject matter from the debtor or a third party to the extent required 15

Faung Kai-Lin, Xintuofa zhi Lilun yu Shiwu [Trust Law: Theory and Practice] (Taipei: Angle Publishing, 2003), p. 45.

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by the purported security, so that such person will have to make restitution or compensation in the manner agreed in respect of the subject matter if the debtor fails to perform his obligations. If the details of compensation have not been agreed, the person entitled under the security rights will be compensated by the proceeds realised on the sale of the subject matter or at a set price.16 Such arrangements provide a flexible method of financing for owners whose property is of value and capable of hypothecation, but at the same time falls short as a subject matter in a typical security interest arrangement. Although hypothecation transactions have existed in Taiwan for a long time, and their validity has been acknowledged by academics, practitioners,17 and a Supreme Court judgment in 1985,18 the legal nature of hypothecation remains unclear.19 In particular, a number of judgments have cast doubt on whether the ‘security of hypothecation’ can be classified as a ‘trust act’ and the debate on this issue remains even after the enactment of the Taiwanese Trust Law. Although there are some similarities between hypothecation and trust in terms of the rights and obligations of the parties, the subject matter of the former is transferred to the creditor for the creditor’s own benefit, which is clearly different from a trust where the trustee is administering or disposing of the trust property for the benefit of the beneficiary. Furthermore, in light of article 34 of the Taiwanese Trust Law,20 whereby an arrangement to benefit the trustee exclusively is disallowed, it is apparent that hypothecation and trust are different legal concepts. Hence, it is inappropriate to explain hypothecation by reference to the concept of trust act.21 This view was 16

17

18 19

20

21

Chen Jung-Lung, ‘Rangyu Danbao zhi Danbaobiaodiwu fanwei’ [The scope of the subject matter in hypothecation’] (2002) 23 Fu Jen Law Review 122. Chen Jung-Lung, ‘Rangyu Danbao zhi Jiekexintuoqiyue’ [‘Hypothecation and the deed of shell trust’] (1997) 27 Taiwan Law Review 48. The article highlights the following potential violations of the law: evasion of constructive possession, prohibitions on forfeiture, mutual false representation and the principle of numerus clausus, etc. See Supreme Court of Taiwan Case No. 272 of 1985. On the evolution of the different views in practice, see Chen Jung-Lung, ‘Rangyu Danbao zhi Falvgouzao (xia) – Zuigao Fayuan Jiushiyi Niandu Taishangzi di Yiyibalinghao Panjue Pingxi’ [‘The legal constitution of hypothecation (Part II): analysis of the Supreme Court Case No. 1180 of 2002’] (2003) 97 Taiwan Law Review 193. Taiwanese Trust Law, art. 34: ‘A trustee shall on no account be entitled to any benefits arising out of a trust unless the trustee is a co-beneficiary of the trust’. Wang Chih-Cheng, Xintuo zhi Jiben Fali [The Fundamental Principles of Trust] (Taipei: Angle Publishing, 2005), pp. 56–7. The same conclusion was reached in Chen ChunShan, Xintuo ji Xintuoyefa Zhuanlun – Lilun yu Shiwu [Discussion on the Trust Law and Trust Enterprise Law: Theory and Practice] (note 12 above), p. 9.

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also adopted in a judgment of the Supreme Court in 2009.22 Nonetheless, some scholars remain of the view that the Taiwanese Trust Law should apply in regulating hypothecation because although the creditor acquires the title of the property, in reality he is only entitled to the beneficial interest of the property.23

Features of Taiwanese trust law As a civil law jurisdiction, the Taiwanese Trust Law represents an attempt by the legislature to introduce a legal institution that originates from the common law system in a way that least conflicts with its indigenous legal principles. Given that the Taiwanese Trust Law was enacted over a decade ago, there have also been calls for reforms to clarify certain ambiguities of the current Law and to increase the utilisation of trusts. Accordingly, in 2008, the Ministry of Justice sponsored the Trust Association of the Republic of China24 to undergo a pilot study of draft amendments to the Taiwanese Trust Law.25 The following section will highlight the major features of the Taiwanese Trust Law, alongside the relevant reform proposals from the Taiwanese Trust Association.

Creation of trust ‘Trust’ is defined in article 1 of the Taiwanese Trust Law as ‘the legal relationship in which the settlor transfers or disposes of a right of property and causes the trustee to administer or dispose of the trust property according to the stated purposes of the trust for the benefit of a 22

23 24 25

According to Taiwanese Supreme Court Case No. 544 of 2009, ‘trust is such an action where the settlor transfers the trust property to the trustee for its administration or disposal for the benefit of the settlor itself or a third party. Whereas hypothecation refers to the case where the debtor transfers the title of the collateral to the creditor in order to guarantee the debt repayment and to which extent the creditor will have the proprietary interest in such collateral which shall be returned to the debtor upon the repayment of debt; so far as this arrangement evades the prohibitions provided in art. 873(2) of the Civil Code as before its amendment on 28 March 2007 in case where the creditor is entitled to sell the collateral or to value the collateral in order to get the payment out of the proceeds of sale or price of valuation, such evasion is exempted. The subject matters attracting legal protection under the trust and the hypothecation are different, with rather distinctive legal effects’ (authors’ translation, emphasis added). Shieh, Xintuofa [Trust Law] (note 6 above), p. 371. Hereafter ‘Taiwanese Trust Association’. Professor Wang Chih-Cheng was the principal investigator of this project.

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beneficiary or for a specified purpose’. There are only three ways to create a trust under the current Taiwanese Trust Law, namely, trust created by deed (also called ‘deed trust’), trust by will and declarative trust. There are other types of statutory trusts provided by legislation. Article 2 then stipulates that ‘a trust shall be established by a contract or a will’. However, this provision does not state clearly: (i) whether the trust contract is a real contract; and (ii) even if it is so, whether it is unilateral or bilateral in nature. In 2008, the Taiwanese Trust Association submitted a proposal of draft amendments to the Ministry of Justice. It sought to resolve the uncertainty as to whether the trust contract is a real contract by proposing reform of the Taiwanese Trust Law to stipulate the conditions for establishing a trust by contract and conferring on the trust contract the status of a real contract.26 It also advocated for similar stipulations about the establishment of a trust by will and the procedures for ascertaining the trustee of a testamentary trust.27 As to whether the trust contract is unilateral or bilateral, the debate was settled in 2006 when the Taiwanese Supreme Court held that a trust contract is unilateral in nature and the subsequent transfer of the right in rem of the trust property is an essential element for creating a trust contract.28

Ownership of trust property As mentioned above, principles of (Taiwanese) civil law such as numerus classus and indivisibility of ownership doctrines may be in conflict with the concept of ‘dual ownership’ of trust property in common law. In order to incorporate the concept of ‘dual ownership’ into the Taiwanese legal system, the legislature in Taiwan followed the trust statutes in Japan and Korea, and provided in article 9 of the Taiwanese Trust Law that the trust property appertains to the trustee.29 The trustee not only possesses the trust property nominally, but is also treated as the legal owner of the trust property, although it is the beneficiary who is entitled to and enjoys the substantive interest. In order to balance the protection of the interest of the beneficiaries with the security of transactions, the legislature has 26 27 28 29

See art. 2(2) of the Draft Amendments of the Taiwanese Trust Law (August 2008). See art. 2(1)–(3) of the Draft Amendments of the Taiwanese Trust Law (August 2008). See Supreme Court of Taiwan Case No. 500 of 2006. Taiwanese Trust Law, art. 9: ‘The property rights acquired by a trustee by virtue of a trust act shall be deemed to be a trust property. Any property rights acquired by a trustee from the administration, disposal, destruction, damage or otherwise of trust property shall appertain to the trust property’.

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laid down the principle of the independence of trust property, notwithstanding that the concept of ‘dual ownership’ was not expressly endorsed. As a result, the Taiwanese Trust Law has also stipulated the following mandatory requirements to achieve the independence of trust property by excluding it from: succession by the trustee’s heirs,30 the trustee’s bankruptcy estate,31 compulsory execution by the trustee’s personal creditors,32 set-off by the trustee’s personal creditors,33 and from commingling with other assets of the trustee.34

Registration and segregation of trust assets The problem underlying the apparent conflict between the dual ownership of trust property in common law and the indivisibility of ownership in civil law relates to the need to differentiate between the trustee’s own property and the trust property, namely, how to design a notice regime for trust law, and how to ensure the independence of such a regime. In this regard, article 4 of the Taiwanese Trust Law provides that ‘[n]o trust in respect of a property right that requires trust registration shall be valid against third parties unless trust registration of the right has been duly completed’. Registration of the trust is a way to achieve public notice, which in turn ensures security of transactions and avoids unfair prejudice to third parties acting in good faith. Based on this provision, the beneficiaries’ rights over trust property are enforceable against third parties if the existence of the trust is capable of being put on notice in accordance with law. However, a number of problems remain. First, scholars in Taiwan remain divided on the question as to whether the beneficiaries’ rights in the trust property will remain enforceable against a third party where, 30

31

32

33

34

Ibid. art. 10: ‘No trust property shall appertain to the trustee’s estate upon the death of the trustee’. Ibid. art. 11: ‘No trust property shall appertain to the bankrupt estate when the trustee becomes bankrupt’. Ibid. art. 12: ‘No trust property shall be subject to compulsory execution unless the subject of the execution is a right in the property that exists before the trust is established, or a right that arises from the administration of trust affairs, or unless it is otherwise provided by other applicable laws’. Ibid. art. 13: ‘Claims appertaining to the trust property shall not be offset against debts not appertaining to the trust property’. Ibid. art. 14: ‘If rights other than title to a property are the subject of a trust property, those rights shall not be extinguished by their being commingled with other rights even if the trustee has acquired rights in the property’.

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say, the trust property is not registrable and hence notification by registration is not applicable.35 Secondly, under a trust arrangement, what the settlor needs to transfer to the trustee is only a nominal title instead of full ownership. However, the current procedures of trust registration in Taiwan require transfer of full ownership of the property rights based on the concept of ‘one property, one ownership’ (unification of ownership). This fails to appreciate the division of ownership of trust property in a trust. Thirdly, upon registration, the property will be marked as trust property with the effect of restricting the trustee’s power to deal with it as his own and in contravention of the trust purpose. However, under the current trust registration system in Taiwan, the name of the trustee appears as the ‘owner’ on the register (notwithstanding that the property is also marked as trust property under the heading ‘other particulars’ on the register). Consequently, a person who does not have thorough understanding of the trust may mistakenly take the view that the trustee enjoys full and unrestricted ownership, which may prejudice the interests of the beneficiaries and undermine the original intention of the trust. Fourthly, although article 4 of the Taiwanese Trust Law provides that registration of trust is not an essential condition for asserting rights over the trust property, and is only necessary when one claims against a bona fide third party, article 758 of the Taiwanese Civil Code stipulates that registration of real property is an essential condition to effecting changes in property right. As a result, some judges and scholars take the view that an unregistered trust relationship in respect of real property cannot even be asserted against third parties who are male fide. Registration of transfer of immovable property adopts the ‘deed registration system’, where the authority will not review the content but merely list the relevant agreements in the ‘special register’ so they can be exigible against third parties. There are two types of registration: registration of ‘trust property’ and registration of ‘trust relationship’. The former refers to the registration of the title transferred or created by the trust relationship. The latter refers to a detailed record of the parties to the trust, trust 35

For a detailed discussion on this issue, see Wang Wen-Yeu, ‘Xintuofa ruhe dingwei Sanweiyiti zhi Xintuo Falv Guanxi’ [‘How trust law positions the Trinity of the trust legal relations’] in Wang Wen-Yeu, Minshangfa lilun yu jingji fenxi (er) [Economic Analyses and Theories of Civil and Commercial Law (II)] (Taipei: Angle Publishing, 2003), pp. 140–3.

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property and the terms of trust so as to inform third parties of the content of the trust relationship. As regards the independence of trust property, the Taiwanese Trust Law imposes a duty on the trustee to segregate the trust assets from those of his own. Article 24 of the Taiwanese Trust Law provides that ‘[a] trustee shall administer a trust property independently of his own property and other trust properties’. Such independence of the trust assets survives the trustee’s death36 and bankruptcy.37 Article 12 of the Taiwanese Trust Law stipulates that ‘[n]o trust property shall be subject to compulsory execution’.38 This expressly protects trust assets from claims by the trustee’s personal creditors, on the basis that although the trustee owns the trust assets nominally, he is merely administering them for the benefit of the beneficiary. At the same time, article 12 also prohibits similar claims from the creditors of the settlor, on the apparent ground that once a trust is created, the trust assets are transferred to the trustee and becomes the property of the trustee.

Nominal ownership This means that the registered owner of property merely allows the property to be registered in his name and himself to become the titular owner, but has no substantive power to dispose of or manage the underlying property or the rights arising from registration. Pursuant to article 1 of the Taiwanese Trust Law, the essential elements for creating a trust include both the settlor’s transfer of title over trust property to the trustee and the grant to him of the right to administer or dispose of the property. In other words, a passive trust in which the trustee does not have rights to administer or dispose of the trust property is not a trust recognised by the Taiwanese Trust Law. The earliest opinion of the Taiwanese Supreme Court on the issue held that such an arrangement was invalid, on the grounds that it lacked legitimate justifications and

36

37

38

Taiwanese Trust Law, art. 10: ‘No trust property shall appertain to the trustee’s estate upon the death of the trustee’. Ibid. art. 11: ‘No trust property shall appertain to the bankrupt estate when the trustee becomes bankrupt’. Ibid. art. 12: ‘No trust property shall be subject to compulsory execution unless the subject of the execution is a right in the property that exists before the trust is established, or a right that arises from the administration of trust affairs, or unless it is otherwise provided by other applicable laws’.

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created a false expression of intention.39 In fact, most of these passive contracts are entered for the purpose of circumventing mandatory rules and will be deemed illegal. Having said that, if these contracts are not entered into for illegal purposes,40 an issue arises as to whether they should be enforced as a trust. A spate of relatively recent decisions of the Taiwanese Supreme Court has confirmed that a passive contract could be considered as a nominal ownership contract rather than a trust,41 so that they fall outside the scope of trust law. More recently in 2009, the Taiwanese Supreme Court held that a nominal ownership contract is entered into on the basis of the substantive owner reposing trust and confidence in the titular owner and is similar to the contract of mandate. If such a contract did not contravene any law and regulation, public policy or good morals, then it is legal and will have the same legal effects as any general contract under the Taiwanese Civil Code; on this basis, the provisions of a contract of mandate under the Taiwanese Civil Code are to be applied mutatis mutandis.42 Given that court’s rationalisation of the contract of ownership as a contract of mandate rather than a trust, the principles of Taiwanese Trust Law, such as subrogation and independence of trust property, will not be applicable. Protection for the substantive owner will be much more limited.

Trustee’s duties Article 22 of the Taiwanese Trust Law expressly stipulates the duty of care of a trustee as follows: ‘[a] trustee shall administer the trust affairs with the care of a prudent administrator’. Following the Asian financial crisis, a controversy arose in Taiwan in relation to the standard of care of trustees when selling offshore financial 39

40

41 42

Shieh Jer-Shenq, ‘Commentary to judgments in practice: deeming the passive trust and registration in other’s name as legal circumvention’ (2008) 6 Special Research on Property Law 493. The Taiwanese Supreme Court held that these contracts were valid if such passive trust acts could be justified by proper underlying reasons, such as: ‘to avoid the attack of slander’, ‘to avoid borrowing money from friends’, ‘the bond between father and daughter’ and ‘to avoid the accumulated taxation upon the land value’: see Taiwanese Supreme Court Cases No. 1871 of 2002, No. 572 of 2000, No. 1119 of 2000 and No. 1054 of 2003. For example, see Supreme Court of Taiwan Case No. 1954 of 2003. See High Court of Taiwan Case No. 76 of 2009. For other similar opinions, see Supreme Court of Taiwan Case No. 990 of 2009, and High Court of Taiwan Case No. 362 of 2005.

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products. For many years, banks in Taiwan have provided private wealth management services to individuals whereby qualified customers would open trust accounts with the banks, which served as trustees to invest in offshore financial products chosen by the bank customers. After the financial crisis, many bank customers who suffered heavy losses from offshore financial products purchased through the banks brought action against the banks for failure to make full disclosures about these products and hence breach of their duty of care under article 22 of the Taiwanese Trust Law. The issue in turn depends on whether the banks’ provision of investment prospectuses and statements of risk disclosure were sufficient to discharge their duty of care. Judicial opinions were divided. Some courts held that the banks had fulfilled the standard of care of a prudent administrator and did not breach any duty of care, on the ground that the banks provided their customers with prospectuses and the customers all signed the trust contracts as either settlors or beneficiaries.43 Other courts held that the customers’ lack of investment experience in offshore financial products and the huge losses suffered entailed a higher standard of care, namely, that the banks should not merely provide the documents containing relevant information to the customers, but also explain their terms and the risks involved before procuring their signature, and provide timely reports to customers after the investment is made to enable them to accurately assess their risks from time to time with a view to prevent investment losses.44 It is submitted that the latter view, which adopts a more nuanced approach in determining the appropriate standard of care of banks, is to be preferred. Although the Taiwanese Trust Law does not expressly refer to the notion of the fiduciary duty of loyalty, it does prohibit the trustee from obtaining any benefits arising from the trust,45 or converting any of the trust property to his property or creating or acquiring any right thereto.46 The latter resembles the common law rule against self-dealing, and the Taiwanese Trust Law has also stipulated detailed exceptions to the general prohibition where: (i) the beneficiaries’ written consent has been obtained and the trust property was acquired at fair market value; (ii) the assets were purchased in an open market; and (iii) the court’s approval has been obtained.47

43 44 45

See High Court of Taiwan Case No. 343 of 2007. See High Court of Taiwan Case No. 299 of 2009. 46 Taiwanese Trust Law, art. 34. Ibid. art. 35.

47

Ibid.

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Accordingly, although the Taiwanese Trust Law stipulates a range of specific prohibitions that fall within the notion of the duty of loyalty, it does not contain any general provision that lays down the trustee’s (fiduciary) duty of loyalty. For example, while article 35 of the Taiwanese Trust Law enumerates lucidly a trustee’s prohibited conducts as a part of the fulfillment of her duty of loyalty, the statutory language does not prohibit conflict of interest transactions per se. The Taiwanese Trust Association has proposed a general provision on the trustee’s duty of loyalty.48 The same proposal also advocated for a new provision on the trustee’s duty to act fairly, which requires a trustee to discharge her duty in accordance with the best interests of the beneficiary and to deal with beneficiaries fairly when there is more than one beneficiary.49

Revoking the trust In order to avoid the misuse of the trust for the purpose of hiving off assets or avoiding creditors, article 6 of the Taiwanese Trust Law empowers a creditor to revoke a trust50 where she can prove that the trust was established for such purposes. The creditor’s power of revocation is of great practical significance. In fact, the Taiwanese Supreme Court created an exception to article 12 of the Taiwanese Trust Law, which prohibits compulsory execution of trust assets by the trustees’ personal creditors, on the basis of the creditor’s power of revocation. It held that article 12(1) will not apply when the settlor establishes a trust solely for the purpose of fraudulently infringing the rights of her creditors.51 Accordingly, when a creditor can show that the trust is established to fraudulently infringe her rights, she may file a petition to the court to revoke the trust. For the sake of completeness, it should be noted that a creditor’s exercise of the power of revocation is subject to article 6(1), which is ambiguous in wording.52 Decisions of the Supreme Court have held that in order to file a petition of revocation, the creditor must show that her rights are infringed concurrently with and as the result of the establishment of the trust. In addition, the creditor must also show that the debtor 48 49 50

51 52

See art. 22(1) of the Draft Amendments of the Taiwanese Trust Law (August 2008). See ibid. art. 23(1). Taiwanese Trust Law, art. 6(1): ‘A settlor’s creditor whose rights are impaired by a trust act shall have the right to apply to the court for the revocation of the trust’. See Supreme Court of Taiwan Case No. 41 of 2009. Taiwanese Trust Law, art. 6(1): ‘A settlor’s creditor whose rights are impaired by a trust act shall have the right to apply to the court for the revocation of the trust’.

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is insolvent before she can file a petition to revoke the trust. In other words, if the debtor has not yet become insolvent when she established the trust, then the court will not revoke the trust even though its establishment depletes the assets of the debtor.53

(Personal) remedies for breach of trust The remedies of compensation, restoration and disgorgement have all been provided for in the Taiwanese Trust Law. Pursuant to article 23 of the Taiwanese Trust Law, a trustee is liable to pay compensation for damage caused to the trust property. He is also liable to restore the damaged property to its original condition if the damage is incurred due to the trustee’s improper administration of the trust property, or if the trustee disposes of the trust property in violation of the stated purpose of the trust.54 Although there is no general duty of loyalty, aspects of the duty of loyalty can be found in, inter alia, article 35, which prohibits the trustee from converting trust property to his own use. If he breaches article 35 and causes damage to the trust property, he will be required to pay compensation under article 23. In addition, the trustee will also be liable to disgorge the benefits he acquires from the breach, so that such benefits will be incorporated into the trust property.55

Real claims against trust property Under the Taiwanese Trust Law, it appears that the beneficiaries can assert real claims against trust properties held in the hands of both the trustee and third parties. By virtue of article 9 of the Taiwanese Trust Law, the trust assets do not only include the initial settled sum, but also assets obtained as a result of the ‘administration, disposal, destruction, damage or otherwise’ of the trust assets.56 This reflects the substitutive 53

54 56

See Kaohsiung District Court Case No. 1073 of 2001, and other similar opinions in Tainan District Court Cases No. 2133 of 2003 and No. 115 of 2005; Taipei District Court Case No. 115 of 2007; and Taipei Shiling District Court Case No. 39 of 2007. Having said that, art. 6(3) provides that: ‘A trust act shall be assumed to be detrimental to a claim if the settlor or his estate is adjudicated bankrupt within six months of the establishment of the trust’. 55 Taiwanese Trust Law, art. 23. Ibid. art. 35. Ibid. art. 9: ‘The property rights acquired by a trustee by virtue of a trust act shall be deemed to be a trust property. Any property rights acquired by a trustee from the administration, disposal, destruction, damage or otherwise of trust property shall appertain to the trust property’.

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nature of trust property. In other words, the beneficiary is entitled to claim all the substitutions of the trust property as appertaining to the trust property, regardless of the value of the trust fund that is used to exchange for the substituted product. Thus, assets derived from the lawful use of the trust fund are clearly treated as part of it. Although the Trust Law does not also expressly provide that assets or profits derived from the unlawful use of the trust fund will also fall within the trust fund (or subject to a constructive trust as in the common law), it is arguable that the catch-all phrase ‘or otherwise’ is wide enough to embrace property obtained from the unlawful use of the trust assets. To briefly sum up, article 9(2) affirms the substitution of trust property, whereby any substituted objects resulting from the trustee’s lawful or unlawful conduct shall remain part of the trust property.57 Seen in this light, it may be said that a limited form of ‘constructive trust’ has been adopted by the Taiwanese Trust Law.

Conclusion This chapter provides a brief overview of the development and major features of the Taiwanese Trust Law. The evolution of trust laws in Taiwan has spanned over fifty years from the use of ‘trust-like’ concepts in investments to the enactment of a trust law, and further to the enactment of trust-related laws for the development of a comprehensive trust law regime. Although the Taiwanese Trust Law closely resembles its Japanese predecessor (in particular, the Japanese Trust Act 1922), controversies and features unique to the Taiwanese system remain. Nonetheless, the rapid development of trust law in Taiwan shows that a mature system of trust law is well under way. 57

Wang Chih-Cheng, Xintuofa [Trust Law] (4th edn, Taipei: Wu-Nan Book, 2010), p. 144.

6 Trust law in China: a critical evaluation of its conceptual foundation lu s i na h o, re b e c c a l e e a n d j i n j i n p i n g

Introduction China’s private law system, which is historically derived from Soviet law, is civil law in nature and does not embrace any indigenous concept of the trust. The trust system was introduced by the enactment of a specialist Trust Law of the People’s Republic of China in 2001,1 and along with it administrative regulations to govern the licensing and operation of trust companies,2 as well as the introduction of a new form of commercial trust, the collective capital trust, that can only be operated by trust companies.3 With the legal framework in place the trust industry in China has experienced exponential growth in the past decade. In 2012, the total assets managed by trust companies amounted to RMB¥:5.3 trillion (about

1

2

3

Trust Law of the People’s Republic of China, Order No. 50 of 2001 (hereafter ‘Chinese Trust Law’) (official trans. National People’s Congress (NPC), China), available at www. npc.gov.cn/englishnpc/Law/2007-12/10/content_1383444.htm (last accessed 15 August 2012). For commentaries on the Law, see Charles Zhen Qu, ‘The doctrinal basis of the trust principles in China’s Trust Law’ (2003) 38 Real Property, Probate and Trust Journal 345; Rebecca Lee, ‘Conceptualizing the Chinese trust’ (2009) 58 International and Comparative Law Quarterly 655; Francis Foster, ‘American trust law in a Chinese mirror’ (2010) 94 Minnesota Law Review 602; Lusina Ho, Trust Law in China (Hong Kong: Sweet & Maxwell Asia, 2003); Yu Waiming, Xintuo Shoutuoren Yanjiu [A Research on Trustees] (Beijing: Law Press, 2007); Toby Graham and Peter Steen, ‘The Chinese trust’ (2012) 18(1) Trusts and Trustees 36. Measures for the Administration of Trust Companies, 28 December 2007, with effect from 1 March 2007, repealing the Measures for the Administration of Trust and Investment Companies 2002. Measures for the Administration of Trust Companies’ Trust Plans of Aggregate Funds (trans. www.fdi.gov.cn), available at www.fdi.gov.cn/pub/FDI_EN/Laws/GeneralLawsandRegulations/MinisterialRulings/P020071112552834211265.pdf (last accessed 15 August 2012). The Measures took effect from 1 March 2007, and repealed the Tentative Measures for the Administration of Trust Companies’ Trust Plans of Aggregate Funds 2002.

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US$833 billion), as compared to RMB¥1 trillion (about US$160 billion) in 2007, and RMB¥250 million (about US$39 million) in 2003.4 In light of the growth of a more comprehensive trust law regime and the trust industry in China, this chapter will, first, briefly examine the historical background and intended purposes of the Chinese Trust Law, secondly, outline the main characteristics of the Chinese trust with a view to highlighting the challenges facing its implementation in China and recognition overseas, and identifying possible areas for legal reform to enhance the effectiveness of the Law where appropriate.

Historical background The impetus for enacting the Chinese Trust Law came primarily from its perceived function to rectify the irregularities practised by trust and investment companies at the time and provide a legal tool in the financial arena for promoting the development of collective investment funds. There was very little, if any, demand from the local population to enact the law for use in family succession and wealth planning, let alone for public or charitable purposes. The history of trust and investment companies in China goes back far longer than that of the trust. They were introduced to provide a platform for raising funds in international markets in the 1920s, closed down for about three decades when the Communist Party commenced its rule in 1949, and revived as China adopted the open door policy in 1979. These companies did not provide trust services as is traditionally seen in common law jurisdictions. As non-bank financial institutions, they operated outside the constraints of state banks – what was in substance loan and deposit-taking businesses in the name of ‘trust loans’ or ‘trust deposits’.5 They provided a great source of financing for infrastructure projects, but also undermined state macroeconomic and budgetary policy and led to demands for rectification. It was in this context that legislators thought the enactment of trust law along with tightened regulations on the establishment and management of non-bank financial institutions would direct them to providing genuine trust services and facilitating specialisation of functions amongst financial institutions in China. 4

5

Statistics available from the China Trustee Association, www.xtxh.net (last accessed 15 August 2012). See also KPMG, Mainland China Trust Survey 2012, p. 3, available at www.kpmg.com.cn (last accessed 15 August 2012). See generally Anjali Kumar et al., China’s Non-Bank Financial Institutions: Trust and Investment Companies, World Bank Discussion Paper No. 358 (1997).

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Another incentive for enacting the Chinese Trust Law, albeit one emerging only at the later stage of the drafting process, was to provide the legal basis for securities investment funds. These funds burgeoned amidst the limited availability of investment products for the mass of newly accumulated wealth. It was the drafters’ intention to use the Chinese Trust Law as a foundation law, and to supplement it with specialist laws and administrative regulations in various areas of its immediate application, such as securities investment funds, pension schemes, real estate investment trusts and asset securitisation,6 and to promote family and charitable trusts in the longer run. Accordingly, the Chinese Trust Law is a broad and general trust legislation which lays out the basic characteristics of a trust concept in order to accommodate it in indigenous private law, but leaves many of the details open-ended.

General features of the trust This section will outline the basic features of the Chinese trust with a view to showing how it puts in place the essential elements of a trust as seen in international practice. While the Chinese drafters drew heavily upon the Taiwanese Trust Law, and in turn Korean and Japanese trust laws at the time, they have made significant adjustments to suit local needs. The present chapter will also seek to highlight the theoretical and practical challenges of the Chinese approach.

Formal requirements for establishing a trust: trust as contract? Similar to current Taiwanese and previous Japanese and Korean trust legislation, the Chinese Trust Law requires a trust to be established by contracts, wills, or other documents authorised by laws or administrative regulations.7 The catch-all phrase ‘other documents’ is common practice in Chinese legislation. No such documents have yet been authorised. 6

7

For a critical review of the application of the trust mechanism to the securities industry, see Li Yan, ‘Lun Woguo Rongzi Rongquan yinru Xintuo jizhi de Chuangxin yu Quexian’ [‘The innovations and defects of using the trust in securities margin trading’] (2011) 5 Zhengquan Fayuan [Securities Law Review] 693. Chinese Trust Law, art. 8: ‘(1) The creation of a trust shall take the form of writing. (2) The form of writing shall consist of trust contracts, testament, or other documents specified by laws and administrative regulations’. The trust information should also disclose details such as the purpose of the trust, the names and domiciles of all trust parties (including, where appropriate, the class of beneficiaries) and the scope of trust property: Chinese Trust Law, art. 9.

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Testamentary trusts, which are established by will, are also subject to additional formal requirements stipulated in the Succession Law of the People’s Republic of China.8 This leaves ‘trust contracts’ as the only form applicable to inter vivos trusts, and also the most common form in China given the overwhelming predominance of commercial capital trusts. While the location of the trust as a species of contract provides the most practical alternative to the trust deed in common law, the Chinese Trust Law has, as will be seen, reinforced the perception that even after its establishment, the trust is a three-party contract involving the settlor, the trustee and the beneficiary. Furthermore, where the Chinese Trust Law is silent, the Chinese court has had no hesitation in invoking the Law of Contract of the People’s Republic of China9 to fill the gap, even if the contractual provision may not be the most appropriate in a trust setting. In Yanxin Co. Ltd v. Huabao Trust and Investment Co. Ltd,10 the plaintiff entrusted funds with the defendant trustee to acquire designated shares to be held on trust for the settlor as sole beneficiary for a fixed term of five years. A few months later, however, the settlor executed an agreement to assign his rights as beneficiary and settlor to a third party for double the original value of the shares, and directed the trustee to transfer the shares to the assignee. The trustee refused to comply; after all, the assignment smacked of a flip-sale to inflate the price of the underlying shares. The Chinese Trust Law is silent on the assignment of the settlor’s rights, and merely provides in general terms that assignment of the beneficiary’s right is subject to restrictions in the trust document. Faced with these gaps, the Shanghai High Court was quick to apply assignment provisions in the Chinese Contract Law. It held that any transfer of the beneficiary’s right must not alter the terms of the trust contract or augment the duties of the trustee, and hence invalidated the purported assignment on the ground, inter alia, that it departed from the trust contract in allowing the assignee to sub-assign part or all of its rights. By the same token, it held that the settlor as a party to the trust contract can assign his rights thereunder, provided 8

9

10

Chinese Trust Law, art. 13; Law of Succession of the People’s Republic of China, Order No. 24 of 1985, art. 17 (official trans. NPC, China), available at www.npc.gov.cn/ englishnpc/Law/2007-12/13/content_1383956.htm (last accessed 15 August 2012). Contract Law of the People’s Republic of China (hereafter ‘Chinese Contract Law’) (official trans. NPC, China), available at www.npc.gov.cn/englishnpc/Law/2007-12/10/ content_1383444.htm (last accessed 15 August 2012). Yanxin Co. Ltd v. Huabao Trust and Investment Co. Ltd, Shanghai Intermediate People’s Court Case No. 226 of 2004 (16 March 2005); on appeal from Yanxin Co. Ltd v. Huabao Trust and Investment Co. Ltd, Case No. 201 of 2004 (25 November 2004).

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that the trustee as a contracting party consents to it. On the facts, the trustee’s refusal to consent rendered the purported assignment invalid. In applying the Chinese Contract Law without discrimination as to the unique nature of the trust, the Shanghai High Court may have inadvertently compromised the scope of the Chinese trust. For example, if, as held by the court, beneficiaries can only assign their rights in full and not in part because of the contractual model, their transferability – which is a typical feature of property rights – will be significantly undermined. Equally, the characterisation of settlor’s rights to monitor the trustee and provide necessary direction to trust administration11 as contractual rights assignable for value also raises questions as to who is the primary holder of rights under a trust contract. In line with its characterisation as contract, the trust becomes effective upon signing of the trust contract.12 This is a point that differs from its Asian predecessors, which require the property to have been vested with the trustee. Under the Chinese approach, a difficult question arises as to whether the trustee or beneficiary can compel a settlor who has entered into a trust contract to then transfer the trust property to the trustee, on the ground that the trust has already become effective. Unfortunately, the Chinese Trust Law does not stipulate any duty on the part of the settlor to make such a transfer, or on the part of the trustee to get in trust property, let alone any direct right on the part of the beneficiary to compel the settlor to constitute the trust. The Chinese Trust Law provides for ‘trust registration’ if the underlying trust property is registrable. Registration should be effected at the time of establishment, failing which it should be effected at a later date, or the trust will have no effect.13 Although it is possible to register the trust after its

11

12

13

Chinese Trust Law, art. 21: ‘If, due to special reasons unexpected at the time the trust is created, the methods for administrating the trust property are not favourable to the realisation of trust purposes or do not conform to the interests of the beneficiary, the settlor shall have the right to ask the trustee to modify such methods’. Ibid. art. 8: ‘Where a trust is created in the form of trust contract, the trust shall be deemed created when the said contract is signed. Where a trust is created in any other form of writing, the trust is deemed created when the trustee accepts the trust’. Thus, trusts established by wills are effective upon acceptance of the trustee. Ibid. art. 10: ‘Where laws or administrative regulations stipulate that registration formalities shall be gone through for the creation of a trust, such formalities shall be gone through accordingly. Anyone who fails to go through the registration formalities … shall go through the formalities as required; otherwise, the trust shall have no effect’. See also Guoqing Liu, ‘The publicity of trusts in common law and civil law systems’ (2011) 10 Canberra Law Review 115; Shen Ning, ‘Lun Xintuo Caichan de Gongshi Zhidu’ [‘On public notification of trust property’] (2010) 4 Zhongguo Shangjie [Business China] 304.

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establishment, the Law does not indicate any time limit by which final registration must be made, let alone whether the trust is voidable or void in the interim. Nor does it stipulate what ‘trust registration’ involves, or whether a trust for non-registrable property is enforceable against third parties, if at all.

Substantive requirements for establishing a trust: transferring ownership? Apart from the formal requirements of writing and registration outlined above, there are also substantive requirements pertaining to the capacity of the trust parties,14 certainty of subject matter15 and object16 and doctrines of illegality or public policy.17 Two points are worthy of note. First, while any natural person, legal person, or legally established organisation with full civil capacity may act as settlor or beneficiary, legally established organisations with full civil capacity (but not legal personhood) are not allowed to act as trustee. This excludes from trusteeship some profit-making enterprises or economic associations, and most profit-making official organs, institutions and social organisations. While the restriction on trusteeship may be imposed on prudent grounds, it also reflects a lesser commitment to the development of charitable trusts. This is because charities are unlikely to be able to afford the services of professional trustees, whereas lay, individual trustees are less suitable for medium- or large-sized charities. Secondly, the Chinese Trust Law uniquely defines a trust as a situation whereby: ‘the settlor … entrusts the rights in his property to the trustee and the trustee manages or disposes of such property in his own name’.18 This provision departs from both the current and previous laws of its Asian counterparts, which either require the transfer of trust property to the trustee or the declaration of the settlor himself as trustee. In Chinese law, the term ‘entrustment’ typically refers to the appointment of agents, who are not vested with ownership.19 Accordingly, it is possible for a Chinese trust to be established merely upon the entry into a trust contract without transferring the trust property to the trustee, although 14 16 18 19

15 Ibid. arts. 19 (settlor), 24 (trustee) and 43 (beneficiaries). Ibid. art. 7. 17 Ibid. art. 11(5). Ibid. arts. 6, 7, 11(1)–(4) and 14. Ibid. art. 2 (emphasis added). General Principles of the Civil Law of the People’s Republic of China (official trans. NPC, China) arts. 64, 65, available at www.npc.gov.cn/englishnpc/Law/2007-12/12/content_1383941.htm (last accessed 15 August 2012); Chinese Contract Law, art. 396; Chinese Trust Law, art. 30 refers to the ‘entrustment’ of agents by the trustee.

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in practice an overwhelming majority of Chinese trusts do involve the transfer of trust property to the trustee. This provision was justified by the Chinese drafters as providing a better mechanism to accommodate the notion of absolute ownership and the cultural inhibition amongst potential Chinese settlors from relinquishing ownership to stranger trustees.20 It has attracted much academic attention from China and abroad, for it raises a fundamental issue about the essential requirements of the trust. Although most commentators are critical of it,21 there has also been favourable review.22 It is submitted that while it is not repugnant to the concept of the trust for the settlor (or indeed anyone) to have ownership over the trust property, his ownership right must be subject to adequate legal constraints in order to preserve the integrity of the trust property, which is core to the trust concept. The reasons are as follows. 20

21

22

Quanguo renda ‘Xintuofa’ qicao gongzuo zu [Drafting Group of the Trust Law, National People’s Congress] (eds.), Zhonghua Renmin Gongheguo Xintuofa Tiaowen Shiyi [Annotation of the Provisions of the Trust Law of the People’s Republic of China] (Beijing: China Finance Publishing House, 2001), p. 20 et seq. See generally Lee, ‘Chinese trust’ (note 1 above); Ho, Trust Law in China (note 1 above); Qu, ‘Doctrinal basis’ (note 1 above); Yu Haiyong, ‘Lun Xintuo Caichan de Suoyouquan guishu’ [‘On the ownership of trust property’] (2010) 224 Journal of Sun Yat-Sen University (Social Science Edition) 189. Amongst the logical possibilities, the views that receive more support are: (a) ownership is transferred to the trustee alone: Qu, ‘Doctrinal basis’ (note 1 above); Geng Lihang, ‘Xintuo Caichan yu Zhongguo Xintuofa’ [‘Trust and trust law of China’] (2004) 115(1) Zhengfa Luntan [Tribune of Political Science and Law] 94; Su Qin, ‘Attribution of the ownership of trust property’ (2004) 4 Journal of China University of Mining and Technology (Social Sciences) 33; (b) ownership remains with the settlor alone: Zhang Chun, ‘Woguo Xintuo Caichan Shuoyouquan Guixu de Taidu jiqi Fali Shenshi’ [‘An examination of the Chinese attitude towards the ownership of trust assets’] (2007) 91(5) Journal of Gansu Institute of Political Science and Law 7; Zhang Chun, ‘Lun you Xintuoren xiangyou de Xintuo Caichan Suoyouquan’ [‘Argument on the ownership of trust properties owned by trustee’] (2007) 5 Jianghai Xuekan [Journal of Jianghai Academia] 124; (c) ownership is with the beneficiaries alone: Wen Shiyang and Feng Xingjun, ‘Lun Xintuo Caichan Suoyouquan – jianlun Woguo xiangguan lifa de wanshan’ [‘On ownership of trust property’] (2005) 58(2) Wuhan Daxue Xuebao: Zhexue Shehui Kexue Ban [Journal of Wuhan University (Philosophy and Social Science)] 203; (d) titular ownership is with the trustee, but substantive ownership is with the settlor and beneficiaries: Bian Yaowu (ed.), Zhonghua Renmin Gongheguo Xintuofa Shiyi [Interpretation of the Trust Law of the PRC] (Beijing: Law Press, 2002), p. 47; Lee, ‘Chinese trust’ (note 1 above), seeing the beneficiaries (not the settlor) as having limited ownership; and (e) ownership may be with the settlor or the trustee depending on whether the settlor has transferred ownership to the trustee: He Baoyu, Xintuofa Yuanli Yanjiu [Analysis of the Legal Principles of Trusts] (Beijing: China University of Political Science and Law Press, 2005), pp. 11–12. Adam S. Hofri-Winogradow, ‘Shapeless trusts and settlor title retention: an Asian morality play’ (2012) 58 Loyola Law Review 135.

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Even though a common law trust typically involves transferring ownership to the trustee subject to the rights of the beneficiaries, this is but one way to endow him with powers to manage and dispose of the trust property. It may even be the best and most efficient way, since the vesting of ownership conveniently gives him the fullest management power over the trust property, but it is clearly not the only way. The trustee can simply be entrusted with these powers directly as in agency, albeit dealings with the property will be more cumbersome. Besides, it is submitted that although the settlor’s retention of ownership poses a risk to one of the essential features of the trust – namely, the immunity of the trust property from the claims of parties other than the trust creditors – such retention is not per se repugnant to preserving the immunity. What matters most is whether the settlor’s ownership is subject to adequate constraints to protect the trust property from his misappropriation and from the claims of parties other than the trust creditors. This may be achieved by imposing on him a series of duties and principles that are modelled upon those applicable to the trustee with respect to segregation of the trust property. These include, for example, the duty to segregate the trust property, the principle that the trust property will not fall within the settlor’s estate in the event of his death, divorce, or bankruptcy, and that the settlor’s personal creditors are barred from claiming against the trust property. Article 15 of the Chinese Trust Law does attempt to preserve the integrity of the trust property by providing that the trust property is segregated from other property held by the settlor, and that it will not fall within his estate when he dies or when he becomes insolvent.23 Unfortunately, this general enactment is not adequate, for no duty is imposed on the settlor to segregate trust assets or not to misappropriate them, let alone any remedy for his misdeeds. In fact, for all the rights that the settlor has been granted under the Chinese Trust Law to monitor and guide trust administration, no duty has been imposed on him to exercise these rights for the benefit of the beneficiaries at all. This reinforces the perception that the drafters saw the essence of the trust as an agency relationship as discussed above, albeit one that ring-fences property managed under it. On this view, the settlor has the right to oversee the trustee’s management and to choose to retain 23

There is no personal bankruptcy law in China. See also Zhang Chun, ‘Xintuo Caichan Dulixing de Fali’ [‘The legal basis of the independence of trust property’] (2011) Shehui Kexue (Social Sciences) 102 (Issue 3).

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ownership of the trust property just like a principal would. As such, these rights are derived from his ownership and hence need not be subject to any duty to exercise them for the benefit of the beneficiaries.24 In this connection, it is noteworthy that in Beijing Haidian Science & Technology Development Co. Ltd v. Shenzhen Xinhua Jinyuan Touzi Fazhan Youxian Gongsi and others,25 the Chongqing High People’s Court expressly opined that even when ownership has been transferred to the trustee, either the settlor or the beneficiary is the real owner. In China, judicial decisions are not binding on lower or future courts, but such statements are indicative of the conceptualisation of the trust in Chinese jurisprudence.

Legal effects of a valid trust: integrity of the trust property The Chinese Trust Law follows the approach of its Asian predecessors in relation to provisions about the substitution and independence of the trust property. It provides that the trust property comprises the initial settled property, and property obtained from the use, management or disposal of the initial property.26 Furthermore, if the trustee obtains any benefits from the use of trust property, such benefits will belong to the trust fund.27 Thus, the principle of substitution applies to both property lawfully and unlawfully obtained from the use of the trust fund. The trust property is also segregated from other assets held by the trustee28 and the settlor.29 It is protected from the claims of their heirs and personal creditors.30 Save for exceptional circumstances when liability was due 24

25

26

27

28

29

30

See also the wording of art. 28 of the Chinese Trust Law, which provides that: ‘The trustee may not conduct inter transaction … between the trust assets of different settlors’ (emphasis added). Beijing Haidian Science & Technology Development Co. Ltd v. Shenzhen Xinhua Jinyuan Touzi Fazhan Youxian Gongsi and others (2006) Yugaofa Minchu zhi [First Instance, Civil Cases, Chongqing High People’s Court] Case No. 14, Chongqing High People’s Court (19 March 2007). Chinese Trusts Law, art 14: ‘(1) The property obtained by the trustee due to a trust accepted is trust property. (2) The property obtained by the trustee through administering, using or disposing of the trust property or by other means falls within trust assets’. Ibid. art. 26: ‘Where the trustee … seeks interests for himself by using the trust property, the interests gained therefrom shall be integrated into the trust property’. Ibid. art. 16: ‘(1) The trust property shall be segregated from the property owned by the trustee’. Ibid. art. 15: ‘The trust shall be differentiated from other property that is not put under trust by the settlor’. Ibid. arts. 15–18.

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upon the trust property before it was placed under a trust, only trust creditors may enforce their claims against the trust property.31

Duties of the trustee: office of trusteeship? The duties imposed on the trustee by the Chinese Trust Law are broadly similar to those found in common law as well as other Asian jurisdictions. After all, unlike the proprietary aspects of a trust, the obligational aspects pose little challenge to indigenous legal concepts. For example, the trustee owes the duties to: comply with the terms of the trust document;32 segregate the trust property from his own property and other property held by him, through separate management and accounting;33 manage the trust himself and not to delegate trust management unless it is provided for in the trust document or circumstances render it necessary to delegate;34 maintain and provide accounts of the trust property initially when he takes up trusteeship and annually thereafter;35 make distributions to beneficiaries;36 and provide upon demand information about the trust accounts to interested parties and provide all documents and information relating to the administration of the trust to the settlor, his heirs and the beneficiaries.37 Interestingly, the most obvious departure from common law lies in the express stipulation of a duty to maintain confidentiality of the settlor, the beneficiary and documents relating to the administration of the trust.38 In common law jurisdictions, a trustee’s duty to maintain confidentiality about trust administration is determined by the general law on confidentiality. The fact that the Chinese drafters considered it necessary to make special stipulation in the Trust Law might be in order to reinforce the legal protection offered by the general law. 31

32 33

34 38

Ibid. art. 17(2): ‘No compulsory measures may be taken against the trust property unless … where the creditors demand repayment of the debts incurred by the trustee in the course of handling trust business’. Ibid. art. 25: ‘(1) The trustee shall abide by the provisions in the trust documents’. Ibid. arts. 16 (‘(1) The trust property shall be segregated from the property owned by the trustee’) and 29 (‘The trustee shall administer the trust property separately from his own property and keep separate accounting books’). 35 36 37 Ibid. art. 30. Ibid. art. 33. Ibid. art. 34. Ibid. arts. 20 and 49. Ibid. ‘(2): In administering the trust property, the trustee shall be careful in performing his duties and fulfil his obligations with honesty, good faith, prudence and efficiency’. On the duty of care, see e.g. Chen Xuewen, ‘Lun Xintuo Shoutuoren Jinshentouzi yiwu’ [‘On trustee’s duty of prudent investment’] (2011) 28(6) Zhengfa Xuekan [Journal of Political Science and Law] 23.

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The most significant adjustment the Chinese Trust Law needed to make in terms of trustees’ duties is the introduction of the duty of loyalty. This is achieved mainly by two broad provisions, namely, duties to: ‘manage the trust honestly, scrupulously, prudently, efficiently and in a trustworthy manner’39 and to ‘handle trust affairs in the best interests of the beneficiary’.40 In addition, there also are two specific provisions that resemble specific prohibitions on fiduciaries found in common law jurisdictions. For example, similar to the selfdealing rule, the trustee must not ‘conduct transactions between his own property and the trust property’ unless the transaction is authorised and conducted at fair market price.41 Likewise, the trustee must not obtain personal benefits from the use of trust property,42 and is not entitled to receive remuneration for his services unless expressly authorised in the trust document or agreed upon by the settlor and beneficiaries after the establishment of the trust.43 The sporadic nature of these specific prohibitions provides little guidance let alone conceptual framework in supplementing the overarching duty to act in the best interests of the beneficiaries. The noticeable gaps are the absence of a fair-dealing rule, lack of specification as to the obtaining of profits through the use of his position or through information obtained in the course of trust administration (such as secret commission and diversion of maturing business opportunity), and the duty to avoid conflicts of duties. The same gaps are found in most of the Taiwanese, Korean and Japanese legislation that the Chinese Trust Act drew heavily upon. However, the duty of loyalty has been better understood by Chinese legislators since then. Article 149 of the Company Law of the People’s Republic of China 200644 puts in place a comprehensive 39

40

41

42

43 44

Ibid. art. 33: ‘(3) The trustee shall … have the obligation to keep confidential minutes relating to the settlor, the beneficiary and trust business handled’. Ibid. art. 25: ‘(1) The trustee shall abide by the provisions in the trust documents and handle trust business for the best interests of the beneficiary’. Ibid. art. 28: ‘(1) The trustee may not conduct inter transaction between his own property and trust assets or between the trust assets of different settlors, unless it is otherwise stipulated in the trust documents or is consented by the settlors or beneficiary and the inter transaction is conducted at fair market price’. Ibid. art. 26: ‘(1) … the trustee may not seek interests for himself by using the trust property’. Ibid. art. 35. Company Law of the People’s Republic of China (official trans. NPC, China), available at www.npc.gov.cn/englishnpc/Law/2007-12/12/content_1383787.htm (last accessed 15 August 2012).

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list of prohibitions pertaining to the loyalty that resembles very closely the common law rules.45 There is much to be said for clarification of the Chinese Trust Law along similar lines. Last but not least, little effort has been made in the Chinese Trust Law to put in place the role of trusteeship as an office. At common law, this is a crucial aspect of trusteeship, and involves his exercise of discretion independently from the influence of settlor and beneficiaries, as well as the court’s inherent jurisdiction to give directions to the trustee and even to execute the trust itself.46 While one would not expect the courts in China to play such a vigilant role, it is also significant that the Chinese Trust Law does not seek to preserve the independent discretion of the trustee in acting in a manner that he considers to be in the best interests of the beneficiaries. Rather, as the two following sections will show, he is more like a commercial trustee whose role it is to hold assets and to discharge duties prescribed by the terms of the trust.

Rights of the settlor It is submitted that one major key to the success of the common law trust is the inherent tension between the trustee and the beneficiaries in the trust relationship. Even though the trustee owes a duty to act in the best interests of the beneficiaries, the latter cannot dictate their wishes to the trustee, who has through his control of the trust property independent powers to manage it. Such an arrangement is crucial to the success of trusts in the family context, as it enables the trustee to exercise his judgment independently in the interests of all the beneficiaries as a whole, while at the same time ensures that he discharges his duties to invest and protect the trust property. The conceptual model as reflected in the Chinese Trust Law departs significantly from the common law approach in two main respects. First, the Chinese trust grants a wide range of rights and powers to the settlor. These include the right to obtain information about trust administration,47 bring actions against a trustee in breach, and even to rescind 45

46 47

For a detailed analysis see Rebecca Lee, ‘Fiduciary duty without equity: “fiduciary duties” of directors under the Revised Company Law of the PRC’ (2007) 47 Virginia Journal of International Law 897. McPhail v. Doulton [1971] AC 424. Chinese Trust Law, art. 20: ‘(1) The settlor shall have the right to know the administration, use and disposition of, and the income and expenses relating to, his trust property, and the right to request the trustee to give explanations in this regard’.

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unauthorised dispositions and require the trustee to restore the trust property to its original state or make compensation.48 In a similar vein, he may remove a defaulting trustee who has wrongfully disposed of trust property or committed a breach of trust with gross negligence,49 remove a beneficiary who has committed a tort against him or other beneficiaries,50 and appoint replacing trustees, to name but a few powers. Although the statute does confer the same rights on the beneficiaries, instead of independently stipulating individual rights on the part of the beneficiaries, the Chinese Trust Law simply provides that the beneficiaries also have such of these rights as are granted to the settlor.51 All these corroborate the perception of the settlor as the principal party in monitoring the trustee and providing guidance to his administration as and when necessary. As such, if there were any tension in this relationship, it is primarily that between the settlor and the trustee. In any event, even if the settlor and the beneficiaries enjoy equal rights in monitoring trustee performance, the former owes no duty to exercise his rights for the benefit of the latter. The tension in this tripartite model of trust will at least be complicated by another tension between the interests of the settlor and beneficiaries. The fact that article 49 of the Chinese Trust Law allows the beneficiary to apply to court to resolve disputes with the settlor as to the exercise of the relevant rights is evidence of the court’s recognition of this tension. Secondly, nowhere in the Chinese Trust Law does it expressly preserve the independent judgment of the trustee to administer the trust in what he believes to be the best interests of the beneficiaries, and free from the dictation of the wishes of the settlor or beneficiary. Instead, the Chinese Trust Law provides that the trustee is allowed, ‘according to

48

49

50

51

Ibid. art. 22: ‘(1) Where the trustee disposes of the trust property in breach of the purposes of the trust, or causes losses to the trust property due to his departure from his administrative duties or improper handling of trust business, the settlor shall have the right to apply to the People’s Court for annulling such disposition and the right to ask the trustee to restore the property to its former state or make compensation’. Ibid. art. 23: ‘Where the trustee disposes of the trust property against the purposes of the trust or commits gross negligence in administering, using or disposing of the trust property, the settlor shall have the right to dismiss the trustee according to the provisions in the trust documents or apply to the People’s Court for dismissing him’. Ibid. art. 51(1), (2): ‘After a trust is created, the settlor may replace the beneficiary or dispose of his right to benefit from the trust under one of the following circumstances: (1) the beneficiary commits a major tort against the settlor; (2) the beneficiary commits a major tort against the other co-beneficiaries’. Ibid. art. 49: ‘The beneficiary may exercise the rights that the settlor enjoys as stipulated in arts. 20 through 23 of this Law’.

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the will of the settlor’, to ‘administer or dispose [trust] property in the interest of a beneficiary or for any intended purposes’.52 In this formulation, it is unclear whether the reference to the intention of the settlor is intended to signify an overriding restriction of the trustee’s powers, or merely identify the source of his duty as arising from the intention of the settlor.

Rights of the beneficiaries While the beneficiary of a Chinese trust is expressly stated as enjoying the right to receive benefits from the trustee,53 both his role in the trust relationship and the nature of his rights differ significantly from those of his common law counterpart. As to the Chinese beneficiary’s role in the trust, apart from the right to receive distribution, his entitlements to monitor the trustee and bring actions for breach are granted by way of duplication of the settlor’s rights, as discussed above. Such duplication suggests that the administration of the Chinese trust will be shadowed by the conflicting interests between the settlor and the beneficiaries. For example, if a settlor changes his mind after establishing a trust in favour of the beneficiaries, he may exercise his rights, say, of appointment of trusteeship to appoint a trustee who is compliant to his wishes rather than one who defends the rights of the beneficiaries already granted under the trust document. Yet, in the absence of further guidance in the Law as to whose interests should take priority, and given the overwhelming perception that the settlor as original owner has a continuing role to play in trust administration, there is a great risk that the beneficiaries’ rights will be encroached upon. Admittedly, this is not a material risk in the collective investment trusts that are prevalent in China, as the investors are both settlors and beneficiaries. However, the issue would become prominent if family trusts were to take off in China. It is also unclear what the nature of the beneficiaries’ rights is. The Chinese Trust Law merely refers to it as a right to receive benefits,54 and 52 53

54

Ibid. art. 2. Ibid. art. 34: ‘The trustee shall have the obligation to pay the beneficiary benefits from the trust within the limits of the trust property’; and art. 43: ‘The beneficiary is the person that enjoys the right to benefit from a trust’. Ibid. art. 43. For academic literature in Chinese on the nature of beneficiaries’ rights, see e.g. Chen Xueping, ‘Xintuo Shouyiren quanli de xingzhi: duirenquan huo duiwuquan’ [‘The nature of trust beneficiary’s rights: personal or proprietary] (2011) 146 Fashang Yanjiu [Studies in Law and Business] 73; Zhang Chun, ‘Guanyu Xintuo Shouyiquan de

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provides that it is assignable and inheritable subject to the terms of the trust document.55 It does not classify the beneficiaries’ rights under any of the two main types of rights, such as real rights or claims (viz. a personal right in common law terminology). It is submitted that the better view is not to force the beneficiaries’ right exclusively into either of these two categories, but to recognise that even though it is in essence a claim against the trustee for beneficiary distribution, it has characteristics that are typical of real rights. These characteristics include: first, immunity from priority conflicts with the claims of the trustee’s or the settlor’s personal creditors through ring-fencing the trust property from the claims of such creditors.56 Thus, even though the beneficiaries’ rights are only claims against the trust property,57 as the trust property is immune from the claims of parties other than trust creditors, this achieves the same practical effect as giving the beneficiaries priority over the creditors. Secondly, if a third party receives the trust property knowing that it comes from the trustee’s unauthorised disposition, the beneficiaries can rescind the transaction between the trustee and the transferee, and require the latter to restore the trust property or pay compensation.58 It might be noted that in Chinese private law, only real rights can be

55 56

57

58

xingzhi – dui youguan guojia faxue de youguan yanjiu de shenshi yu jiantao’ [‘The nature of beneficial interest in a trust: an examination of the theories in the relevant jurisdictions’] (2010) 24(5) Journal of Hunan University (Social Sciences) 126. Ibid. art. 48. Ibid. arts. 15–17. The relevant parts of these provisions are: art. 15 ‘Where, after a trust is created, the settlor dies or is dissolved or cancelled according to law, or is declared bankrupt, and … the settlor is not the sole beneficiary, the trust shall subsist, and the trust property shall not be his legacy or liquidation property’; art. 16 ‘(2) Where the trustee dies or the trustee as a body corporate is dissolved, removed or is declared bankrupt according to the law, and the trusteeship is thus terminated, the trust property shall not be deemed his legacy or liquidation property’; art. 17 ‘No compulsory measures may be taken against the trust property unless … (1) where, before the creation of the trust, the creditors enjoyed the priority right to be paid with the trust property and may exercise this right according to law; (2) where the creditors demand repayment of the debts incurred by the trustee in the course of handling trust business’. Ibid. art. 34: ‘The trustee shall have the obligation to pay the beneficiary benefits from the trust within the limits of the trust property’. Thus, the beneficiaries are unsecured creditors in relation to the trust property and will be subordinated to secured trust creditors. Ibid. art. 22: ‘Where a transferee of trust property [disposed of in breach of the purposes of the trust] accepts the property while knowing the violation of the purposes of the trust, he shall return the property or make compensation’. Ibid. art. 49 grants the same rights to beneficiaries.

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enforceable against third party transferees and can give priority over unsecured creditors of the party possessing it. The beneficiaries’ rights, however, bear these features even though they are not real rights.59 In light of these observations, it is submitted that the beneficiaries’ rights are claims (that is personal rights) that are enforceable against third parties. As such, they fall within a very small but distinct category of propertised claim rights that exist in Chinese civil law. These include, for example, the right of a purchaser who has entered into an agreement to acquire real property to make an advance registration of his impending ownership. Advance registration renders invalid any subsequent disposal of the property without the registered purchaser’s consent.60 Another example is a creditor’s right to annul (or rescind) his debtor’s release of a debt owed to the debtor, making of a gift of the debtor’s own property, or transfer of property at an undervalue in favour of parties knowing the impropriety of the debtor’s actions.61 This right to rescission is similar to the beneficiaries’ right to rescind unauthorised dispositions made in favour of knowing transferees, and has been a long-standing propertised claim.62

Remedies for a breach of trust The Chinese Trust Law only contains a few broad provisions on the remedies available for a breach of trust. Where loss has been incurred to the trust through unauthorised disposition of the trust property, or the trustee’s ‘departure from his administrative duties or improper handling of trust business’, articles 22 and 49 provide that the settlor or beneficiary may apply to court to rescind the disposition within one year of when he knows or ought to have known of the breach, and require the trustee to restore the property to its former state or make compensation. The Chinese Trust Law does not contain any further guidelines on the 59

60 62

Property Law of the People’s Republic of China (hereafter ‘Chinese Property Law’) (official trans. NPC, China), available at www.npc.gov.cn/englishnpc/Law/2009-02/20/ content_1471118.htm (last accessed 15 August 2012). Under art. 2(3) of the Chinese Property Law, a real right is ‘the exclusive right of direct control over a specific thing in accordance with law, and includes (exhaustively) ownership, usufructuary rights, and security rights’. The beneficiaries’ rights do not fall within this definition. 61 Chinese Property Law, art. 20. Chinese Contract Law, art. 74. For details of this view, see Lusina Ho, ‘Trust laws in China: history, ambiguity, and beneficiaries’ rights’ in Lionel Smith (ed.), Re-imagining the Trust: Trusts in Civil Law (Cambridge/New York: Cambridge University Press, 2012), ch. 5.

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detailed remedial principles, such as rules relating to causation or the measure of recovery. However, since the compensatory remedy stated in article 22 broadly follows that available in the Law on Tort of the People’s Republic of China,63 where there are gaps in the Chinese Trust Law, it is likely that the courts will draw inspirations from the Chinese Tort Law to resolve disputes. Where a gain is made as the result of the use of trust property, whether lawfully or unlawfully, the Chinese Trust Law provides that the gain falls within the trust property.64 While this amounts in effect to the imposition of a constructive trust on the part of the trustee, the scope of this provision may be more limited in practice. First, unlike in common law jurisdictions, there are no rules of equitable tracing to resolve evidential ambiguities and allocate losses to the defaulting trustees. Secondly, such de facto proprietary relief is only available if the gain is obtained upon the use of trust property. The wording may therefore rule out gains obtained upon a pure breach of duty, such as bribes or misuse of trust information. To incorporate gains made from such breaches, the courts will have to adopt a very wide concept of trust property or deem the gains as loss incurred to the trust property and recoverable on a compensatory basis. Thirdly, since the gains are treated as falling within the trust property held in the hands of the trustee, once they are transferred to a third party, they are not ring-fenced from the other assets of the transferee. In the Chinese Trust Law, it is also possible to impose personal liability against third parties in relation to a breach of trust. Where the trust property is transferred to a third party, the latter owes a duty to return the property or make compensation only if he knowingly receives the trust property.65 In other words, bona fide purchasers and innocent volunteers are protected from the imposition of personal liability. This is broadly similar to the doctrine of knowing receipt. Although there are no specific provisions in the Chinese Trust Law pertaining to knowing 63

64 65

Law on Tort Liability of the People’s Republic of China (hereafter ‘Chinese Tort Law’) (with effect from 1 July 2010) (trans. China Law and Practice), arts. 15 and 19, available at www.chinalawandpractice.com/Article/2596124/Search/PRC-Tort-Liability-Law.html (last accessed 15 August 2012). See also Chinese General Principles of the Civil Law, art. 117. Chinese Trust Law, arts. 14 and 26. Ibid. art. 22: ‘(1) … Where a transferee of the said trust property accepts the property while knowing the violation of the purposes of the trust, he shall return the property or make compensation’.

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assistance, it is most likely that the Chinese Tort Law will be invoked to impose liability on knowing assisters. Article 6 of the latter Law provides that: ‘One who is at fault for infringement upon a civil right or interest of another person shall be subject to the tort liability’. The phrase ‘civil right or interest’ is defined broadly in article 2 as including ‘property rights’, which include claims and real rights. It is worthy to note that article 6 only refers to fault and not a more serious degree of fault such as dishonesty at common law. If applied to the trust, this article can potentially impose a broader scope of liability for knowing assisters than in common law. Since the Chinese Tort Law provisions are not specifically couched with the trust in mind, it remains to be seen whether the court will calibrate its application to this new context. While the remedies outlined so far broadly replicate those found in common law, there are at least three significant points of departure. First, the Chinese Trust Law does not expressly provide for the remedy of disgorgement of profits; it merely incorporates such profits into trust property. As a result, where profits that have been deemed as trust property are dissipated or extinguished through no fault of the trustee, there will be no alternative remedy against him. Secondly, the remedy of rescission is available even if the wrongful disposition is made in favour of an innocent recipient, who is entitled to retain the trust property. In such a situation, the effect of rescission is primarily to invalidate the disposition vis-à-vis the trustee only, and hence compel him to make good the trust property or pay compensation for loss. Thirdly, there is no mention of the remedy of injunction, which is clearly available in the Chinese Tort Law. Here, it is doubtful if the court will be as zealous in invoking the Chinese Tort Law to fill gaps as in the case of knowing assistance. After all, where no tort has been committed, there is very little basis for extending a tortious remedy to a breach of trust.

Conclusion The background to the introduction of the Chinese Trust Law shows that the Law is intended to serve many functions, including regulating nonbank financial institutions and acting as a foundation law in modernising the financial infrastructure generally. As such, it is inevitable that it is a piece of broad and general legislation with gaps and ambiguities to be fleshed out in the course of the development of a more comprehensive legal and regulatory regime for the trust. Despite these imperfections, a critical examination of the features of the Chinese trust shows that it is

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still possible to introduce a trust in a civil law jurisdiction that performs substantially the same functions as the common law trust. Nonetheless, the question of whether the trust is compatible with China’s civilian system remains. There are generally two main conceptual difficulties in accommodating the trust into the Chinese civil law framework. The first relates to the conceptual basis of the trust. The present chapter suggests that, whether on the basis of the provisions of the Chinese Trust Law (such as those pertaining to formal/substantive requirements for establishing a trust, and rights and duties of the settlor/trustee/beneficiaries), or recent judicial decisions, the Chinese approach appears to locate the trust as a species of contract. From a pragmatic point of view, this avoids the issue of the absence of any indigenous concept of the trust. However, this is likely to create considerable hurdles in terms of promoting efficient management of the trust, safeguarding the independent exercise of discretion on the part of the trustee, as well as protecting the segregated trust fund from the encroachment of the settlor. The second conceptual difficulty pertains to the nature of the beneficiaries’ right in view of the civil law doctrines of indivisibility of ownership and numerus classus. The present chapter suggests that the usual rights of the beneficiaries, such as the right to immunity of the trust fund from the claims of the trustee’s (or settlor’s) personal creditors; the right to claim compensatory and disgorgement remedies against the trustee for breaches of trust; as well as the right to make personal claims against third party recipients of trust property, are broadly similar to their common law counterparts, albeit very often narrower in scope. More importantly, some of these rights do bear proprietary characteristics such as their continuation over assets lawfully and unlawfully obtained from the original trust asset. Accordingly, the beneficiaries’ rights can be understood as a propertised personal right. On this view, the civil law trust can function efficaciously without infringing the two fundamental civil law doctrines of indivisibility of ownership and numerus classus.

PART II Case studies: hypothetical scenarios

7 Case 1: Creating, managing and terminating the management relationship

alternative 1 Scot is approaching his retirement age. Because of some recent health problems, he decides to find someone to help invest his assets on his behalf for the benefit of his son, Ben. Terence is a professional investment manager, and so Scot decides to engage Terence’s services. In Terence’s office, Scot signs a document granting Terence full investment powers over a capital value of US$2,000,000. The terms of the document indicate that Terence’s powers are to be irrevocable for the term of five years. These powers enable Terence to buy and sell shares. The document also provides that Terence will credit all the income produced by the managed capital to a separate bank account. It stipulates that Terence will be entitled to deduct an annual fee, calculated as a percentage of the capital value of the managed assets. The next day, Scot sends a cheque payable to Terence for US$2,000,000. What sort of legal relationship does the above arrangement create? How is such legal relationship regulated?

This scenario raises the issue of the creation and termination of an asset management relationship. Four features of the facts are worth noting: (1) Terence has full investment powers over the US$2,000,000; (2) those powers are irrevocable for a term of five years; (3) he agrees to deposit the assets into an independent bank account; and (4) he will be remunerated for his services.

Japan (1) Legal relationship between Scot and Terence In the present scenario, even though the term ‘trust’ was not used in the document, the arrangement may create a trust as well as a mandatory contract (between Scot and Terence) for the benefit of a third party (that 101

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is, Ben). The law governing the former is the Trust Act1 and that for the latter is Chapter 2 on Contracts, which is found in Part III of the Civil Code2 (in particular articles 537,3 643–554). Article 2 of the Japanese Trust Act defines a trust as ‘an arrangement in which a specific person … administers or disposes of property in accordance with a certain purpose (excluding the purpose of exclusively promoting the person’s own interests …) and conducts any other acts that are necessary to achieve such purpose’. According to article 3, a trust shall be created by (i) an agreement with a trustee to the effect that he will be assigned property, granted a security interest in property, or that property will otherwise be disposed of to him, and that he should administer or dispose of such property in accordance with the trust agreement; (ii) a will to the above effect; or (iii) a manifestation of intention to the above effect evidenced by notarial deed, any other document or electromagnetic record. Trusts created by these three methods are called ‘trusts by agreement’, ‘trusts by will’ and ‘trusts by declaration (or self-trust)’, respectively. The most crucial differences between trust and mandate are as follows: .

(a) Trust assets are protected from the trustee’s bankruptcy while mandated assets are not as long as they are cash or substitutions of original assets: article 646(2) of the Japanese Civil Code provides that the mandatary (that is, the obligor in the mandatory contract) must transfer to the mandator rights the mandatary has acquired in his own name on behalf of the mandator. Until such rights are transferred, they still belong to the mandatary. If the mandatary goes into bankruptcy before the transfer, the rights will belong to his bankruptcy estate, which means the mandator has no right to claim 1

2

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4

Trust Act of Japan, Act No. 108 of 2006 (hereafter ‘Japanese Trust Act’) (official trans. Ministry of Justice, Japan), available at www.japaneselawtranslation.go.jp/law/detail/? id=1936 (last accessed 15 August 2012). Civil Code of Japan, Act No. 89 of 1896 (hereafter ‘Japanese Civil Code’) (official trans. Ministry of Justice, Japan), available at www.japaneselawtranslation.go.jp/law/detail/?ft=2&re=02&dn= 1&yo=civil+code&x=54&y=17&ky=&page=3 (last accessed 15 August 2012). Japanese Civil Code, art. 537: ‘If one of the parties promises in a contract that he/she will tender certain performance to any third party, the third party shall have the right to claim that performance directly from the obligor … [The] rights of the third party shall accrue when the third party has expressed his/her intention to the obligor to enjoy the benefit of the contract’. Ibid. art. 643: ‘A mandate shall become effective when one of the parties mandates the other party to perform a juristic act, and the other party accepts the mandate’. Ibid. arts. 643–55 set out the rights, duties and liabilities of a mandatary, as well as the grounds and procedures for the termination of mandate.

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them back from the trustee in bankruptcy. All that the mandator can do is to participate in the distribution of each bankruptcy estate on a pro rata basis with the general creditors of the mandatary. On the other hand, article 25 of the Japanese Trust Act provides that where a trustee is bankrupt, the trust assets shall not belong to his bankrupt estate available for distribution to his personal creditors. The bankrupt will continue to be the trustee, or be replaced by another person if the trust deed so provides. In either case, the trust will continue. (b) The settlor loses his power to manage the trust property while the mandator’s power will compete with the mandatary, which means that the mandator will not rescind his powers under a mandate. An investment management agreement that grants full discretion to the manager, such as the one in the present scenario, usually takes the form of a mandate. The investment manager is regulated by the Financial Instruments and Exchange Act of Japan,5 which requires him, in addition to being registered as an investment advisory manager, to segregate the managed assets from his own assets and other assets managed by him.6 Investment managers may achieve segregation by using a trust structure to entrust the managed assets to a third party trustee such as trust banks. Thus, a trust structure may still be used, albeit between the manager and the custodian bank-trustee. However, if the document executed by Scot and Terence explicitly refers to the creation of a trust, a trust will be established. Even if the term ‘trust’ is not used, if the arrangement requires Terence to place the funds in a separate bank account, the court will most likely infer that Scot wishes to protect the invested assets from his own and/or Terence’s bankruptcy, and hence the arrangement can still be regarded as giving rise to a trust instead of a mandate. In 2002, the Supreme Court of Japan held that the Japanese Trust Law applies to an arrangement whereby, upon engaging a contractor to construct buildings, a party deposited the initial part payment of the construction fee into a separate bank account held by the contractor and on condition that the latter could not use the funds except for the construction project.7 5

6 7

Financial Instruments and Exchange Act of Japan, Act No. 25 of 1948 (hereafter ‘Japanese Financial Instruments and Exchange Act’) (official trans. Financial Services Agency, Japan), available at www.fsa.go.jp/common/law/fie01.pdf (last accessed 15 August 2012). See Japanese Financial Instruments and Exchange Act, arts. 29 and 43–2, respectively. See Supreme Court of Japan Judgment No. (Ju) 1671 of 2000 (17 January 2002), discussed in Makoto Arai, Shintaku-ho [The Law of Trust in Japan] (3rd edn, Tokyo: Yuhikaku Publishing, 2008), p. 190. Cf. Barclays Bank v. Quistclose Investments Ltd [1970] AC 567.

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Furthermore, it is indisputable that Terence enters into a contract with Scot in the course of business. Under the Trust Business Act of Japan,8 no person may carry out trust business without having obtained a licence to establish a trust company from the Prime Minister.9 For Terence to carry out the current trust business as a professional manager, as stated in the facts, it must be a trust company that holds a licence to do so, or will be subject to penalty.10

South Korea (1) Contract of mandate in favour of a third party According to article 539 of the Civil Code of the Republic of Korea,11 where there is a contract between two parties to perform an act in favour of a third party, the third party has a direct right to enforce the undertaking against the obligor.12 Accordingly, as in the facts of the present scenario, when Scot and Terence conclude a contract for Terence to invest a designated sum for the benefit of Ben, a contract for the benefit of a third party is created. Once Ben declares his intention to Terence to accept the benefits of the contract, he can enforce his rights directly against Ben.13 Additionally, the contract between Scot and Terence is also a contract of mandate, whereby a person agrees to manage another person’s affairs.14 Here, the mandatary, Terence, is engaged to represent 8

9

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13 14

Trust Business Act of Japan, Act No. 154 of 2004 (hereafter ‘Japanese Trust Business Act’) (official trans. Ministry of Justice, Japan), available at www.japaneselawtranslation. go.jp/law/detail/?id=1946 (last accessed 15 August 2012). Japanese Trust Business Act, art. 3: ‘No person may carry out Trust Business without obtaining a licence from the Prime Minister’. However, if he holds neither a trust business licence under the Japanese Trust Business Act nor an investment advisory licence under the Japanese Financial Instruments and Exchange Act, he will be punished for the latter offence instead of the former. Civil Code of the Republic of Korea (also translated as Civil Act of the Republic of Korea), Code No. 471 of 1958 (hereafter ‘Korean Civil Code’) (official trans. Ministry of Government Legislation, Korea), available at www.moleg.go.kr/english/korLawEng?pstSeq=52674 (last accessed 15 August 2012). Articles 539–42 of the Korean Civil Code deal with contracts in favour of third parties. Article 539 provides that ‘[w]here a party to a contract has agreed therein to effect an act of performance in favour of a third person, the person may demand such act of performance directly from the obligor’. These articles set out the establishment of the third party’s rights, as well as the rights of the obligor. Korean Civil Code, art. 539. Ibid. art. 680: ‘A mandate shall become effective when one of the parties has entrusted the other party with the management of affairs and the other party has consented thereto’.

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the mandator, Scot, in managing Scot’s assets on behalf of Ben. Two features of the mandate are worthy of note: first, while it is generally assumed that the mandatary acts in the name of the mandator (i.e., through direct representation), it is possible for a mandatary to bind the mandator by acting in his own name (i.e., without direct representation). In commercial practice, this takes the form of the contract of commission, whereby a commission agent acts in his own name to affect the sale and purchase of goods or valuable instrument on account of another person.15 Secondly, Scot as mandator continues to hold the title of the invested assets, and is bound by the acts of the mandatary acting in Scot’s name. This means that, in general, titles, rights and duties that are created by acts of the mandatary will fall directly into the patrimony of the mandator.

(2) Trust Another legal characterisation of the present facts is the trust. According to article 2 of the Trust Act of the Republic of Korea16 in a trust, property is transferred from a settlor to a trustee, who then holds the property for the benefit of the beneficiary or certain purposes. In the present scenario, the invested sum is transferred to Terence who holds it in his own name, but as trustee on trust for Ben as beneficiary. Article 3(1)(i) provides that a trust can be created by contract between the settlor and the intended trustee.17 Scot’s rights against Terence are personal rather than real rights. However, Scot’s right are still well protected. First, if Terence goes

15

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The mandatary’s duties (e.g., duty of care and duty to report) and rights (e.g., right to demand remuneration) are set out in arts. 680–92 of the Korean Civil Code. Commercial Code of the Republic of Korea (also translated as Commercial Act of the Republic of Korea), Code No. 1000 of 1962 (hereafter ‘Korean Commercial Code’) (official trans. Ministry of Government Legislation, Korea), available at www.moleg.go. kr/english/korLawEng?pstSeq=52668 (last accessed 15 August 2012). Article 101 of the Korean Commercial Code defines a commission agent as follows: ‘A person who makes it his business to effect sales and purchases of goods or of valuable instruments in his own name for the account of another person’. For details on the rights, duties and liabilities of the commission agent, see Korean Commercial Code, arts 101–13. Trust Act of the Republic of Korea, originally promulgated by Act No. 900 of 1961, revised by Act No. 10924 of 2011 (with effect from 26 July 2012) (authors’ translation). Korean Trust Act, art. 3(1)(i)–(iii) provides for three methods of creating the trust: (i) by contract between the settlor and the intended trustee; (ii) by will; and (iii) by declaration of trust.

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bankrupt, the trust property18 will not form part of Terence’s general property.19 Instead, it falls within the trust property. This also means that Terence’s personal creditors can only enforce their claims against his general property, but not the trust property;20 however, it must be noted that Terence’s trust creditors can enforce their claims against not only his trust property but also his personal assets.21 Given that a trust creditor can enforce his claim against the personal assets of Terence, this will be inconsistent with the notion of separate patrimony, where trust creditors can only enforce their claims against the trust assets. In light of this, it appears that the Korean Trust Act protects the segregation of the trust fund without adopting the notion of separate patrimony. Secondly, if Terence expends the trust fund to acquire a new asset, the principle of real subrogation set out in article 27 of the Korean Trust Act will apply to incorporate the new assets into the trust property.22

(3) Discretionary investment (wrap account) business Regardless of whether the arrangement gives rise to a trust or a mandate contract, if the intention of the parties is for Terence to buy and sell securities or derivatives, then the Financial Investment Services and Capital Markets Act of the Republic of Korea,23 which governs trust businesses, will apply. According to this Act, no one may carry out 18 19

20

21 22

23

The word ‘property’ is intended to denote wealth in this chapter, not proprietary right. Korean Trust Act, art. 24: ‘The trust property shall not be a part of the trustee’s bankruptcy estate, the individual rehabilitation foundation, or the trustee’s private property which the manager of rehabilitation procedures has right to manage and dispose’. Subject to a few exceptions, art. 22 of the Korean Trust Act provides that no compulsory execution or public auction may be made of any trust property: ‘(1) No compulsory execution, auction for exercise of security right and so on, preservative measure … or administrative disposition on default of national tax and so on shall be made to any trust property. However, this shall not apply where it is based on any right arising from a cause already existing prior to the creation of the trust, or in the course of management of the trust affairs’. Supreme Court of Korea Case No. 2007da63997 of 2007 (24 June 2010). Korean Trust Act, art. 27: ‘Any property obtained by the trustee due to management, disposal, operation, development, destruction or damage of the trust property, or other causes, shall fall within the scope of trust property’. Financial Investment Service and Capital Markets Act of the Republic of Korea (hereafter ‘Korean Financial Investment Service and Capital Markets Act’), Act. No. 10361 of 2010 (official trans. Ministry of Government Legislation, Korea), available at www.moleg.go.kr/ english/korLawEng?pstSeq=54745 (last accessed 15 August 2012). The Act was partly amended by Act No. 10063 of 2012.

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financial investment business without a licence from the Financial Services Commission.24 Furthermore, under the Korean Commercial Act, only a stock company can acquire such a licence. On the present facts, for Terence to provide the relevant investment service in the course of his business, he can only be an employee of a stock company that has obtained the appropriate licence. By having full investment powers to buy and sell shares, Terence provides ‘discretionary investment business’ under the Korean Financial Investment Service and Capital Markets Act.25 While the Act contains provisions with regard to duties of care and loyalty, as well as procedural requirements in the conduct of such business,26 it does not contain rules that determine whether the present arrangement gives rise to a contract of mandate or a trust. However, one may still apply the general rules of contract of mandate to the case of a discretionary investment agreement. This is because these rules apply irrespective of whether a corporation or an individual is acting as the mandatary.

Taiwan In Taiwan, trust is regulated by the Trust Law of the Republic of China.27 According to article 1 of this Law, ‘the term ‘trust’ refers to the legal relationship in which the settlor transfers or disposes of a right of property and causes the trustee to administer or dispose of the trust property according to the stated purposes of the trust for the benefit of a beneficiary or for a specified purpose’. Since trust is a private legal relationship, where there are gaps in the Taiwanese Trust Law, general legal codes on private law, such as the Civil Code28 and special laws related to trusts29 are also applicable. 24 25 27

28

29

Korean Financial Investment Service and Capital Markets Act, art. 12. 26 Ibid. art. 6(1), (5). Ibid. arts. 96–101. Trust Law of the Republic of China, promulgated on 26 January 1996; amended on 30 December 2009 (hereafter ‘Taiwanese Trust Law’) (official trans. Ministry of Justice, Taiwan), available at http://law.moj.gov.tw/Eng/LawClass/LawAll.aspx?PCode=I0020024 (last accessed 15 August 2012). Civil Code of the Republic of China (hereafter ‘Taiwanese Civil Code’) (official trans. Ministry of Justice, Taiwan), available at http://law.moj.gov.tw/Eng/LawClass/LawAll. aspx?PCode=B0000001 (last accessed 15 August 2012). See e.g., the Trust Enterprise Act of the Republic of China (hereafter ‘Taiwanese Trust Enterprise Act’) (official trans. Ministry of Justice, Taiwan), available at http://law.moj. gov.tw/eng/LawClass/LawContent.aspx?pcode=G0310027 (last accessed 15 August 2012); and the Securities Investment Trust and Consulting Act of the Republic of China

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The arrangement in the present scenario creates a trust relationship under Taiwanese law, since there has been a transfer of assets (the invested sum) to the trustee (a professional investment manager) to invest the amount for the benefit of a beneficiary. Taiwanese law on the concepts of agency, mandate and contracts for the benefit of third parties is broadly similar to those in China.30 Hence, for the same reasons as in Chinese law, the present arrangement does not involve the creation of an agency relationship or the entry into a contract for the benefit of a third party. More specifically, since the trust is an investment arrangement whereby full discretion is granted to the trustee to invest in securities (shares), it falls within the definition of a ‘full fiduciary discretionary investment business’ provided in the Taiwanese Securities Investment Trust and Consulting Act. Article 5(10) of this Act defines full fiduciary discretionary investment business as one whereby a customer delivers by a mandate or transfers under a trust securities or securities-related products to a mandatary or trustee, and vests the latter with full powers to make investment decisions and execute such investments. Furthermore, as the trustee in the present scenario is a professional investment manager carrying out trust business, the Taiwanese Trust Enterprise Act requires it to be an institution (as opposed to a natural person) that has obtained approval from the relevant authority to conduct trust business.31 The combined effect of these two applicable Acts is to subject Terence the trustee to licensing requirements and operational standards and procedures designed for the protection of investors, such as segregation of assets, accounting rules and disclosure requirements, to name but a few.

China The arrangement creates a trust under Chinese law, but to illustrate the distinction between the trust and a closely similar concept of agency, the following section will first briefly compare the two concepts. Article 2 of the Trust Law of the People’s Republic of China provides that:

30 31

(hereafter ‘Taiwanese Securities Investment Trust and Consulting Act’) (official trans. Ministry of Justice, Taiwan), available at http://law.moj.gov.tw/eng/LawClass/LawContent. aspx?pcode=G0400121 (last accessed 15 August 2012). For details, see Case 1, Alternative 1 (China). Articles 2, 33, and 48 of the Taiwanese Trust Enterprise Act provide that only institutions that have obtained approval from the relevant authority are permitted to conduct trust business; non-trust institutions are prohibited from providing mandatory service to a collective group of non-specified investors; and breach of such prohibition will be punished by fine and imprisonment.

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‘For purposes of this Law, trust refers to the fact that the settlor, based on his faith in the trustee, entrusts his property rights to the trustee and allows the trustee, according to the will of the settlor and in the name of the trustee, to administer or dispose of such property in the interest of a beneficiary or for any intended purposes’.32 While there are a variety of agency relationships under Chinese law, the most relevant type of agency in the present scenario is that created by an entrustment contract (also known as commission contract) (weituo hetong) under the Contract Law of the People’s Republic of China.33 This involves ‘a contract whereby the principal and the agent agree that the agent shall handle the affairs of the principal’34 in the latter’s name, and ‘in accordance with the instructions of the principal’.35 In doing so, the agent can bind the principal directly to a contract entered into with a third party, if the latter knows about his capacity as agent.36 In light of the respective legal provisions governing these two concepts, their differences may be enumerated as follows. (a) Nature of the legal relationship: in a Chinese trust, there are three parties to the legal relationship: the settlor, the trustee and the beneficiary,37 whereas there are only two parties to an entrustment contract, namely, the principal and the agent.38 The trustee acts in his own name in conducting trust affairs, but the agent acts in the name of his principal. In general, a trustee is given broad, independent discretion to manage the trust, whereas an agent must act strictly within the terms of his authority, which usually pertains to specific tasks. Upon the creation of the trust, beneficiaries have direct rights to make claims against the trustee to distribute trust assets to them, which rights are assignable and inheritable. This gives the beneficiaries more extensive rights than if the settlor and trustee had only entered into a contract for the benefit of the beneficiaries as a third party. This is because China adopts the rule of privity of

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Trust Law of the People’s Republic of China, Order No. 50 of 2001 (hereafter ‘Chinese Trust Law’) (official trans. National People’s Congress (NPC), China), available at www. npc.gov.cn/englishnpc/Law/2007-12/10/content_1383444.htm (last accessed 15 August 2012). Contract Law of the People’s Republic of China (hereafter ‘Chinese Contract Law’) (official trans. NPC, China), available at www.npc.gov.cn/englishnpc/Law/2007-12/10/ content_1383444.htm (last accessed 15 August 2012). Chinese Contract Law, art. 396: ‘A commission contract is a contract whereby the principal and the agent agree that the agent will handle the principal’s affairs’. 35 36 Chinese Contract Law, art. 396. Ibid. art. 399. Ibid. art. 402. 38 Chinese Trust Law, art. 3. Chinese Contract Law, art. 396.

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contract, and hence a third party who is to benefit from the performance of a contract has no right to sue the contracting party for non-performance.39 Nor can such a third party have any assignable rights under the contract. Apart from the beneficiaries, the settlor also has continuing rights to monitor the trustee through the rights to bring actions against him for breach of trust; to petition for the variation of the terms of the trust; to demand trust accounts; to remove trustees and appoint replacing trustees; and to receive the residue of the trust property upon termination, albeit in last priority after individuals expressly appointed in the trust deed and the beneficiaries and their heirs.40 (b) Necessity and integrity of assets: the entrustment contract does not involve any transfer of assets to the agent, whereas a Chinese trust may – and typically does, notwithstanding that article 2 of the Chinese Trust Law defines the trust as the ‘entrustment’ of property rights to the trustee (under Chinese law, the term ‘entrustment’ also embraces the establishment of an entrustment agency, which does not mandate the transfer of property rights). Furthermore, to create a trust, the trust assets must be defined with certainty. Trust assets are segregated from all other assets of the trustee, in that they are immune from the claims of the trustee’s heirs and personal creditors.41 Such immunity protects the assets from the trustee’s death or insolvency. (c) Termination: an entrustment contract terminates if either the principal or the agent is deceased, incapacitated or goes into bankruptcy.42 In contrast, a trust continues notwithstanding the death, dissolution or bankruptcy of the parties establishing a trust. In light of the above differences, it is submitted that the present arrangement creates a trust relationship. Under the arrangement, Terence has a broad, independent discretion to make investment decisions over a sum that has been transferred to him to be segregated in a separate bank account. These features are typically absent from

39

40 41

42

Ibid. art. 64: ‘Where the parties agree that the debtor shall discharge the debts to a third party and where the debtor fails to do so or fails to meet its liability as contracted, the debtor shall bear the liability for breach of contract to the creditor’. Chinese Trust Law, arts. 20–23, 30, 29(5), 40 and 54. Ibid. art. 16: ‘The trust property shall be segregated from the property owned by the trustee …, and may not be included in, or made part of his own property of the trustee’; and art. 17: ‘No compulsory measures may be taken against the trust property’. See generally, Dong Weining, Xintuo Caichan Falv Wenti Yanjiu [Research on Issues concerning Trust Property] (Beijing: Law Press, 2011). Chinese Contract Law, art. 411.

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entrustment contracts. If Terence also invests in his own name, the relationship will unequivocally be a trust governed by the Chinese Trust Law.43 One might also assume, for the sake of argument, that the following conditions for establishing a valid trust are satisfied on the facts: all three parties have full capacity for civil conduct;44 the trust is created for lawful purposes;45 the trust property is lawful and its scope defined with certainty;46 there is certainty of beneficiaries,47 including that they are stated in the written trust document;48 (e) the trust is created in writing;49 (a) (b) (c) (d)

Once these conditions are met, the trust comes into effect when the trust contract is signed,50 not when the trust property is transferred to the trustee.

Hong Kong The above arrangement creates a trust relationship, since property has been transferred to Terence (the trustee) for the benefit of Ben (a beneficiary), on terms to be segregated from other assets of Terence. Hong Kong trust law follows English common law and principles of equity. In addition, the Trustee Ordinance of Hong Kong,51 which was 43

44

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46

47 48 50

51

If Terence is a professional investment manager, he will also need to abide by the following laws and regulations: Law of the People’s Republic of China on Funds for Investment in Securities, Administration of Trust and Investment Companies Procedures, Measures for the Administration of Trust Companies’ Trust Plans of Aggregate Funds, Measures for the Administration of Operation of Securities Investment Fund, and Measures for the Administration of Securities Investment Fund Management Companies. Chinese Trust Law, arts. 19 and 24. The settlor can be a natural or legal person, or an organisation established according to law (art. 19), whereas the trustee can only be a natural or legal person (art. 24). Ibid. arts. 6, 11(1) and (4). It must not violate laws or regulations, or impair the public interest (art. 11(1)) not be aimed at taking legal actions or recovering debts (art. 11(4)). Ibid. art. 7. See Hu Jihua and Zhang Guilong, Zhonghua Renmin Gongheguo Xintuofa Tiaowen Shiyi [Interpretation of Trust Law of the PRC] (Beijing: People’s Court Press, 2001), p. 39. Chinese Trust Law, art. 11(5). 49 Ibid. art. 9(3). See also Chinese Contract Law, art. 11. Chinese Trust Law, art. 8. Ibid. art. 8(3): ‘Where a trust is created in the form of trust contract, the trust shall be deemed created when the said contract is signed. Where a trust is created in any other form of writing, the trust is deemed created when the trustee accepts the trust’. Trustee Ordinance, Cap. 29 of the Laws of Hong Kong (hereafter ‘Hong Kong Trustee Ordinance’) (official trans. Department of Justice, Hong Kong), available at www. legislation.gov.hk/eng/home.htm (last accessed 15 August 2012).

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enacted in 1934 and modelled on the English Trustee Act 1925, supplements and amends the common law and equitable principles relating to trustees. No particular form of words is required to create a trust: it is even possible for a person to create a trust without knowing it.52 If the invested sum has not been transferred to Terence, and subsequent investments derived from it are held in Scot’s name, the arrangement will be one of agency. An agency is an arrangement whereby a principal expressly or impliedly assents that an agent shall have authority to act on his behalf so as to affect his legal relations with third parties.53 As an individual who carries on the business of providing investment management of securities, Terence must also have been licensed under section 114 of the Securities and Futures Ordinance of Hong Kong.54

alternative 1(a) The facts are as in Case 1, Alternative 1 above, except as detailed below. After executing the document, Scot returns home and receives his medical report confirming that he is in good health. Scot then decides to invest his assets himself instead. He immediately calls Terence, telling him that he is not going to send him the cheque for US$2,000,000. Does this affect the legal relationship, if any, between Terence and Scot? Separately, if Terence does not take action after learning that Scot refuses to make the transfer of US$2,000,000, can Ben compel the transfer of the money to Terence?

Japan As for a trust by agreement, the revised Japanese Trust Act clearly states that the agreement is a consensual contract.55 Thus, once Scot signs a 52

53

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For example, see Paul v. Constance [1977] 1 WLR 54; Re Vandervell’s Trusts (No. 2) [1974] Ch 269. See Peter Watts and F.M.B. Reynolds, Bowstead and Reynolds on Agency (19th edn, London: Sweet & Maxwell, 2010), para. 1–001. Securities and Futures Ordinance of Hong Kong, Cap. 571 of the Laws of Hong Kong (hereafter ‘Hong Kong Securities and Futures Ordinance’) (official trans. Department of Justice, Hong Kong), available at www.legislation.gov.hk/eng/home (last accessed 15 August 2012). Article 3(i) of the Japanese Trust Act provides that a trust shall be created by, inter alia, ‘concluding an agreement with a specific person to the effect that the person will be assigned property, that the person will be granted a security interest in property, or that property will otherwise be disposed of to the person, and that said specific person should administer or dispose of such property in accordance with a certain purpose and carry out any other acts that are necessary for achieving such purpose’. Before the revision of

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document to create a trust, the contract becomes valid and effective even without the transfer of the funds to Terence. It will only be possible for Scot to invest the assets himself if one of the two following circumstances applies. First, Scot and Ben are able and willing to terminate the trust. Article 164 of the Japanese Trust Act provides that a trust may be terminated at any time by agreement between the settlor and the beneficiary, unless the trust deed provides otherwise.56 In the present scenario, the trust deed provides that Terence’s powers are irrevocable for five years, and hence the trust is supposed to continue during this period. It will not be open for Scot and Ben to agree to terminate the trust in advance. Secondly, due to Scot’s failure to transfer the funds to Terence, it is not possible for the latter to fulfil the purpose of the trust, and hence the trust is terminated. As to whether Scot can be compelled to transfer the assets pursuant to the validly created trust, if Ben is not willing to do so, Terence cannot compel Scot to transfer the assets, even if doing so is in Ben’s financial interest. This is because the trust contract is a consensual agreement, and hence the intention of the settlor and beneficiary overrides the independent judgement of the trustee.57 However, since the arrangement amounts to a clear manifestation of a gift by Scot in favour of Ben, if it is in writing, Ben can invoke article 549 of the Japanese Civil Code to compel Scot to perform the contract.58 Secondly, if Ben does wish the transfer to take place, it is open to debate whether he can compel Scot to transfer the assets to Terence. The Japanese Trust Act is silent on the matter. It may be argued that the provisions in the Japanese Civil Code on gift contracts apply to the relationship between a settlor and a volunteer beneficiary, whom Ben most likely is. Article 550 provides that gift contracts not in writing may

56

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the Act in 2006, it was not clear under the Act (even though it was generally accepted) that trust agreements were contracts in kind, on the ground that art. 1 of the earlier Japanese Trust Act 1922 defined trust as allowing another party to manage or dispose of assets that have been transferred to him by the settlor: Tetsuji Aoki, Shintaku-horon [The Theory of Trust] (Tokyo: Finance and Economics Times Newspaper Publishing House, 1926), p. 93. Under the Japanese Trust Act, it is not possible for Scot to unilaterally terminate the trust against Ben’s wishes. See Japanese Trust Act, art. 3(i). Japanese Civil Code, art. 549: ‘Gifts shall become effective by the manifestation by one of the parties of his/her intention to give his/her property to the other party gratuitously, and the acceptance of the other party thereof’. Article 550 further provides only gifts not in writing may be revoked by the donor in so far as the gift has not been performed.

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be revoked by either party. If the investment agreement in the present scenario is not in writing, Scot may revoke the gift. Ben will not be able to compel the transfer of the funds to Terence. On the contrary, if the agreement is in writing, Ben can compel Scot to transfer the funds. In practical terms, when it becomes apparent that Scot has no intention to transfer the funds, Terence may provide a letter of demand to Ben requesting Ben to compel Scot to effect the transfer. If Ben fails to comply, Terence may terminate the trust on the ground that no assets are held under the trust and he can no longer fulfil its purpose.

South Korea Depending on whether the arrangement is treated as giving rise to a mandate or a trust, the respective rules for these institutions will apply.

(1) Contract of mandate A contract of mandate comes into effect when the mandator entrusts the management of his affairs to the mandatary and the mandatary accepts the entrustment.59 Hence, on the present facts, the contract becomes effective once Scot signs the investment agreement. Such contracts may be unilaterally terminated at will and at any time by either party to the mandate, regardless of whether the contract is gratuitous or not, or whether it is bound for certain duration or not. However, if a party’s termination of the mandate causes loss to the other party, he must make compensation for the loss.60 In this case, Scot has and does exercise the right to terminate the contract by expressing his intention to Terence. The parties are released from the mandate from this point. Unless Terence has incurred any loss (and the facts do not suggest that) Scot needs not pay compensation. The right of the third person, Ben, come into existence from the time when he declares to the obligor, Terence, his intention to accept the benefit of the contract.61 While it is not clearly indicated in the present 59 60

61

Korean Civil Code, art. 680. Ibid. art. 689: ‘(1) Either party may at any time terminate a contract of a mandate for the future. (2) If one of the parties terminates a mandate for the future without any inevitable reasons at a time unfavourable to the other party, he shall compensate the other party for any damages occasioned by such termination’. Ibid. art. 539.

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facts, it is assumed that Ben has declared his intention to accept the benefit of the contract. Although Ben has acquired rights as a beneficiary under the contract in favour of a third party, he is not a party to this contract and hence cannot exercise any direct rights against Scot to compel him to transfer US$2,000,000 to Terence. On the other hand, the transfer of US$2,000,000 may also be considered as having been made under a gratuitous contract, in which case the law on gifts will be applied. A contract of gift will become effective when one of the parties declares his intention to transfer property of his own gratuitously to the other party and the other agrees to accept it.62 On the facts, since the asset management agreement between Scot and Terence is in writing, it may not be terminated pursuant to article 555 of the Korean Civil Code.63 However, it may be argued that the conditions for termination set out in article 557 of the Korean Civil Code are satisfied, namely, that Scot’s health has improved, permitting him to invest his own property instead. Scot’s property status has thus changed and performance of the contract will affect his living.64 Consequently, Scot can validly terminate the contract, and Ben cannot compel Scot to perform the contract.

(2) Trust There are two views as to when a trust becomes effective. The first view treats the trust as validly created once the settlor and trustee have assented to the trust contract, and the transfer of assets is but an act of performance,65 whereas the second view considers the transfer necessary for the trust contract to be validly created.66 Under the second view, no valid trust has been created on the present facts. Scot is free to extricate himself from the arrangement. To the contrary, under the first view, the trust has been created. Scot’s action amounts to an attempt to terminate the trust. 62 63

64

65

66

Ibid. art. 554. Ibid. art. 555: ‘A contract of gift which is not in writing may be terminated by either party’. Ibid. art. 557: ‘The donor may terminate a contract of gift, if after the conclusion of a contract of gift the donor’s property status has been adversely changed and the donor’s living has become gravely affected by the performance of contract of gift’. Choi Su-Jeong, ‘Sintakgyeyakui Beopjeokseongjil’ [‘The legal nature of trust contract’] (2009) 45(1) Minsabeophak [Korean Journal of Civil Law] 481. Choi Dong-Sik, Sintakbeop [Trust Law] (Seoul: Bobmunsa Publishing, 2006), p. 63.

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Article 99 of the Korean Trust Act provides for the termination of the trust by the parties to the trust. Article 99(1) stipulates that a settlor and a beneficiary may terminate a trust at any time by an agreement between them, unless the terms of the trust document provides otherwise: article 99(4). Therefore, even if Scot and Ben agree to terminate it, the trust is supposed to continue for at least five years since the document indicates that Terence’s powers are to be irrevocable for that term. In any event, Ben as beneficiary will have acquired a beneficial interest under the trust before its termination if there is a valid trust contract. The beneficial interests involve the right to request the trustee, Terence, to secure the trust property as part of his duties to manage the trust property with the care of a good manager67 and administer trust affairs faithfully on behalf of the beneficiary.68 If the transfer of US$2,000,000 does not take place, Terence will seek performance of it from Scot. If Terence does not do so, he may breach his duties as trustee. As a result, although Ben cannot directly compel Scot to make the transfer, Ben may direct Terence to do so.

Taiwan Pursuant to article 1 of the Taiwanese Trust Law, the transfer of trust assets to the trustee is necessary for a valid trust to arise. Since Scot now refuses to effect the relevant transfer, no valid trust is created. The Taiwanese Trust Law cannot be invoked to impose any duty on Scot; nor can it confer any right on Ben to compel either Scot or Terence to takes steps to this effect. Even if the facts were categorised as a gratuitous contract, the legal effect would be the same. Article 408 of the Taiwanese Civil Code allows the donor to revoke the gift as long as it has not been transferred, unless the gift has been notarised or is made for the discharge of a moral obligation.69 Accordingly, as long as the document signed above has 67

68 69

Korean Trust Act, art. 32: ‘The trustee shall administer the trust with a reasonable manager’s duty of care. Where otherwise is provided in the deed of the trust, that prevails’. Ibid. art. 33: ‘The trustee shall manage the trust affairs for the interest of the beneficiary’. Taiwanese Civil Code, art. 408: ‘So long as the right of the gift has not been transferred to the donee, the donor may revoke the gift. If the thing given has been partially transferred, the donor may revoke the gift for the portion has not been transferred. The provision of the preceding paragraph shall not apply to gifts notarised or to gifts made for the discharge of a moral obligation’.

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not been notarised, and is not for the discharge of a moral obligation, Scot can validly revoke the gift before sending the cheque to Terence.

China If Scot as settlor refuses to transfer assets to the trustee after entering into a trust contract, the following issues will arise: (i) whether, and if so when is a trust validly created?; and (ii) if it has not been validly created, at which point can the beneficiary compel the intended settlor or trustee to take steps to create the trust, if at all?

(1)

When is a trust validly created?

Article 8 of the Chinese Trust Law provides that trusts created by contracts (as in the present scenario) are created when the contract is signed. As discussed above, the transfer of the property to the trustee is not necessary for a valid trust to arise,70 and much criticism has been levelled against this approach.71 Nonetheless, albeit not relevant to the present scenario, even if the trust is validly created, it is not effective until all formal requirements are met.72 For example, if the trust property is registrable, such as real estate, the trust takes effect only after it is registered.73 If registration is not 70 71

72

73

See the discussion in Case 1, Alternative 1 (China). See, e.g., Dong Weining, Xintuo Caichan Falv Wenti Yanjiu [Research on Issues concerning Trust Property] (Beijing: Law Press, 2011), p. 28–34; Lou Jianbo, ‘Xintuo Caichan de Dulixin yu Xintuo Caichan Quishu de guanxi – Jianlun Zhongguo Xintuofa Di Er Tiao de jieshi yu yingyong’ [‘Relationship between the independence and nature of trust property : analysis of the interpretation and application of art. 2 of the Chinese Trust Law’] (2012) 2 Social Sciences in Guangdong 242; Kang Rui, Woguo Xintuofalv zhidu Yizhi Yanjiu [Study on the Transplantation of Trust Law in China] (Shanghai: Shanghai University of Finance and Economics Press, 2008), pp. 149–51. Su Qin, ‘Attribution of the ownership of trust property’ (2004) 4 Journal of China University of Mining and Technology (Social Sciences) 33; Zhang Chun, ‘Woguo Xintuo Caichan Shuoyouquan Guixu de Taidu jiqi Fali Shenshi’ [‘An examination of the Chinese attitude towards the ownership of trust assets’] (2007) 91(5) Journal of Gansu Institute of Political Science and Law 7. Cf. Adam S. Hofri-Winogradow, ‘Shapeless trusts and settlor title retention: an Asian morality play’ (2012) 58 Loyola Law Review 135. See He Baoyu, Xintuofa Yuanli Yanjiu [Analysis of the Legal Principles of Trusts] (Beijng: China University of Political Science and Law Press, 2005), p. 98. Chinese Trust Law, art. 10: ‘Where laws or administrative regulations stipulate that registration formalities shall be gone through for the creation of a trust, such formalities shall be gone through accordingly’. Although it is possible to register the trust after its establishment, the Law does not indicate any time limit by which final registration must

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necessary, such as in the present scenario where the trust property is cash, the trust becomes valid and effective at the signing of the contract. Subsequent refusal by Scot to transfer the property to Terence will not affect its effectiveness. While it is possible to treat Scot’s refusal as an attempt to terminate the trust, there is no clear guidance in the Chinese Trust Law as to whether Scot’s act amounts to valid termination of the trust.

(2)

Beneficiary’s right to compel the settlor to transfer the property upon trust

Whether Ben can compel Scot to transfer the property to the trustee depends on, first, whether Scot owes a duty to do so, and secondly, whether Ben has standing to sue Scot. As to the first question, if no valid trust contract has been created, Scot owes no duty to perform it. If, as in the present scenario, a valid and effective trust has been created, Scot as settlor is bound by the trust contract to perform his duty to transfer the trust assets to the trustee.74 The Chinese Trust Law does not provide for such a duty. However, since the trust is created by contract, Scot arguably owes a duty under the Chinese Contract Law to fulfil the purpose of the contract by rendering assistance to its performance.75 For both parties to fulfil the purpose of the investment contract at hand, it is essential that Ben transfers the trust assets to Terence, so that the latter can make investments. If Scot breaches this duty, he will be liable primarily to specifically perform his duty, and then to compensate any loss, including foreseeable loss of profits, that is still suffered after specific performance of the contract.76 As to the second question about Ben’s locus standi, if the cause of action against Scot lies in breach of contract, Ben as a third party to the

74

75

be made, let alone whether the trust is voidable or void in the interim. Nor does it stipulate what ‘trust registration’ involves, or whether a trust for non-registrable property is enforceable against third parties, if at all. Article 10 of the Chinese Trust Law provides for ‘trust registration’ if the underlying trust property is registrable. Registration should be effected at the time of establishment, failing which it should be effected at a later date, or the trust will have no effect. It does not elaborate whether it is merely ineffective as a trust enforceable against third parties, but nonetheless valid as a contract between the two contracting parties, or that it is also ineffective between the contracting parties. See also Guoqing Liu, ‘The publicity of trusts in common law and civil law systems’ (2011) 10 Canberra Law Review 115; Shen Ning, ‘Lun Xintuo Caichan de Gongshi Zhidu’ [‘On public notification of trust property’] (2010) 4 Zhongguo Shangjie [Business China] 304. 76 Chinese Contract Law, art. 60. Ibid. arts. 107 and 113.

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trust contract is barred by privity.77 Nor does the Chinese Trust Law expressly grant the beneficiary a right to compel settlors to transfer intended trust property to the trustee. However, since a valid trust has been created, Terence’s duties as trustee have already arisen. In particular, under article 25 of the Chinese Trust Law, he must ‘handle trust business in the best interest of the beneficiary’. Thus, Ben can compel Terence to sue Scot for breach of contract and to obtain specific performance and compensation for loss of foreseeable profit, if any. If Terence refuses to do so, he will prejudice the interest of the beneficiary and breach article 25.

Hong Kong (1)

When is a trust validly created?

To create an express trust as Scot has clearly intended, he must declare his intention to set up a trust (declaration of intention) and do everything within his power to transfer the title of the trust property to the trustee (constitution of trust).78 While the signing of the investment agreement amounts to a declaration of trust, no trust is created if Scot has not taken steps to transfer the assets.

(2)

Compelling the settlor to transfer trust property

Scot may be compelled to transfer the trust property under the following circumstances, with varying chances of success. First, if Ben has paid consideration for Scot to create the trust, it is clear that he can compel Scot to specifically perform the agreement and transfer the assets to Terence. Secondly, if the investment agreement is under seal or made by deed, then Terence has obtained the rights of such an agreement. Such rights form a chose in action, which can be the subject matter of a trust. Based on a judicial decision in the nineteenth century,79 which has been 77

78

79

Ibid. art. 64. See the discussion in Case 1, Alternative 1 (China). Wang Liming, Hetongfa Yanjiu I [Research on Contract Law I] (2nd edn, Beijing: China Renmin University Press, 2011), pp. 130–31. Re Rose, Rose v. Inland Revenue Commissioners [1952] Ch. 499. It appears, after the decision in Pennington v. Waine [2002] EWCA Civ 227; [2002] 1 WLR 2075, that if the settlor has acted in such a way towards the intended beneficiary so as to make it unconscionable for him to recall a promised gift, he will hold the gift on constructive trust for the transferee. Fletcher v. Fletcher (1844) 4 Hare 67.

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departed from in subsequent English cases,80 it may be argued that once Terence obtains the chose, there is a constituted trust of it – as opposed to the underlying property – in favour of Scot. Hence, Terence as trustee is bound to and can compel Scot to specifically perform the agreement. Although such an analysis opens up the theoretical possibility of treating a constituted trust as having arisen, unless the facts evidence a clear intention on the part of Scot to create a trust of the rights of the agreement, as opposed to the invested sum, it is unlikely that the court will act against the current weight of authority. In the absence of the exceptional circumstances discussed above, if Ben is a volunteer, he falls under the general rule in Anglo-Hong Kong law that equity will not perfect an imperfect gift, and will not assist a volunteer.81 This means that Ben has no right to compel Scot directly or Terence indirectly to have the trust property transferred to the latter.

alternative 2 The facts are as in Case 1, Alternative 1 above, except as detailed below. In the second year of their relationship, Scot reads in a newspaper that Terence is implicated in the international trafficking of stolen works of art. He does not know whether the allegations are true but he decides to terminate their relationship. He communicates this to Terence. He demands restitution of the managed assets, as well as a full account of the investments that have been made. Upon Terence’s refusal, Scot sues, asking for: (a) a judicial declaration that the relationship is terminated; (b) a remedy enjoining Terence from entering into any further transaction related to the assets; (c) a full audit of the previous period; (d) restitution of the managed assets; and (e) damages. Terence counterclaims, seeking: (a) a declaration that he still enjoys full managing powers until the end of the five-year term; and (b) damages.

Japan There are two legal routes to terminating Terence’s office as trustee.82 First, under article 58(4) of the Japanese Trust Act, a trustee may be 80 81 82

Re Pryce [1917] 1 Ch. 234; Re Kay’s Settlement [1939] Ch. 329. Milroy v. Lord (1862) 4 De GF & J 264. Article 54(1) also provides that subject to contrary provisions in the trust document, the settlor and beneficiary can dismiss a trustee by agreement. This sub-article is unlikely to help Scot, because even if Ben agrees with him, the terms of the trust suggest that the agreement is to continue for five years.

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dismissed by a court upon the application of the settlor or beneficiary if, inter alia, there is material ground to do so.83 The term ‘material ground’ is not defined, but most probably refers to a significant reason for dismissing the trustee that he himself fails to refute.84 Secondly, article 165 of the Japanese Trust Act empowers the court, on application by the settlor, trustee or beneficiary, to terminate the trust where, due to ‘special circumstances’ that were unforeseeable at the time of creation of the trust, termination is in the best interest of the beneficiary.85 In the present scenario, Scot may argue that such allegations amount to special circumstances that justify either dismissal of Terence as trustee or termination of the trust. Although the allegations have not yet been proven, they are highly publicised and may implicate Terence as holder of criminal proceeds. As a matter of practicality, it will be difficult, if not impossible, for Terence to engage the services of financial institutions, which will render it infeasible for him to discharge his duties in investing the assets on behalf of the trust.86 Upon the termination of a trust, article 177 of the Japanese Trust Act requires a trustee to: (i) conclude the current business; (ii) collect debts belonging to the trust property and perform obligations of the trust; and (iii) distribute residual assets to its lawful owners. Article 184(1) of the Japanese Trust Act also provides that when a trustee has fully discharged such duties, he must promptly settle the final trust accounts and obtain approval of them from all beneficiaries and those entitled to the trust fund upon termination of the trust. Applying these provisions, Scot is likely to obtain the following items: (a) a judicial declaration that the relationship is terminated; (b) an order restraining Terence from future 83

84

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86

Japanese Trust Act, art. 58(4): ‘When the trustee has caused a substantial detriment to the trust property through a breach of the duties or where there are other material grounds, the court may, upon the petition of a settlor or a beneficiary, dismiss the trustee’. Nonetheless, a similar legal term has been adopted in, e.g., art. 528(2) of the Japanese Companies Act 2005, which empowers the court to dismiss supervisors on ‘significant grounds’. Article 58(5)–(7) also stipulates procedural safeguards for dismissal, such as granting the trustee a right of hearing before the court, requiring the court to give reasons for its decision, and granting the settlor and/or a beneficiary a right to appeal against the court’s decision. Such special circumstances include both changes in the circumstance of the trust and the beneficiaries. For an explanation as to the meaning of special circumstance, see Hiroto Dogauchi, Shintaku-ho-nyuumon [An Introduction to the Trust Act] (Tokyo: Nikkei Publishing, 2009), pp. 224–5. See the Murakami Fund incident, whereby upon the arrest of Yoshiaki Murakami, manager of the Murakami Fund for insider dealing, there was a rush for cancellations by insiders. The fund was subsequently dissolved.

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transactions pertaining to the assets; and (d) restitution of the managed assets. As to item (c), the Japanese Trust Act contains no provision requiring a trustee to use auditors, but a final trust account will be produced under article 184(1).87 Whether Scot can obtain item (e), damages, depends on whether Ben has suffered any loss as the result of these allegations.

South Korea (1) Termination of mandate As mentioned above,88 under Korean law either party may terminate the contract of mandate at any time. However, unless the terminating party has a good reason to break the mandate, he needs to compensate any loss suffered by the other party as the result of the termination.89 Thus, in the present scenario, Scot may terminate the mandate at any time, irrespective of the stipulation that granted Terence irrevocable managing powers for five years. Since contracts for investment services depend on the mandator reposing confidence in the mandatary, Terence’s implication in international trafficking will most likely constitute a ‘good reason’ justifying termination. Accordingly, Scot will be granted the following reliefs: (a) a declaratory judgment that the relationship is terminated; (b) a preliminary injunction enjoining Terence from further dealings with the assets (on the basis that the relationship has terminated); (c) a full audit of the previous period;90 (d) an order for the assets to be transferred back to Scot;91 and 87

88 89 90

91

Japanese Trust Act, art. 184(1): ‘When a liquidation trustee has completed the duties, the liquidation trustee shall, without delay, settle the final accounts related to trust affairs and request approval for the settlement of accounts from all of the beneficiaries … and vested right holders as of the time of the termination of the trust’. See the discussion in Case 1, Alternative 1(b) (South Korea). Korean Civil Code, art. 689. Ibid. art. 683: ‘A mandatary shall upon demand by the mandator report on the status of the management of the entrusted affairs, and upon the termination of the mandate he shall make a full report on the entire developments with respect to the management of the entrusted affairs without delay’. Ibid. art. 684: ‘(1) A mandatary shall deliver to the mandator all the money and any other things which he has received and the fruits which he has collected therefrom in the course of management of the entrusted affairs. (2) All rights which the mandatary has acquired in his own name on behalf of the mandator shall be transferred to the mandator’.

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(e) assuming that Scot discharges the burden of proving the authenticity of the newspaper reports, damages from Terence due to breach of an implied contractual duty to refrain from conduct that may endanger the purpose of the mandate contract. As to Terence’s counterclaims, first, notwithstanding that the contract stipulated for a term of five years, express terms of the contract cannot override the statutory rule that a mandate can be terminated at any time. Secondly, any claim by Terence for damages will be denied, since irrespective of their authenticity, the negative media reports per se have already undermined Scot’s confidence in Terence and hence constitute a good reason for termination.

(2) Termination of trust Scot may either seek to terminate the trust (which ends both the trust itself and Terence’s office as trustee) or merely to dismiss Terence from his office as trustee. In relation to the former course of action, the Korean Trust Act provides for: (a) termination by statutory term;92 (b) termination by mutual consent or the settlor’s manifestation of his intent to terminate;93 and (c) termination by court.94 Only if the settlor and the beneficiary are the same person can the settlor make an arbitrary decision to terminate the contract. If the settlor and beneficiary are two different persons, they may agree to terminate the contract, but will be subject to provisions in the Korean Civil Code governing contract law. These provide that if the terminating party has no valid reasons for the termination, he must compensate the other party for loss suffered as a result.95 Scot will therefore need to obtain Ben’s consent to terminate the 92

93

94

95

Korean Trust Act, art. 98 (1)(i) and (vi), which stipulates that the trust can be terminated when the ‘object of the trust is attained or has become unattainable’ (art. 98(1)(i)), or the purpose as provided by the trust instrument has been performed (art. 98(1)(vi)). Ibid. art. 99: ‘(1) The settlor and the beneficiary may at any time mutually agree to terminate the trust, except where there is no settlor. (2) Where the settlor enjoys the entire benefit of the trust, the settlor or his heir may at any time terminate the trust’. Ibid. art. 100: ‘Where it is apparent that terminating the trust is appropriate in the interest of the beneficiary due to special circumstances unpredicted at the time of the creation of the trust, the settlor, the trustee, or the beneficiary may request the court to terminate the trust’. See ibid. art. 99(3): ‘Where the settlor, the beneficiary, or the heir of the settlor terminates the trust at a point of time adverse to the trustee’s interests without reasonable grounds, the settlor, the beneficiary, or the heir of the settlor shall compensate the trustee’, and Korean Civil Code, art. 689.

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contract based on grounds similar to those for terminating the mandate contract discussed above. Alternatively, Scot may seek to dismiss Terence. According to article 16(3) of the Korean Trust Act, the court may, upon request by the settlor or beneficiary, remove a trustee who has breached any of his duties or on justifiable grounds. It is therefore possible for Scot to dismiss the current trustee without consulting Ben as beneficiary. In the present scenario, even though Scot does not know whether the allegations in the newspaper are true, this can be regarded as a ‘justifiable ground’. Therefore, if Scot and Ben agree to the dismissal, they can request the court to remove Terence at any time. If Terence is removed, the trust can be administered by a newly appointed trustee. Article 21(1) of the Korean Trust Act provides that if the duties of trustee have terminated, the settlor and the beneficiary may, based on an agreement between them, appoint a new trustee. Thus, Scot needs to consult Ben on the appointment of the replacement trustee. If no agreement can be reached between them regarding the appointment, Scot and Ben will have to ask the court to appoint a new trustee.96 Therefore, if Scot and Ben make an agreement, they can dismiss Terence and appoint a new trustee.

Taiwan Scot may consider either terminating the trust or removing Terence from trusteeship. As to the former, article 64 of the Taiwanese Trust Law provides that ‘[i]f a trust does not inure to the sole benefit of the settlor, the trust may be jointly terminated by the settlor and the beneficiary at any time and from time to time unless it is otherwise provided in the trust act’.97 In the present scenario, since the trust document stipulates for an irrevocable term of five years, it is not open to Scot to terminate the trust even if he has obtained Ben’s agreement.98

96

97 98

Korean Trust Act, art. 21(2): ‘If the matter of appointment of a new trustee is not mutually agreed between the settlor and the beneficiary, the interested persons may request the court to appoint a new trustee’. Taiwanese Trust Law, art. 64. For the sake of completeness, if Scot could validly terminate the trust, the court will grant the declaration sought under item (a), but not item (d) (restitution of property) to Scot. Upon termination, the trust property devolves, subject to express terms of the trust, ‘to whom the trust inures to the sole benefit’, that is, Ben: Taiwanese Trust Law, art. 65(1).

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As to removing Terence from trusteeship, article 36(2) of the Taiwanese Trust Law provides that ‘[u]pon the breach by the trustee of his obligations or upon the occurrence of any material event, the court may, upon application of the settlor or beneficiary, remove the trustee’. Under this section, the crucial question for the court will be whether Terence’s implication in trafficking amounts to a ‘material event’. It is submitted that if the court considers that this raises doubts about whether Terence can act in accordance with the purpose of the trust, it will most likely grant item (a), a declaration that his trusteeship is terminated. Following the removal of Terence, Scot as settlor may, under article 36(3), appoint a new trustee unless the trust document provides otherwise. Terence must transfer the trust property to the new trustee, provide final financial statements and reports about the trust and deliver them to the new trustee and the beneficiary.99 Thereupon, his trusteeship ceases, so Scot should be able to obtain a court order to enjoin him from exercising his authority over the property (item (b)). Scot should have no difficulty obtaining full audit reports under item (c). Article 31 of the Taiwanese Trust Law requires trustees to ‘prepare and maintain separate books of account for each of the trusts being administered to record the condition of each trust’. Article 50 of the Trust Law also requires the outgoing trustee to render, together with the trust property, a final financial statement and a report on the trust affairs administered to the new trustee. Thus, Terence should prepare and maintain books of accounts for the trust being administered and Scott can request review of these accounts under article 32 of the Taiwanese Trust Law.100 In addition, when Terence is compelled to transfer the trust property to the new trustee after his removal, he must compile full accounts and reports of the previous period and transfer them to the new trustee together with the trust property. However, since the trust still continues, it will not be open for Terence as a settlor per se to obtain item (d), restitution of the trust property. Nor will Scot obtain damages as requested in item (e), since Terence has not breached his obligation as trustee. Under article 23 of the Taiwanese 99

100

Taiwanese Trust Law, art. 50: ‘Upon the change of a trustee, the former trustee shall render a final financial statement and a report on the trust affairs administered and shall deliver both the statement and the report together with the trust property to the new trustee in concert with the beneficiary or trust supervisor’. Terence is subject to the same duty if the trust is terminated: ibid. art. 68. Ibid. art. 32: ‘A settlor or beneficiary shall have the right to ask for permission to inspect, transcribe or make photocopies of those documents provided in the preceding article’.

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Trust Law, ‘a settlor, beneficiary or other trustees may request the trustee to pay pecuniary compensation for damage caused to the trust property or to restore the damaged property to its original condition if the damage is incurred due to the trustee’s improper administration of the trust property’. As to Terence’s counterclaim for damages, if he is removed by the court under article 36(2), he will not be able to claim damages for loss suffered. If, assuming there is no express terms to the contrary in the trust document, Scot and Ben have agreed to terminate the trust, they are jointly and severally liable to compensate Terence if they terminate it at a time that is detrimental to Terence’s rights and interests, unless the termination is due to factors beyond their control.101 Terminating the trust due to newspaper reports of trafficking may not be regarded as a matter ‘beyond Ben and Scot’s control’. This is because even after Scot has read about the newspaper reports on trafficking, the trust can still be continued without imminent detriment to the beneficiary; and it depends on Scot and Ben’s decision whether to terminate it or not. Therefore, their decision to terminate it is not due to factors beyond their control. On the contrary, since the concept of ‘material event’ in article 36(2) is broader than the notion of ‘beyond one’s control’, when Terence is being implicated in the international trafficking of stolen works of art (a crime), Scot’s confidence in Terrence may be materially destroyed. For this reason, it may be a material event upon which the court may, upon application of the settlor or beneficiary, remove the trustee under article 36(2) discussed above.

China The scenario raises issues about the termination of the trust and its legal consequences.

(1) Termination of the trust relationship A trust may be terminated upon, inter alia, the ground that its continuance infringes the original purpose of the trust.102 However, it is doubtful 101

102

Ibid. art. 64(2): ‘The settlor and the beneficiary who terminate the trust at a time detrimental to the rights and interests of the trustee shall be jointly and severally liable to pay compensation to the trustee, unless the termination is due to any factor beyond one’s control’. See a similar provision in art. 63(2) for unilateral termination by settlors who are sole beneficiaries. Chinese Trust Law, art. 53(2). Article 53 provides as follows: ‘Under one of the following circumstances, a trust shall be terminated: (1) the cause for its termination specified in

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if unconfirmed media reports about Terence’s illegal property dealings could provide sufficient evidence of such infringement. Separately, Scot may also seek to dismiss the trustee under article 39(5) of the Chinese Trust Law,103 with the result of terminating the trust relationship. The ground of dismissal can be found in article 23 of the Chinese Trust Law which provides that a trustee can be dismissed if he ‘disposes of the trust property against the purposes of the trust or commits gross negligence in administering, using or disposing of the trust property’.104 These concepts are not defined in the Chinese Trust Law, but the preponderance of commentaries in the field of civil law treats gross negligence to mean breach of the duty of care105 in circumstances where the defendant was indifferent to reasonably foreseeable harm on the part of the plaintiff.106 Again, on the limited facts available, it is doubtful if these conditions can be met.

(2)

Legal consequences of the termination of a trust

If the court does order termination of the trust, the following consequences will ensue: (1) Ownership of the trust property will pass to individuals specified in the trust document, or, in the absence of such specification, to the beneficiary (viz. Ben) or his successor, and the settlor (viz. Scot) or his successor in the order listed.107 (2) In the interim period when the trustee takes steps to transfer trust property to the owner(s) ultimately entitled to receive the trust fund (that is Ben), the trust will be deemed to subsist and such owners

103

104 105

106

107

the trust documents arises; (2) the continuance of the trust goes against the purposes of the trust; (3) the purposes of the trust have been realised or cannot be realised; (4) the parties concerned [agree] through consultation to terminate it; (5) the trust is cancelled; (6) the trust is revoked’. See further Hu and Zhang, Xintuofa Tiaowen Shiyi [Interpretation of Trust Law] (note 46 above), p. 191. Chinese Trust Law, art. 39(5): ‘Under one of the following circumstances, the trustee’s appointment shall be terminated: … (5) he resigns or is dismissed’. Ibid. art. 23. Wei Zhenying (ed.), Minfa [Civil Law] (2nd edn, Beijing: Peking University Press and Higher Education Press, 2010), p. 659. Ibid. 659; Hu and Zhang, Xintuofa Tiaowen Shiyi [Interpretation of Trust Law] (note 46 above), p. 108; Wang Qing and Guo Ce, Zhonghua Renming Gongheguo Xintuofa Tiaowen Quanshi [Analysis of the Trust Law of the PRC] (Beijing: China Legal Publishing House, 2001), p. 63. Chinese Trust Law, art. 54.

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deemed beneficiaries.108 Although Scot remains as settlor, the Chinese Trust Law does not grant him any express right to enjoin Terence from entering into transactions related to the assets during this period. (3) The trustee must prepare a liquidation report on the trust business.109 Since the party who has the right to raise objection against the report is the nominated owner of the residue after termination or the existing beneficiary, but not the settlor in his capacity as such,110 it might be inferred that only such a beneficiary (Ben in the present scenario) rather than the settlor (viz. Scot) has the right to demand the liquidation report from Terence.

Hong Kong This section will explore whether the trustee can be removed or the trust terminated, and the legal consequences of such actions.

(1) Removing the trustee There are several ways to remove Terence. First, if the trust instrument contains express provisions about the removal of the trust, these provisions will apply. It is not clear whether the trust document contains such provisions, but if Terence is granted an irrevocable term of five years, it is unlikely that there will be any. Secondly, in the absence of express provisions in the trust instrument, a trustee may be removed under section 37 of the Hong Kong Trustee Ordinance if, among other things, he is unfit to act.111 It may be argued that Terence’s involvement in trafficking renders him unfit to act. Even if this ground is established, section 37(1) provides that unless there is a specified nominee provided in the trust document, the power to appoint a new trustee will rest with the existing trustee. Furthermore, section 37 108

109

110 111

Ibid. art. 55. See also Chen Xiangcong, Xintuo Falv Zhidu Yanjiu [On Trust Legal System] (Beijing: China Procuratorate Publisher, 2007), p. 275. Chinese Trust Law, art. 58. See further Hu and Zhang, Xintuofa Tiaowen Shiyi [Interpretation of Trust Law] (note 46 above), p. 198. Chinese Trust law, art. 58. According to s.37(1), there are a total of seven situations, namely, where the trustee (i) is dead; (ii) remains outside Hong Kong for more than twelve months; (iii) desires to be discharged; (iv) refuses to act; (v) is unfit to act; (vi) is incapable of acting; and (vii) is under the age of twenty-one.

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merely empowers the nominee/existing trustee to make the appointment, rather than imposing a duty on them to do so. Therefore, if no nominee is stipulated in the trust document, Scot is unable to rely on this section to remove Terence and appoint a new trustee. Thirdly, under section 42 of the Hong Kong Trustee Ordinance, Scot or Ben may apply to the court for an order invoking its jurisdiction to appoint a new trustee to replace Terence.112 However, the court will only do so in exceptional circumstances,113 such as when the trustee has been convicted for dishonesty.114 It is unlikely that unverified allegations of illegal activities that do not necessarily relate to the trust property suffice for this purpose. It is worth noting that there are no express provisions in the Hong Kong Trustee Ordinance giving beneficiaries the right to remove trustees, although beneficiaries may remove trustees by express authorisation by the trust instrument or invoking the court’s inherent jurisdiction. This is unsatisfactory, as the former depends on whether the settlor has provided the beneficiaries with a power to remove trustees, whereas the latter depends on the court’s discretion, and consequently considerable time and costs. This is particularly so compared to the English position whereby a beneficiary may rely on section 19 of the English Trusts of Land and Appointment of Trustees Act 1996 to remove trustees. Section 19 empowers all beneficiaries of a trust who are of full age and capacity and absolutely entitled to the trust assets to remove and appoint trustees, unless the trust deed provides otherwise.115 The beneficiaries may give written directions for either (or both) the retirement of the existing trustee and the appointment of a new trustee.116 Provided that the conditions in section 19(3) are fulfilled, a trustee will then be deemed to have retired and discharged from the trust.117 In the recent review of 112

113 114

115 116 117

The court has inherent jurisdiction to appoint trustees if it considers it equitable to do so, but on the facts it is doubtful if the court will exercise this jurisdiction contrarily to his statutory jurisdiction under s.42. Re Gibbon (1882) 45 LT 756. Turner v. Maule (1850) 15 Jur. 761; Re Wheeler and De Rochow [1896] 1 Ch. 315; Re Sichel’s Settlements [1916] 1 Ch. 358. English Trusts of Land and Appointment of Trustees Act 1996, s. 25(5). Ibid. s. 19(2). Ibid. s. 19(3) stipulates the consequences of a trustee having received a written direction to retire: ‘Where (a) a trustee has been given a direction under subsection (2)(a); (b) reasonable arrangements have been made for the protection of any rights of his in connection with the trust; (c) after he has retired there will be either a trust corporation or at least two persons to act as trustees to perform the trust; and (d) either another

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the Hong Kong Trustee Ordinance, Hong Kong has proposed to amend the Ordinance in line with the English position.118

(2) Terminating the trust relationship Although he cannot remove Terence directly, Ben may do so indirectly by invoking the rule in Saunders v. Vautier,119 which states that if all sui juris and legally capable beneficiaries are between themselves absolutely entitled to the trust property, they may act unanimously to terminate the trust and set up a new trust (so appointing a new trustee). Here, assuming Ben is sui juris and has legal capacity, as the sole beneficiary absolutely entitled under the trust, he can terminate it contrary to the five-year restriction and re-settle the trust fund with a new trustee. Scot as settlor cannot invoke the rule, however. Nor does Scot in his capacity as settlor have the right to terminate the trust relationship, unless he has reserved a power to do so in the trust instrument.

(3) Legal consequences of terminating the trust relationship (a) Judicial declaration If Ben is entitled to invoke Saunders v. Vautier, he can give notice to the trustee to terminate the trust without the need for a judicial order to do so. (b) Enjoining Terence from entering into further transactions relating to the trust assets There is no provision in the Hong Kong Trustee Ordinance dealing specifically with this claim. However, it is possible for the beneficiary to apply to court for an interim injunction to prohibit Terence from dealing with the trust assets prior to obtaining a court direction to convey the assets.

118

119

person is to be appointed to be a new trustee on his retirement … or the continuing trustees by deed consent to his retirement, he shall make a deed declaring his retirement and shall be deemed to have retired and be discharged from the trust’. See Review of the Trustee Ordinance and Related Matters, Consultation Paper (Hong Kong: Financial Services and the Treasury Bureau, June 2009), para. 4.14; Consultation Conclusions on Review of the Trustee Ordinance and Related Matters (Hong Kong: Financial Services and the Treasury Bureau, February 2010), para. 72; and Detailed Legislative Proposal on Trust Law Reform, Consultation Paper (Hong Kong: Financial Services and the Treasury Bureau, March 2012), para. 2.48; and Trust Law (Amendment) Bill 2013, clause 25, available at www.gld.gov.hk/egazette/pdf/20131706/ es3201317064.pdf (last accessed 25 February 2013). The Trust Law (Amendment) Bill 2013 was presented to the Legislative Council for first reading on 20 February 2013. (1841) 4 Beav. 115.

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In order to obtain an interim injunction, Ben must show that: (1) his case is not frivolous or vexatious; (2) there is a serious question to be tried; and (3) the balance of convenience lies in granting an injunction. In exercising the balance of convenience, the court will consider: (a) whether damages will be a sufficient remedy if no injunction is granted; and (b) whether the defendant can afford to pay for the damages.120 In the present scenario, although there may be a serious question to be tried, namely, whether Ben has breached his duty as trustee, any loss suffered as the result of Terence’s continuous investment of the trust property is likely to be compensable by damages. Therefore, the balance of convenience does not lie in Ben’s favour, and he is unlikely to obtain an interim injunction.

(c) Full audit There is no provision in the Hong Kong Trustee Ordinance dealing with auditing after termination of trust. On the other hand, section 24(4) of the Ordinance deals with auditing prior to termination. A beneficiary can insist that trust accounts be audited. However, unless there are special circumstances, the audit cannot be carried out more than once every year, and the costs are to be paid out of the trust. Therefore, if a beneficiary wishes to carry out more frequent audits, it is likely that he will be personally responsible for the costs.121 In the present scenario, it is suggested that Ben can make a request for audit to be carried out prior to the termination of trust. He can terminate the trust thereafter. (d) Restitution of managed assets If the trust is terminated under the rule in Saunders v. Vautier, then Scot as beneficiary can compel the trustee to convey the trust assets to whoever he directs.122 (e) Damages Unless Terence is not merely implicated in trafficking but has also committed a breach of trust, he will not be liable to pay damages to Scot. However, if Terence refuses to convey the trust assets as directed by Ben, Ben may apply to court for directions to compel Terence to do so. 120 121

122

American Cyanamid Co. v. Ethicon Ltd [1975] AC 396. AJ Oakley, Parker and Mellows: the Modern Law of Trusts (9th edn, London: Sweet & Maxwell, 2008), p. 816. Re Marshall [1914] 1 Ch. 192; Re Sandeman’s Will Trusts [1937] 1 All ER 368.

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Terence may be personally liable for the costs incurred in such an application, unless there are reasonable grounds for his refusal.123

alternative 3 In the second year of their relationship, Scot sees excellent investment opportunities in the sportswear business arising from an upcoming International Sports Competition to be held in the country. He therefore asks Terence to purchase shares in Active Sportswear Co. Ltd, a publicly-listed company, as an investment. Ben also learns by chance that this company will likely be granted a lucrative contract in the Competition and urges Terence to make the same investment. Terence refuses on the ground that, in his view, the company has not been performing well. Does Scot and/or Ben have any legal recourse?

Japan Once a settlor has granted a trustee full investment powers, the trustee does not have to take into consideration any subsequent instruction of the settlor and/or the beneficiary regarding what he should invest in, as long as he has acted reasonably in believing that their proposed investments will not be in the best interest of the beneficiaries. This is because any such subsequent instructions will derogate from the grant of full investment powers already made. If the settlor and/or beneficiary wishes to override such powers contrary to Terence’s wish, they will need to communicate to Terence their intention to modify the terms of the trust, and show that the modification will not harm the interests of the trustee.124 Since Terence, who has been granted full investment powers, takes the view that the company has not been performing well, neither Scot nor Ben may compel him to abide by their suggestion.

South Korea (1) Contract of mandate If the relevant arrangement is treated as giving rise to a contract of mandate, and in particular a discretionary investment contract, under 123

124

John Mowbray et al., Lewin on Trusts (18th edn, London: Sweet & Maxwell, 2008), para. 24–02. Japanese Trust Act, art. 149(3)(i).

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article 97(2)(4) of the Korean Financial Investment Service and Capital Markets Act, it should contain stipulations with regard to amendments to and termination of the contract. If Scot’s request is consistent with such stipulations as to amendments, there is little reason for Terence to reject it, so that his refusal will amount to a breach of contract. Scot will have the right to terminate the contract, but will have to pay compensation to Terence for any loss arising from the termination. Since Ben is only a third party who can benefit from the contract, but not a party to the contract, Terence is not under any duty to follow Ben’s suggestions.

(2) Trust If the arrangement is treated as giving rise to a trust, then unless the terms of the trust document provide otherwise, neither the settlor nor the beneficiary can direct the trustee in the exercise of his discretionary investment powers; in fact, a trustee who follows their instructions without exercising his independent discretion will be in breach. On the facts, unless the terms of the trust mandate Terence to comply with Scot’s or Ben’s request (and such terms are rare in practice), Terence owes no duty to do so.

Taiwan As the trust document grants full investment power to the trustee to buy and sell shares, neither Scot nor Ben has the right to compel Terence to follow their instructions. Furthermore, pursuant to article 64 of the Taiwanese Trust Law,125 as the trust document granted Terence an irrevocable investment power for five years, Scot and Ben cannot jointly terminate the trust even if Terence refuses to follow their instructions.

China The facts involve the trustee’s exercise of his investment powers.126 The definition of the trust in the Chinese Trust Law only contains a scant description of it as an arrangement that ‘allows the trustee 125

126

Taiwanese Trust Law, art. 64: ‘If a trust does not inure to the sole benefit of the settlor, the trust may be jointly terminated by the settlor and the beneficiary at any time and from time to time unless it is otherwise provided in the trust act’. Chen, Xintuo Falv Zhidu Yanjiu [On Trust Legal System] (note 108 above), p. 223.

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to … administer or dispose of [the trust property]’.127 Such powers are subject to a series of duties.128 In the present scenario, the trustee has rejected, out of his professional judgement, the request of both the settlor and beneficiary to invest in a certain company. The issue that arises is whether he owes a strict duty to accede to their request. First, what Ben and Scot propose may be treated as an attempt to vary the method of trust administration. Article 21 of the Chinese Trust Law permits this if unforeseen circumstances render the original method of administration detrimental to the realisation of the trust purpose or the interests of the beneficiaries.129 Since Scot’s wish is based on his financial judgement rather than any change of circumstance, it is doubtful if he or Ben can invoke article 21. Secondly, as Terence has been given power to manage the trust assets, he is also entitled to exercise independent discretion based on his professional expertise. There is no indication on the facts of any breach of duties (such as breaching the purpose of the trust or mishandling trust property) on his part. Accordingly, Terence may reject Scot’s and Ben’s request with impunity.

Hong Kong Whether either Scot or Ben has the right to compel Terence to abide by their request to make a particular investment depends on: (1) trustees’ powers to manage the trust property and administer trust affairs; (2) whether Scot has any right to intervene in Terence’s management; and (3) whether Ben has any right to intervene in Terence’s management.

(1) Trustee’s powers to manage the trust property and administer trust affairs Trustees’ powers of investment may be derived either from the trust instrument or the Hong Kong Trustee Ordinance. Trust instruments often provide trustees with wide powers of investment such as ‘all the investment powers of a beneficial owner’. 127 129

128 Chinese Trust Law, art. 2. Ibid. arts. 20–9, 49. Ibid. art. 21: ‘If, due to special reasons unexpected at the time the trust is created, the methods for administrating the trust property are not favourable to the realization of trust purposes or do not conform to the interests of the beneficiary, the settlor shall have the right to ask the trustee to modify such methods’.

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In the absence of express provisions in the trust instrument, the Second Schedule to the Hong Kong Trustee Ordinance sets out the range of permissible investments (‘authorised investments’) which trustees may make unless the court authorises wider powers of investment.130 These authorised investments contain products including shares, debentures, government bonds, mutual funds and cash deposits, and are designed to provide a range of prudent investment products by way of default. In administering the trust, trustees assume a duty of reasonable prudence, the standard of which is that of an ordinary prudent man of business managing his own affairs: Speight v. Gaunt.131 When it comes to investment of trust property, this standard is modified such that the trustee has to exercise such care as the prudent man of business would when acting for the benefit of those ‘for whom he felt morally obliged to provide’.132 A more stringent standard applies to professional trustees on the basis that a trust corporation holds itself out as having specialised expertise in trust management.133 In the present scenario, Terence is given ‘full investment powers’ over the US$2,000,000, and it seems unlikely that there are any restrictions on his investment powers obliging him to follow the wishes of the settlor and the beneficiary to invest in a particular company. In any event, the facts do not suggest that Terence has breached his duty of reasonable prudence in rejecting Scot and Ben’s proposal, especially since it appears that the rejection is based on his professional judgement. Accordingly, Terence may reject Scot’s and Ben’s request with impunity. The issue then is whether Scot and/or Ben can compel Terence to invest by exercising their rights as settlor and beneficiary.

(2)

Right of Scot to intervene in Terence’s management/ investment powers

As settlor, Scot has no right to compel Terence. In fact, once the trust is validly established, the settlor drops out of the picture. If he wishes to 130

131 132

133

Cf. s. 3 of the English Trustee Act 2000 where trustees are given a general power to invest. (1883–84) LR 9 App. Cas. 1. Re Whiteley (1886) 33 Ch. D 347, 355; affirmed by Learoyd v. Whiteley (1887) 12 App. Cas. 727. Bartlett v. Barclays Bank Trust Co. Ltd [1980] 1 Ch. 515.

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restrict Terence’s powers to manage the trust, he should have done so formally by express reservation of power in the trust document or informally by way of a letter of wishes to Terence setting out his wishes. However, the latter is by no means binding on the trustees and is unlikely to alter Terence’s decision in the present scenario.134

(3) Right of Ben to intervene in Terence’s management/ investment powers As beneficiary, Ben enjoys more rights compared to Scot. While Terence has the power to make investment decisions, his powers are not entirely unchecked. There are two general principles relating to a beneficiary’s right to control the trustee’s discretion, namely: (a) that any decisions with regard to the administration of the trust must be made by the trustee alone;135 and (b) that all beneficiaries together, provided they are sui juris and together absolutely entitled to the trust property, can bring the trust to an end.136 The significance of these two principles for the present scenario is as follows. As regards (a), it has been suggested that in situations where a beneficiary passes confidential information about investment options to the trustee, the trustee must give due consideration to that information; however, the final decision-making power remains with the trustee.137 That being so, the question remains as to what Ben can do when Terence still refuses to purchase shares in Active Sportswear Co. Ltd. It is submitted that Ben may (i) apply to the court to compel Terence to invest; or (ii) sue Terence for compensation for his failure to invest. For (i), although the court has jurisdiction to direct a trustee to do a particular act (or to refrain from doing a particular act), such an order is limited to acts which the trustee is under an indisputable obligation to do (or not to do).138 Since the present scenario is concerned with investment decisions which Terence has the discretion to make, Ben cannot apply to the court for such an order. As for (ii), there are no facts suggesting that 134 135

136 137 138

See generally, Mowbray et al., Lewin on Trusts (note 123 above), paras. 23-52–23-61. Ibid. paras. 29-83, 29-84 and 36-09. This is because it is a general principle that trusteeship is an office of personal confidence. Saunders v. Vautier (1841) 4 Beav. 115. Oakley, Modern Law of Trusts (note 121 above), p. 814. Suffolk v. Lawrence (1884) 32 WR 899.

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Terence’s refusal to invest in Active Sportswear Co. Ltd amounts to a breach of his duty of reasonable prudence. Hence Ben cannot sue Terence for compensation. The remaining recourse is therefore for Ben to terminate the trust as a sui juris beneficiary who is absolutely entitled to the trust asset, as mentioned in general principle (b) above.

8 Case 2: Protecting ring-fenced assets against incompetence of the asset manager

Please refer to the facts in Alternative 1 of Case 1.

alternative 1 In the second year of their relationship, Scot learns that Terence has made very risky investments that have done poorly. As a result, he has lost 50 per cent of the value of the capital. Does Scot and/or Ben have any legal recourse? In particular, can Scot and/or Ben appoint a new investment manager?

Japan Article 29(2) of the Japanese Trust Act states that, subject to contrary provisions in the trust document, a trustee should exercise the due care of a prudent manager.1 On the facts, Terence has clearly breached this article in making a risky investment. After all, the trust was set up by an ailing father to provide for his son. If a breach is established, the trustee is liable under article 40(1)(i) to compensate for loss to trust property; and article 40(1)(ii) to restore damage to trust property, unless restoration is extremely difficult, requires excessive expenses, or is inappropriate due to special circumstances. On the present facts, Terence may be required either to restore the trust fund to its pre-breach state by making good the 50 per cent loss of capital, or to compensate for the actual loss of capital. Although not stipulated in the Japanese Trust Act, the compensatory principle laid down in the Japanese Civil Code should also apply to the present scenario. Under the Civil Code, special loss (such as profits that could 1

Japanese Trust Act, art. 29: ‘(1) A trustee shall administer trust affairs in line with the purpose of the trust. (2) A trustee shall administer trust affairs with the due care of a prudent manager; provided, however, that if terms of trust otherwise provide, the trustee shall administer trust affairs with such care as provided for by the terms of trust’.

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have been made had there been no breach) is also recoverable if it is reasonably foreseeable.2 Article 58(4) of the Japanese Trust Act provides that ‘where the trustee has caused a substantial detriment to the trust property through a breach of the duties or where there are other materials grounds, the court may, upon the petition of a settlor or a beneficiary, dismiss the trustee’. Although not explicitly clarified in the Act, it is submitted that dismissal under such circumstances as wrongful conduct or material grounds should not be affected by a provision in the trust document for an irrevocable term of the trustee’s office. Scot or Ben may petition the court to dismiss Terence, and appoint a new trustee by agreement between them.3

South Korea (1) Breach of mandate If the arrangement creates a mandate, Terence will be subject, under article 681 of the Korean Civil Code, to the duty to ‘manage the affairs trusted to him with the care of a good manager in accordance with the tenor of the mandate’. Additionally, as a discretionary investment business entity, Terence also owes, under article 96(1) of the Korean Financial Investment Services and Capital Markets Act, a duty to execute ‘business affairs in good faith in managing the relevant property’, and, under article 96(2), ‘a fiduciary duty to investors to protect their interests’.4 Whether Terence has breached either of these duties depends on the circumstances of the risky investment, such as whether the risk was reasonably foreseeable; whether Terence has exercised care in selecting the investment; whether he has hedged the risks; and the market situation in which the investment is made. Once a breach and loss arising from it are established, Terence will be liable under article 390 of the Korean Civil Code to pay damages.5 2 4

5

3 Japanese Civil Code, art. 416(2). Japanese Trust Act, art. 62. Korean Financial Investment Services and Capital Markets Act, art. 96: ‘(1) An investment advisory business entity shall execute its business affairs in good faith in providing advice for investment, and a discretionary investment business entity shall also execute its business affairs in good faith in managing the discretionary investment property. (2) An investment advisory business entity and discretionary investment business entity owes the fiduciary duty to investors to protect their interests’. Korean Civil Code, art. 390: ‘If an obligor fails to effect performance in accordance with the tenor and purport of the obligation, the obligee may claim damages. Provided, That this shall not apply to cases where performance has become impossible, and where this is not due to the obligor’s intention or negligence’.

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Even if Terence has not breached any duty of care, Terence has most probably breached article 46 of the Korean Financial Investment Services and Capital Markets Act. It provides that Terence must ascertain whether Scot is an ordinary or professional investor. If he is an ordinary investor, Terence must not recommend Scot to make an investment that is unsuitable to him in light of his investment experience, the purpose of his investment, and the status of the relevant property.6 Under article 64 of the same Act, if Terence breaches any duty stipulated in the Act and its subordinate legislation or a term of the investment agreement or prospectus, or if loss is caused by his negligence, he will be liable for damages.7 On the limited facts available, namely, the making of a risky investment for someone who is most likely an ordinary investor, there has most probably been a breach of article 46.

(2) Breach of trust If the arrangement creates a trust that involves discretionary investment management, both the Korean Trust Act and the Korean Financial Investment Services and Capital Markets Act will apply. The former requires the trustee to act with ‘the care of a reasonable manager’,8 whereas the latter states that a trustee owes a duty to ‘execute its business affairs in good faith in managing the trust property and a fiduciary duty to protect beneficiaries’ interests’.9 The stipulations with regard to these two duties resemble those applicable to a mandatary.10 The previous analysis as to whether Terence has breached his duties of care as a mandatary therefore also applies to the present context. If a breach of these two duties is established, Terence will, as with a mandatary, be liable for failing to effect performance in accordance with 6

7 8

9

10

Korean Financial Investment Services and Capital Markets Act, art. 46: ‘(1) Each financial investment business entity shall confirm whether an investor is an ordinary investor or a professional investor … (3) No financial investment business entity shall recommend an ordinary investor to make an investment, if the investment is deemed unsuitable for the investor in light of the investment purpose, status of property, experience in investment, etc. of the investor’. Korean Financial Investment Services and Capital Markets Act, art. 64. Korean Trust Act, art. 32: ‘The trustee shall administer the trust with a reasonable manager’s duty of care. Where otherwise is provided in the deed of the trust, that prevails’. Korean Financial Investment Services and Capital Markets Act, art. 102; see also Korean Trust Act, art. 32. Korean Financial Investment Services and Capital Markets Act, art. 96(1), (2); Korean Civil Code, art. 681.

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the purport and tenor of his obligation, and to pay damages under article 390 of the Korean Civil Code. Since there is also a breach of trust, and Terence’s act amounts to a wrongful infringement of trust property, article 43 of the Korean Trust Act will also apply.11 This article provides that if a trustee breaches his duties and causes damage to the trust, the settlor, the beneficiary or other trustees may claim damages or seek restoration of the trust property to the original state. This will involve making good the loss of 50 per cent of the capital of the trust property. As previously explained, even if neither of these two duties is breached, article 46 of the Korean Financial Investment Services and Capital Markets Act will most probably apply and Terence will be liable thereunder. If Scot can demonstrate that Terence’s decision amounts to a breach of trust, then he may replace Terence. On a breach of trust or on a justifiable ground, a settlor or a beneficiary have the right to apply to court to remove the trustee.12 Alternatively, if the settlor and beneficiary agree and subject to contrary provisions in the trust document, they may remove the trustee and appoint a replacement trustee without court sanction. As stated above,13 article 21(1) of the Korean Trust Act provides that if the duties of trustee have terminated, the settlor and the beneficiary may, based on an agreement between them, appoint a new trustee. If the settlor and the beneficiary cannot reach an agreement, the relevant parties may request the court to appoint a new trustee pursuant to article 21(2).

Taiwan Unless otherwise provided in the trust deed, a trustee shall follow the prudent investor rule in making investment decisions.14 A trustee would 11

12

13 14

Korean Trust Act, art. 43: ‘(1) Where there is damage to the trust property due to the trustee’s breach of duties, the settlor, the beneficiary or the other trustee in case multiple trustees exist may request the trustee to restore the trust property. Where the restoration is impossible or impracticable, where the cost of restoration is too high, or where restoration is not appropriate due to special circumstances, the settlor, the beneficiary or the other trustee may claim damages’. Ibid., art. 16(3): ‘If the trustee breaches his duties, or there is any justifiable reason, the settlor or the beneficiary may request the court to dismiss the trustee’. See the discussion in Case 1, Alternative 2 (South Korea). Taiwanese Trust Law, art. 22: ‘A trustee shall administer the trust affairs with the care of a prudent administrator’.

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violate the prudent investor rule if he makes high-risk investments that have done poorly. If there is evidence showing that Terence has not acted prudently when making those investments, or that it is inappropriate for the beneficiaries to be burdened with risk associated with such investments,15 then Terence will be personally liable for breach of the prudent investor rule. Article 23 of the Taiwanese Trust Law then permits the ‘settlor, beneficiary or other trustees [to] request the trustee to pay pecuniary compensation for damage caused to the trust property or to restore the damaged property to its original condition if the damage is incurred due to the trustee’s improper administration of the trust property’. In addition, article 36(2) of the Taiwanese Trust Law provides that ‘[u]pon the breach by the trustee of his obligations or upon the occurrence of a material event, the court may, upon application of the settlor or beneficiary, remove the trustee’. Article 36(3) then states that: ‘unless otherwise provided in the trust document, the settlor may appoint a new trustee; failing so, the court may appoint a new trustee upon the petition of interested parties’. Since Terence’s breach has led to a loss of 50 per cent of the capital, it can be treated as a material cause evidencing that Terence is not a competent trustee. Scot and Ben may then apply to the court on the ground that ‘a material cause’ has arisen to justify removing Terence from trusteeship. Upon Terence’s dismissal, unless the trust document expressly provides otherwise, Scot as settlor may appoint a new trustee.

China The present situation raises the following issues: (1) what is the standard of care required of a trustee; (2) what liabilities arise from breaching such a standard; and (3) when can the settlor or beneficiary remove and replace the trustee?

(1)

Standard of care

The Chinese Trust Law stipulates a general duty of care in administering trust affairs, but contains no specific provision as to investment duties.16 15 16

See Case No. 181 of 2012 of the High Court of Taiwan. See generally, Zhang Min, Woguo Shoutuoren de Jinshentouzi yiwu Yanjiu [On the Trustee’s Duty of Prudent Investment] (Beijing: China Legal Publishing House, 2011);

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The general duty therefore applies to investment activities. It states, in article 25, that: ‘[i]n administering the trust property, the trustee shall be careful in performing his duties and fulfil his obligations with honesty, good faith, prudence and efficiency’. Prudence is not defined in the Chinese Trust Law, nor in other laws or regulations that involve the use of the trust structure, such as Measures for the Administration of Trust Companies’ Trust Plans of Aggregate Funds, Measures for the Administration of Trust Companies, and the Chinese Securities Investment Funds Law. The meaning of ‘prudence’ may, however, be discerned from the drafting history of the Chinese Trust Law. The 1996 draft of the Law provides that ‘in administering the trust property, the trustee shall exercise such prudence as he would for his property’.17 This standard was thought to be inadequate as the trustee is managing trust assets on behalf of beneficiaries, not for himself.18 Hence, the promulgated Law refers instead to good faith and prudence in management. In view of this background, ‘prudence’ should signify a higher standard than the care one takes in managing one’s own property. Academic commentators have also unanimously understood article 25 as referring to the exercise of reasonable care and skill by someone who acts in good faith in managing the trust,19 having regard to the knowledge and experience reasonably expected of the profession or segment of society in which the trustee belongs.20

17

18

19

20

Chen Xueping and Dou Jingjun, Xintuo guanxi zhong Shoutuoren Quanli yu Hengping jizhi Yanjiu [Trustees’ Right and their Balance Mechanism under the Trusts] (Beijing: Law Press, 2008). Article 23 of the Chinese Trust Law (Draft) (First bill) (authors’ translation). The draft was passed at the 117th meeting of the Committee on Finance and Economy of the NPC in 1996 and submitted for first examination at the 23rd meeting of the 8th NPC Standing Committee. Hu Jihua and Zhang Guilong, Zhonghua Renmin Gongheguo Xintuofa Tiaowen Shiyi [Interpretation of the Trust Law of the PRC] (Beijing: People’s Court Press, 2001), p. 115. Bian Yaowu (ed.), Zhonghua Renmin Gongheguo Xintuofa Shiyi [Interpretation of the Trust Law of the PRC] (Beijing: Law Press, 2002), p. 96; Zhou Yuhua, Xintuofa Xue [Study of Trust Law] (Beijing: China University of Political Science and Law Press, 2001), p. 180; He Baoyu, Xintuofa Yuanli Yanjiu [Analysis of the Legal Principles of Trusts] (Beijing: China University of Political Science and Law Press, 2005), p. 210; Chen Xiangcong, Xintuo Falv Zhidu Yanjiu [Study of the System of Trust Law] (Beijing: China Procuratorate Publisher, 2007), p. 202; Xu Mengzhou (ed.), Xintuofa Xue [Study of Trust Law] (Beijing: China Financial Publishing House, 2004), p. 175; Zhong Ruidong and Chen Xiangcong, Xintuofa [Trust Law] (2nd edn, Xiamen: Xiamen University Press, 2007), p. 108. Huo Yufen, Xintuofa Yaolun [Discussion of the Trust Law] (Beijing: China University of Political Science and Law Press, 2003), p. 89.

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Nonetheless, three uncertainties surrounding article 25 remain. First, while the Chinese courts have adjudicated on notions of ‘efficient’ or ‘bona fide’ management outside the trust context, it remains to be seen how they will interpret them in relation to trusts, and whether a distinction should be drawn between lay and professional trustees. It has been argued that whereas a paid professional trustee who is an individual should be subject to a higher standard of care than a lay trustee, corporate trustees who are financial institutions, such as banks and trust companies, should be subject to an even higher standard.21 Secondly, it is unclear whether the duty of care under article 25 can be excluded by express terms in the trust deed. Thirdly, it is also unclear how, if at all, the trustee’s duty of care is different from that of company directors. The latest Company Law of the People’s Republic of China,22 which was enacted after the Chinese Trust Law, contains more detailed provisions on the duty of company directors, particularly in relation to business judgements and control of investment risks. It remains to be seen whether Chinese courts will interpret article 25 by reference to the Chinese Company Law. In the present scenario, Terence is a paid trustee with knowledge in professional investment. He should exercise such care and skill as expected of people in this profession. The facts only suggest that he has made a risky investment without indicating any special circumstances or diversified investment portfolio justifying it. In the absence of any such justifications, it is submitted that Terence has breached the requisite standard of care, even though he might argue that a high-risk investment may yield a higher rate of return.

(2) Liabilities of the trustee The liabilities of trustees in breach are stipulated in article 22 of the Chinese Trust Law as follows: ‘Where the trustee disposes of the trust property in breach of the purposes of the trust, or causes loss to the trust property due to his departure from his administrative duties or improper 21

22

Lei Langcai, ‘Zhengquan Touzi Jijin Guanliren Falv Yiwu Wenti Yanjiu’ [‘Analysis of the legal obligations owed by the Securities Investment Fund Manager’], available at http:// 51099.com/lunw/eczj/20060703/50795.html (last accessed 15 August 2012). Company Law of the People’s Republic of China (hereafter ‘Chinese Contract Law’) (official trans. NPC, China), available at www.npc.gov.cn/englishnpc/Law/2007-12/12/ content_1383787.htm (last accessed 15 August 2012).

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handling of trust business, the settlor shall have the right to apply to the People’s Court for annulling such disposition and the right to ask the trustee to restore the property to its former state or make compensation’. Article 49 extends the same right of claim to the beneficiaries. Although article 22 does not specifically say so, it is submitted that breach of the duty of prudence in article 25 falls within ‘improper handling of trust business’. It renders the trustee liable to restore the (damaged) property or make compensation for loss. If trust property is disposed of as a result of the breach, it is a disposition ‘in breach of the purposes of the trust’ and can be annulled.

(a) Restoration of trust property The remedy of restoration is well established under Chinese civil law. In the context of trust, it requires the trustee to restore the trust property to the state it was in before he breached the trust and caused loss to the property. It is available only if it is practicable and feasible to restore the damaged property. This poses no problem if the property concerned is money, which is exchangeable currency.23 Under article 22, restoration is available either: (1) upon a wrongful disposal of trust property in breach of trust purpose;24 or (2) where even though the trust purpose is met, the trustee breaches his duty of prudence and causes loss to the trust property.25 The former situation does not require proof of any loss to the trust property, whereas the latter does. The Chinese Trust Law is silent on the test of causation between the breach and the loss. Prevalent views in tort law26 require but-for causation, which is likely to be satisfied on the present facts. Terence will be liable to restore the 50 per cent loss of capital. (b) Compensation Unlike the remedy of restoration, which only aims to restore the property to the state it was in before the breach and hence focuses on actual or 23

24 25

26

Zhang Xinbao, Qinquan Zerenfa Yuanli [Principles of Tortious Liability] (Beijing: China University of Political Science and Law Press, 2005), p. 538. Zhong and Chen, Xintuofa [Trust Law] (note 19 above), p. 92. Wang Qing and Guo Ce, Zhonghua Renming Gongheguo Xintuofa Tiaowen Quanshi [Analysis of the Trust Law of China] (Beijing: China Legal Publishing House, 2001), p. 57. Note that the recently enacted Law on Tort Liability of the People’s Republic of China (with effect from 1 July 2010) (trans. China Law and Practice), available at www. chinalawandpractice.com/Article/2596124/Search/PRC-Tort-Liability-Law.html (last accessed 15 August 2012), does not contain any provision on the test of causation.

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direct loss, the compensatory remedy in Chinese tort and contract laws allows recovery of indirect loss, that is, loss of benefits (such as profits) that could have been obtained but for the breach.27 Although not explicitly stated to be so, it is submitted that the compensatory remedy laid down in article 22 should also protect indirect loss in line with general civil law. It will be odd if a trustee who is subject to a more stringent standard of duty than a contracting party or tortfeasor is liable to a lesser extent.28 In fact, if the trust is created by a trust contract, the settlor as a party to the contract can recover indirect loss under article 113 of the Chinese Contract Law in any event. If claimants can only rely on Chinese Contract Law to recover indirect loss, testamentary beneficiaries will be unfairly prejudiced. In the present scenario, Terence’s risky investment falls within improper handling of trust business, which caused direct loss to the trust property. The facts do not indicate any indirect loss, but if, say, the property used for the risky investment would have otherwise been invested profitably (that is, but-for causation is established), there will be indirect loss to the extent of such lost profits. Combining the two remedies, Scot and Ben may seek restoration of the trust fund to its original value before the breach (hence recovering the direct loss of 50 per cent). Restoration is perfectly feasible because the trust property involves money. They may also seek compensation for any indirect loss of profits. The burden of proof is on them to show both what the state of the trust fund was before the breach, and what profits it could have obtained but for the breach. They may invoke their rights (under article 20)29 to inspect trust accounts and obtain information related to trust administration to substantiate their claims.

(c) Right to remove the trustee Under the Chinese Trust Law, the settlor and beneficiary have the right to dismiss a trustee if it is expressly provided for in the trust document. Alternatively, they may petition the court to dismiss the trustee if he (a) disposes of the trust property against the purpose of the trust, 27 28

29

Zhang, Qinquan Zerenfa Yuanli [Principles of Tortious Liability] (note 23 above), p. 538. See Chinese Contract Law, art. 113, which protects loss of profits that would have accrued had the contract been duly performed; and General Principles of Civil Law, art. 117 which covers indirect loss in tort law as ‘other great losses’. Chinese Trust Law, art. 20(2): ‘The settlor shall have the right to check, transcribe or duplicate the trust accounts related to his trust property and other documents drawn up in the course of dealing with trust business’.

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or (b) commits gross negligence in administering, using or disposing of the trust property.30 These two grounds are not defined in the Chinese Trust Law. The making of an investment in the present scenario still falls within the purpose of the present trust, albeit it has led to losses. As such, there is no wrongful disposition of trust property. The only remaining ground for removing Terence will be gross negligence. The preponderance of academic opinion in Chinese Civil Law suggests that gross negligence means indifference to reasonably foreseeable consequences of one’s actions.31 In the present scenario, absent special circumstances, if a reasonable person could foresee substantial loss arising from the investment, and yet Terence as a professional investment advisor is indifferent to it, he is grossly negligent. Scot and Ben may apply to the court to remove him.

(d) Appointment of a new trustee When the office of a trustee is terminated, a new trustee can be appointed in the order of the following ways: (i) in accordance with the provisions of the trust document; (ii) by the settlor; (iii) by the beneficiary; and (iv) by the beneficiary’s guardian. In the present scenario, if there are no express terms in the trust document on this matter, Scot as settlor will have the power to appoint a new trustee.32 It is worthy to note that following strong objection during consultation, the Chinese Trust Law does not provide for judicial appointment of new trustees. The main objections were that this was not catered for in the Civil Procedure Law of the People’s Republic of China33 pertaining to the powers of the court; that the length of the judicial process cannot accommodate the demand for efficient appointment of new trustees; and that the court has no expertise in financial management to assess the suitability of candidates.34 30 31

32 33

34

Chinese Trust Law, art. 23. Wei Zhenying (ed.), Minfa [Civil Law] (2nd edn, Beijing: Peking University Press and Higher Education Press, 2010), p. 659; Hu and Zheng, Xintuofa Tiaowen Shiyi [Interpretation of the Trust] (note 18 above), p. 108; Wang and Guo, Xintuofa Tiaowen Quanshi [Analysis of the Trust Law] (note 25 above), p. 63. Chinese Trust Law, art. 40. Civil Procedure Law of the People’s Republic of China (official trans. NPC, China), available at www.npc.gov.cn/englishnpc/Law/2007-12/12/content_1383880.htm (last accessed 15 August 2012). Quanguo renda ‘Xintuofa’ qicao gongzuo zu [Drafting Group of the Trust Law, National People’s Congress] (eds.), Zhonghua Renmin Gongheguo Xintuofa Tiaowen Shiyi

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Hong Kong (1)

Standard of care

As discussed in Case 1, Alternative 3 (Hong Kong), trustees’ powers of investment are either provided for in the trust instrument or derived by way of default from the Hong Kong Trustee Ordinance. In the present scenario, Terence was given ‘full investment powers’ over the US$2,000,000. The standard of care expected of a trustee is currently governed by case law. More specifically, in selecting investments, a trustee should exercise care as a prudent man of business, keeping in mind that he is investing for someone for whom he feels morally bound to provide,35 and that professional trustees are subject to a higher standard of care.36 Applying this standard to Terence, a paid trustee with expertise in professional investment, the question is whether a properly informed prudent trustee would have pursued the same course of conduct as Terence did.37 The facts do not disclose the most important details as to whether there is any justification for the risky investment, but assuming the absence of such grounds, and bearing in mind the higher standard of care applicable to Terence, it is likely that he has breached the duty to exercise prudence.

(2) Liabilities of trustee Upon establishing a breach of trust, Ben may consider claiming compensation from Terence.38 Assuming Terence is not authorised to make the investment, his conduct amounts to misapplication of the investment funds. Ben as beneficiary may falsify the account and treat the investment as having never been made, so that Terence will have to use his own funds to make good the loss to the trust fund. Assuming Terence is authorised to make the particular investment, and he is negligent in making the risky investment or in failing to make the

35

36 37 38

[Annotation of the Provisions of the Trust Law of the People’s Republic of China] (Beijing: China Finance Publishing House, 2001), p. 106. Re Whiteley (1886) 33 Ch. D 347, 355; affirmed in Learoyd v. Whiteley (1887) 12 App. Cas. 727. See Case 1, Alternative 3 (Hong Kong). Bartlett v. Barclay’s Bank Trust Co. Ltd [1980] Ch. 515, 534. Wight v. Olswang (No. 2) [2001] CP Rep. 54. This is traditionally known as the taking of accounts, which is a procedural remedy requiring the trustee to produce the accounts for review, allowing the beneficiaries to surcharge the account on the basis of wilful default (for breach of trust) or falsify the account (for unauthorised disbursement).

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appropriate investment, Ben will have the right to surcharge the account on the basis of wilful default. This means that Terence will be required to pay compensation to make good the harm Ben suffers as a consequence. In the present scenario, if but for Terence’s breach of duty, he would not have made the risky investment resulting in a loss of 50 per cent of the value of the capital, he would be liable to compensate the trust for the 50 per cent loss in the value of the capital. Furthermore, the account will be surcharged to represent what Terence ought to have received but for his failure to discharge his duty. For example, if the invested amount was originally intended for buying shares of Company A, and the value of these shares rises by 20 per cent during the relevant period, this constitutes a loss of profits that would have accrued to the trust fund had the risky investment not been made. Causation is established, and Terence would also be liable for the loss of profits.

(3) Removing and replacing the trustee A trustee may be replaced by a new trustee appointed in the order of the following ways: (i) by express provisions in the trust deed; (ii) under section 37 of the Hong Kong Trustee Ordinance 1925; and (iii) by court order under section 42 of the Hong Kong Trustee Ordinance.39 If there are express provisions in the trust deed pertaining to the removal and appointment of trustees, they will apply in first priority. In their absence, as is most likely in the present scenario, the default provisions in the Hong Kong Trustee Ordinance will apply. Under section 37,40 among other grounds, a trustee who is ‘unfit to act’41 may be removed and replaced by a new trustee by, first, anyone nominated to do so in the trust 39

40

41

The court also has inherent jurisdiction to remove and appoint trustees if it considers it equitable to do so, taking into account the settlor’s wishes, the beneficiaries’ interests and the efficient administration of the trust. Nonetheless, on the present facts, it is doubtful if the court’s conclusion in exercising its inherent jurisdiction will be any different from that under its statutory jurisdiction. According s. 37(1), there are a total of seven situations, namely, where the trustee (i) is dead; (ii) remains out of Hong Kong for more than twelve months; (iii) desires to be discharged; (iv) refuses to act; (v) is unfit to act; (vi) is incapable of acting; and (vii) is under the age of twenty-one. The meaning of ‘unfit to act’ is unclear: see John Mowbray et al., Lewin on Trusts (18th edn, London: Sweet & Maxwell, 2008), para. 14-14. It has been suggested that reference may be drawn from the circumstances in which the court may remove trustees: AJ Oakley, Parker and Mellows: the Modern Law of Trusts (9th edn, London: Sweet & Maxwell, 2008), p. 614.

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instrument, and failing that, the surviving or continuing trustees for the time being.42 Assuming the trust deed has not nominated any person, this section will not assist Ben, because Terence as continuing trustee is unlikely to cooperate in appointing a new trustee to replace himself. The remaining avenue is to ask the court to exercise its statutory discretion under section 42 of the Hong Kong Trustee Ordinance. This provision empowers the court to appoint a new trustee ‘whenever it is expedient [to do so], and it is found inexpedient, difficult or impracticable to do so without the assistance of the court’. Judicial authorities applying section 42 suggest that the court will only intervene in exceptional circumstances,43 such as to remove a trustee who is convicted for dishonesty.44 If Terence is only negligent in making investments, it is unlikely that the court will exercise its statutory jurisdiction.

(4)

Terminating the trust

As a last resort, Ben as an adult beneficiary who is absolutely entitled to the trust may invoke the rule in Saunders v. Vautier45 to terminate the trust and re-settle the trust to appoint a new trustee.46

alternative 2 In the second year of their relationship, Scot and/or Ben learn(s) that Terence does not use his own judgement to make any of the investment decisions. Instead, Terence relies exclusively on the recommendations in a well-known monthly financial newsletter. Do(es) Scot and/or Ben have any legal recourse?

Japan A preliminary condition to obtaining legal recourse against Terence is to establish a breach of a trustee’s duty of care as a good manager. Article 29 of the Japanese Trust Act provides that a trustee must administer the 42

43 44

45 46

The order listed in the section is to be strictly applied. The person empowered can make an appointment irrespective of the wishes of the beneficiaries. See also Re Higginbottom [1892] 3 Ch. 132. Re Gibbon (1882) 45 LT 756. Turner v. Maule (1850) 15 Jur. 761; Re Wheeler and De Rochow [1896] 1 Ch. 315; Re Sichel’s Settlements [1916] 1 Ch. 358. Saunders v. Vautier (1841) 4 Beav. 115. See the discussion in Case 2, Alternative 1 (Hong Kong).

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trust business in accordance with the purpose of the trust and with the due care of a prudent manager. It is hardly possible that a good manager would abdicate from exercising his own judgement and rely exclusively on a financial newsletter. After all, if the trust agreement grants the trustee discretion in making investment decisions, he is expected to exercise his own judgement in selecting investments. Unless there are exceptional circumstances, such as that the financial newsletter is the only and ultimate guide to investments and it is the practice of professional investment advisors to rely solely on it, Terence is most likely to have breached his duty of care. If the breach has caused loss to the trust property, Ben as beneficiary may demand compensation or restoration pursuant to article 40(1) and (2) of the Act. However, the facts do not reveal any loss suffered on the part of the trust property. Furthermore, in accordance with article 44(1) of the Japanese Trust Act, which provides that if the trustee engages in acts in violation of the terms of the trust which are likely to cause substantial harm to the trust property, Ben, the beneficiary, may demand that Terence cease such act. If Terence refuses, Scot or Ben may petition the court in accordance with article 58(4) to remove Terence from trusteeship, on the grounds that either a substantial detriment to the trust property has occurred through a breach of duties or that there are material grounds for removal. Since Scot or Ben will be most unlikely to be able to establish substantial detriment, they need to argue that Terence’s breach of the duty of care and the risk of substantial harm constitute a material ground.47 Upon the termination of Terence’s trusteeship, in the absence of any relevant stipulations in the trust document, Scot and Ben may, by mutual agreement, appoint a new trustee in accordance with article 62.

South Korea (1) Contract of mandate The decisive question in establishing a breach on the part of Terence is whether he has acted negligently and breached his duty to act as a good manager,48 and failed to exercise his duty of care.49 The investment 47

48 49

As to the meaning of ‘substantial harm’, see Makoto. Arai, Konmentaru Shintaku-ho [Commentary on the Trust Act] (Tokyo: Gyosei Corporation, 2008), pp. 195–6. Korean Civil Code, art. 681. See the discussion in Case 2, Alternative 1 (South Korea). Korean Financial Investment Services and Capital Markets Act, art. 96(1).

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agreement does not expressly prohibit Terence from relying exclusively on the recommendations of a well-known monthly financial newsletter. However, given the substantial amount invested, the wide investment discretion granted to Terence, and his expertise as a professional investment manager, a good manager would have taken greater care in selecting investments than to rely on a single source of analysis. If a breach is established, Terence will be liable under article 390 of the Korean Civil Code to pay damages for non-performance of obligation according to the purport of the agreement. Since no loss is shown on the facts, Scot’s priority may be to terminate the mandate relationship. Scot may accordingly exercise his right under article 689 of the same Code to terminate the mandate at any time, without proving a breach of duty on the part of Terence.

(2) Trust As a trustee, Terence is subject to the same extent of duty of care as when he is a mandatary, namely, to exercise care as a good manager.50 Moreover, he also owes fiduciary duty and duty of care as a business entity providing the service of a discretionary investment trustee.51 The content of these duties is the same as those applicable to Terence as a mandatary. Breach of these duties will render Terence liable under article 390 of the Korean Civil Code (for damages) and article 43(3) of the Korean Trust Act (for restoration or compensation for infringement of property).52 Since the facts do not reveal any loss to the trust property, Scot or Ben will also need to remove Terence if he refuses to rectify his conduct. To this end, article 16(3) of the Korean Trust Act provides that if a trustee has breached his duty, or if there is a justifiable ground, either the settlor or the beneficiary may request the court to remove him. To invoke this article, it is not necessary to prove that loss has resulted from the breach.

50 51 52

Korean Trust Act, art. 32. Korean Financial Investment Services and Capital Markets Act, art. 102. Korean Trust Act, art. 43(3): ‘Where the trustee is in breach of the duties stipulated in Articles 33–37, even though there is no damage to the trust property, the trustee shall disgorge the whole profit that the trustee or a third party has made due to the breach’. Articles 33–37 set out a trustee’s fiduciary duty (art. 33); duty to avoid conflicts of interest (art. 34); duty of fairness (art. 35); duty to avoid personal profit (art. 36); and duty to segregate trust property (art. 37).

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Taiwan Article 22 of the Taiwanese Trust Law stipulates that trustees are obliged to exercise care as a prudent administrator.53 The concept of prudence connotes diligence, skill and the exercise of sound, independent judgement. Academic opinion suggests that this is assessed objectively by the care, knowledge and experience of the trade or profession the trustee belongs to.54 Furthermore, a recent judgment of the High Court of Taiwan suggests that in making investment decisions, a trustee should additionally consider whether it is appropriate for the beneficiaries to be burdened with risks associated with the investment.55 In relying solely on a financial newsletter, Terence fails to exercise his own judgement, or the care and skill expected of a professional investment manager in selecting investments. He is in breach of his duty as trustee to exercise care. Where the trustee has committed a breach of his duty or where there is a material cause, the settlor or the beneficiary may petition the court to remove him from trusteeship.56 Since Terence is engaged in fully discretionary investment business, he must make investment decisions based on his analyses and reports, failing which he would be sanctioned by the competent authority (the Financial Supervisory Commission of the Executive Yuan)57 pursuant to articles 17, 58 and 113 of the Taiwanese Securities Investment Trust and Consulting Act.58 53

54

55 56 57 58

Taiwanese Trust Law, art. 22: ‘A trustee shall administer the trust affairs with the care of a prudent administrator’. Chen Chun-Shan, Xintuo ji Xintuoyefa Zhuanlun – Lilun yu Shiwu [Discussion on the Trust Law and Trust Enterprise Law: Theory and Practice] (Taipei: Taiwan Academy of Banking and Finance, 2000), p. 80. See also Shieh Jer-Shenq, The Law of Trusts (Taipei: Angle Publishing, 2010), pp. 157–8. See Case No. 181 of 2010 of the High Court of Taiwan. Taiwanese Trust Law, art. 36(2). The Executive Yuan is the executive branch of the Taiwanese government. Taiwanese Securities Investment Trust and Consulting Act, art. 17: ‘In managing a securities investment trust fund to invest or trade, a securities investment trust enterprise shall base its decisions on its analysis reports; it shall keep records of its execution thereof, and shall also submit a review report on a monthly basis’; art. 58: ‘The provisions of Article 17 shall apply mutatis mutandis to investment decisions that a securities investment trust enterprise or securities investment consulting enterprise makes for the utilisation of fiduciary investment assets’; art. 113: ‘A securities investment trust enterprise, securities investment consulting enterprise, fund custodian institution, or full fiduciary custodian institution that [violates, inter alia, art. 17] shall be fined an administrative fine of not less than NT$120,000 and not more than NT$600,000, and ordered to make corrections within a specified period’.

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China The present scenario is concerned with the trustee’s duty in relation to the making of investment decisions, and the settlor’s or the beneficiary’s right to obtain remedy for breach of such a duty. As discussed above,59 article 25 of the Chinese Trust Law only lays down a general duty of prudent management, which is generally understood as the care and skill expected of people in the profession or segment of society that the trustee belongs to.60 A prudent trustee with professional expertise in investment would conduct regular review of the investment portfolio and consult a wide range of views on potential investment choices. As such, exclusive reliance on merely one financial newsletter clearly violates the duty of prudence. Once a breach is established, Scot and Ben are entitled to claim restoration or compensation under article 22, which is discussed above.61 The facts do not state whether the trust property has sustained any loss as the result of Terence’s conduct. If there is none, neither restoration nor compensation will be applicable. Unless the trust document contains express stipulations for Scot and Ben to remove Terence unilaterally, their remaining recourse is to petition the court to remove Terence under article 23, on the ground either that he has disposed of trust property against the purpose of the trust, or has acted with gross negligence. As to wrongful disposal, despite his lack of prudence in selecting investments, Terence is still acting within the purpose of the trust, which is to invest the trust fund. Rather, it is arguable that a trustee with professional expertise in investment acts in a grossly negligent manner in slavishly relying on a financial newsletter and abdicating his own judgement. On this ground, it is submitted that the court will most likely grant an order to remove Terence.

Hong Kong The legal principles pertaining to a trustee’s duty to exercise reasonable prudence and the legal recourse available for breach of such a duty have already been explained.62 The present discussion will focus on: (1) 59 60 61 62

See Case 2, Alternative 1. Huo Yufen, Xintuofa Yaolun [Discussion of the Trust Law] (note 20 above), p. 89. See Case 2, Alternative 1. See the discussion in Case 2, Alternative 1 (Hong Kong).

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whether Terence’s exclusive reliance on the newsletter constitutes any breach of the duty of reasonable prudence; and (2) if so, whether Ben is entitled to seek remedies. As a paid professional trustee, especially one with professional expertise in investment, Terence owes a higher standard than that owed by a non-professional trustee to exercise care as a prudent man of business, keeping in mind that he is investing for someone for whom he feels morally bound to provide.63 As such, Terence is expected to at least conduct regular reviews of his investment portfolio, and consult a range of sources in selecting investments. Exclusive reliance on a single financial newsletter unequivocally violates this duty, let alone the higher one applicable to paid professional trustees. It is unclear from the facts whether the trust suffers any loss as a result of Terence’s breach. If there is none, the most effective remedy available to Ben would be to remove Terence as trustee. The principles governing removal of trustees have been discussed in Case 2, Alternative 1, above. A professional trustee who slavishly follows a financial newsletter without exercising his own judgment will most probably be regarded as being ‘unfit to act’. Ben might then invoke section 37 of the Hong Kong Trustee Ordinance to appoint an additional trustee to replace Terence. However, as discussed previously, in the absence of any express stipulation in the trust document for a specific nominee to make the appointment, it is unlikely that Ben could invoke section 37. The only remaining recourse will be to invoke the principle of Saunders v. Vautier to terminate the trust, re-settle it, and appoint a new trustee. 63

Bartlett v. Barclay’s Bank Trust Co. Ltd [1980] Ch. 515.

9 Case 3: Protecting ring-fenced assets against disloyalty of the asset manager

Sloppy is managing Janice’s assets with full power to sell them. The assets he holds on her behalf include several old buildings in the Dund area (the ‘Dund Property’) and two Picasso paintings.

alternative 1 Sloppy learns that the government is going to launch a large-scale redevelopment plan in the Dund area in the course of exploring investment possibilities for Janice, with the result that the government is going to pay a huge premium for the property in the area to facilitate the redevelopment plan. A month before the redevelopment plan is announced, Sloppy incorporates a new company, Sloppy & Co., to purchase several nearby old buildings in the same area. Soon after the government announces the redevelopment plan and its decision to buy back the property in the Dund area at a price which is 30 per cent higher than the market price, the value of both Janice and Sloppy’s properties increases by 30 per cent. Janice learns this by chance, and wants to make a claim against Sloppy. Will Janice’s claim succeed?

Japan The facts are ambiguous and may give rise to either a privately appointed agency by mandate or a trust between Janice and Sloppy.1 It is only stated that Sloppy ‘holds’ the old buildings on behalf of Janice. This may mean that Sloppy has legal title to the buildings, or merely that he is in possession of them. If legal title is not vested with Sloppy, he cannot be trustee of the buildings. The granting of ‘full power to sell’ will most likely suggest that he is a privately appointed agent by mandate. If, however, Sloppy does have legal title of the buildings, a trust has been created. 1

Japanese Civil Code, art. 643.

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157

Mandate

There is only one provision in the Japanese Civil Code governing profits made by privately appointed agents by mandate. This is article 646, which provides that the mandatary must deliver to the mandator monies and other things that he has received during the course of administering the mandated business. The question arising from the present facts is whether the profits made by Sloppy from his own property are made during the course of administering the mandated business. Although Sloppy comes to know about the investment opportunity in the course of managing Janice’s property, he uses his own funds to purchase his property, and hence the profits are generated from his own assets rather than in the course of administering mandated business. Janice is unlikely to be able to claim the profits from Sloppy. Japanese law does not impose obligations of loyalty (such as that to avoid conflict of interest and hence to inform the mandatory of investment opportunities obtained in the course of managing mandated business) on agents like Sloppy. Only trustees are subject to such duties pursuant to the Japanese Trust Act.

(2) Trust Even if there were a trust relationship between Janice and Sloppy, and hence the latter is subject to the duty to faithfully administer trust business,2 and to avoid conflicts of interest and disgorge profits arising from it,3 Sloppy will still not be liable. This is because Japanese trust law does not embrace the broad notion of conflict of interest adopted in Anglo-American law. To compel a trustee to disgorge profits obtained in 2 3

Japanese Trust Act, art. 30. Ibid. art. 31(1): ‘A trustee shall not carry out the following acts: (i) causing property that belongs to the trust property (including any right for such property) to be included in the trustee’s own property, or causing property that belongs to the trustee’s own property (including any right for such property) to be included in the trust property; (ii) causing property that belongs to the trust property (including any right for such property) to be included in the trust property of another trust; (iii) carrying out an act for the trust property with a third party while serving as the third party’s agent; and (iv) establishing a security interest on property that belongs to the trust property in order to secure a claim pertaining to an obligation that the trustee is liable to perform only by using property that belongs to the trustee’s own property, or carrying out any other act with a third party for the trust property which would create a conflict of interest between the trustee or an interested party thereof and the beneficiary.

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the course of administering trust business, it is necessary that a loss has occurred to the trust property or the beneficiary.

South Korea (1) Contract of mandate The facts merely suggest that Sloppy ‘holds Janice’s property on her behalf’ and it is unclear whether the parties intend to create an express trust. Instead, the relationship between Janice and Sloppy will most likely be governed by rules pertaining to the contract of mandate. A mandatary is subject to a duty to manage the affairs entrusted to him with the care of a good manager in accordance with the tenor of the mandate.4 There is, however, no stipulation pertaining to conflicts of interest. In the present scenario, Sloppy obtained the business opportunity in the course of administering the mandated business. If it is possible for him to make the investment on Janice’s behalf, and yet he does so for his own personal gain, it can be said that he has breached his duty of care as a good manager.5 Even if a breach is indeed established, it is not clear whether Janice’s claim for remedy will succeed under Korean civil law. Since no direct loss has been incurred by Janice, she will wish to make Sloppy disgorge the wrongful gains to her. Yet this remedy has not been expressly provided for in the Korean Civil Code. Article 393 of this Code, the most relevant provision, only stipulates ordinary damages arising from nonperformance of obligation, and damages arising through ‘special circumstances’ if the defendant foresaw or could have foreseen the loss.6 Janice cannot claim ordinary damages since she has suffered no loss. She will have to claim special damages, and argue that but for Sloppy’s breach, she would have made the investment and hence the profits herself. Her loss will therefore be measured by the amount of profits made by Sloppy. 4 5

6

Korean Civil Code, art. 681. Note that the Korean Civil Code does not distinguish between notions of duty of care and duty of loyalty in the case of mandate contract. The Korean Trust Act, however, contains a few provisions on the duty of loyalty: arts. 33 (general fiduciary duty), 24 (no conflict rule) and 36 (no profit rule). Korean Civil Code, art. 393: ‘(1) The compensation for damages arising from the nonperformance of an obligation shall be limited to ordinary damages. (2) The obligor is responsible for reparation for damages that have arisen through special circumstances, only if he had foreseen or could have foreseen such circumstances’.

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On the facts, however, it is doubtful if she can show that she would have bought the buildings herself had Sloppy not purchased them.

(2) Trust On the other hand, if there were a trust relationship between Janice and Sloppy, different consequences would follow. Under article 36 of the Korean Trust Act, a trustee is not allowed to obtain any benefit from his position.7 A trustee may therefore not profit from his management or, according to article 34, place himself in a position where his interest and duty may conflict.8 Since the profit made by Sloppy flows exclusively from information gathered in his capacity as trustee, and as he is not a beneficiary, he will have to account for the profit to Janice pursuant to article 43(3) of the Korean Trust Act, which requires a trustee to disgorge any profits obtained from a breach of his duty of loyalty, even though no loss is made to the trust property.9

Taiwan There is a trust relationship in the present scenario, because Sloppy holds land on Janice’s behalf (i.e., title over the land has been transferred to Sloppy). The Taiwanese Trust Law contains no express reference to the duty of loyalty. For example, article 22 only refers to the duty to exercise ‘the care of a prudent administrator’.10 Nonetheless, aspects of the 7

8

9

10

Korean Trust Act, art. 36 provides that the trustee shall not profit from the trust, even under the name of another person: ‘No trustee, whether he uses his own name or the name of others, may enjoy any benefits when administering the trust, except in a case where the trustee is one of the beneficiaries’. Ibid. art. 34(1): ‘The trustee may not do the following acts in the name of any person: (i) making the trust property his own property, or attributing any property thereto to his own property; (ii) making his own property the trust property or attributing any property thereto to the trust property; (iii) attributing the trust property of one trust or any property thereto to the trust property of another trust in case where multiple trusts were undertaken; (iv) representing a third person in an act regarding the third person’s trust property; or (v) any acts contrary to the beneficiary’s interest in ways other than the aforementioned’. Note also that art. 397 of the revised Korean Commercial Code 2012 also proscribes the usurpation of business opportunities by directors. Any profits obtained by the director shall be presumed to be loss suffered by the corporation. Taiwanese Trust Law, art. 22: ‘A trustee shall administer the trust affairs with the care of a prudent administrator’.

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duty of loyalty can be found in articles 34 and 35 of the Law, which prohibit the trustee from entitlements to trust benefits and from converting trust property to his own use.11 If Sloppy is a trust enterprise, he will be subject to the Taiwanese Trust Enterprise Act, which was enacted after the Trust Law in 2000. As compared to the Taiwanese Trust Law, which merely refers to the ‘care of a prudent administrator’, article 22 of the latter Act additionally refers to the duty to act ‘in good faith’ (zhongshi yiwu).12 Articles 25 and 27 of the Taiwanese Trust Enterprise Act also prohibit the trust enterprise from engaging in self-dealing transactions. In the present scenario, Sloppy’s duties and powers pertain to the management and sale of the Dund Property. Although he obtains the business opportunity in the course of such management, he has not used trust property in acquiring nearby properties. His conduct does not fall foul of article 35 of the Taiwanese Trust Law, which prohibits a trustee from converting trust property to his own use. To invoke article 35, it is necessary to use or acquire rights over the trust property. In a similar vein, article 34 deals with a trustee’s entitlement to the trust fund, and does not embrace the present scenario, where Sloppy’s profits are made out of investment of his own assets. For the sake of completeness, if article 35 is indeed breached, Sloppy will be liable under article 35(2) to disgorge his profits for incorporation into the trust fund.13 If Sloppy is a trust enterprise, article 22 of the Taiwanese Trust Enterprise Act14 will also apply. In this connection, it might be noted that an even more explicit duty of loyalty is stipulated in the Securities

11

12

13

14

Ibid. art. 34: ‘A trustee shall on no account be entitled to any benefits arising out of a trust unless the trustee is a co-beneficiary of the trust’; art. 35: ‘A trustee shall not convert any of the trust property to his own property or create or acquire any right thereto except [for certain situations set out therein]’. Taiwanese Trust Enterprise Act, art. 22: ‘A trust enterprise shall handle trust activities with the care of a good administrator and in good faith’. Taiwanese Trust Law, art. 35(2): ‘If the trustee uses or disposes of the trust property in violation of [art. 35(1)], the provisions of Article 23 hereof shall apply mutatis mutandis; in addition, the settlor, beneficiary or other trustees shall have the right to request the trustee to disgorge the benefit which the latter has acquired for incorporation into the trust property. The interest accrued from the benefit shall also be disgorged and incorporated into the trust property if the trustee is liable mala fide’. Taiwanese Trust Enterprise Act, art. 22: ‘A trust enterprise shall handle trust activities with the care of a good administrator and in good faith [i.e., with the duty of loyalty]’.

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Investment Trust and Consulting Act,15 which was enacted in 2004. It is the latest of the three laws involving trustees and applies to securities investment funds. Article 7 of this Act refers to both the duty to act in good faith (chengshi xinyong) and also with loyalty (zhongshi yiwu), thus suggesting that the phrase zhongshi yiwu in article 22 of the Taiwanese Trust Enterprise Act is not limited to honesty but extends to loyalty. Nonetheless, even if either of these two Acts applies to the present scenario, there is no elaboration of the meaning of loyalty to indicate whether the mere use of information obtained in the course of trust administration for one’s own profits amounts to a lack of loyalty. Thus far, there is also no case law on this point in Taiwan.

China On the limited facts given, the nature of the parties’ relationship might take one of the following forms.

(1) Entrusted agency (Weituo daili) Entrusted agency16 is a relationship whereby a principal appoints an agent to handle, in the principal’s name,17 the principal’s affairs18 within the scope of authority granted by the principal.19 In this case, Janice might have engaged Sloppy as her agent. The issue is whether Sloppy is permitted to use business opportunities or information obtained in the course of managing the principal’s affairs for his own benefit, in 15

16

17 18

19

Taiwanese Securities Investment Trust and Consulting Act, art. 7, imposes the duty to ‘conduct business in good faith and with the duties of due care, diligence, and fidelity [i.e., loyalty] as good administrators’. Article 64 of the General Principles of the Civil Law of the People’s Republic of China states that: ‘Agency shall include entrusted agency, statutory agency and appointed agency. An entrusted agent shall exercise the power of agency as entrusted by the principal; a statutory agent shall exercise the power of agency as prescribed by law; and an appointed agent shall exercise the power of agency as designated by a people’s court or the appointing unit’. General Principles of the Civil Law of the People’s Republic of China (hereafter ‘Chinese General Principles of the Civil Law’) (official trans. NPC, China), available at www.npc.gov.cn/englishnpc/Law/2007-2/12/content_1383941.htm (last accessed 15 August 2012). Unless otherwise stated, ‘agency’ in the present Case refers to entrusted agency. Ibid. Wei Zhenying (ed.), Minfa [Civil Law] (2nd edn, Beijing: Peking University Press and Higher Education Press, 2010), p. 171. Chinese General Principles of the Civil Law, art. 63. See also the Chinese Contract Law, art. 396.

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situations where no loss is incurred on the part of the principal. Neither the Chinese General Principles of Civil Law nor the Chinese Contract Law contains any provision relating to this issue. There is at most a brief stipulation in the Contract Law that requires agents to act according to the principal’s instructions,20 but Sloppy has not breached this duty in the present scenario. It appears, therefore, that Janice would have no legal redress against Sloppy’s actions if he were an agent.

(2) Brokerage (Hanji) A brokerage contract is a contract whereby an appropriately qualified broker21 engages, in his own name,22 in trade activities23 for the principal (also called the trustor) in return for remuneration.24 Janice might have engaged Sloppy to sell the properties as a broker. As with agency, there is also no legal provision governing the present situation in the context of brokerage relationships, and hence no legal recourse against Sloppy.

(3) Trust The nature and characteristics of a trust have already been discussed in Case 1. In the present scenario, if Sloppy is acting as a trustee for Janice’s sole benefit, two issues arise: (a) whether Sloppy breached his duties as a trustee in exploiting the business opportunity; and (b) if so, what are his liabilities?

(a) Breach of duty The ‘duty of loyalty’ is not expressly mentioned in the Chinese Trust Law, but is perhaps encapsulated, first, in the broad duty in article 25 to ‘handle trust business for the best interests of the beneficiary’; and secondly, in concrete rules in article 26 that prohibit trustees from using trust property for personal benefits;25 converting the trust property into his own property;26 and conducting transactions between his own property and trust property or between the trust properties of different settlors.27 20 21 23

24 26

Chinese Contract Law, art. 399. 22 Wei, Minfa [Civil Law] (note 18 above), p. 544. Ibid. Chinese Contract Law, art. 414. The scope of brokerage is limited to trade activities such as the sale and purchase of chattels. See also Wei, Minfa [Civil Law] (note 18 above), p. 543. 25 Chinese Contract Law, art. 414. Chinese Trust Law, art. 26. 27 Ibid. art. 27. Ibid. art. 28.

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In the present scenario, Sloppy obtains the business opportunity in the course of exploring investment possibilities for Janice, but uses his own funds to exploit the opportunity for himself. In so far as Sloppy has not expended trust property in pursuing his own investment, article 26 does not seem applicable, even if Sloppy’s conduct involves a conflict between his personal interest and his duty towards Janice. Janice may argue that the reference to ‘property’ includes property that could reasonably have been obtained by the trust fund, but this involves a considerable stretch of the meaning of the word ‘property’. Janice will need to invoke the broad duty in article 25 to act in the best interests of the beneficiary,28 on the following basis. A trustee who acts in the best interests of the beneficiary should inform the beneficiary of any business opportunity he comes across as the result of his position as trustee. If he fails to do so but then exploits the opportunity for his own benefit, he prefers his own interests to those of the beneficiary. He is not acting in the best interests of the beneficiary. Such an interpretation of article 25 to include the use of trust position (rather than property) to obtain benefits is in line with similar provisions in the Chinese Company Law, which was revised after the Chinese Trust Law was promulgated. Articles 148 and 149 of the Chinese Company Law expressly proscribe the usurpation of business opportunities by the directors and state that profits made should belong to the company.29 In a similar vein, article 25 of the Measures for the Administration of Trust Companies requires the trust company who acts as trustee to avoid conflicts of interest and, if it is impossible to do so, to make disclosure to the settlor and beneficiary or to resign.30

28

29

30

Hu Jihua and Zheng Guilong, Zhonghua Renmin Gongheguo Xintuofa Tiaowen Shiyi [Interpretation of the Trust Law of the PRC] (Beijing: People’s Court Press, 2001), p. 115. Chinese Company Law (official trans. NPC, China), available at www.npc.gov.cn/englishnpc/Law/2007-12/13/content_1384124.htm (last accessed 15 August 2012). For academic commentaries, see Yuan Zhifang, ‘Lun Dongshi de Zhongshi Yiwu’ [‘Discussion on the fiduciary duty of directors’] (2008) 2 Fazhi yu Shehui [Legal System and Society] 170; Zhang Min’an, ‘Dongshi Zhongshi Yiwu Yanjiu’ [‘Research on the fiduciary duty of directors’] (1997) 5 Jinlin Daxue Shehui Kexue Xuebao [Social Science Journal of Jilin University] 86; Sun Wenying, ‘Dongshi Zhongshi Yiwu jiqi Lifa Wanshan’ [‘The fiduciary duty of directors and its legislative improvement’] (2007) 8 Nanfang Lunkan [Southern Review] 28; Liu Xiaojia, ‘Lun Gongsi Dongshi de Xintuo yiwu’ [‘On company directors’ trust duties’] (2011) 182(6) Shangye Wenhua [Business Culture] 50. Order of China Banking Regulatory Commission, No. 2 [2007] (trans. Chinalawinfo), available at www.lawinfochina.com/law/display.asp?ID=5893&DB=1 (last accessed 15 August 2012).

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(b) Remedies for breach Assuming that a breach of article 25 is established, the available remedies are stipulated in article 22 of the Chinese Trust Law. However, they only include annulment, restoration and compensation.31 Since Sloppy has not wrongfully disposed of trust property, nor caused any loss to it, none of these three remedies is relevant. Rather, Janice would be most interested in requiring Sloppy to disgorge the profits he made from the breach. While the Chinese Trust Law does not expressly stipulate for disgorgement of profits, Janice may argue that the profits made by Sloppy would have been made by her had Sloppy disclosed the opportunity to her. It therefore constitutes an indirect loss (of profits), for which Sloppy must compensate under article 22.32 In contrast, if Janice could establish a breach under article 26, the profits obtained by Sloppy would belong to the trust fund.33 This has the same effect of an executed disgorgement of profits just like the constructive trust in common law. The present scenario demonstrates the inadequacy of the Chinese Trust Law in failing to expressly provide for an in personam remedy of disgorgement of profits under article 25. As a result, as long as the trustee refrains from expending trust property (and hence is not caught by article 26), he could keep profits obtained by him from the use of his position with impunity; he would only need to make good losses suffered by the trust fund. If he has used trust property to obtain profits, and those profits are destroyed through no fault of his own, he owes no personal liability to disgorge the profits. This is hardly sufficient disincentive from breach. It is hoped that the legislative gap could be plugged by an Interpretation by the Supreme People’s Court, if not an amendment of the Chinese Trust Law. Hong Kong Janice might have settled the Dund Property and the two Picasso paintings on trust to be managed by Sloppy as trustee for her sole benefit, since the facts indicate that Sloppy holds the assets on Janice’s behalf. On this 31 32 33

Chinese Trust Law, art. 22. See the discussion in Case 2, Alternative 1 (China). Article 26 of the Chinese Trust Law provides that: ‘Where the trustee, in violation of the provisions of the preceding paragraph, seeks interests for himself by using the trust property, the interests gained therefrom shall be integrated into the trust property’.

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assumption, two issues arise: (1) whether Sloppy’s exploitation of the business opportunity amounts to a breach of his fiduciary obligation; and (2) if so, what are his liabilities?

(1) Breach of fiduciary duty A trustee is subject to the fiduciary no-profit or no-conflict rules.34 This means that he is prohibited from making profits out of his fiduciary position, or placing himself in a position where his personal interest conflicts with that of his beneficiary. In applying these rules, the courts have adopted a strict approach that requires the trustee to pass on any relevant information to the beneficiaries, and refrain from obtaining any benefits out of such information except with the consent of the beneficiary.35 In the present scenario, if Sloppy utilises the trust information for his own gain without Janice’s consent, he has clearly breached the noconflict and no-profit rules. For the purposes of these rules, it is irrelevant that the trustee or fiduciary obtains the information in his personal capacity. For example, in Bhullar v. Bhullar,36 directors of a company who saw a sale sign put up on land adjacent to their company’s land, and bought the plot with their own funds without first passing the information on to the company, which made property investments, were held in breach of fiduciary duty. In this light, since Sloppy obtained the information in the course of administering trust business and the information is relevant to Janice’s interests, he will clearly be liable for breach of fiduciary duty.

(2) Liabilities for breach of fiduciary duty Once a breach of fiduciary duty is established, the defaulting fiduciary or trustee is liable to account for profits made as the result of the breach.37 It is irrelevant that the principal has suffered no loss from the breach, or may even have made profits in the circumstances.38 There is English authority suggesting that it is not necessary to prove but-for causation 34 35

36 37

Bray v. Ford [1896] AC 44; Breen v. Williams (1996) 186 CLR 71. Industrial Development Consultants Ltd v. Cooley [1972] 1 WLR 443; CMS Dolphin Ltd v. Simonet [2001] EWHC (Ch) 4159; [2001] 2 BCLC 704; Bhullar v. Bhullar [2003] EWCA Civ 424; [2004] 2 BCLC 241. Bhullar v. Bhullar [2003] EWCA Civ 424; [2004] 2 BCLC 241. 38 Regal (Hastings) Ltd v. Gulliver [1942] 1 All ER 378. Ibid.

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between the defendant’s breach and his gain.39 However, the Hong Kong Court of First Instance in Kao, Lee and Yip v. Koo has expressed the principle in a more circumspect manner, suggesting the need for reasonable approximation between the breach and the gain. The courts may declare a constructive trust over the unauthorised profits as a mechanism to compel the fiduciary to account for the profits.40 In Bhullar v. Bhullar, for example, the court ordered the defendant directors to hold the plot of land on trust and transfer it to the plaintiff company at the price they paid for it. Applying Bhullar v. Bhullar, Janice might request the court to order Sloppy & Co. to hold its property in the Dund area on constructive trust for her benefit. However, it is uncertain whether such a constructive trust also gives Janice proprietary interest over the Dund property in the event of Sloppy & Co.’s insolvency. There is dictum in recent English authority that treats business opportunities as ‘belonging’ to the principal and hence profits derived from them as subject to its proprietary claim.41 However, this view has been doubted in subsequent authority.42

alternative 2 Sloppy uses his own money to buy property in the Rund area (the ‘Rund Property’), which is adjacent to the Dund Property, in his personal capacity. Two months after his purchase, Sloppy applies to the Planning Board for a commercial development permit for the Dund Property on behalf of Janice. The Planning Board refuses to issue such development permit to Janice, indicating that this is because of the failure to acquire the adjacent land for joint development. Because of the failure to develop the land, the price of the Dund Property drops by 30 per cent. When Janice becomes aware of this fact she claims the Rund Property from Sloppy. She also claims from Sloppy an amount corresponding to the decreased value of the Dund Property. Will Janice’s claims succeed?

Japan If, through no fault on his part, Sloppy purchases the Rund Property without knowing that this will adversely affect Janice’s application for 39 40 41

42

Murad v. Al-Saraj [2005] EWCA Civ 959; [2005] All ER (D) 503. See e.g., Boardman v. Phipps [1967] 2 AC 46. Sinclair Investments (UK) Ltd v. Versailles Trading Finance Ltd and others [2011] EWCA Civ 347; [2011] 3 WLR 1153. FHR European Ventures LLP v. Mankarious and others [2013] EWCA Civ 17.

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development permit, whether before or after he becomes trustee, he has not breached his duty of care43 or loyalty44 by the purchase itself. There is no general prohibition on trustees purchasing property adjacent to the entrusted property. The same conclusion applies if Sloppy is a mandatary. Even though article 644 of the Japanese Civil Code imposes a duty on the mandatary to administer the mandated business with the care of a good manager and in compliance with the main purport of the mandate, it is doubtful if such a duty is breached by the unknowing acquisition.45 Since Sloppy’s purchase of the Rund Property is lawful, and it is only as the result of a subsequent turn of events that his continued ownership has become detrimental to Janice’s interest, there is no basis for Janice to claim the Rund Property or any compensation from Sloppy.

South Korea (1) Contract of mandate The relevant duty and potential liabilities at issue are the same as in Alternative 1 of the present Case. The present facts are weaker than those in Alternative 1, since if Sloppy is a mandatary, it may be argued that he has already exercised his due diligence by making an application to the Planning Board, and that the failure to develop the Dund Property is not caused by his fault. He therefore has not breached his duty of care as a good manager. Janice will not be able to claim Sloppy’s Rund Property or damages on this basis.

(2) Trust If Sloppy is a trustee, it is submitted that he will also not be in breach of the prohibition in article 36 of the Korean Trust Act, which prohibits a 43

44

45

Japanese Trust Act, art. 29: ‘(1) A trustee shall administer trust affairs in line with the purpose of the trust. (2) A trustee shall administer trust affairs with the due care of a prudent manager; provided, however, that if terms of trust otherwise provide, the trustee shall administer trust affairs with such care as provided for by the terms of trust’. Article 40(1) of the Japanese Trust Act then provides that if a trustee neglects his duties, the beneficiary may demand that the trustee compensate for the losses arising as a result thereof or should restore the property to its original condition. Ibid. art. 30: ‘A trustee shall administer trust affairs and conduct any other act faithfully on behalf of the beneficiary’. Japanese Civil Code, art. 644: ‘A mandatary shall assume a duty to administer the mandated business with the care of a good manager in compliance with the main purport of the mandate’.

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trustee from obtaining any benefit from his position as trustee.46 This is because unlike in Alternative 1 of the present Case, Sloppy has not even used any information or opportunity acquired as the result of his position as trustee. Moreover, Sloppy purchases the Rund Property at a time when the Planning Board’s view is not known, and so there is no realistic chance of conflict of interest for him to fall foul of the no-profit rule prescribed in article 36. For the sake of completeness, two points can be made in relation to circumstances where a breach (whether of Sloppy’s duty as mandatary or trustee) is established. First, if a breach is established and Janice claims damages corresponding to the reduction in the value of her property,47 the burden of proof is on Sloppy to show that his breach has not caused loss to Janice’s property. Sloppy will have little difficulty showing that it is not his purchase but the government’s refusal to grant a redevelopment permit that should be considered the responsible cause for the depreciation in the value of Janice’s property. Secondly, if a breach of trust is established, Janice will be able to claim the Rund Property from Sloppy. Under article 43(3) of the Korean Trust Act, Janice may require Sloppy to disgorge the Rund Property obtained in breach of his duty of loyalty (the no-profit rule), even though no loss is made to Janice’s Dund Property.48 However, there is not yet any similar remedy under the Koeran Civil Code for breach of the mandatary duty of care under which Janice might claim the Rund Property from Sloppy. One of the possible grounds for nullifying Sloppy’s purchase is boni mores, that is it is against good morals for a mandatary to purchase land in such a way that it prejudices the value of his principal’s land. To prove this claim, Janice will have to show that Sloppy knows his purchase will prejudice Janice’s 46

47

48

Korean Trust Act, art. 36: ‘No trustee, whether he uses his own name or the name of others, may enjoy any benefits when administering the trust, except in a case where the trustee is one of the beneficiaries’. Korean Civil Code, art. 393 (mandatary); Korean Trust Act, art. 43(1): ‘Where there is damage to the trust property due to the trustee’s breach of duties, the settlor, the beneficiary or the other trustee in case multiple trustees exist may request the trustee to restore the trust property. Where the restoration is impossible or impracticable, where the cost of restoration is too high, or where restoration is not appropriate due to special circumstances, the settlor, the beneficiary or the other trustee may claim damages’. Korean Trust Act, art. 43(3): ‘Where the trustee is in breach of the duties stipulated in Articles 33–37, even though there is no damage to the trust property, the trustee shall disgorge the whole profit that the trustee or a third party has made due to the breach’.

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interest and nonetheless goes ahead with the purchase. Even if this is established, it will only render Sloppy’s purchase null and void; 49 it does not give rise to any right on the part of Janice to claim the Rund Property.

Taiwan If Sloppy is acting as a trustee, his conduct will prima facie not fall foul of article 22 of the Taiwanese Trust Act, which only requires a trustee to act as a good manager, but does not mention any duty of good faith or loyalty (zhongshi yiwu).50 As noted in relation to Case 2, Alternative 1, article 22 of the Taiwanese Trust Enterprise Act and article 7 of the Taiwanese Securities Investment Trust and Consulting Act explicitly stipulate the zhongshi yiwu. The term is translated differently as the duty of good faith and duty of loyalty in these two respective statutes. In so far as these statutes are applicable to Sloppy, he will be subject to the duty of loyalty, and must avoid all possible conflicts of interest. If at the time of purchasing the Rund Property there is a possibility that the purchase will prejudice the value of Janice’s Dund Property, Sloppy allows his personal interest to conflict with his duty to seek the best interest of Janice. He should inform Janice, so she can purchase the Rund Property for joint development. If Sloppy fails to do so, he will breach the duty of loyalty. In such a case, Janice can claim to include the Rund Property as trust property, provided that she reimburses Sloppy for the costs of acquiring the land in the manner stated in article 177(2) of the Taiwanese Civil Code.51 Furthermore, article 23 of the Taiwanese Trust Law allows beneficiaries to request the trustee to pay pecuniary compensation for damage to the trust property incurred due to the trustee’s improper administration. As an alternative to claiming the Rund 49

50

51

Korean Civil Code, art. 103: ‘A juristic act which has for its object such matters as are contrary to good morals and other social order shall be null and void’. Taiwanese Trust Law, art. 22: ‘A trustee shall administer the trust affairs with the care of a prudent administrator’. Taiwanese Civil Code, art. 177: ‘(1) If the management of the affair does not accord with the provisions of the preceding article, the principal may still be entitled to the interests derived from the management. But the obligation specified in the first paragraph of the preceding article of the principal towards the manager shall be only to the extent of the interests he acquired. (2) The provision of the preceding paragraph shall apply mutatis mutandis to the situation when the manager knew it was another person’s affair but still managed for his own interests’.

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Property, Janice may claim the diminished value of the Dund Property as compensation.

China As in previous scenarios, if an entrusted agency or a brokerage is created, there is no provision that deals with the present scenario.52 If a trust is created, Sloppy may breach article 25 and become liable for remedies stipulated in article 22 of the Chinese Trust Law. Alternatively, Sloppy may also be held liable under articles 60 and 107 of the Chinese Contract Law. The present scenario is not specifically provided for in article 25 of the Chinese Trust Law, which stipulates broadly that trustees owe the duty to act in the best interests of beneficiaries. The issue that arises is whether at the time he purchases property adjacent to trust properties, Sloppy owes a duty to disclose the opportunity to Janice and obtain her consent before making the purchase. As compared to Alternative 1, the facts here are weaker, in that the Planning Board’s view is not known to Sloppy when he purchases the Rund Property. Nor is there any reason why Janice would be interested in acquiring the Rund Property. Hence, there is no conflict of interest that exists at this time. Assuming that a breach is nonetheless established, Janice might invoke article 22 of the Chinese Trust Law to seek annulment, restoration or compensation for disposal of trust property in breach of trust purpose or loss arising from improper administration. Since the value of the trust property has dropped by 30 per cent as a result of the breach, Janice may claim compensation calculated on the basis of the depreciated value of the trust properties. Additionally, if the trust relationship is created by a trust contract, Janice can also claim that Sloppy has breached article 60 of the Chinese Contract Law. This article requires contracting parties to ‘observe the principle of good faith and fulfil the obligations of notification, assistance and confidentiality in accordance with the nature and aims of the contract and trade practices’. Assuming that a breach is established, Janice can require Sloppy to perform his obligations or make compensation for loss under article 107 of the Chinese Contract Law. As a general principle, both direct and indirect losses are recoverable as in 52

See Case 1, Alternative 1 (China).

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article 26 of the Chinese Trust Law.53 In the present scenario, Janice’s direct loss is the 30 per cent loss in the value of the Dund Property. There are insufficient facts as to whether indirect loss has been suffered.

Hong Kong (1) Whether Sloppy has breached his fiduciary duty Assuming that a trust has been established, the issue here is whether Sloppy should disclose the opportunity of acquiring the Rund Property to Janice and obtain her consent to his purchase. As compared to Alternative 1 of the present Case, the facts here are weaker, in that, first, Sloppy’s purchase is of a different area and not in the same Dund area; and secondly and more importantly, at the time of purchase, the Planning Board’s view is not known to Sloppy. There is no really sensible possibility of any conflict of interest,54 whereas in Alternative 1, Sloppy has news that land adjacent to Janice’s land will become very valuable. Given such news, Janice might be interested in buying such land and hence a conflict of interest arises.

(2) Whether Janice’s requests will succeed Assuming that a breach is nonetheless established, Janice will most likely be able to surcharge the account55 and hence claim equitable compensation for the 30 per cent loss of value of the trust property. As to the Rund Property which is acquired by Sloppy in breach of his fiduciary duty, Janice might be able to request the court to order Sloppy & Co. to hold the Rund Property on constructive trust for herself, if Bhullar v. Bhullar is applied.56 53

54 55

56

Li Guoguang, Zhongguo Hetongfa Tiaowen Shijie [Interpretation of the Provisions in the Contract Law of China] (Beijing: Xinhua Press, 1999), p. 241. See Boardman v. Phipps [1967] 2 AC 46, per Lord Upjohn. Although the remedy of ‘surcharging the account’ is usually invoked in situations involving a failure to demonstrate the necessary standard of care in making authorised investments, it should also be applicable to other breaches of duties (such as breach of fiduciary duty in the present scenario) that do not involve a failure to comply with the terms of the trust. See the discussion in Case 3, Alternative 1 (Hong Kong). Note also that the plaintiff would be required to elect between inconsistent remedies: Tang Man Sit v. Capacious Investments Ltd [1996] AC 514.

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alternative 3 Sloppy misappropriates the two Picasso paintings to himself. He hangs them up on the wall in his apartment. A month later, a fire breaks out and the paintings are destroyed. The market value of the Picasso paintings doubles in the meantime. Janice is now aware of this and wants to claim from Sloppy an amount corresponding to the increased value of the paintings. Will Janice’s claim succeed? Would Janice’s claim be different if it now transpires that the two Picasso paintings are only fake replicas worth US$100 each?

Japan (1) Mandate In a privately appointed agency by mandate, as with all agencies, ownership of the managed assets remains with the mandator. When a mandatary misappropriates a movable asset as in the present scenario, the mandator can assert his ownership rights and claim for the return of the property. Such a claim is based on real rights over the property and gives the mandator priority over competing claims of the mandatary’s creditors. Since the paintings have already been destroyed, it is no longer possible for Sloppy to return them. All Janice can claim is compensation, which is based on the current market value of the property. In the present scenario, this will mean the current, doubled value of the paintings when they are destroyed. Since this is a personal claim, and not a real claim that can be specified and identified, Janice will be a general creditor of Sloppy only. If, however, the paintings are covered by insurance, Janice will be able to assert a real claim over the insurance payments, and enjoy priority over Sloppy’s general creditors. Janice may also argue that Sloppy has breached his duty to exercise the care of a good manager, and claim for loss of profits that the paintings could have fetched had there been no breach. The claim will proceed on the following basis. Sloppy is granted full power to sell the paintings. If he had exercised the care of a good manager and performed his obligation in accordance with the purport of the mandate, he would probably have sold it at a price level near, say, the highest interim value. His misappropriation prevents him from doing so, and so he should be liable for the highest interim value of the property. Article 415 of the Japanese Civil Code provides that if an obligor fails to perform in a way consistent with the purport of his

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obligation, the obligee shall be entitled to demand damages arising from such failure. Such an argument will be worth pursuing if the interim value of the paintings is higher than both their current market value and their value at the time of misappropriation. Since this is a personal claim, Janice will also be treated as a general creditor of Sloppy. If the paintings are only replicas, Sloppy’s duty to compensate their current market value or their highest interim value will mean compensation at US$100 each.

(2) Trust The same conclusion applies if Janice and Sloppy are trustee and beneficiary. Article 31(1)(i) of the Japanese Trust Act prohibits a trustee from ‘causing property that belongs to the trust property (including any right for such property) to be included in the trustee’s own property’. Sloppy’s misappropriation clearly breaches this duty. Where this duty is breached, article 40(3) of the Japanese Trust Act presumes that the loss suffered by the trust is the same as the profits obtained by the trustee.57 Accordingly, Sloppy owes a duty to return the misappropriated paintings. If he is unable to do so because the paintings have been destroyed by fire, he needs to compensate loss measured at the current market value of the paintings he has obtained.58 Since article 29 of the Japanese Trust Act also imposes on a trustee the duty to administer the trust business with the care of a good manager,59 Sloppy will also be liable for the highest interim value of the paintings on the same ground as when he is a mandatary.

South Korea (1) Contract of mandate If Sloppy is a mandatary, his misappropriation amounts to a breach of contract and since the fire now renders it impossible for Sloppy to return 57

58

59

Japanese Trust Act, art. 40(3): ‘Where a trustee has carried out any act in violation of [the duty of loyalty in art. 30 and duty to avoid conflicts of interest in arts. 31–32], the trustee shall be presumed to have caused a loss to the trust property in the same amount as the amount of the profit obtained by the trustee or an interested party thereof as a result of such act’. See Case 2, Alternative 1 (Japan) for recovery of foreseeable special loss (of profits) on the same principle as that in Japanese Civil Code, art. 416(2). See the discussion in Case 2, Alternative 2 (Japan).

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the paintings, Sloppy will be required to compensate for any loss suffered by Janice.60 Compensation will include ordinary damages (arising from non-performance of an obligation) and special damages that have arisen through particular circumstances which were foreseeable or could have been foreseen by the obligor, that is, Sloppy.61 Consequently, Janice would be able to demand the increased market value of the paintings from Sloppy as ordinary damages.62

(2) Trust If Sloppy is a trustee, his misappropriation amounts to a breach of the duty to manage trust property separately from his personal assets under article 37 of the Korean Trust Act.63 It also breaches article 43(1) of the same Act, which prohibits him from disposing of the trust property in contravention of his duties. Sloppy should restore the trust property to its original state or make compensation for any loss he has caused. Since any restoration is not possible in this case, Sloppy will need to compensate for the current market value of the two paintings, being the state the trust fund would have been in had there been no breach. If the two paintings are fake replicas, compensation will be based on their actual, original value, which is US$100 each, regardless of whether there is a contract of mandate or trust.

Taiwan In misappropriating the paintings, Sloppy has breached article 35 of the Taiwanese Trust Law, which prohibits a trustee from converting trust property to his own property. Following the breach, Janice may require Sloppy to make compensation under article 23 of the same Law, since it is now not possible to restore the trust property to its original 60

61 62

63

Korean Civil Code, art. 390: ‘If the obligor fails to effect performance in accordance with the tenor and purport of the obligation, the obligee may claim damages’. Korean Civil Code, art. 393. Where the market value of the mandated property has risen significantly compared to the time when the contract of mandate was established, the increased market value will be recovered as part of the ordinary, rather than special, damages (Supreme Court of Korea Case No. 92da20163 (27 May 1993)). Korean Trust Act, art. 37(1): ‘The trustee shall manage the trust property separately from the trustee’s personal property and make the trust property identifiable’.

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condition.64 In particular, Janice may seek compensation for the current value of the paintings under article 216 of the Taiwanese Civil Code.65 If those two Picasso paintings are only fakes replicas worth US$100 each, the loss suffered by the trust will only be US$200. Janice will therefore only claim US$200 as compensation under article 216 of the Taiwanese Civil Code.

China (1) Entrusted agency If an entrusted agency was created, Janice as principal continues to own the Picasso paintings. She can base her claims either on principles of Chinese property law or on the Chinese Contract Law.

(a) Infringement of property rights Claims for infringement of property rights are provided for in article 117 of the Chinese General Principles of Civil Law and, more recently, article 37 of the Property Law of the People’s Republic of China.66 Article 117 requires the infringer to return the property or compensate its estimated price to the victim. In the present scenario, since Janice remains the owner of the two paintings, Sloppy as agent may at most have possession over them. His misappropriation clearly infringes Janice’s property rights. Since the fire renders it impossible for him to return the paintings or restore them to their original condition, Janice can require Sloppy to compensate the estimated value of the paintings. In general, compensation is based on the actual, original value of the property.67 However, if the value of the property has appreciated over 64

65

66

67

Taiwanese Trust Law, art. 23: ‘A settlor, beneficiary or other trustees may request the trustee to pay pecuniary compensation for damage caused to the trust property or to restore the damaged property to its original condition if the damage is incurred due to the trustee’s improper administration of the trust property, or if the trustee disposes of the trust property in violation of the stated purpose of the trust’. Taiwanese Civil Code, art. 216: ‘Unless otherwise provided by the act or by the contract, the compensation shall be limited to the injury actually suffered and the interests which have been lost. Interests which could have been normally expected are deemed to be the interests which have been lost, according to the ordinary course of things’. Property Law of the People’s Republic of China (hereafter ‘Chinese Property Law’) (official trans. NPC, China), available at www.npc.gov.cn/englishnpc/Law/2009-02/20/ content_1471118.htm (last accessed 15 August 2012). Yang Lixin, Qinquanfa Shiwu Quanshu [Practice about Tort Law] (Changchun: Jilin People’s Publishing House, 1999), p. 381.

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time, it has been suggested that compensation should be assessed on the basis of the current, higher value of the property, and not the original, lower one. Such an approach offers more protection for the innocent party.68 On this approach, Janice will obtain compensation based on the current market value of the painting, that is, at double their original prices. If the paintings are fake replicas, compensation on this basis will be at US$100 for each painting, being their actual, original value. The same conclusion can also be supported by article 37 of the Chinese Property Law, which provides civil liabilities, including return of property and restoration where property rights have been infringed, and compensation for loss suffered.69

(b) Breach of contract If the agency relationship between Janice and Sloppy is created by contract, Sloppy can be held liable for breach of contract. The remedial principles for compensation for breach are laid down in article 406 of the Chinese Contract Law, which requires different levels of fault depending on whether Sloppy is a paid or gratuitous agent. A paid agent is liable for negligent losses, whereas a gratuitous one is only liable for losses arising from his deliberate intention or gross negligence. Here, Sloppy deliberately misappropriates the two Picasso paintings to himself. He will be liable to compensate the loss of the two paintings even if he acts gratuitously. As discussed in the previous paragraph, loss is assessed as the current, doubled market value of the paintings. This way, the innocent party will be able to acquire a substitute product from the market and be more adequately protected from the breach. If the two paintings are fake replicas, loss will be assessed at their actual, original value of US$100 each. (2) Brokerage The analysis for entrusted agency also applies if a brokerage is created. As principal in a brokerage relationship, Janice still owns the paintings and can therefore invoke article 117 of the Chinese General Principles of Civil Law and article 37 of the Chinese Property Law. In the absence of specific provisions for brokerage contracts, article 423 of the Chinese Contract 68 69

Ibid. 382. Chinese Property Law, art. 37: ‘Where the infringement of the property right causes damages to an obligee, the obligee may request compensation for the damages and may also request the infringing party to assume other civil liabilities’.

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Law extends provisions governing entrusted agency to brokerages, thus justifying Janice’s claim for compensation under article 406 of the same Law.

(3) Trust Article 27 of the Chinese Trust Law prohibits a trustee from misappropriating trust property to himself as in the present scenario, and provides for the remedies of restoration of the trust property to its original condition and compensation for loss. Since the paintings are destroyed, restoration is not possible; Janice can only claim compensation. In line with civil law principles, compensation covers both direct (actual) loss and indirect loss (of obtainable profits).70 There is no indirect loss on the facts. Direct loss is assessed at the actual, original value of the damaged or destroyed property,71 except if the value of the property has appreciated, in which case loss will be assessed based at the current, increased value. If the two paintings are fake replicas, compensation will be based on their actual, original value, which is US$100 each.

Hong Kong It is clear that Sloppy’s misappropriation of the paintings amounts to a breach of trust. Janice can assert her (equitable) proprietary interest over the paintings (or their exchange products) and claim for their return in specie. If the paintings are destroyed and cannot be so returned, Sloppy should make compensation to restore the trust fund to the state it would have been in had there been no breach. The relevant date for assessing the loss is the date of judgment. Thus, Janice is entitled to the current (and increased) market value of the paintings. Applying the same principle, if the two paintings are fake replicas, Sloppy will only need to compensate for their current market value as fake replicas, which is US$100 each. 70

71

Yang Lixin, Qinquan Xingweifa [Tort Law] (Shanghai: Fudan University Press, 2005), pp. 71–2. Yang, Qinquanfa Shiwu Quanshu [Practice about Tort Law] (note 66 above), p. 381.

10 Case 4: Distribution of property in the insolvency of the owner

alternative 1 Xiaoling is an antique dealer. Daiming retains Xiaoling’s service in selling his Ming vase. Fugui is interested in buying this vase. He draws a cheque for US$100,000 in favour of Xiaoling as a deposit to demonstrate his keen interest in purchasing the vase. Upon receiving the cheque, Xiaoling agrees that she will refund the amount to Fugui if the sale does not proceed. Xiaoling deposits the cheque into a new bank account she opened and has not withdrawn any money from it since then. After a few rounds of negotiations, Daiming decides to sell the vase to someone else who offers a better price. Fugui asks for a refund of the deposit from Xiaoling, but she has now become insolvent. Is Fugui a general creditor of Xiaoling, or does his claim have priority over other claims to Xiaoling’s assets?

Japan The question of whether Fugui’s claim has priority over other creditors of Xiaoling depends on the nature of the legal relationship between Xiaoling and Fugui.

(1) Mandate The facts suggest that Xiaoling is an intermediate dealer or agent. Her duties are to identify a prospective buyer who offers the best price to Daiming. The legal relationship between her and Daiming is that of mandate (and in particular indirect agency), whereby she acts in her own name in transacting with a third party on behalf of Daiming. If the arrangement is such that Xiaoling procures the contract directly between Daiming and the purchaser, but that she will not be a party to this contract, the arrangement creates a direct agency. Typically, antique dealers operate as indirect agents.

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In addition to this, the deposit arrangement between Xiaoling and Fugui also gives rise to another legal relationship, which may take one of two forms. First, it may be a quasi-mandate agreement, ‘quasi’ because the agreement is only to safe-keep the deposit, which is a de facto act, and not a juristic act involving alteration of legal rights.1 Under such an arrangement, Xiaoling safe-keeps the amount for Fugui, and uses it to contribute towards the purchase price should a contract to purchase the vase be concluded, or refunds the same amount to him should the contract fail to materialise. If Xiaoling is an indirect agent, she transacts in her own name and hence receives Fugui’s deposit (or any purchase price) absolutely, without any need to segregate it from her own funds. In any event, even if Xiaoling is a direct agent and receives the deposit on behalf of Daiming, it is well established in Japanese law that the person who possesses cash owns it,2 and commentators in Japan have regularly applied this principle to credits in bank accounts.3 The principle is based on the view that cash (such as banknotes and coins) inevitably commingles in the hands of the person holding it, such that it is impossible to identify cash in someone’s hands as belonging to another.

(2) Trust Alternatively, if the agreement between Xiaoling and Fugui is such that Xiaoling undertakes to segregate the payment from her own funds, then their relationship may also be analysed as a (presumptive) trust. In such a trust, Xiaoling acts as trustee for the benefit of Fugui as beneficiary in relation to the deposited amount.4 Her duties as trustee are to safe-keep 1

2

3

4

In any event, art. 656 of the Japanese Civil Code provides that the provisions on mandate apply mutatis mutandis to quasi mandates. Hiroshi Suekawa, ‘Kahei to Sono Shoyuuken’ [‘Money and the ownership of it’] in Hiroshi Suekawa, Bukken, Shinzoku, Sozoku [Real Right, Relatives and Inheritance] (Tokyo: Iwanami Shoten Publishers, 1970), p. 264; Supreme Court of Japan Case No. (A) 5403 of 1952 (5 November 1954), Case No. (O) 146 of 1963 (24 January 1964), and Case No. (Ju) 1172 of 1999 (21 February 2003). Yoshio Shiomi, ‘Songai-hoken-dairiten no Hoken-ryo Hokan Koza to Yokin-saiken no Kizoku’ [‘A dedicated bank account to safekeep insurance premium only of non-life insurance agent, and to whom the monetary claim to the deposit belongs’] (2003) 1685 Kin-yu Homu Jijo [Financial Legal Affairs] 48; Masao Yanaga, ‘Torimodoshi-ken no Taisho’ [‘The subject matter of the right of segregation’] (1992) 995 Jurist 108. It depends on whether Xiaoling just happens not to have withdrawn any money from the bank account, or whether she refrains from doing so in pursuance of a contractual agreement not to use the money for any purpose other than the purchase of the vase. In the latter scenario, a trust may have arisen.

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the funds for the purpose of assisting Fugui’s negotiation with Daiming, and to refund the money to Fugui should the negotiation fall through. The amount, being trust property, is protected from Xiaoling’s bankruptcy; it is not available to her personal creditors. On the facts, it is only clear that Xiaoling deposits the money into a new bank account she opens for the arrangement and has not withdrawn any money from. It is unclear whether she does so in compliance with any undertaking to segregate trust property as required by a trust relationship.

South Korea (1) Contract of mandate On the facts, Xiaoling is a mandatary of Daiming in the sale of the Ming vase. She receives full ownership of Fugui’s deposit when Fugui is negotiating with Daiming about the Ming vase. Her duty is to hand over the deposit to Daiming if the vase is sold to Fugui and refund the deposit if the contract does not materialise. In claiming for the refund, Fugui will be asserting a personal claim and is therefore a general creditor of Xiaoling. Whether Fugui can claim in priority to Xiaoling’s general creditors depends on the way the deposit is held. According to article 93 of the Korean Commercial Code, Xiaoling is a broker if she is holding herself out as in the business of acting as an intermediary in the commercial activities between other parties (in the present scenario Fugui and Daiming). As such, her receipt of the deposit is governed by the Korean Commercial Code and the Korean Financial Services and Capital Markets Act.5 In practice, a client’s deposit should be kept separate from the dealer’s own money, and recently this practice has been expressly confirmed by article 74(1) of the Korean Financial Services and Capital Markets Act, which provides that ‘[a]n investment trader or investment broker shall separate an investor’s deposit … from its property and shall place it in a deposit or trust account with a financial securities company’. Moreover, article 75(5) provides that ‘a depositing investment business entity shall, when it falls under any of the following subsections, withdraw the investor’s deposit placed in a deposit or trust account to be paid to the investor first’ (i.e., prior to other personal creditors). For this purpose, insolvency of the 5

The relationship between the Korean Commercial Code and the Korean Financial Services and Capital Markets Act is one of special law and general law, such that the former prevails over the latter.

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business entity is one of the circumstances listed in paragraph 3 of article 75(5). As a result, Fugui will be given priority over Xiaoling’s general creditors if Xiaoling placed the money in a deposit account.

(2) Trust If, for the sake of argument, the deposit is transferred to Xiaoling upon trust, she owes the duty to segregate (and manage) it separately from her own assets.6 As trust property, the deposit will not be available to Xiaoling’s personal creditors, and therefore will not fall within Xiaoling’s bankruptcy estate.7

Taiwan (1) Contract of mandate The arrangement between Xiaoling and Fugui may be analysed as falling within two alternative legal relationships. First, Fugui may have engaged Xiaoling as agent in procuring the purchase of the vase on his behalf. However, it is unusual in an agency relationship for the principal to transfer any assets or funds to the agent (as Fugui did by drawing a cheque in favour of Xiaoling), let alone for the agent to deposit such funds into a separate bank account of her own.8 Nonetheless, assuming an agency (mandate) relationship has arisen, Xiaoling will be under a duty to purchase the Ming vase. When Fugui transfers the deposit to Xiaoling, it will take the form of a consumption deposit according to articles 602(1)9 and 60310 of the Taiwanese Civil Code. Xiaoling must 6

7

8

9

10

Korean Trust Act, art. 37: ‘(1) The trustee shall manage the trust property separately from the trustee’s personal property and make the trust property identifiable’. Ibid. art. 24: ‘The trust property shall not be a part of the trustee’s bankruptcy estate, the individual rehabilitation foundation, or the trustee’s private property to which the manager of rehabilitation procedures has right to manage and dispose’. See Taiwanese Civil Code, art. 528: ‘A contract of mandate is a contract whereby the parties agree that one of them commissions the other party to deal with his affairs, and the latter agrees to do so’. In other words, pursuant to this article, an agency relationship arises when a principal entrusts his affairs to the management of an agent who agrees to manage them on the principal’s behalf. Ibid. art. 602(1): ‘In the case of a deposit of fungible things, if it is agreed that the ownership of such things transfers to the depositary, and that the depositary shall return things of the same kind, quality and quantity, this is consumption deposit. The provisions concerning Loans for Consumption shall be applied mutatis mutandis from the moment when the things were accepted by the depositary’. Ibid. art. 603: ‘If the deposit is one of money, it is presumed to be consumption deposit’.

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return the money to Fugui within the agreed deadline (i.e., when the sale does not proceed) under article 47811 as applied mutatis mutandis to article 602(1) of the Taiwanese Civil Code. If Xiaoling is unable to do so and has become bankrupt, Fugui’s deposit will be treated as part of Xiaoling’s bankruptcy estate,12 and Fugui can only make a claim according to the bankruptcy procedures.

(2) Trust Secondly, Fugui may have established a trust whereby Xiaoling holds the funds for the purpose of buying the Ming vase. Under article 1 of the Taiwanese Trust Law, to establish a trust, it is necessary to transfer ownership of the trust property to the trustee, and entrust the latter with the power to administer and dispose of the trust property for the benefit of a purpose or a beneficiary.13 In the present scenario, Fugui transfers US$100,000 to Xiaoling, who deposits the amount in a new bank account separate from her own funds. It may also be that Fugui intends Xiaoling to use the payment only for the purpose of procuring the vase for Fugui’s benefit. If it is indeed so, a self-benefit trust14 has been created between Fugui and Xiaoling. Assuming that a trust has been established, if a trustee is declared bankrupt, as in the present scenario, her trusteeship will terminate,15 and

11

12

13

14 15

Ibid. art. 478: ‘The borrower shall return things of the same kind, quality and quantity as lent, within the agreed deadline. If no such deadline for return has been agreed upon, the borrower may return them at any time; the lender may also fix a reasonable deadline, not less than one month later, and notify the borrower to return’. Bankruptcy Law of the Republic of China, art. 82 (hereafter ‘Taiwanese Bankruptcy Law’) (English translation compiled by David C.C. Kang, A Compilation of the Laws of the Republic of China (1st edn, Taipei: San Min Book, 1971), vol. I, pp. 817–55): ‘The following properties shall constitute the bankrupt’s estate: (1) all properties belonging to the bankrupt person at the time of adjudication of bankruptcy and the claim on properties to be made in future; and (2) properties acquired by the bankrupt person after adjudication of bankruptcy and before close of bankruptcy. The right solely belonging to the bankrupt person himself and the properties against which an attachment is prohibited are exempted from being included in the bankrupt’s estate’. Taiwanese Trust Law, art. 1: ‘the term “trust” refers to the legal relationship in which the settlor transfers or disposes of a right of property and causes the trustee to administer or dispose of the trust property according to the stated purposes of the trust for the benefit of a beneficiary or for a specified purpose’. See the discussion in Case 1, Alternative 1(a) (Taiwan). A self-benefit trust is a trust whereby the settlor and beneficiary are the same person. Taiwanese Trust Law, art. 45(1).

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her duties and powers as trustee will come to an end.16 The trust, however, will not fail for want of a trustee,17 because subject to express provisions in the trust document,18 either the settlor or, failing which, another interested party may appoint a new trustee. In the present scenario, however, since Daiming has decided not to sell the vase to Fugui, it is also not possible to fulfil the trust purpose to acquire the Ming vase. As such, under article 62 of the Taiwanese Trust Law, the trust will also terminate.19 It will not be necessary to appoint any new trustee. Fugui’s claim to recover the payment from Xiaoling’s bankruptcy estate depends on whether the amount forms part of Xiaoling’s bankruptcy estate. There are two relevant principles in prima facie conflict with each other. On the one hand, legislative provisions have maintained the independence of trust property from other assets held by the trustee. For example, article 11 of the Taiwanese Trust Law states that ‘no trust property shall appertain to the bankrupt estate when the trustee becomes bankrupt’. Article 12(1) further protects trust property from compulsory execution.20 Thus, when the trustee becomes bankrupt, the trust property does not fall within the trustee’s bankruptcy estate and cannot be used to repay the trustee’s private creditors. Rather, the new trustee or whoever is entitled to the trust property upon the termination of the trust can exercise the right against the bankruptcy administrator to repossess the trust property pursuant to article 110 of the Taiwanese Bankruptcy Law.21 On the other hand, the Taiwanese Trust Law also provides that trusts of registrable properties (such as securities or real estate) are valid only if the procedures of trust registration (and hence public notification)

16 17

18 19

20

21

Wang Chih-Cheng, Xintuofa [Trust Law] (4th edn, Taipei: Wu-Nan Book, 2010), p. 200. Taiwanese Trust Law, art. 8: ‘a trust relation[ship] shall not be extinguished because the settlor or trustee dies, becomes bankrupt or loses his legal capacity unless the trust act provides otherwise’. Ibid. arts. 45(2) and 36(3). Ibid. art. 62 provides that: ‘A trust relation shall be terminated upon the occurrence of an event provided in the trust act or upon the completion or impossible completion of the purposes for which the trust is established’. Ibid. art. 12(1): ‘no trust property shall be subject to compulsory execution unless the subject of the execution is a right in the property that exists before the trust is established, or a right that arises from the administration of trust affairs, or unless it is otherwise provided by other applicable laws’. Taiwanese Bankruptcy Law, art. 110: ‘Properties which do not belong to the bankrupt person may be recovered by the person entitled to rights over properties from the trustee in bankruptcy without complying with the bankruptcy procedure’.

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have been complied with.22 It follows that if the trust is invalid due to non-registration, no independent trust property can be established. The relevant provisions are silent as to whether independence of trust property can still be maintained in relation to trusts over non-registrable property, as such trusts are not registrable. At least three views have been put forward in academic literature. First, non-registrable property is not independent from the trustee’s general assets.23 Secondly, notwithstanding the absence of registration, non-registrable trust assets are immune from the claims of the trustee’s personal creditors.24 Thirdly, the conflicting needs to protect trust property and third party interests in the security of their transactions with the trustee should be balanced on a case-by-case basis.25 It is submitted that there is no necessary connection between independence of trust property and public notification. The former ring-fences the trust property from the claims of the trustee’s personal creditors; the latter protects third parties who deal with the trustee in relation to trust assets. Furthermore, even in the absence of public notification, the trustee’s general creditors can be given access to all relevant information about the trust to verify the content of the trust property. Since it is still feasible to identify the trust property without relying on registration, and the legal provisions recognising its independence do not exclude non-registrable trust property, such property should be immune from the claims of the trustee’s personal creditors notwithstanding the lack of registration.26 If this view is taken, the trust funds held in Xiaoling’s bank account will be immune from the claims of her personal creditors.

22

23

24

25 26

Taiwanese Trust Law, art. 4(1), (2): ‘No trust in respect of a property right that requires trust registration shall be valid against third parties unless trust registration of the right has been duly completed’. ‘If securities are the subject of a trust property, then the trust created shall not be valid against third parties unless the particular stock certificates or other documentary certificates of rights specify in accordance with the regulations of the industry’s regulatory authority that they appertain to the trust property.’ Jan Sheng-Lin, ‘Xintuo zhi Jiben Wenti – Zuigao Fayuan Panjue yu Xintuofa Guiding zhi Fenxi Bijiao’ [‘Basic questions of trust: analysis of Supreme Court Decisions and Trust Regulations’] (1996) 204 Lushi Tongxun [Lawyer Journal] 66. Faung Kai-Lin, Xintuofa zhi Lilun yu Shiwu [Theories and Practice of Trust Law] (Taipei: Yueh Tan Publishing, 1994), p. 230. Wang, Xintuofa [Trust Law] (note 16 above), p. 160. For detailed discussions on this issue, see Wang Wen-Yeu, ‘Xintuo caichan zhi dulixing yu zhutixing’ [‘The independence and subjectivity of trust property’] in Wang Wen-Yeu, Minshangfa lilun yu jingji fenxi (er) [Economic Analyses and Theories of Civil and Commercial Law (II)] (Taipei: Angle Publishing, 2003), pp. 333–40.

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Fugui may then invoke article 65 of the Taiwanese Trust Law to claim the trust property from the bankruptcy administrator. This article provides that upon the termination of a trust relationship, the trust property shall first devolve upon the beneficiary, who would then be entitled to exercise the right of recall pursuant to article 110 of the Taiwanese Bankruptcy Law. Since Fugui is the beneficiary of the ‘self-benefit trust’, he should be entitled to the trust fund upon the termination of the trust, and may exercise the right to recall the deposit from Xiaoling’s bank account.

China Since there is yet no law in China governing the bankruptcy of individuals, the following discussion proceeds on the assumption that Xiaoling operates as a private enterprise, and therefore the Enterprise Bankruptcy Law of the People’s Republic of China27 applies.

(1) Trust Since Daiming only retains Xiaoling’s service to sell his Ming vase, it is unlikely that a trust has arisen to render the latter trustee of the vase for Daiming’s benefit. As between Xiaoling and Fugui, although Fugui has transferred a sum in favour of Xiaoling, the purpose of the payment is to demonstrate his sincerity in purchasing the vase; there is no understanding that Xiaoling should manage the funds for the benefit of Fugui or for any specified purposes, as is required by article 2 of the Chinese Trust Law.28

(2) Entrusted agency It is submitted that the relationship is one of entrusted agency (weituo daili)29 or brokerage (hanji). Entrusted agency is a relationship whereby a

27

28

29

Enterprise Bankruptcy Law of the People’s Republic of China (hereafter ‘Chinese Enterprise Bankruptcy Law’) (official trans. NPC, China), available at www.npc.gov.cn/englishnpc/Law/2008-01/02/content_1388019.htm (last accessed 15 August 2012). Chinese Trust Law, art. 2: ‘[The] trust refers to [a relationship whereby] the settlor, based on his faith in trustee, entrusts his property rights to the trustee and allows the trustee, according to the will of the settlor and in the name of the trustee, to administer or dispose of such property in the interest of a beneficiary or for any intended purposes’. Chinese General Principles of the Civil Law, art. 64: ‘Agency shall include entrusted agency, statutory agency and appointed agency. An entrusted agent shall exercise the power of agency as entrusted by the principal; a statutory agent shall exercise the power of

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principal appoints an agent to handle, in the principal’s name,30 the principal’s affairs31 within the scope of authority granted by the principal.32 A brokerage contract is a contract whereby an appropriately qualified broker33 engages, in his own name,34 in trade activities35 for the principal (also called the trustor) in return for remuneration.36 Although both the trustee and broker engage in activities in the name of the trustee/broker, the two forms of relationships differ in terms of the independence of the managed assets: there is no transfer of ownership of assets in a brokerage relationship. Even if it is accepted that the relationship between Daiming and Xiaoling amounts to brokerage, three further questions arise. First, what is the relationship between Xiaoling and Fugui? This depends on the nature of Fugui’s ‘deposit’ of US$100,000. Secondly, does Fugui enjoy the right of exemption (biechu quan) over the payment in the event of Xiaoling’s bankruptcy? Thirdly, does Fugui enjoy the right of recall (quhui quan) over the payment in the event of Xiaoling’s bankruptcy? A brief explanation of the nature of Fugui’ payment and these two rights is in order.

(a) Nature of Fugui’s payment Since no contract is established between Xiaoling and Fugui, Fugui’s payment to Xiaoling can only fall within the category of deposit for creation of a principal contract (‘deposit for creation’) according to article 115 of the Judicial Interpretation of the Law of Guarantee of the People’s Republic of China.37 Article 115 further provides that the

30

31

32 33 35

36 37

agency as prescribed by law; and an appointed agent shall exercise the power of agency as designated by a people’s court or the appointing unit’. Unless otherwise stated, ‘agency’ in this Case refers to entrusted agency. Ibid. Exceptionally, the agent may act in his own name pursuant to arts. 402 and 403 of the Chinese Contract Law. Wei Zhenying (ed.), Minfa [Civil Law] (2nd edn, Beijing: Peking University Press and Higher Education Press, 2010), p. 171. Chinese General Principles of the Civil Law, art. 63. 34 Wei, Minfa [Civil Law] (note 31 above), p. 544. Ibid. Chinese Contract Law, art. 414. The scope of brokerage is limited to trade activities such as the sale and purchase of chattels. See also Wei, Minfa [Civil Law] (note 31 above), p. 543. Chinese Contract Law, art. 414. Judicial Interpretation of the Law of Guarantee of the People’s Republic of China, art. 115 (trans. asianlii.org), available at www.asianlii.org/cn/legis/cen/laws/tjiotspcosirtaotglotproc1345/ (last accessed 15 August 2012). See also Guo Mingrui, Fang Shaokun and Zhang Pinghua, Danbaofa [Guarantee Law] (Beijing: China Renmin University Press, 2006), p. 230. Apart from this type of deposit, there are deposits to secure the performance of contractual obligations (Chinese Guarantee Law, art. 89), deposits to be paid as a

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deposit will be forfeited if the party paying the deposit refuses to create the contract as agreed. But if the party receiving a deposit refuses to create the contract, he must refund twice the amount of the deposit. In the present scenario, Xiaoling only agrees to refund the paid amount (rather than twice its value) if the sale does not proceed. Such an arrangement does not provide any incentive to Xiaoling to enter into the contract, and so it is doubtful if the payment is intended to be a deposit.

(b) Right of exemption The right of exemption is a right to be paid from specific assets of the bankrupt’s estate in priority to other creditors, on the basis that the creditor has a right of guarantee in relation to the relevant assets.38 In order to establish a right of exemption, a creditor’s debt must be ‘secured by the specific property of the bankrupt’.39 According to the Chinese Guarantee Law,40 the right of mortgage (diya quan), the right of the pledge (zhi quan), the right of lien (liuzhi quan) and deposit (dingjin)41 justify giving the creditor the right of exemption. Accordingly, if Fugui wishes to establish a right of exemption over the payment, he must establish a secured right over it. On the facts, the right Fugui enjoyed over the money could not be a right of mortgage, pledge or lien. The only remaining possibility is the deposit. However, as discussed above, it is unlikely that the payment was intended to be a deposit. Hence, Fugui did not have any secured right over the payment, and therefore did not have any right of exemption to be repaid in priority to other creditors.

38

39 40

41

condition of the validity of the principal contract (‘deposit for validity’; Judicial Interpretation of the Guarantee Law, art. 116), and deposits to secure a contractual party’s right to terminate the contract (‘deposit of termination’; Judicial Interpretation of the Guarantee Law, art. 116). Li Guoguang, Xin Qiye Pochanfa Lijie Yu Shiyong [Understanding and Application of the New Enterprise Bankruptcy Law] (Beijing: People’s Court Press, 2006), p. 475. Chinese Enterprise Bankruptcy Law, art. 109. Guarantee Law of the People’s Republic of China (hereafter ‘Chinese Guarantee Law’) (official trans. NPC, China), available at www.npc.gov.cn/englishnpc/Law/2007-12/12/ content_1383719.htm (last accessed 15 August 2012). See art. 2(2) of the Chinese Guarantee Law. The modes of guarantee provided in this article also include suretyship. However, a suretyship is not established on some property, but is ‘an agreement pursuant to which a surety and a creditor agree that the surety shall perform the obligation or bear the liability according to the agreement, when the debtor fails to perform his obligation’ (Chinese Guarantee Law, art. 6). Therefore, the right of suretyship cannot be the basis of a right of exemption.

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(c) Right of recall According to article 38 of the Chinese Enterprise Bankruptcy Law, the right of recall refers to the right to take back property placed in the possession of the debtor, but which does not belong to him.42 The rights that justify rights of recall include ownership, security rights, usufructuary rights and rights to possession.43 It is generally accepted that money, as a special kind of chattel, is owned by whoever possesses it. Hence, from the moment Xiaoling obtains the money, she has become the owner. Fugui is no longer owner of the funds, nor does he have any security right (the payment not being a deposit), usufructuary right or possession over the money. Fugui’s claim for the refund is only a right of obligatory claim, for which there is no right of recall. However, there is a possibility that Fugui may enjoy a right of recall even if his relationship with Xiaoling is classified as one of brokerage. This occurs when Fugui’s deposit is placed in a special account of Xiaoling so that it is ring-fenced and does not mix with assets of Xiaoling. If Fugui can prove the existence of such special intention, he can exercise his right of recall over the deposit. But even so, a brokerage still differs from a trust in that once a trust comes into existence, trust assets are segregated and do not form part of the trustee’s estate. Hong Kong Whether Fugui can assert a proprietary claim over the whole of the payment depends on whether he is merely a general creditor of Xiaoling or the beneficiary of any trust established over the payment.44 If the money is paid as an earnest for entering into the contract, that is a deposit, Xiaoling is only a debtor who receives full ownership of the money paid, and owes a personal obligation to return the equivalent amount should the contract not materialise. In the absence of obtaining

42

43

44

Wang Weiguo, Pochanfa Jingyi [The Essence of Bankruptcy Law] (Beijing: Law Press, 2007), p. 105. Li Yongjun, ‘Lun Pochan Chengxu Zhong de Quhui Quan’ [‘Discussion on the right of recall in bankruptcy procedures’] (1995) 2 Bijiao Fa Yanjiu [Journal of Comparative Law] 130. Bankruptcy Ordinance of Hong Kong, Cap. 6 of the Laws of Hong Kong (Department of Justice, Hong Kong), available at www.legislation.gov.hk/eng/home.htm (last accessed 15 August 2012). Section 38(8) states that, subject to contrary provisions in the Ordinance, any debts owed by a bankrupt person shall be paid pari passu.

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any security for such a debt, Fugui ranks with other general creditors in the event of Xiaoling’s bankruptcy, and shares pari passu with them. While it is possible, in exceptional circumstances, to argue that a payment made for a specific purpose such that the recipient is not free to dispose of the payment may create a so-called Quistclose trust,45 these requirements are unlikely to be made out on the present facts. This is because the facts merely suggest that Xiaoling deposited the amount in a new bank account, but not that Fugui intends her to keep the payment separate from her own general funds.

alternative 1(a) Xiaoling is an antique dealer. Daiming retains Xiaoling’s service in selling his Ming vase. To facilitate the ease of Xiaoling’s dealings with potential buyers, Daiming places the vase in Xiaoling’s gallery and authorises her to sell the vase in her name. Xiaoling undertakes to transfer the purchase price to Daiming after making deductions for her fee. Before the vase is sold, Xiaoling has become insolvent. Can Daiming claim the vase back? Does his claim have priority over competing claims?

Japan It is submitted that irrespective of whether there was a trust relationship between Xiaoling and Daiming, Daiming has the right to claim the vase back and his claim will have priority over other competing claims. In general, the legal relationship between an owner and an antique dealer is indirect agency (mandate), whereby the dealer (indirect agent/ mandatary) transacts in his own name on behalf of the mandator. When the mandatary receives assets such as cash or deposits into his bank account from a third party during the course of administering the mandated business, he owns such assets until he delivers them to the mandator. In contrast, he does not automatically own the property he is engaged to sell, such as the Ming vase in the present scenario. According to article 560 of the Japanese Civil Code, ‘[i]f the subject matter of the sale is the rights of others, the seller shall assume an obligation to acquire 45

Barclays Bank Ltd v. Quistclose Investments Ltd [1968] UKHL 4; [1970] AC 567; Twinsectra Ltd v. Yardley [2002] UKHL 12; [2002] 2 AC 164 at [73]–[74]. There is authority in Hong Kong (Typhoon 8 Research Ltd v. Seapower Resources International Ltd) [2002] 2 HKLRD 660, in which it was held that a deposit paid under a commercial lease was paid upon a Quistclose trust, but the decision is out of line with the Quistclose doctrine, and unlikely to be followed by future courts.

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the rights and transfer the same to the buyer’. Applying this article to the indirect agency in the present scenario, Xiaoling needs to acquire ownership of the vase from Daiming some time before she delivers it to the buyer. Since she already has possession of the vase, it is typically the parties’ intention that she acquires ownership from Daiming only after she has identified a purchaser and shortly before she delivers the vase. Therefore, if bankruptcy intervenes before Xiaoling acquires ownership of the vase, Daiming as owner can claim the vase back from Xiaoling’s bankruptcy estate in priority to her general creditors. If the parties intend the contrary, that is, that ownership has already passed to Xiaoling upon delivery of possession to her, then upon Xiaoling’s bankruptcy the mandate contract is terminated and she owes a duty to return ownership of the vase to Daiming. If she fails to do so before bankruptcy intervenes, Daiming can only rank as one of the general creditors. In practice, however, mandators rarely agree to transfer ownership to the mandatary along with delivery of possession to them, as this would unnecessarily assume the risk of the mandatary’s insolvency.

South Korea Commission agency As between Daiming and Xiaoling, Xiaoling is a commission agent who sells or buys business, goods or securities in their own name for the account of the principal.46 According to article 103 of the Korean Commercial Code, goods handed over to the commission agent by his principal or acquired from third parties in sales and purchases made on his behalf are deemed to belong to the principal as between the principal and the commission agent or his creditors. In the present scenario, Daiming as principal handed over possession of the Ming vase to Xiaoling. As between Daiming, on the one hand, and Xiaoling and her creditors, on the other, the vase is deemed to belong to him.47 Even if the vase has been agreed to be sold before Xiaoling becomes insolvent, as long as it remains in Xiaoling’s possession, the vase is treated as belonging to Daiming. As a result, Daiming can claim 46

47

Korean Commercial Code, art. 101. For details on commission agency, see Case 1, Alternative 1 (South Korea). Ibid. art. 103: ‘Goods or valuable instruments which have been received by the commission agent from his principal … are deemed to belong to the principal so far as the principal and the commission agent, or the principal and the commission agent’s creditor are concerned’.

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the vase back, and does not have to compete with the claims of Xiaoling’s other creditors. However, if the vase has been acquired by (or delivered to) subsequent purchasers, Daiming will not be able to claim the vase back from them because there is no direct relationship between Daiming and the subsequent purchasers. If the commission agent, Xiaoling, is declared bankrupt, Daiming as owner of the vase can reacquire such goods in priority to Xiaoling’s personal creditors.48 In other words, he is entitled to raise a demurrer against any compulsory execution by the personal creditors of the commission agent based on the fact that he is the owner of the goods.49

Taiwan Of the two legal relationships (namely, trust and agency) that may possibly arise on the present facts, it is more likely that a trust is created whereby Xiaoling holds the vase on trust with the duty to sell. A trust involves transfer of ownership of the trust property to the trustee who has power to manage and dispose of the property in his own name. In contrast, there is no transfer of ownership to an agent, and he acts in the name of the principal. To transfer ownership of movable assets (such as the vase in the present scenario) in Taiwan, there needs to be physical delivery of the asset, which serves as public notification of the transfer, coupled with an agreed intention between the parties to pass ownership to the transferee. Where immovable assets are concerned, there must be transfer of possession in writing coupled with registration of the transferred rights,50 so as to provide the third parties with notice as to the fact that such rights have been transferred.

48

49

50

Debt Rehabilitation and Bankruptcy Act of the Republic of Korea, Act No. 7428 of 2005 (official trans. Ministry of Government Legislation, Korea), art. 407, available at www. moleg.go.kr/english/korLawEng?pstSeq=52645 (last accessed 15 August 2012): ‘A declaration of bankruptcy shall not affect rights to reacquire from the bankruptcy foundation any assets that do not belong to the debtor’. Civil Execution Act of the Republic of Korea, Act No. 6627 of 2002 (official trans. Ministry of Government Legislation, Korea), art. 48, available at www.moleg.go.kr/english/korLawEng?pstSeq=52691 (last accessed 15 August 2012): ‘(1) When any third party alleges that he has ownership of the objects of compulsory execution, or that he has a right to prevent a transfer or delivery of the objects, he may file a lawsuit of demurrer against the creditor about such compulsory execution; Provided, that when the debtor contests such demurrer, he may make the debtor a co-defendant’. Taiwanese Civil Code, art. 758: ‘The acquisition, creation, loss and alternation of rights in rem of real property through the juridical act will not have effect until registration has been made. The acts as specified of the preceding paragraph shall be made in writing’.

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In the present scenario, Daiming has transferred possession of the Ming vase to Xiaoling, and thus fulfilled the requirement of public notification. The facts, however, do not expressly indicate whether the parties have the agreed intention to transfer ownership of the Ming vase to Xiaoling, or whether Daiming merely places it in Xiaoling’s gallery and authorises her to act on his behalf as agent to sell it. It is submitted that the circumstances of the transfer suggest the former. This is because, contrary to an agency relationship, Xiaoling is given power to act in her own name. Besides, if their agreement is for her to transfer the purchase price to Daiming after deducting her fees, it suggests that she has the power to convey ownership to the purchaser and receive the purchase price directly without involving Daiming. As such, it is also obvious that she has the power to manage and dispose of the trust property as required in a trust. It is submitted, therefore, that their relationship leans in favour of trust rather than agency. If Xiaoling as trustee is declared bankrupt, even though the Ming vase is not registrable property and hence the trust has not been registered, article 11 of the Taiwanese Trust Law should still be applicable.51 The vase should not form part of Xiaoling’s bankruptcy estate. Daiming therefore has priority over Xiaoling’s personal creditors in recovering it under article 110 of the Taiwanese Bankruptcy Law.

China The relationship between Xiaoling and Daiming may take the form of entrusted agency (weituo dali),52 brokerage contract (hangji) or trust.

(1) Entrusted agency A relationship of entrusted agency between Xiaoling and Daiming can arise when Daiming entrusts Xiaoling to handle his affair (the sale of the vase) in Xiaoling’s own name. As explained above, an owner is entitled to the right to recall property placed in the bankrupt debtor’s possession. Such property will not be included in the bankruptcy estate. 51

52

Taiwanese Trust Law, art. 11: ‘No trust property shall appertain to the bankrupt estate when the trustee becomes bankrupt’. The Chinese General Principles of Civil Law recognise three types of agency: entrusted agency, statutory agency and appointed agency. The agency involved in the present scenario is entrusted agency.

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More specifically, the present scenario is covered by article 71 of the Provisions on Some Issues concerning the Trial of Enterprise Bankruptcy Cases of the Supreme People’s Court, which excludes ‘entrusted transaction’ (here, entrustment of the sale of an antique vase to an agent) from bankruptcy properties.53 Accordingly, the vase will not belong to the bankruptcy estate of Xiaoling; Daiming as owner of the vase is entitled to reclaim it from the bankruptcy administrator.

(2)

Brokerage contract

The present relationship also falls within the brokerage contract, in that the sale of the Ming vase is a trading activity, and Xiaoling transacts in her own name in return for remuneration from Daiming. Although brokerage is not expressly mentioned in article 71 of the Trial of Enterprise Bankruptcy Cases Provisions, the list of categories provided therein is not exhaustive. In light of this, brokerage should be treated as analogous to, if not falling within, such categories as entrusted agency or sale by proxy, and should therefore be protected from Xiaoling’s bankruptcy. Additionally, since the brokerage involves a contract and is not otherwise expressly regulated by the Chinese Contract Law, provisions on entrusted agency can be applied to brokerage.54 Accordingly, just as the principal of an agency relationship is entitled to the right to recall, Daiming as the trustor of a brokerage should have the same right.

(3) Trust Finally, Xiaoling may be holding the vase on trust with duty to dispose of it for the benefit of Daiming as beneficiary. If so, pursuant to article 16 of the Chinese Trust Law, the vase will not form part of the trustee’s bankruptcy estate. This entails that Xiaoling’s personal creditors will not be able to assert any claims over the vase, thus giving Daiming de facto priority over them. When a trustee is declared bankrupt, her trusteeship will be terminated;55 and subject to express provisions in 53

54

55

Provisions on Some Issues concerning the Trial of Enterprise Bankruptcy Cases of the Supreme People’s Court (hereafter ‘Trial of Enterprise Bankruptcy Cases Provisions’) (trans. chinalawinfo), available at www.lawinfochina.com/law/display.asp?id=2417& keyword= (last accessed 15 August 2012). Chinese Contract Law, art. 423: ‘For questions not regulated by this Chapter [on brokerage contracts], the relevant provisions on entrustment contracts shall apply’. Chinese Trust Law, art. 39(3).

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the trust document, the settlor and, in second priority, the beneficiary may appoint a new trustee.56 If Daiming only wishes to claim back the vase rather than let the trust continue under a different trustee, he as settlor and beneficiary may revoke and hence terminate the trust unless the trust document provides otherwise.57 Upon its termination, ownership of the trust property will pass to Daiming as sole beneficiary.58 As owner, he will be entitled to claim back the vase from the bankruptcy administrator.

Hong Kong In determining whether Daiming has any proprietary interest in the vase so as to give him priority over other competing claims, it is first necessary to consider the nature of the relationship between Xiaoling and Daiming. This may be one of agency or trust.

(1) Agency An agency relationship can be created by express or implied agreement.59 Although the facts do not suggest any express agency agreement, the handing of the vase to Xiaoling who agrees to sell it on Daiming’s behalf is sufficient conduct to create an agency relationship by implied agreement.60 In general, an agent who holds or obtains assets on behalf of the principal is only liable to account for the property qua debtor,61 unless 56 57

58

59

60 61

Ibid. art. 40. Ibid. art. 50: ‘Where the settlor is the only beneficiary, he or his successor may revoke the trust. Where it is otherwise provided for in the trust documents, the provisions there shall prevail’. Cf. ibid. art. 53. Ibid. art. 54: ‘Where a trust is terminated, the trust property shall be owned by the person specified in the trust documents; where there are no such specifications in the documents, the following order of precedence shall be applied for determining the ownership: (1) the beneficiary or his successor; and (2) the settlor or his successor’. In addition, agency can also be created by the doctrine of apparent authority: Peter Watts and F.M.B. Reynolds, Bowstead and Reynolds on Agency (19th edn, London: Sweet & Maxwell, 2010), para. 1–010. Garnac Grain Co. Inc v. HMF Faure and Fairclough Ltd [1968] AC 1130, 1137. Lupton v. White (1808) 15 Ves 432. Subject to the terms of the contract between the principal and the agent, it is often the case that where the agent simply holds property for his principal without any issue of breach of fiduciary duty, the agent is only subject to a duty to transfer or account for it to his principal. For details, see Watts and Reynolds, Bowstead and Reynolds on Agency (note 59 above), para. 6–041.

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it is the intention of the parties that the agent segregates the property from her other assets, in which case she holds it on trust. Since there is no mention of any agreement to segregate the vase or its proceeds from Xiaoling’s other assets, it is submitted that Xiaoling does not hold it as trustee. Daiming will therefore be able to claim the vase as a general creditor, and rank pari passu with other general creditors of Xiaoling.

(2) Trust If Daiming has manifested the objective intention for Xiaoling to hold the vase for the exclusive purpose of selling it and to segregate the vase and its proceeds from her general assets, it is possible that a Quistclose trust has been established.62 On the facts, if the physical delivery of the vase to Xiaoling was coupled with the intention to transfer ownership to her, and for her to segregate it from her other assets and only to retain it for sale, a trust has arisen. Daiming as beneficiary has the full beneficial interest in the vase, and may recover it in specie in priority to other creditors.

Alternative 2 Premier Golfing (PG) is an agent that sells membership rights of prestigious golf clubs to individual customers. Customers paid money to PG, who deposited it in its bank account. PG has recently become insolvent. Some customers have already paid PG, but have not been granted membership rights. Some clubs have already granted membership rights to customers, but have not received payments from PG. The funds in PG’s bank account are not sufficient to meet all the claims. Do such customers and golf clubs, which now claim the money in the bank account, have any priority over competing claims, or are they treated as general creditors of PG?

Japan The following discussion is based on the assumption that PG is an agent (a direct agent) acting on behalf of the golf clubs (the principals), to which relationship article 99 of the Japanese Civil Code applies.63

62 63

See the discussion in Case 4, Alternative 1 (Hong Kong). Article 99 of the Japanese Civil Code provides that a manifestation of intention made by an agent representing that the same is made on behalf of the principal within the scope of the agent’s authority binds the principal.

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Except where money is concerned, an agent does not acquire ownership of movables that he receives during the course of administering the principal’s affairs. Rather, since article 99 provides that when an agent acts with the manifested intention of representing his principal, the agent’s acts bind the principal, any properties obtained by the agent in a sale and purchase contract immediately belong to the principal as party to the contract. This does not apply to money, in that money received by the agent (whether from the principal or the third party) in the course of managing the principal’s affairs belongs to the agent absolutely, because ownership of cash always vests with the person who possesses it. Accordingly, the principal only acquires title over cash when the agent transfers it to him. On the facts of the present scenario, when the customers, who are principals, make payment to PG, the latter obtains full ownership of the payment. If PG has not paid over the purchase price to the golf clubs even though the latter have already conferred membership rights on customers, the golf clubs cannot claim the payments from PG, let alone in priority to other competing claims over PG’s assets. In a similar vein, it has been decided by the Japanese Supreme Court that bank deposits (not general deposits in savings account but fixed term deposits) always belong to the person who provides for the deposit with the intention that it belongs to him instead of the nominee of the bank account. However, some seem to understand that this ruling is also applicable to general deposits in savings account. In the present scenario, although it may be argued that the funds in PG’s bank account are paid by the customers for the purpose of acquiring membership rights from the golf clubs, unless all the outstanding balance in the account comes from the customers, the above ruling should not apply to that type of general deposits. Nor can the golf clubs pursue claims against customers for the outstanding purchase price, because when customers pay their purchase price to PG and receive their membership rights in return, the contract for the sale and purchase of membership rights has already been performed. If the customers have already made payment to PG (their own agent) but have not yet obtained membership rights, unless there are express stipulations to the contrary, such customers may claim membership rights direct from the respective golf clubs. This is because PG is the agent of the golf clubs and hence its receipt of the purchase price binds them as principal. For the sake of completeness, it might be noted that the above analysis remains unchanged even if the bank account has segregated the deposits

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from other assets of PG. In Japanese law, ownership of funds deposited with a bank is deemed to lie with the party in whose name the bank account is opened and who manages it. Since the deposits are held in PG’s account, it is deemed owner of the funds. Neither the golf clubs nor the customers can claim in priority to its general creditors. If PG acts as indirect as opposed to direct agent, the analysis may differ. As discussed in Alternative 1(a) of the present Case, it is PG as indirect agent who acquires the membership rights, the subject matter of the sale and purchase contract, and then transfers them onwards to customers.64 Accordingly, for those golf clubs that have already transferred membership rights to PG (and then to customers) but not yet received payment, they should sue PG as purchaser of such rights. For customers who have paid PG but not yet been granted membership rights, they should claim such rights from PG. Both claims, however, are personal and rank pari passu with the general creditors of PG. As far as recovery of payments made to PG is concerned, since ownership of cash lies with whoever possesses it,65 the analysis is the same as that applicable to direct agency.

South Korea As between PG and the golf club, on the one hand, and PG and the customers, on the other, PG acts as an intermediary between the golf clubs and customers, respectively. The issues arising from the facts are: (i) whether PG owes a duty to segregate the payments from its own assets; and (ii) whether it has fulfilled that obligation. If PG acts as a mandatary of the golf clubs and the customers, it will normally be required under the mandate contract (not by the Civil Code) to segregate the assets. However, even if PG has fulfilled this duty, the golf clubs and customers will not be able to recover payments or membership rights prior to PG’s general creditors as long as the case does not involve any relationship of security, trust or commission agency. This is because, apart from those relationships, Korean law treats money as belonging to the person who actually possesses it (the so-called ‘money dogma’). In the present scenario, PG which has obtained possession of the cash is also its owner. Accordingly, unless the customers and PG have any security or beneficial interests, or unless there exists a commission 64 65

Japanese Civil Code, art. 560. See the discussion in Case 4, Alternative 1 (Japan).

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agency contract, the customers and PG are considered a mere mandatory (i.e., an obligor), and do not enjoy any preferred position vis-à-vis other competing claims. If PG has mixed customers’ payment with its general fund, the golf clubs and customers will also be treated as general creditors of PG. The argument in the preceding paragraph also applies to such a situation. In either of the two situations mentioned above, the customers cannot claim any membership rights against PG, for the following reason. If PG is acting as agent of the golf clubs, article 104 of the Korean Civil Code will be applicable.66 Article 104(1) provides that a contract entered into by an agent on behalf of the principal acting within the agent’s authority creates a direct contractual relationship between the principal and the third party, that is, the customers and the golf clubs in the present facts. Hence, customers who have already paid PG but who have not been granted membership rights may claim performance of contracts directly against the golf clubs.

Taiwan (1)

Is there a trust relationship between PG and those customers who have not been granted membership?

In general, when customers pay the agent (such as PG) of golf clubs to purchase membership rights, they are making a simple contractual payment to the clubs through the agent rather than establishing a trust over the payment. When an agent acting within the scope of his authority expresses a legal intention to do a juridical act in the name of his principal, his conduct binds the principal.67 Since PG is the agent of the golf clubs, when the customers purchase membership rights from PG, a contract of sale is formed between PG and the customers for the sale and purchase of club membership rights. If the customers make payment to PG, and PG receives payment on behalf of the golf clubs, the golf clubs 66

67

Korean Civil Code, art. 104 (on the effects of acts by agent): ‘(1) A declaration of intention made by an agent, within the scope of his authority while disclosing the fact that he is acting for a principal, shall be effective directly against the principal’. See Taiwanese Civil Code, art. 103: ‘An expression of intent which an agent makes in the name of the principal within the scope of his delegated power takes effect directly to the principal. If an expression of intent which is required to be made to the principal is made to his agent, the provision of the preceding paragraph shall be applied mutatis mutandis’.

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should transfer the membership rights to the customers under article 348(1) of the Taiwanese Civil Code.68 Exceptionally, if the customers make payment to PG on the specific understanding that the payment should be managed and disposed of for the specific purpose of acquiring membership, and hence segregated from PG’s general assets, then the requirements stipulated in article 1 of the Taiwanese Trust Law are satisfied and a trust is created.

(2)

Is there a trust relationship between PG and those golf clubs that have not received payment despite having conferred membership rights?

In the present scenario, since the membership rights are transferred directly by the clubs to customers without passing ownership to PG in the interim, and the role of PG is only to receive payment on behalf of the clubs, there is no trust relationship between PG and the golf clubs. Instead, PG is the agent of the golf clubs in selling membership rights on their behalf. However, if the golf clubs first transfer the membership rights to PG, which then sells them in its own name, then a trust relationship between PG and those golf clubs may arise. It should be noted that the membership of a golf club is a right with property value and therefore can be trust property. If the substance of the arrangement is for the golf clubs to transfer ownership of their membership rights to PG for sale to customers, and PG accounts for the sale proceeds to those clubs, then it is possible to infer an implied common intention between PG and those golf clubs to create a trust. This is because property has been transferred to the trustee with authority to manage and dispose of it.

(3) Will the customers and the clubs enjoy a right of recall over their fees paid and fees to be received, respectively, against the funds in PG’s account? If there is only a contract of sale between PG and the customers whereby PG sells membership rights to them on behalf of the golf clubs, once the 68

Ibid. art. 348: ‘The seller of a thing is bound to deliver the thing to the buyer and to make him acquire its ownership. The seller of a right is bound to make the buyer acquire the right sold. If, by virtue of such right, the seller can possess a certain thing, he is also bound to deliver the thing’.

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customers have paid PG under the contract, the golf clubs owe a duty to transfer such rights to them. As PG is an agent of the golf clubs, a direct contractual relationship is established between the golf clubs and the customers. If the golf clubs fail to discharge their contractual duty to transfer membership rights to the customers, the latter can terminate the contract and claim restitution of the payment directly from the clubs. As such, the customers will not be creditors of PG, let alone have priority over other creditors of PG. For the same reason, if PG as the golf clubs’ agent for sale fails to account for the fees collected from the customers, the clubs have the right to recover the fees from PG, but this is a personal claim that will not give them priority over PG’s other creditors. On the contrary, if there is a trust between PG and the golf clubs, then the trustee has an obligation to manage his own property and the trust property separately, so that his potential creditors will know the extent of the properties he is responsible for. This does not entail that trust funds must be deposited in a separate bank account from that of the trustee, but that separate accounts be kept.69 A problem arises when the trustee acts in breach of his separate management obligation – should the law protect the trustee’s creditors or the trust beneficiaries? It is submitted that if both are acting in good faith, the latter should be preferred,70 because it is more likely that preferring the trust beneficiaries satisfies the intention of the parties to the trust. Furthermore, in a trust relationship where the trustee possesses superior information over the beneficiaries in relation to trust affairs, the latter is in a disadvantageous position to supervise the trustee’s discharge of his duties and hence at risk of abuse. On the other hand, it is less costly for general creditors of the trustee to obtain the relevant information, and hence it is more appropriate for them to bear the risk. Applying these principles to the present scenario, the fact that PG deposits the funds obtained from the customers in a separate account does not affect its independence as trust property. Furthermore, when PG becomes insolvent, such funds should not form part of its bankruptcy 69

70

See Taiwanese Trust Law, art. 24(1): ‘A trustee shall administer a trust property independently of his own property and other trust properties. If the trust property is money, the money may be entered on the books independently’. For detailed illustration on this issue, see Wang, ‘Xintuo zhi Gongshi Jizhi yu Duishi Xiaoli’ [‘The Public Notification and Universality of Trust’] in Wang Wen-Yeu, Minshangfa lilun yu jingji fenxi [Economic Analyses and Theories of Civil and Commercial Law (II) (Taipei: Angle Publishing, 2003), pp. 318–19.

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estate.71 The trust relationship should be regarded as being terminated on the ground of failure of trust purpose, so that the golf clubs have priority over PG’s other creditors in getting back their money pursuant to article 110 of the Taiwanese Bankruptcy Law. In other words, the golf clubs will enjoy the right of recall.

China As in previous alternatives, one needs to determine the nature of the relationships between PG, the golf clubs and the customers.

(1) Entrusted agency The relationship between PG and the clubs might be one of entrusted agency. PG might be seen as the agent of the clubs in handling the sale of membership rights and in dealing with customers; these customers are third parties to the agency relationship between PG and the clubs. Such sales involve civil juridical acts which, if conducted within the scope of authority granted to PG by the clubs, are deemed to be acts of the clubs themselves, with the consequence of binding the clubs to grant membership rights to the customers. At the same time, it is equally possible that PG acts as the entrusted agent of the customers in dealing with the clubs as third parties. Combining both possibilities, PG might also be acting as the entrusted agent of both the clubs and customers. Although there are no express provisions in the Chinese General Principles of Civil Law of China and the Chinese Contract Law which deal with entrusted agents who act for both parties, there is no prohibition against it either. The following analysis will consider the claims that the clubs and customers might have against PG’s bankrupt estate under each of the three possibilities outlined above.

(a) Entrusted agency between PG and the clubs Bearing in mind the unique nature of money as currency and the Opinion of the Supreme Court of the People’s Republic of China in the Zhengzhou Shopping Centre case,72 if PG acts as the agent of the clubs, 71 72

Taiwanese Trust Law, art. 11. See the Reply of the Supreme Court to the question raised by the High Court of Henan Province about whether Dong Guiqin and fifty other businesses can exercise the right of recall in the bankruptcy case of Zhengzhou Yaxiya Wucai Shopping Centre Co. Ltd (Case No. 14 of 2003, Supreme People’s Court, 9 June 2003) (hereafter ‘Supreme People’s

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and if the clubs wish to exercise any right of recall over the moneys paid by the customers, they need to show that PG has deposited the customers’ payments in a separate bank account. Otherwise, PG as possessor of the moneys is presumed to be the full owner. Customers who are third parties to the agency relationship do not have any direct legal relationship with PG the agent. Instead, they are deemed to have purchased membership rights directly from the clubs.73 Accordingly, those customers who have already paid PG are entitled as against the clubs to be granted membership rights.

(b) Entrusted agency between PG and the customers On the basis of the Supreme People’s Court’s Opinion in the Zhengzhou Shopping Centre case, the customers/principals only have the right of recall if PG has deposited their payments in separate, individual bank accounts. On the facts, PG mixes all their payments, along with its own assets, into an indistinguishable mass in its own bank account. In the absence of earmarking and segregation, the customers will not be able to exercise any right of recall. They can only participate in the distribution of PG’s bankrupt estate as general creditors. The clubs are third parties to the agency relationship between PG and the customers. They are deemed to have entered into a contract directly with the customers. If they have conferred membership on some customers but have not received payment from them (via PG), the clubs can demand payment from the customers directly.74 It is no defence for the customers to say that they have paid PG, as PG is their own agent and not that of the clubs. The amount paid by the customers to PG, but which has been retained by it, still belongs to the customers. If the amount has

73

74

Court’s Opinion in the Zhengzhou Shopping Centre case’), where the Supreme People’s Court stated that, while an agency relationship was established between the businesses of a shopping centre and the shopping centre for the latter to accept sale proceeds on behalf of the former, the ‘available evidence could not prove that the shopping centre had opened a specific account to deposit the proceeds, and so the proceeds were not properly earmarked. Due to the unique nature of currency, Dong Guiqin and the other fifty businesses did not have ownership over proceeds that had not been earmarked’. In light of this opinion, for the clubs to establish any right of recall over the customers’ payment, they need to show that PG must have earmarked the amount by depositing it in a separate bank account. Article 63 of the Chinese General Principles of the Civil Law provides that: ‘An agent shall perform civil juristic acts in the principal’s name within the scope of the power of agency. The principal shall bear civil liability for the agent’s acts of agency’. This is pursuant to art. 63 of the Chinese General Principles of the Civil Law.

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been segregated pursuant to the Supreme People’s Court’s Opinion in the Zhengzhou Shopping Centre case, the customers will be entitled to recall them from PG’s liquidation properties.

(c) PG as agent for both the clubs and customers Even if PG acts for both parties to the transaction, the applicable principle is the same, namely, that both principals only have the right of recall if PG has deposited the payments into separate, individual bank accounts. Since PG has not done so, the conclusion remains unchanged. Equally, as discussed above, customers who have paid PG are deemed to have purchased membership rights directly from the clubs and can claim against the latter directly for membership rights.75 In the same manner, the clubs that have conferred membership on some customers but have not received their payment can demand payment directly from them. (2) Brokerage The relationship between PG and the clubs may also be one of brokerage because: (1) there are two parties in the relationship: PG as broker and the clubs as trustors (also known as principals); (2) the act performed by PG is a trading activity, namely, the sale and purchase of merchandise – although merchandise is not defined, it is generally accepted as referring to objects or rights that have value and can be traded, and thus includes membership rights; (3) PG handles the activities in its own name. The customers are third parties to the brokerage. Conversely, the customers can also be seen as trustors engaging PG as a broker. Unlike in the case of entrusted agency, however, it is not possible to view PG as broker for both the customers and the clubs. This is because, unlike entrusted agents, brokers enter into sale and purchase contracts in their own name, as if they were the sellers or purchasers. If PG were the broker for both parties, it would be both purchaser and seller of the membership rights. This would conflict with a fundamental principle of the Chinese Contract Law, which requires contracts to be entered into by at least two parties.76

75 76

Ibid. See e.g., Chinese Contract Law, art. 2, which emphasises that a contract is an agreement ‘between’ civil subjects, hence contemplating at least two parties to a contract; Wang Liming, Hetongfa Yanjiu I [Research on Contract Law I] (2nd edn, Beijing: Renmin

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The following section will consider the possible claims of the clubs and customers in each of the two variations of the brokerage identified above.

(a) PG as broker of the clubs Unlike in agency, civil juristic acts between the broker and the third party will not have any direct legal effect on the trustor.77 Accordingly, proceeds of sale obtained by the broker belong to him, as opposed to the trustor, until he accounts for them to the trustor. If the broker is declared bankrupt, the trustor is not able to exercise any right of recall, as he is not the owner of the money. In the present scenario, therefore, the clubs can only take part in the distribution of the bankruptcy estate as general creditors. Following the principle that the transaction between the third party and the broker does not have any direct legal effect on the trustor, there is no direct legal relationship between the customers and the clubs. Customers who have paid PG do not have the right to require the clubs to confer membership on them. They can only recover the payments from PG as general creditors. (b) PG as broker of the customers Following the Supreme People’s Court’s Opinion in the Zhengzhou Shopping Centre case, in the absence of segregation of the payments, the customers have no ownership and hence no right of recall over the payments, and can only claim them back as general creditors. As to the clubs that have already granted membership rights to customers who have paid PG but whose purchase money is still retained by it, they only have rights as general creditors to require PG to make over the necessary payments. They cannot demand that the customers pay the overdue amount, as they have no contractual relationship with them. Furthermore, as explained above, since the sale and purchase agreement is strictly between PG and the customers, and does not involve the clubs, the clubs cannot make any direct claim against customers who have been granted membership but who have not yet paid PG.

77

University of China Press, 2011), p. 9: ‘A contract is an agreement by two parties that has legal effects and is based on the wills of both parties’. Li Guoguang, Zhongguo Hetongfa Tiaowen Shijie [Interpretation on Provisions in the Contract Law in China] (Beijing: Xinhua Press, 1999), p. 645.

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(3) Trust Several variations of the trust relationship will be considered as follows.

(a) Golf clubs as settlor It is not possible for the clubs to be the settlor entrusting membership rights to PG, for there is no certainty of subject matter on the facts.78 It is true that membership rights, being rights to claim contractual performance by the clubs and something of value, can be treated as valuable assets to be held upon trust. However, on the present facts, the parties have not delineated an identifiable class of membership rights as falling within the trust. There is no evidence of the clubs’ assignment of any class of membership rights to PG, and while that may not be necessary for the creation of a trust, the clubs continue to sell and trade all their membership rights without distinction between these rights. If, to the contrary, the clubs do set aside a certain number of membership rights to be sold by PG, there will be sufficient certainty of trust property. Proceeds received by PG upon the sale of such membership rights will also be held on trust by it; and the clubs as beneficiaries will be able to establish a right of recall over the proceeds. (b) Customers as settlors It is submitted that no trust arises upon the customers’ payments for purchasing membership rights. This is because the payments are made in a simple sale and purchase contract, and not upon any understanding that PG will hold them, in a segregated fund, for the benefit of the customers or for any specified purpose. Hong Kong The rights of the golf clubs and customers to claim money from PG depend on their relationships with PG. In the present scenario, it may either be agency or trust.

(1) Agency The principles regarding creation of agency have been discussed in Alternative 1(a) of the present Case. There are three possibilities in the 78

See Chinese Trust Law, art. 7.

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case studies: hypothetical scenarios

present scenario: (a) PG is agent for the golf clubs; (b) PG is the customers’ agent; or (c) PG is common agent for both the golf clubs and the customers.

(a) PG as agent of the golf clubs (i) Customers’ entitlements If PG acts as an agent for the golf clubs, the customers will be third parties to the agency relationship. As long as PG acts within its scope of authority, the customers will be contracting with the golf clubs directly and will not have any direct legal relationship with PG. Accordingly, those customers who have already paid PG are entitled as against the clubs to be granted membership rights.79 PG will be liable to grant membership rights directly to the customers only if it signs as principal in the sale of such rights. Even so, because the customers’ rights to claim compensation for the failure to transfer membership rights is in personam, they will only rank pari passu with PG’s general creditors. (ii) Golf clubs’ entitlements Since the contract is deemed to be made between the golf clubs and the customers, if the golf clubs have granted membership rights but have not yet received payments, they may claim the outstanding payments directly from the customers. Alternatively, since PG is agent for the golf clubs, it is liable to account for the customers’ payments, but this is an equitable debt and does not give the golf clubs priority in PG’s insolvency. If it is the objective intention of the golf clubs that PG segregates the payments from its own assets, PG will hold them as trustee and the clubs can assert proprietary interest over the payments. The facts, however, militate against the finding of a trust, as there are no special circumstances to suggest that the purchase price received by an agent in an ordinary sale and purchase contract should be segregated from its own funds.

(b) PG as agent for customers (i) Customers’ entitlements If PG acts as agent for customers in dealing with the golf clubs as third parties, the customers may enforce their contracts against the golf clubs directly and ask for the membership rights already paid for but not conferred. The customers may also sue PG

79

Montgomerie v. United Kingdom Mutual Steamship Association [1891] 1 QB 370.

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for recovery of the payments qua debtor or trustee, depending on whether there is any intention for PG to segregate the payments. (ii) Golf clubs’ entitlements The golf clubs are third parties to the agency relationship between PG and the customers. They are deemed to have entered into a contract directly with the customers, and so may claim outstanding membership fees directly from them. It is no defence for the customers to say that they have paid PG, since PG is acting for them rather than the golf clubs. Nonetheless, since the payments retained by PG still belong to the customers, they should recover them from PG. Prima facie, the golf clubs have no rights to claim the payments from PG, unless the contract for the sale of membership rights provides otherwise. In any event, such claims are personal in nature, and do not give the golf clubs priority over other claimants of PG.

(c) PG as agent for both golf clubs and customers As a general principle, an agent owes fiduciary duties towards his principal, and may not act as fiduciary for two principals whose interests conflict, unless both of them have consented to the double employment.80 Even if consent has been granted upon full disclosure, a fiduciary cannot engage in any actual conflict of interest, that is, where he cannot fulfil his obligations towards one without breaching his obligations towards the other.81 Since it is inevitable that the interests of the golf clubs are in actual conflict with those of the customers as sellers and purchasers of membership rights, it is unlikely on the facts that PG is acting for both parties. (2) Trust Several variations of the trust relationship will be considered as follows.

(a) Golf clubs as settlors To create an express trust, there must be certainties of intention, object and subject matter.82 Even if there is intention for the golf clubs to vest membership rights on trust with PG for sale for the benefit of the clubs 80 81

82

Bristol & West Building Society v. Mothew [1998] Ch. 1. Ibid. 19. See also Hillier v. Barker Booth & Eastwood [2005] UKHL 8; [2005] 1 WLR 567. Cf. Kelly v. Cooper [1993] AC 205. Knight v. Knight (1840) 3 Beav. 148, 173.

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themselves as beneficiaries, there is no certainty of subject matter.83 The parties have not delineated an identifiable class of membership rights as subject matter of the trust. There is no suggestion that the golf clubs have assigned any identifiable class of membership rights to PG for sale. While that may not be necessary for the creation of a trust, the golf clubs continue to sell and trade all its membership rights without distinguishing them. It is unlikely, therefore, that a valid trust has been established. If, for the sake of argument, the golf clubs have indeed set aside some membership rights on trust for sale by PG, there will be certainty of subject matter to create a valid trust. PG will hold the proceeds of sale on trust for the clubs, which will have proprietary interests in them in priority to PG’s general creditors.

(b) Customers as settlors There are no special circumstances on the facts to suggest that the customers’ purchase of membership rights through PG is different from an ordinary sale and purchase contract. As such, payments made by customers are out and out payments that belong to PG absolutely, not sums settled upon trust to be segregated from its general funds. No trust has arisen and the customers can only make contractual claims against PG. 83

See John Mowbray et al., Lewin on Trusts (18th edn, London: Sweet & Maxwell, 2008), paras. 3-05–3-06.

11 Case 5: Protecting ring-fenced assets from the insolvency of the asset manager

Akiko and Baku each paid Yamato Ltd, a company that acts as a professional investment manager, US$100,000 to invest in any kind of assets. Under Akiko’s contract with Yamato Ltd, the latter is to keep the assets from Akiko separate from other clients. Under Baku’s contract, Yamato Ltd is to pool its and other similar clients’ assets under a collective investment scheme, whereby all such clients share the profits and losses pro rata. One year later, Yamato Ltd has become insolvent. It transpires that Yamato Ltd does not keep separate the positions of all of its clients, including Akiko. There are insufficient assets in its account to meet all of their claims. What claim(s) can Akiko and Baku make against Yamato Ltd’s assets?

Japan A professional investment manager like Yamato Ltd must either hold a trust business licence under the Japanese Trust Business Act or be registered by the Prime Minister with an investment management licence under the Japanese Financial Instruments and Exchange Act.1 In the latter case, an investment manager is usually required to hold the managed assets in a trust structure. It is submitted that the position of Yamato Ltd in this case is similar to that of Terence in Case 1, and hence it is likely that the respective agreements entered into by Akiko and Baku with Yamato Ltd take the form of ‘mandate’ regulated by the Japanese Financial Instrument Exchange Act. For the sake of completeness and for the same reasons set forth in Case 1,2 the following discussion will assume instead that Akiko and Baku have established respective trust relationships with Yamato Ltd. 1

2

See Japanese Trust Business Act, art. 3 and Japanese Financial Instruments and Exchange Act, art. 29, respectively. See the discussion in Case 1, Alternative 1 (Japan).

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Article 34(1) of the Japanese Trust Act provides that in relation to trusts that involve non-registrable properties such as money and nonregistrable movables, the trustee should fulfil his duty to segregate the trust assets. This involves keeping clear accounts of the trust assets and retaining them separately from property that belongs to the trustee’s own property and the property of other trusts in a manner whereby they can be distinguished from each other on sight. In the present scenario, Yamato Ltd has breached article 34 vis-à-vis Akiko in mixing trust assets under her trust with those held for other clients. If trust assets held for Baku are only commingled with those of similar clients, but not, say, Yamato Ltd’s own assets, the latter has not breached article 34 vis-à-vis Baku. When trust assets from various sources are mixed in an indistinguishable mass, article 18(3) of the Japanese Trust Act provides that the beneficiaries of these trusts will co-own the mixed assets in proportion to their contribution. Accordingly, both Akiko and Baku may assert a real claim for a pro rata share of the balance of assets now held by Yamato Ltd. In addition, they may also assert a personal claim against Yamato Ltd to recover the shortfall after the recovery from the real claim. Article 40(4) of the Japanese Trust Act provides that when a trustee breaches article 34, thus causing loss or damage to the trust property, the trustee is liable to compensate loss or restore the trust property to its original state, unless the loss or damage would in any event have happened without the breach. Akiko will have no difficulty establishing a breach of article 34, and can claim the shortfall unless Yamato Ltd can show that the shortfall would have occurred even if he has complied with the duty of segregation. Baku will not be able to rely on article 40(4), as Yamato Ltd has not breached article 34 vis-à-vis him. If he can, however, establish a breach of the due care of a prudent manager on the part of Yamato Ltd, and claim that the loss of his trust fund is the result of such a breach, he may claim compensation from Yamato Ltd.3

South Korea The facts suggest that Yamato Ltd is granted power to invest in any kind of assets. In so far as these involve the sale and acquisition of securities or 3

See Japanese Trust Act, arts. 29(2) and 40(1)(i).

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derivatives for the benefit of Akiko and Baku, the Korean Financial Investment Services and Capital Markets Act applies. Under the Act, Yamato Ltd must have obtained approval from the relevant authority to operate business as a ‘financial investment business entity’.4 The following discussion assumes that Yamato Ltd has obtained such approval, and that Akiko’s arrangement involves an ‘unspecified money trust’, whereas that of Baku involves an ‘investment trust’. An ‘unspecified money trust’ is one whereby the settlor does not designate the management method of the trust property (money). The trustee will be subject to some rules prescribed in the Trust Act and Financial Investment Services and Capital Markets Act, for example: 5 • it shall not guarantee any rates of return arising from the investment; • its liability as trustee to the beneficiary is confined to the amount of the trust fund;6 • it must segregate and separately manage the trust fund from its own assets and other trust funds held by it;7 and • it is liable to claims by the settlor, beneficiary or other trustees for compensation for loss suffered by the trust property or to restore destroyed or damaged trust property to its original state, if such loss or damage is caused by his improper management of the trust property or wrongful disposal in contravention of the purpose of the trust.8

4 5

6

7

8

Korean Financial Investment Services and Capital Markets Act, art. 12. Enforcement Decree of the Financial Services and Capital Markets Act of the Republic of Korea, Presidential Decree No. 22516 of 2010, art. 104 (official trans. Ministry of Government Legislation, Korea), available at www.moleg.go.kr/english/korLawEng?pstSeq=57394&brdSeq= 33&searchCondition=AllButCsfCd&searchKeyword=financial+investment (last accessed 15 August 2012): ‘(1) No trust business entity shall guarantee to indemnify for any loss or assure profits for the entrusted property’. Korean Trust Act, art. 38 provides that the trustee shall be liable for performance of any obligation to the beneficiary arising from the trust only to the extent of the trust property. Ibid. art. 37: ‘(1) The trustee shall manage the trust property separately from the trustee’s personal property and make the trust property identifiable. (2) The trustee, who undertook multiple trusts, shall manage each of the trusts separately and identify that they are the trust properties different from one another’. Ibid. art. 43: ‘(1)Where there is damage to the trust property due to the trustee’s breach of duties, the settlor, the beneficiary or the other trustee in case multiple trustees exist may request the trustee to restore the trust property. Where the restoration is impossible or impracticable, where the cost of restoration is too high, or where restoration is not appropriate due to special circumstances, the settlor, the beneficiary or the other trustee may claim damages’.

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An ‘investment trust’ is a collective investment scheme established by an approved business entity in the form of a trust.9 The business entity, which acts as trustee, must divide the beneficiaries’ interests in the trust equally and indicate each beneficiary’s divided right in beneficiary certificates.10 The beneficiaries have equal rights in the redemption of the beneficial interest, and a right to pro rata distribution of profits. The trustee must segregate the pooled assets from its own funds and from other funds held on trust by it.11 The trustee must abide by the terms of the trust, exercise fiduciary due care and loyalty,12 and act in good faith in the best interest of the beneficiaries in managing the trust affairs.13 It the trustee will be liable for damages caused by its breaches of statutory or contractual duties or negligence.14 In the present scenario, whether the trust takes the form of an unspecified money or collective investment trust, the funds invested by Akiko or Baku are subject to the trust and should be segregated from Yamato Ltd’s own funds and other funds held on trust by it.15 Such funds will not belong to Yamato Ltd’s bankruptcy estate; nor will its personal creditors be able to make claims against them.16 In so far as Yamato Ltd discharges its duty to segregate, the funds can be identified and thus protected. However, if Akiko’s funds are not segregated, there will be a breach of trust. Since the trust assets involve money, which is not registrable property, whether the trust can be enforced against third parties depends 9

10

11

12 13

14 16

According to art. 9(18)(i) of the Korean Financial Investment Services and Capital Markets Act, a ‘collective investment scheme’ may take the form of a trust: ‘A collective investment scheme in the form of a trust, in which settlors, who are collective investment business entities, require a trust business entity to invest and manage the property entrusted to the trust business entity in compliance with instructions provided by the collective investment business entities (hereinafter referred to as “investment trust”)’. Ibid. art. 189(1): ‘A collective investment business entity shall divide the beneficiary interest in the investment equally and indicate it in the beneficiary certificates’. Ibid. art. 246(2): ‘A trust business entity that keeps in custody and manages collective investment property shall separate the collective investment property from its property, other collective investment property, and the property with which it has been entrusted by a third party for safekeeping and management. In such cases, it shall clearly earmark the facts pertaining to the collective investment property and the settlor’. Korean Trust Act, arts. 33–34 and 36. The duty of loyalty and the duty of care are set out in Korean Financial Investment Services and Capital Markets Act, arts. 79 (collective investment business entity), 102 (trust business entity). 15 Ibid. art. 64. Korean Trust Act, art. 37. Ibid. art. 24: ‘The trust property shall not be a part of the trustee’s bankruptcy estate, the individual rehabilitation foundation, or the trustee’s private property which the manager of rehabilitation procedures has right to manage and dispose’.

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on whether Akiko can show that it has been independently managed.17 On the present facts, it will be difficult for Akiko to do so, as her trust assets have been mixed in the commingled pool. She will only be able to make a personal claim against Yamato Ltd for breach of trust and rank pari passu with other general creditors. In contrast, since Baku’s beneficial interest involves a pro rata share in the pooled investment fund, which has now been depleted, he will still be able to claim his interest in the fund in proportion to his contribution.

Taiwan At the outset, it is necessary to determine the legal nature of the parties’ relationship. On the facts, it is most likely that Akiko and Baku have established trusts, respectively, with Yamato Ltd, since both Akiko and Baku have transferred their funds to Yamato Ltd, respectively, and granted the latter discretion to invest in suitable assets for their benefit. With regard to Akiko, according to article 24(1) of the Taiwanese Trust Law, Yamato Ltd as trustee owes an obligation to manage Akiko’s trust property separately from assets either owned by it and or held on trust for others, as well as an obligation to keep separate accounts of her assets, unless the trust documents provide otherwise. Accordingly, when Yamato Ltd mixes Akiko’s trust funds with those in a collective investment scheme, it breaches its duty as trustee to segregate the trust fund. Akiko can claim disgorgement of profits resulting from the breach,18 or compensation for loss incurred to her trust fund. In addition, when Yamato Ltd becomes insolvent, trust property held for Akiko’s benefit will not form part of its bankruptcy estate. The bankruptcy estate will only comprise Yamato Ltd’s own property.19 Akiko can, in theory, 17

18

19

Ibid. art. 4: ‘(1) With respect to any property that can be registered, the fact that such property is subject to a trust may be asserted against a third party by making a registration thereof. (2) With respect to any property that cannot be registered, the fact that such property is subject to a trust may be asserted against a third party when it is identifiable through managing it separately from other properties’. Taiwanese Trust Law, art. 24(3): ‘[I]f a trustee acquires any benefit in violation of the first paragraph, the settlor or beneficiary shall have the right to request the trustee to disgorge [the] said benefit to the trust property. If the violation causes any damage to the trust property and even if occurrence of the damage is not imputable to the negligence of the trustee, the trustee shall still be liable for the damage unless the trustee can prove that the damage could not be avoided even if the trust property had been administered independently’. Taiwanese Bankruptcy Law, art. 82.

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exercise a right of recall over the relevant property against the bankruptcy administrator, and in this way enjoy priority over the general creditors of Yamato Ltd. However, in practice, because Yamato Ltd does not keep a separate trust account registered in the name of Akiko, it would be very difficult for Akiko to prove or identify the assets that belong to her trust fund. With regard to Baku, since his agreement with Yamato Ltd empowers the latter to manage his trust assets in a pooled fund along with assets of other investors, the requirement of separate management will be dispensed with in so far as other investors are concerned.20 When Yamato Ltd is declared bankrupt, the trust property will not form part of its bankruptcy estate. Baku will also be entitled, in theory, to exercise his right of recall against the bankruptcy administrator and obtain priority over general creditors of Yamato Ltd. Although both Akiko and Baku are entitled to a right of recall over their respective trust assets, in practice, it is difficult to identify their funds from the commingled assets. The Taiwanese Trust Law does not provide any detailed guidelines on the distribution of commingled trust funds among beneficiaries in the event of a trustee’s bankruptcy, such as the present situation. It is submitted that the fairest solution is pro rata distribution among all investors who contributed, willingly (such as Baku) or unwilling (such as Akiko), to the trust fund. Finally, if Yamato Ltd is a trust enterprise, and either fails to discharge its liabilities or damages the settlors or beneficiaries’ interests on its insolvency, the Financial Supervisory Commission of the Executive Yuan may exercise statutory power and make an executive order to require Yamato Ltd to transfer the trust agreements and relevant trust property to a new trust enterprise to replace Yamato Ltd.21

China The facts only refer to Yamato Ltd as a professional investment manager without elaborating what legal arrangement has been adopted by the parties. Investment or wealth management is a business concept that 20 21

Taiwanese Trust Law, art. 24(2). Taiwanese Trust Enterprise Act, art. 43(1): ‘If a trust enterprise, due to obvious adverse changes in its business or financial status, fails to pay its liabilities when due or it is likely that the trust enterprise damages a trustor’s or beneficiary’s interests, the Competent Authority may order it to transfer the trust agreement and its trust property to another trust enterprise designated by the Competent Authority’.

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refers to a party’s engagement of another to manage his wealth,22 and might take one of several legal forms. The laws and regulations in China, such as the Interim Measures for the Administration of Commercial Banks’ Personal Financial Management Services issued by the China Banking Regulatory Commission, refer to wealth management products, but do not clarify their legal nature, let alone prescribe the legal form which they should take. There is support in academic commentary that it can involve trust,23 agency, mandate, and even a mere creditor-debtor relationship. A closer examination of each of these possibilities is in order.

(1) Trust This typically involves granting the manager (trustee) extensive powers to manage and dispose of the assets in his own name. This gives the manager power to deal with the assets as if he were the owner, but also subjects him to duties to protect the principal’s interests.24

(2) Agency A wealth manager may also act in the capacity of an agent. An agent handles the affairs of the principal in the latter’s own name.25 Transactions that are entered into between a third party and the agent within the scope of agency will create immediate legal effect between the principal and the third party. Support for seeing wealth management as involving agency has been expressed, inter alia, by an official of the China Banking Regulatory Commission.26 22

23

24

25

26

Chen Xiangyong and Ding Ying, ‘Woguo Shangshi Gongsi Weituo Licai de Shizheng Fenxi’ [‘Empirical analysis on entrusted financing of listed companies in China’] (2002) 3 Guanli Shijie [Management World] 107. Hu Tongjie, ‘Fenye Jianguan Geju xia Zhongguo Licai Shichang Tanxi – Fang Zhongguo Renmin Daxue Jijin yu Xintuo Yanjiusuo Zhixing Suozhang Xing Cheng’ [‘Analysis of the financial market in China under the Separate Supervision Mode: interview with the Director of the Institute of Fund and Trust of Renmin University of China’] (2006) 10 Jinrong Shidian [Financial Perspective] 37. One ardent supporter is Xing Cheng, the former Director of the Institute of Fund and Trust of Renmin University of China: see Hu, ibid. Chinese Contract Law, art. 396: ‘An entrustment contract [that is, agency] is a contract whereby the principal and the agent agree that the agent shall handle the affairs of the principal’. See also Chinese General Principles of Civil Law, art. 63 and Chinese Contract Law, art. 399. An unnamed regulator at the China Banking Regulatory Commission was quoted as saying the following in a media interview: ‘The Measures [Interim Measures for the Administration of Commercial Banks’ Personal Financial Management Services] and

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As compared to a trustee, who is usually given discretionary powers in managing assets, an agent is expected to act in accordance with the instructions of the principal, and seek the latter’s approval whenever he intends to depart from these instructions.27 For example, the agent may be given executive powers to implement investment decisions made by the principal. A case in point is the entrustment of funds to commercial banks for investments overseas, which was permitted by article 17 of the Measures for the Administration of Individual Foreign Exchange. A similar notice of the China Banking Regulatory Commission also provides that clients may identify an overseas investment they wish to make, and instruct the bank to carry out the necessary sales and acquisitions.28 The main distinction between trusteeship and agency is that, save for cash held in the agent’s hands, ownership of the entrusted asset is never transferred to an agent, whereas it is usually transferred to a trustee. In an agency relationship, the assets can be deposited into a bank account opened in the principal’s name, but the principal can give the agent power to manage and dispose of the funds. Where cash is concerned, because China adopts the principle that ownership follows possession of money, cash held in the hands of the agent will be owned by him.29 In this respect, agency offers less protection from the bankruptcy of the agent than trust. The treatment of cash held by agents as belonging to him has been subject to heavy criticism. There is academic opinion that such cash (as well as funds deposited in a separate bank account of the agent) should be treated as owned by the principal and not be available for distribution to the agent’s general creditors, on the following grounds.30 First, a right

27 28

29 30

the Guidelines [Guidelines for the Risk Management of Personal Financial Management Services Provided by Commercial Banks] expressly define the personal financial management service as a banking service based on the relationship of entrusted agency’. Hu Yunxiang, ‘Shangye Yinhang Licai Chanpin Xingzhi yu Licai Xinwei Maodun Fenxi’ [‘Analysis of the nature of financial products of conflicts of financing of commercial banks’] (2006) 9 Shanghai Jinrong [Shanghai Finance] 72. Chinese Contract Law, art. 399. See Notice of the General Office of China Banking Regulatory Commission on the Relevant Issues for Commercial Banks to Provide Overseas Financial Management Services on Behalf of Clients (No. 164 of 2006). See Case 4, Alternative 1(d) (China). Wang Liming, Wuquanfa Yanjiu I [Research on Property Law I] (1st edn, Beijing: Renmin University of China Press, 2002), p. 37. Discussion of this point was omitted from the second edition of the book: see Wang Liming, Wuquanfa Yanjiu I [Research on Property Law I] (2nd edn, Beijing: Renmin University of China Press, 2007), pp. 502–4.

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to claim does not offer adequate protection to principals.31 Secondly, the agent’s factual possession of the funds should not also give him the legal rights usually entailed by such possession, because unlike the usual cases, he is vested with possession not for his own benefit, but only to deal with the cash upon the principal’s instructions. As such, and especially vis-à-vis the principal who is the controlling mind behind the use of the cash, the agent should not have the right to assert possession let alone ownership over the cash.32 Thirdly, in common practice, cash or funds obtained by an agent are typically intended to be deposited in a separate bank account of the agent. This reflects the intention of the relevant parties to segregate cash and funds held by the agent from his own assets. Such an intention will be frustrated if such cash and funds are nonetheless treated as being the agent’s own property.33

(3) Creditor-debtor relationship There are a considerable number of investment arrangements that guarantee a fixed rate of return.34 If these provide for the transfer of the assets to a manager who is free to invest the assets as he thinks fit, and who only undertakes to provide a fixed rate of interest, they in effect pass the risks (and profits) of investment to the manager. Such arrangements should be seen as creating a debtor-creditor relationship.35 Such contracts fall within the definition of loan contracts in article 196 of the Chinese Contract Law, which defines a ‘loan contract’ as ‘a contract whereby the borrower borrows a loan from the lender and repays the loan with interest when the loan becomes due’. Based on the above analysis, the precise legal nature of the wealth management arrangement in the present scenario depends on further facts as follows: (a) If the management agreement provides for the relevant assets to be placed in a separate account held in the manager’s name, and the

31 34

35

32 33 Ibid. 39. Ibid. 38 Ibid. 39. Zhang Jianqiu, ‘Lun Lianying Hetong zhong de Baodi Tiaokuan Wenti’ [‘Discussion on provisions on guaranteed returns in joint management contracts’] (1997) 2 Qiushi Xuekan [Seeking Truth] 62. Zhu Yifei, ‘Weituo Licai de Falv Xingzhi’ [‘The legal nature of entrusted wealth management], Renmin Fayuan Bao [People’s Court Daily], 7 December 2005.

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manager is given wide discretionary powers to manage and invest the assets, a trust is created. (b) If, under the agreement, the relevant assets continue to be owned by the principal, and the manager is given the power to manage and invest them in accordance with instructions from the principal from time to time, an agency relationship is created. (c) If the agreement provides for a fixed rate of return and transfer of assets to the manager to be invested on his own account, a creditordebtor relationship is created. One may then apply the above analysis to the facts of the present scenario as follows.

(i) Relationship between Akiko and Yamato Ltd The agreement between Akiko and Yamato Ltd involves the transfer of the relevant assets to Yamato Ltd to be segregated from other assets of Yamato Ltd, and a general discretionary power for him to invest in any kind of assets as he thinks fit. Since Yamato Ltd has a general discretion to invest, rather than a duty to act upon specific instructions from time to time, it is submitted that the arrangement does not create an agency relationship. It is possible for it to be a debt relationship, since the facts do not rule out that Yamato Ltd might have undertaken to provide a fixed rate of return. Nonetheless, since unlike in a loan, Yamato Ltd is required to segregate the assets from other assets held by him, it is submitted that their arrangement is not a loan. Instead, several aspects of the arrangements point towards a trust; for example, there is transfer of assets to the manager, segregation of the assets, and the grant of a general discretionary power to Yamato Ltd. (ii) Relationship between Baku and Yamato Ltd Yamato Ltd’s contract with Baku differs from that with Akiko only in relation to the pooling of assets from the clients. Since this feature alone does not alter the nature of the arrangement as a trust, it is submitted that Baku has also established a trust. As a result of the pooling of assets, Baku’s trust is a collective investment fund. In China, collective investment funds may take the form of securities investments funds or collective capital trusts. The former are governed by the Law of the People’s Republic of China on Securities Investment Funds, which requires all securities investment funds to be sold by public

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offering.36 Given the lack of reference to any public offering in the present facts, the following discussion will consider whether the fund in the present scenario is a collective capital trust. Collective capital trusts are recognised and regulated by the Measures for the Administration of Trust Companies’ Trust Plans of Aggregate Funds.37 They are trusts whereby investors settle assets upon trusts operated by trust companies in exchange for rights in units in the pooled trust fund.38 According to the Measures, the following conditions39 must be met in establishing a collective capital trust: (1) The settlor must be a ‘qualified investor’, meaning, if he is a natural person, one of the following: (a) his aggregate individual or family financial assets, as proven by relevant ownership certificates, must exceed RMB¥1,000,000 at the time he subscribes the trust; (b) his proven annual income exceeds RMB¥200,000 for the previous three years; or (c) the proven total annual income of the investor and his spouse exceeds RMB¥300,000 for the previous three years. (2) The settlor has civil capacity. (3) The settlor must also be the sole beneficiary. (4) The number of natural persons involved in a single collective capital trust must not exceed fifty.40 (5) The trust period must not be shorter than one year. (6) The beneficiaries’ rights are divided into units of equivalent shares.

36

37

38 40

Law of the People’s Republic of China on Funds for Investment in Securities, art. 2 (hereafter ‘Chinese Securities Investment Funds Law’) (official trans. NPC, China), available at www.npc.gov.cn/englishnpc/Law/2007-12/05/content_1381963.htm (last accessed 15 August 2012). Measures for the Administration of Trust Companies’ Trust Plans of Aggregate Funds (hereafter ‘Measures’) (trans. www.fdi.gov.cn), available at www.fdi.gov.cn/pub/FDI_EN/ Laws/GeneralLawsandRegulations/MinisterialRulings/P020071112552834211265.pdf (last accessed 15 August 2012). Article 2 of the Measures provides that: ‘These Measures shall apply to the business activities of fund trusts conducted under the trust plans of aggregate funds (hereinafter referred to as trust plans) established within the territory of the People’s Republic of China, and of which trust companies act as trustees and conduct centralised management, operation or disposal of the funds trusted by two trustors [settlors] or more in accordance with the will of the trustors [settlors] and for the interests of the beneficiaries’. 39 Measures, art. 2. Ibid. arts. 5–6. Note that in the Measures which came into force in 2009, the number is not restricted in respect of natural persons and qualified institutional investors whose investment amount per single trust is RMB¥3,000,000 or above.

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(7) Subject to any express stipulations for trustee remuneration, which must be at a fair level, the trustee may not seek profits for itself or anyone else directly or indirectly by using the trust assets. The following analysis will assume that all of the above requirements are satisfied on the facts, and Baku invests in a collective capital trust. Article 29 of the Chinese Trust Law requires trustees to ‘administer the trust property separately from his own property and keep separate accounting books’, but does not stipulate in detail how this can be achieved in actual practice. In any event, since Yamato Ltd clearly breaches his duty to segregate the funds of all of its clients, the issue that arises is what claims Akiko and Baku might have in relation to the assets they entrust to Yamato Ltd.

(i) Akiko Since Yamato Ltd is the trustee of the funds, according to article 16 of the Chinese Trust Law, when it is declared insolvent, the trust assets will not belong to its liquidation property. Article 38 of the Chinese Enterprise Bankruptcy Law provides that: ‘After the people’s court accepts an application for bankruptcy, the property, which has been taken by a debtor into his possession but which does not belong to the debtor, may be taken back by the obligee of the property through the administrator, unless otherwise provided for by this Law’. In the present scenario, the obligee of the trust property is Akiko, who is both settlor and beneficiary. She is entitled to recall the trust assets representing the original settled sum from the bankruptcy administrator.

(ii) Baku Baku is the subscriber of a collective capital trust operated by Yamato Ltd. Under article 3 of the Measures, ‘in case a trust company goes through the procedures for account settlement for such reasons as being wound up according to law, being cancelled according to law, being declared bankrupt according to law or any other reason, the properties of trust plans shall not be treated as liquidation properties’. The ‘properties of trust plans’ refers to the collective properties paid in by all subscribers of a collective capital trust. When Yamato Ltd is insolvent, Baku is entitled to exercise the right of recall in relation to his share in these properties. The actual amount Baku may recover

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depends on the provisions of the trust contract, and also the performance of the trust fund.41 Another ground for Baku to recall his share in the trust fund are provisions of the Chinese Trust Law42 and the Measures43 which provide that a collective capital trust terminates when the trustee is declared bankrupt and no replacement trustee is appointed. Assuming that no trustee is appointed to replace Yamato Ltd when it is declared insolvent, the trust will terminate. In this circumstance, articles 31 and 32 of the Measures provide that the trust will be liquidated, and the trust assets distributed in accordance with the proportion of the trust units held by the beneficiaries as stipulated in the trust contract. Finally, it is worth noting that although it is possible in theory to treat a Chinese trustee as having two separate patrimonies (namely, its own personal patrimony and a distinct trust patrimony), so that there is no issue of the trustee’s personal creditors having recourse to the trust patrimony in the event of the trustee’s insolvency, implementation of this view may be difficult in practice. This is because the operational guidelines on separate accounting and trust registration are still very rudimentary.44 For example, article 10 of the Chinese Trust Law provides that trust registration is necessary in relation to registrable properties (such as real estate), and non-registration will render the purported trust invalid and ineffective. To date, no further guidelines have been issued as to how trust registration can be made, thus rendering the validity and effectiveness of trusts of real estate uncertain, so that the issue about a separate trust patrimony of real estate does not arise.

Hong Kong While it is possible in common law to structure an investment management arrangement by way of agency, the present facts most likely involve

41

42

43

44

Measures, art. 11: ‘the trust plan, which does not promise break-even principal and minimum profits, has certain investment risks’. Chinese Trust Law, art. 39: ‘Under one of the following circumstances, the trustee’s appointment shall be terminated: … (3) his trusteeship is removed or he is declared bankrupt’. Measures, art. 30: ‘Where it is under any of the following circumstances, a trust plan shall be terminated: (3) the trustee’s duties are terminated and no new trustee is selected in accordance with the relevant provisions’. See Dong Weining, Xintuo Caichan Falv Wenti Yanjiu [Research on Issues concerning Trust Property] (Beijing: Law Press, 2011), ch. 5.

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the use of a trust. This is because ownership of the assets has been transferred to Yamato Ltd, as is typically so in a trust. In relation to both Akiko’s and Baku’s agreements, the assets are to be segregated from Yamato Ltd’s own funds and invested for the benefit of their respective investor-beneficiaries. In Akiko’s case, the funds should not even be mixed with other trust funds held by Yamato Ltd; in Baku’s case, the funds may be pooled with other funds but should still be kept separate from Yamato’s funds. It is one of the fundamental duties of Yamato Ltd as trustee to segregate the trust funds from its own assets and other assets held by it on trust unless the beneficiary has agreed to the contrary. This does not entail physical segregation of the trust property, but rather the keeping of clear accounts to enable the trust assets to be distinguished from other assets. On the facts, where a professional investment scheme is involved, segregation of trust funds can be achieved by keeping separate client accounts, as is likely to be Akiko’s case. Since Baku agrees to the pooling of his assets with other investorbeneficiaries, Yamato Ltd owes to him the duty to segregate the pooled investment fund from its own assets, but not also from those of other investors of the pooled fund. Baku and other beneficiaries of the fund will be equitable tenants in common having beneficial interests pro rata to their contribution. In Hong Kong, such collective investment schemes45 may take the forms of unit trusts, mutual funds, pooled retirement funds, real estate investment trusts and mandatory provident funds, to name but a few. They are subject to regulatory supervision of the Securities and Futures Commission of Hong Kong. In light of the absence of any indication of the context of Baku’s investment and limitation on the nature of the assets to be invested, it is most likely a unit trust, which is subject to the Code on Unit Trusts and Mutual Funds issued by the Securities and Futures Commission of Hong Kong.46 Yamato Ltd as trustee must satisfy the requirements set out in paragraphs 4.2–4.3 of the Code, namely, that it must be: (a) a licensed bank;

45

46

‘Collective investment schemes’ is defined as an investment fund formed for the pooling of investments by an investment manager (which is usually an institutional investor): Hong Kong Securities and Futures Ordinance, Schedule 1, Part 1, s. 1. See SFC Handbook for Unit Trusts and Mutual Funds, Investment-Linked Assurance Schemes and Unlisted Structured Investment Products (Securities and Futures Commission of Hong Kong, June 2010), section II (Code on Unit Trusts and Mutual Funds).

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(b) a trust company which is a subsidiary of such a bank; (c) a registered trust company; or (d) a banking institution or trust company incorporated outside Hong Kong which is acceptable to the Securities and Futures Commission. In addition, the trustee must be independently audited and must have minimum issued and paid-up capital and non-distributable capital reserves of HK$10 million. Furthermore, the trustee should either be subject to regulatory supervision or appoint an independent auditor to periodically review and report its internal controls and systems.47 Finally, the collective investment scheme must also appoint a management company that engages primarily in fund management and has a minimum issued and paid-up capital and capital reserves of HK$1 million to enable it to conduct its business effectively.48 As beneficiaries to their respective trusts, Baku and Akiko are entitled to assert their proprietary interest over any traceable products of their trust funds held in the hands of Yamato Ltd. There are presumptive rules that help them overcome evidential difficulties in tracing their beneficial interests into the commingled funds. The nature and extent of Baku’s and Akiko’s claims are as follows.

(1) Baku Since Baku contributes to a pooled investment fund whereby each investor is considered to have agreed to sharing their profits and losses together, the investors will share the insufficient residue of the funds pari passu. This approach is laid down in a decision of the English Court of Appeal in Barlow Clowes International v. Vaughan,49 which criticised and displaced an old approach in Clayton’s Case to allocate the funds to claimants on a first-in, first-out basis.50 Clayton’s Case was also not followed in a decision of the Hong Kong Court in Re C.A. Pacific Finance Ltd,51 on the ground that it would lead to the unjust result of making distributions based on the fortuitous circumstance of the claimant’s contribution to the fund.

(2) Akiko Akiko’s funds is intended to be segregated from all other assets held by Yamato Ltd, but they have most likely been unlawfully mixed with assets 47 50

48 Ibid. para. 4.1 and Appendix G. Ibid. para. 5.2. 51 (1816) 1 Mer. 572. [2000] 1 BCLC 494.

49

[1992] 4 All ER 22.

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beneficially owned by Yamato Ltd and other investors. If the mixing takes place in a running bank account, then as between the funds of Yamato Ltd (the wrongdoing trustee) and the innocent beneficiaries (including Akiko), Akiko can invoke presumptions that favour innocent beneficiaries to resolve evidential difficulties in distinguishing the traceable product of her assets from those of Yamato Ltd.52 As between the mixed assets of innocent beneficiaries (such as those of Akiko and Baku), following Barlow Clowes International v. Vaughan and Re C.A. Pacific Finance Ltd, the court will most likely distribute the mixed fund on a pro rata basis. 52

See e.g., Re Hallett’s Estate (1880) 13 Ch. D 696 and Re Oatway [1903] Ch. 356.

12 Case 6: Misappropriation and unauthorised disposition by the asset manager

The facts are as in Case 5, except as detailed below. The following alternatives occur:

alternative 1 Without authority, Yamato Ltd uses all of the money in Akiko’s account (US$1,000,000) to buy a designer watch, which is now worth US$2,000,000. Yamato Ltd is still solvent. Akiko wants to terminate the relationship and take the watch. Can she do this?

Japan The following discussion is based on the assumption that Akiko’s trust funds are segregated from those of other investor-beneficiaries held by Yamato Ltd. Upon Yamato Ltd’s unauthorised sale of trust property, Akiko has several options. She may rescind the sale or ratify it. In addition, she may also terminate the trust relationship. To rescind the sale, Akiko may rely on article 27(1) of the Japanese Trust Act, which provides as follows: Where an act conducted by a trustee for the trust property does not fall within the scope of the trustee’s powers, a beneficiary may rescind such act, if all of the following conditions are met: (i) that the other party to the act knew, at the time of the act, that the act was conducted for the trust property; and (ii) that the other party to the act knew or was grossly negligent in failing to know, at the time of the act, that the act did not fall within the scope of the trustee’s powers.

Upon rescission, Yamato Ltd as trustee will have to restore the trust fund to its original value, thus in effect making good the US$1,000,000 loss. However, since the watch is now double its original value, and it is not 225

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mandatory for Akiko to rescind the sale, she may ratify Yamato Ltd’s purchase or simply tacitly adopt it by not complaining. (To ratify the breach, it does not matter whether the seller of the watch knows about the breach or not.) If the sale is not rescinded, the watch will become part of trust property as it is purchased with trust funds.1 Akiko may then terminate the relationship in accordance with article 164(1) of the Japanese Trust Act, which provides that ‘a settlor and a beneficiary may terminate a trust at any time by an agreement between them’. Upon termination, she as sole beneficiary will be able to claim the trust property, which now comprises the watch.2 This is because profits obtained from the use of trust property inure to the trust fund, regardless of whether they are obtained lawfully or unlawfully (in breach of the trustee’s duties). Accordingly, it is not open for Yamato Ltd to keep the watch, even though it has increased in value.

South Korea If there is a trust, the deposit in Akiko’s account will be trust property. According to the principle of real subrogation set out in article 27 of the Korean Trust Act,3 as long as it is acquired from the use of trust funds, the watch will be treated as part of the trust property; it is irrelevant that it is acquired without authorisation and in breach of the terms of the trust. Since Akiko is the sole settlor and beneficiary, she may terminate her relationship with Yamato Ltd whenever she wishes to, and regardless of whether there is a breach of trust.4 However, if the termination is made without any valid reason and to the prejudice of the trustee, she will be required to pay it compensation for loss suffered by it as a result of the termination.5 In light of Yamato Ltd’s breach, it is submitted that Akiko has a valid reason for terminating the trust.

1 3

4

5

2 Japanese Trust Act, art. 16(1). Ibid. Korean Trust Act, art. 27: ‘Any property obtained by the trustee due to management, disposal, operation, development, destruction or damage of the trust property, or other causes, shall fall within the scope of trust property’. Ibid. art. 99(2): ‘In case where the settlor enjoys the entire benefit of the trust, the settlor or his heir may at any time terminate the trust’. Ibid. art. 99(3): ‘In case where the settlor, the beneficiary, or the heir of the settlor terminates the trust at a point of time adverse to the trustee’s interests without reasonable grounds, the settlor, the beneficiary, or the heir of the settlor shall compensate the trustee’; and Korean Civil Code, art. 689.

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Taiwan The facts raise two issues: (1) whether Akiko is entitled to terminate the trust relationship at any time; and (2) whether upon termination, Akiko is entitled to take the watch. As to the first issue, article 63(1) of the Taiwanese Trust Law stipulates that a settlor who is also the sole beneficiary of a trust has the right to terminate it ‘from time to time and at any time’.6 This is because the termination will not cause any harm to third parties. If the termination adversely affects the interests of the trustee, he must pay compensation for any loss suffered thereby.7 However, where the terms of the trust document stipulate that the trust should not be terminated within a certain period, the Ministry of Justice takes the view that such a term overrides article 63(1), which is not a mandatory provision.8 There is much to be said for adopting such a construction. This is because in a self-benefit trust there are only two parties – the beneficiary and the trustee – and hence no party will be affected by their self-binding agreement to refrain from terminating the trust. In such a situation, the parties should be given freedom to opt out of article 63(1).9 6

7

8

9

Taiwanese Trust Law, art. 63(1): ‘If a trust inures to the sole benefit of the settlor, the settlor or his inheritor shall have the right to terminate the trust from time to time and at any time’. Ibid. art. 63(2): ‘If a trust is terminated by the settlor or his inheritor under [art. 63(1)] at a time which is detrimental to the rights, and interests of the trustee, the settlor or his inheritor shall be liable to pay compensation to the trustee unless the termination is due to any cause beyond one’s control’. See also Wang Chih-Cheng, Xintuofa [Trust Law] (4th edn, Taipei: Wu-Nan Book, 2010), p. 309. See Letter No. 0930033879 dated 26 August 2004 from the Ministry of Justice: ‘The legislative intention behind [art. 63(1)] is that termination of a self-benefit trust, where the settlor is the only beneficiary, will cause no harm to others, and hence the wishes of the settlor-beneficiary should be respected: Lai Yuan-Ho and Wang Chih-Cheng, Xiandai Xintuofa Lun [Theories of Modern Trust Law] (3rd edn, Taipei: Wu-Nan Book, 2001), p. 155. Although the trustee must respect the settlor-beneficiary’s right to terminate the trust, if the parties agreed to restrict such a right by way of stipulation in the terms of the trust, and such restrictions are necessary for realising the trust purpose and do not conflict with public order or good custom, such terms should bind the trustee and the settlor and its inheritor. This is because art. 63 is not a mandatory provision: see Xintuo Fazhi [The Institution of Trust Law] (7th edn, Taipei: Taiwan Academy of Banking and Finance, 2011), p. 73)’. Wang, Xintuofa [Trust Law] (note 7 above), p. 310. Furthermore, in deciding whether the nature of this rule should be permissive or compulsory, considerations such as whether there exists any information asymmetry or third party involvement may be taken into account. For a detailed discussion, refer to Wang Wen-Yeu, ‘Xintuo zhi Gongshi Jizhi yu Duishi Xiaoli’ [‘The public notification and universality of trust’] in Wang Wen-Yeu, Minshangfa Lilun yu jingji Fenxi (er) [Economic Analyses and Theories of Civil and Commercial Law (II)] (Taipei: Angle Publishing, 2003), pp. 292–4.

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In the present scenario, the facts do not mention any such agreements or express terms. Akiko is entitled to invoke article 63(1) and inform Yamato Ltd about his intention to terminate the trust relationship at any time. If the trust is terminated, Akiko has the right to obtain the watch. Article 9(1) of the Taiwanese Trust Law stipulates that any property rights obtained by a trust act of the trustee belong to the trust property. Article 9(2) further provides that ‘any property rights acquired by a trustee from the administration, disposal, destruction, [and] damage or otherwise of [the] trust property shall appertain to the trust property’. These articles affirm the substitution of trust property, whereby any substituted assets resulting from the trustee’s lawful or unlawful conduct will remain part of the trust property. Put another way, even if the original trust property has been exchanged into a different property, the new form (or the exchange product) will still be treated as if it were part of the original settled property.10 In the present scenario, the watch, which is acquired in exchange of the original trust property, becomes the substitution of the original trust property and appertains to the trust property, notwithstanding the fact that it is obtained in breach of trust. The beneficiary is entitled to trace into the watch and request Yamato Ltd to return the watch after terminating the trust relationship.

China The present analysis proceeds on the conclusions drawn in Case 5, that Yamato Ltd is trustee of Akiko and Baku, respectively. Akiko’s wish is to terminate the trust relationship with Yamato Ltd and take the watch acquired from the use of the original trust property.11 This depends on: (i) whether and how a beneficiary (such as Akiko) may exert rights over assets obtained from the use of trust property; and (ii) whether Akiko is allowed to terminate the trust relationship. According to article 14 of the Chinese Trust Law, ‘property obtained by the trustee through administering, using or disposing of the trust 10 11

Wang, Xintuofa [Trust Law] (note 7 above), p. 144. Since the value of the watch has appreciated, it is to Akiko’s advantage to ratify the unauthorised disposition and hence treat the watch as part of the trust fund. If the value of the watch has depreciated, Akiko may invoke art. 23 of the Chinese Trust Law to rescind the authorised disposition.

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property or by other means falls within trust assets’. While this article clearly includes lawfully acquired properties, it is silent as to unlawfully acquired ones. This is dealt with by article 26, which prohibits a trustee from seeking personal interests from the use of trust property, and stipulates that any benefit obtained from such conduct will be integrated into the trust property. It may be safely assumed that it is not the purpose of the present trust (or indeed any trust) to benefit the trustee itself in its capacity as trustee.12 Yamato Ltd’s use of trust property to purchase a watch for itself clearly breaches article 26. Consequently, the watch is treated as part of the trust property. Since Yamato Ltd has made an unauthorised disposition of trust property, Akiko may terminate Yamato Ltd’s trusteeship either in accordance with provisions in the trust contract (if applicable) or by application to the court on the ground of Yamato Ltd’s unauthorised disposition in breach of trust purpose.13 Upon the removal of Yamato Ltd, Akiko as settlor may, subject to express provisions in the trust document, appoint a replacing trustee.14 Once the new trustee is appointed, Yamato Ltd should transfer the trust assets (which include the watch) to him.15 Alternatively, Akiko as the sole settlor and beneficiary may invoke article 50 of the Chinese Trust Law to revoke the trust. In general, once a trust is validly established, the settlor is not allowed to revoke the trust; however, revocation is allowed when the settlor is also the sole beneficiary, as any revocation will only affect his own interest.16 In the present scenario, unless the trust contract provides otherwise, Akiko may revoke the trust without seeking judicial approval or the consent of Yamato Ltd. Once the trust is revoked, it is terminated.17 The Chinese Trust Law, however, does not set out the precise procedure for revocation. Since the trust in the present Case is established through a contract, article 96 of

12

13 16

17

Quanguo renda ‘Xintuofa’ qicao gongzuo zu [Drafting Group of the Trust Law, National People’s Congress] (eds.), Zhonghua Renmin Gongheguo Xintuofa Tiaowen Shiyi [Annotation of the Provisions of the Trust Law of the People’s Republic of China] (Beijing: China Finance Publishing House, 2001), p. 85. 14 15 Chinese Trust Law, art. 23. Ibid. art. 40. Ibid. art. 41. Wang Qing and Guo Ce, Zhonghua Renmin Gongheguo Xintuofa Tiaowen Quanshi [Analysis of the Trust Law of China] (Beijing: China Legal Publishing House, 2001), p. 129. Quanguo renda ‘Xintuofa’ qicao gongzuo zu [Drafting Group of the Trust Law, National People’s Congress], Xintuofa Tiaowen Shiyi [Annotation of the Provisions of the Trust Law] (note 12 above), p. 123.

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the Chinese Contract Law,18 which requires Akiko to communicate her intention to revoke the trust to Yamato Ltd, should apply. The trust is automatically revoked once Yamato Ltd obtains notice of her intention. Once the trust is terminated, unless the terms of the trust document provide otherwise, the trust property will belong to Akiko as beneficiary.19

Hong Kong Since the basic fact situation is the same as in Case 5, the present analysis proceeds on the conclusions drawn in the previous Case, that Yamato Ltd is trustee of Akiko and Baku, respectively. In expending the trust fund without authority, Yamato Ltd misappropriates trust assets in breach of trust. Akiko may terminate the trust. In addition, since Yamato misappropriates trust assets to buy a watch which has increased in value, Akiko may simply claim the watch on the ground that it is part of the trust fund.

(1) Terminating the trust relationship The principles about the termination of a trust relationship have been considered in Case 1, Alternative 2. Since Akiko is the sole and sui juris beneficiary absolutely entitled to her segregated trust account, she can invoke the principle in Saunders v. Vautier 20 to terminate the trust and compel Yamato Ltd to transfer the trust fund to her. In fact, under the proposed reform of the Hong Kong Trustee Ordinance, where the beneficiaries can invoke the principle in Saunders v. Vautier, they can also remove and replace the trustee.21 18

19 21

Chinese Contract Law, art. 96: ‘When a party advocates the dissolution of the contract …, the party shall notify the other party. The contract shall be dissolved when the notice reaches the other party. If the other party has objections, it may apply to a people’s court or an arbitration institution to determine the validity of the dissolution of the contract’. 20 Ibid. art. 54. (1841) 4 Beav. 115. The Hong Kong Government proposes to empower dissatisfied beneficiaries to remove trustees along the lines of s. 19 of the English Trusts of Land and Appointment of Trustees Act 1996: see Review of the Trustee Ordinance and Related Matters: Consultation Paper (Hong Kong: Financial Services and the Treasury Bureau, June 2009), para. 4.14; Consultation Conclusions on Review of the Trustee Ordinance and Related Matters (Hong Kong: Financial Services and the Treasury Bureau, February 2010), para. 72; and Detailed Legislative Proposal on Trust Law Reform: Consultation Paper (Hong Kong: Financial Services and the Treasury Bureau, March 2012), para. 2.48; and Trust Law (Amendment) Bill 2013, clause 25, available at www.gld.gov.hk/egazette/pdf/20131706/es3201317064. pdf (last accessed 25 February 2013). The Trust Law (Amendment) Bill 2013 was presented to the Legislative Council for first reading on 20 February 2013.

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(2) Watch as part of trust assets Under common law trust principles, trust funds include the original settled sum and all assets representing it from time to time, whether derived lawfully or unlawfully. Akiko can trace the amount misappropriated by the trustee into its exchange products, namely, the watch, and assert her beneficial title over the watch by claiming a constructive trust.22 Alternatively, Akiko can simply invoke Saunders v. Vautier to terminate the trust and claim the watch, which is an exchange product of the trust fund, as currently representing the trust asset. She does not need to prove a breach of trust. Furthermore, it is also possible for Akiko to bring a personal action to require Yamato Ltd to account for the profits (US$2,000,000) she obtains from breach. Since Yamato Ltd is solvent, Akiko is likely to recover the sum in full. The result will be practically the same as declaring a constructive trust over the watch.

alternative 1 Without authority, Yamato Ltd uses all of the money in Akiko’s account (US$1,000,000) to buy a painting, which is now worth US$2,000,000. Yamato Ltd sold the painting to Taeko for US$2,000,000. Yamato Ltd then uses the proceeds to purchase a vase, which is destroyed. Can Akiko claim: (a) the proceeds of sale from Yamato Ltd.

Japan Under the Japanese Trust Act, there is no prohibition on Akiko from ratifying only the advantageous purchase out of the series of unauthorised sales and acquisitions by Yamato Ltd. Accordingly, Akiko has four options: (1) rescinding the purchase of the painting, thus treating Yamato Ltd as purchasing it out of its own assets, and any subsequent dealings with the painting, its proceeds and the vase as involving Yamato Ltd’s assets; (2) ratifying the purchase of the painting but not subsequent transactions, thus treating only the painting as part of trust property; (3) ratifying the purchase and disposal of the painting but not subsequent transactions, thus treating only the proceeds of the painting 22

Foskett v. McKeown [2001] 1 AC 102 at 127 (per Lord Millett). See generally, Lionel Smith, The Law of Tracing (Oxford: Oxford University Press, 1997).

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(i.e., US$2,000,000) as part of trust property; or (4) ratifying all unauthorised acts, thus treating the ultimate (destroyed) vase as part of the trust property. It is Akiko’s wish to rescind the contract of the purchase of the painting between Yamato and Taeko unilaterally and claim it back from Taeko (usually only in the case where she anticipates an increase in the price of the painting, i.e., more than US$2,000,000). This can be achieved by the second option only if Taeko is not a bona fide purchaser pursuant to article 27(1) of the Japanese Trust Act. If only the purchase of the painting is ratified, the painting is deemed to have been part of the trust property. If it is also her wish to claim the proceeds from the sale of the painting (i.e., US$2,000,000), this can be achieved by the third option, namely, ratifying only the purchase and disposal of the painting but not the subsequent purchase of the vase. If the purchase and disposal of the painting are ratified, the proceeds become part of the trust property. If she is unable to rescind the purchase of the vase, and assuming that the vase has been destroyed as the result of Yamato Ltd’s negligence, Akiko may claim compensation from Yamato Ltd in accordance with article 40(1) of the Japanese Trust Act.23 Compensation would be at the full current market price of the vase if it is completely destroyed. If the vase is completely destroyed by a third party, Yamato Ltd as trustee must claim compensation from him.

South Korea According to article 27 of the Korean Trust Act, property obtained by the trustee due to the management, disposal, administration, investment, destruction or damage of the trust property, or other causes, shall fall within the trust property. This article puts in place the principle of real subrogation with respect to the trust. Since the painting, and in turn its proceeds and the vase, are obtained from the use of the trust fund, each of these items in turn represents the substituted trust property. When the 23

Japanese Trust Act, art. 40: ‘(1) When any of the cases listed in the following items has occurred due to the trustee’s breach of the duties, the beneficiary may demand that the trustee take the measures specified in the respective items; provided, however, that this shall not apply to the measures specified in item (ii), if it is extremely difficult to restore the trust property, if the restoration would require excessive expenses, or if there are other circumstances where it is inappropriate to have the trustee restore the trust property; where any loss to the trust property has occurred, compensation for such loss; and where any change to the trust property has occurred, restoration of the trust property’.

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last substituted trust property, namely, the vase, is destroyed, all of the trust property is extinguished. However, since the proceeds held by Yamato Ltd are trust property at the time it is disposed in exchange for the vase, and the purchase is unauthorised, the disposition constitutes a breach of trust with a resulting loss of trust fund in the form of the proceeds. Yamato Ltd therefore owes a duty to restore the trust fund to the state it was in before the breach.24 On this basis, Yamato Ltd must make good the misapplied proceeds. Additionally, if the destruction of the vase occurs as the result of improper management by Yamato Ltd, Akiko may also claim compensation for damages or restoration of the trust property to its original state, this being the current market value of the vase, since it constitutes the whole trust property before the destruction. If the destruction of the vase occurs through third party wrongdoing, Yamato Ltd as trustee has a right to hold the third party liable in tort to itself (the trustee). Since the claim is acquired as the result of the destruction of the vase (i.e., trust fund), it will form part of the trust fund according to the doctrine of real subrogation prescribed in article 27 of the Korean Trust Act. If the seller of the vase also knows or could have known about Yamato Ltd’s breach of trust, Akiko is entitled to rescind the purchase of the vase in accordance with article 75 of the Korean Trust Act.25

Taiwan Akiko can make a claim against Yamato Ltd for the proceeds of sale of the painting and compensation for damage made to the vase. In order to reflect the substitutive nature of trust property, article 9(2) of the Taiwanese Trust Law entitles the beneficiary to claim all the substitutions of the trust property as appertaining to the trust property,26

24

25

26

Korean Trust Act, art. 43(1): ‘Where there is damage to the trust property due to the trustee’s breach of duties, the settlor, the beneficiary or the other trustee in case multiple trustees exist may request the trustee to restore the trust property’. Ibid. art. 75(1): ‘In case where the trustee disposes of trust property in breach of the trust, the beneficiary can rescind the disposition, provided that the other party or the subsequent purchaser knew, at the time of the breach, the disposition was concluded in breach of the trust or could have known about the breach through reasonable investigation’. Taiwanese Trust Law, art. 9(2): ‘Any property rights acquired by a trustee from the administration, disposal, destruction, [and] damage or otherwise of [the] trust property shall appertain to the trust property’.

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regardless of the value of the trust fund that is used to exchange for the substituted product. In the present scenario, Yamato Ltd acts in breach of trust in buying a painting with the trust fund, and then sells it to Taeko at its increased market value. All the profits obtained by Yamato Ltd in this transaction, as reflected in the sale proceeds, should appertain to the trust property. The vase acquired by Yamato Ltd with the sale proceeds should also appertain to the trust property. Yet since the vase has been destroyed, whether the beneficiary can claim against Yamato Ltd depends on the cause of its destruction. If the vase is destroyed as a result of Yamato Ltd’s improper management of the trust property, under article 23 of the Taiwanese Trust Law,27 the beneficiary is entitled to claim pecuniary compensation for damage caused to the trust property or to restore the damaged property to its original condition, and can also request a reduction of the remuneration payable to the trustee. Akiko may therefore claim the current market value of the destroyed vase. Alternatively, if the vase is destroyed due to a wrongful act of a third party, the right to claim compensation against that third party will appertain to the trust property (as opposed to the trustee’s own property).28 This means, pursuant to article 11 of the Taiwanese Trust Law, that when, say, Yamato Ltd becomes insolvent, the right to claim compensation will not form part of its bankruptcy estate. Akiko will be entitled to exercise the right of recall over the right of claim against the bankruptcy administrator and in priority to other creditors of Yamato Ltd. In assessing the amount of compensation payable by the third party wrongdoer, the Taiwanese Civil Code provides that both the damage suffered and benefits lost (including benefits which could normally have been expected) may be claimed.29 Assuming the market value of the vase 27

28

29

Ibid. art. 23: ‘A settlor, beneficiary or other trustees may request the trustee to pay pecuniary compensation for damage caused to the trust property or to restore the damaged property to its original condition if the damage is incurred due to the trustee’s improper administration of the trust property, or if the trustee disposes of the trust property in violation of the stated purpose of the trust. In addition, reduction of the remuneration payable to the trustee may also be sought’. Ibid. art. 11: ‘No trust property shall appertain to the bankrupt estate when the trustee becomes bankrupt’. Taiwanese Civil Code, art. 216: ‘compensation shall be limited to the injury actually suffered and the interests which have been lost. Interests which could have been normally expected are deemed to be the interests which have been lost, according to the ordinary course of things, the decided projects, equipment, or other particular circumstances’.

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is US$2,000,000, the damage suffered as the result of its destruction will be its full market value at the material time. In the present scenario, Akiko can only claim compensation from the third party wrongdoer for the actual damage suffered, as opposed to any further profits expected to arise from the vase. If, to the contrary, the vase is destroyed through no fault of a third party such as Taeko, Akiko cannot claim compensation against her. However, pursuant to article 18(2) of the Taiwanese Trust Law,30 Akiko may still be able to rescind the subsequent acquisition of the vase if Taeko knows or is grossly negligent in failing to know about Yamato Ltd’s breach of trust.

China There are two bases on which Akiko could claim relief. First, as discussed above,31 she could invoke article 26 of the Chinese Trust Law to claim that profits obtained by a trustee from the use of trust property are included in the trust property. On this basis, the painting, its proceeds and the vase belong in turn to the trust property. However, since the vase has been destroyed, it is not advantageous for Akiko to accept the vase as part of the trust fund. The best remedy for her is to claim the proceeds of the painting, and disregard the trajectory of events that happen after the sale proceeds are received. Secondly, and it is in Akiko’s interest to do so, she could argue that Yamato Ltd has breached article 22 of the Chinese Trust Law by ‘[disposing] of the trust property in breach of the purposes of the trust, or [causing] losses to the trust property due to his departure from his administrative duties or improper handling of trust business’, and then seek to annul the purchase of the vase, and have the trust fund restored to its original state, namely, the state when Yamato Ltd held the proceeds from the sale of the painting.32 Since the Chinese Trust Law does not mandate a beneficiary to annul an unlawful disposition, Akiko is free to cherry-pick and annul only the unprofitable transaction. It has been well affirmed, at least in academic 30

31 32

Taiwanese Trust Law, art. 18(2): the right to apply for revocation may be exercised if ‘(3) the trust property is a property right other than those provided in the preceding two subparagraphs [i.e., registrable property and securities] and both the opponent and the transferee knew or failed to know by gross negligence that the trustee had disposed of the property against the stated purpose of the trust’. Case 6, Alternative 1 (China). See the discussion in Case 2, Alternative 1 (China).

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opinion, that a claimant’s entitlement to civil rights entails the freedom to choose between available claims or remedies.33

Hong Kong In the present scenario, Akiko may pursue proprietary or personal claims, but neither one enables her to recover the full proceeds from the sale of the painting. Common law jurisdictions have developed the equitable tracing process to identify the value of an original asset in a new, substituted asset, and allow the claimant to assert his proprietary rights over the substituted asset.34 In order to invoke the evidential rules of equitable tracing, the claimant must establish his continuous proprietary interest through the series of substituted assets to the ultimate asset against which he asserts a claim. This does not present any problem for Akiko in the present scenario, for it is clear that the misappropriated trust fund is substituted in turn by the painting, its sale proceeds, and ultimately the vase. However, since the vase has been destroyed, the trust property is also destroyed along with it. Consequently, a proprietary claim against the extinguished trust fund will be worth nothing. Since Yamato Ltd is still solvent, Akiko may consider making a personal claim against it for breach of trust, and seeking to recover loss suffered by the trust fund. An interesting question arises as to whether the loss is assessed at US$1,000,000, being the actual amount misappropriated by Yamato Ltd, or US$2,000,000, being the highest traceable amount the misappropriated trust fund has reached before it is extinguished. The common law does not have a clear view on this. It is submitted that it is unlikely that Akiko can recover the higher amount. This is because, even though equity does allow beneficiaries to claim the reasonable profits the trust fund would have made had there been no breach, such a measure is only applicable to the surcharging of accounts on the footing of wilful default. Surcharging the account involves charging the trustee beyond his actual receipts, for amounts that he should have received but did not because of his wrongful act or omission. The reference to ‘wilful’ only means that he acts as a free agent, not that he acts in bad faith. 33

34

Wang Liming, Minfa Zongze Yanjiu [Research on the Chinese General Principles of the Civil Law] (1st edn, Beijing: Renmin University of China Press, 2003), pp. 205–6. See generally, Smith, The Law of Tracing (note 22 above).

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In the present scenario, Yamato Ltd’s breach involves misapplication of the trust fund. The appropriate remedy is falsification (as opposed to surcharging) of trust account. In a falsification claim, the beneficiary seeks to disallow unauthorised disbursements, thus treating the outgoing as not having been made; the trustee will therefore need to account for the amount with funds from his own pocket.35 Given such a remedial process, it is irrelevant that the misapplied amount has increased in value in the interim between the date of breach and the date of judgment, as it is treated as being the trustee’s own disbursement. To briefly sum up, while Akiko may assert proprietary and personal claims, it is more advantageous for her to make a personal claim against Yamato Ltd by seeking falsification of the US$1,000,000 misapplied to acquire the painting. This is because, even though she may trace into the destroyed vase, any proprietary claim against it will be worthless. (b) The painting or any remedy from Taeko or her assets where: (i) at the time of sale, she does not know that Yamato Ltd has no authority to sell the painting.

Japan As long as Taeko does not know that Yamato Ltd has no authority to sell the painting to her and is not at fault in purchasing the painting, she has duly acquired the painting.36 Akiko will not be able to claim either the painting or any remedy from Taeko.

South Korea According to article 75(1) of the Korean Trust Act, if a disposition made by a trustee is in breach of trust, the beneficiary can rescind it if the third party transferee knew or could have known about the breach at the time of the disposition.

35

36

See Peter Millett, ‘Equity’s place in the law of commerce’ (1998) 114 Law Quarterly Review 214 at 225–6. Akiko will only be able to rescind the contract if Taeko is not a bona fide purchaser pursuant to art. 27(1) of the Japanese Trust Act. Since Taeko is acting in good faith, Akiko will not be able to invoke art. 27(1), Taeko will be regarded as having duly acquired the painting.

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Since Taeko does not know about the breach of trust, Akiko will not be able to rescind the disposition or make any remedial claim against her.

Taiwan Although a trustee has ownership over the trust assets, he is not free to dispose of them as an ordinary owner would; he must do so in accordance with the trust purpose. To protect the integrity of the trust assets, apart from imposing personal liability on the trustee for wrongful dispositions (that is, dispositions that infringe the trust purpose), any property acquired therefrom will appertain to the trust property.37 Additionally, the beneficiary has the right to revoke the wrongful transaction as follows. If the trust property is registrable (e.g., property right or securities) and its encumbrance by a trust is registered so that it is clear that the property appertains to the trust property, the beneficiary can revoke the transaction as against the transferee, irrespective of whether he knows about the wrongful disposition. If the trust property is nonregistrable, the beneficiary can only revoke the transaction if both the defendant and the transferee know or are grossly negligent in not knowing about the wrongful disposition.38 The painting in the present scenario is a movable property and hence is not registrable. Since Taeko does not know and is not grossly negligent in not knowing that the disposition has been in breach of trust purpose, Akiko cannot revoke the sale as against Taeko, or claim any remedy from her.

China 39

As discussed above, the painting is part of the trust assets by virtue of article 26 of the Chinese Trust Law. Akiko is entitled under article 22 to annul the unauthorised sale of the painting. The same article only imposes liability on third party transferees who knowingly accept an unauthorised disposition to return the trust property or make compensation for loss. Since Taeko does not know about Yamato Ltd’s lack of authority, Akiko cannot claim the painting or any remedy from Taeko. 37 38

Wang, Xintuofa [Trust Law] (note 7 above), p. 193. 39 Taiwanese Trust Law, art. 18. Case 6, Alternative 1(a) (China).

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It may be noted that article 106 of the Chinese Property Law allows the owner to recover from the transferee property that is transferred to him by an unauthorised disposition. However, since Akiko is the settlor/ beneficiary but not the owner of the trust assets, it is unlikely that she can invoke this article.

Hong Kong Since the painting is purchased from misappropriated trust assets, Yamato Ltd holds it on constructive trust for Akiko.40 However, since Taeko is a bona fide purchaser of the painting without any notice of Yamato Ltd’s breach, she is able to take free of Akiko’s (beneficial) proprietary claim against the painting. (ii) Although she does not know about Yamato Ltd’s lack of authority at the time of sale, she becomes aware of the situation subsequently, when the painting is still owned by her.

Japan According to article 27 of the Japanese Trust Act, in order for Akiko to rescind the contract for the sale of the painting, Taeko must know about Yamato Ltd’s lack of authority at the time of sale. This principle is treated as essential in protecting the security of transactions. If Taeko comes to know about the breach subsequently, the transaction will still not be disturbed.

South Korea Article 75(1) of the Korean Trust Act clarifies this point by stipulating that knowledge is assessed at ‘the time of the disposition’, that is, when the disposition is concluded. Accordingly, any subsequent acquisition of knowledge about the fact of breach is irrelevant. Thus, in order for Akiko to rescind the sale of the painting, Taeko must have come to know about Yamato Ltd’s lack of authority at the time Yamato Ltd and Taeko carried out the contract.

40

Foskett v. McKeown (note 22 above).

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Taiwan In Taiwanese law, if there is no knowledge at the time of the transfer of trust property, the transferee acquires a good title. Subsequent acquisition of knowledge will not impeach the transaction. In this way, the security of the transaction will be protected. Accordingly, the legal consequence is the same as in Alternative 1(b)(ii) of the present Case above.

China Article 22 of the Chinese Trust Law only imposes liability on transferees who knowingly accept an unauthorised disposition. As long as they do not know about the breach at the time of acquiring the trust property, they will not be subject to any liability towards the settlor or beneficiary; their position will not be compromised by any subsequent acquisition of knowledge. Such a principle is in line with the approach adopted in relation to the doctrines of bona fide acquisition41 and apparent agency42 in Chinese law.

Hong Kong In Anglo-Hong Kong common law, once Taeko has established the defence of bona fide purchase by showing, inter alia, that she has no notice at the time of transfer of the legal title of the trust property, she will enjoy the full protection of equity. Even if she acquires notice subsequently, her position will not be affected.43 41

42

43

Article 106 of the Chinese Property Law provides that: ‘Where a person transfers to a transferee immovables or movables which he has no right to dispose of, the owner shall have the right to recover them; except where otherwise provided for by law, the transferee shall acquire ownership of the said immovables or movables under one of the following circumstances: (1) the transferee is in good faith when the said immovables or movables are transferred to him; (2) the transfer is made at a reasonable price; or (3) the said immovables or movables have duly been registered as is required by law, or have been delivered to the transferee where no registration is required. Where a transferee acquires the ownership of the immovables or movables in accordance with the provisions in the preceding paragraph, the original owner shall have the right to request the person who has no right of disposition to compensate for the losses’. Article 49 of the Chinese Contract Law provides that: ‘Where an actor enters, without the right of agency, in excess of the right of agency or beyond the expiration of the right of agency, into a contract in the name of a principal, and where the counterpart has grounds to believe that the actor has the right of agency, the act of agency shall be deemed as effective’. John Mowbray et al., Lewin on Trusts (18th edn, London: Sweet & Maxwell, 2008), para. 41–132.

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(iii) The facts are the same as in (ii) except that she has sold the painting to another person by the time she becomes aware of the situation.

Japan If Taeko has obtained good title to the painting, whether she has sold it on before acquiring knowledge of the breach is irrelevant to Akiko’s right to rescind the sale transaction.

South Korea As stated in Case 6, Alternative 1(b)(ii), article 75(1) of the Korean Trust Act provides that knowledge is assessed at ‘the time of the disposition’, and therefore, it does not matter whether the third party transferee becomes aware of the fact of breach subsequently. Since Taeko becomes aware of the breach after the disposition has been made, Akiko is not entitled to rescind the disposition even though Taeko knows about the breach by the time she sells the painting to another person.

Taiwan Akiko is not entitled to exercise the right of revocation because Taeko has already obtained good title to the property. Any subsequent acquisition of knowledge, including that obtained after she has sold on the painting, is irrelevant.

China As discussed in Case 6, Alternative 1(b)(i) and (ii) (China), so long as Taeko acts in good faith and has no knowledge of the breach at the time of the acquisition of the property, she obtains lawful ownership of the painting. Her title is not affected by her subsequent acquisition of knowledge. The sale of the painting is accordingly a lawful disposition. Akiko has no claim against Taeko.

Hong Kong As discussed in the previous scenario, since Taeko as bona fide purchaser has already extinguished Akiko’s beneficial interest in the painting at the time when its legal title is transferred to her, any subsequent

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acquisition of knowledge by Taeko is irrelevant; nor will it give rise to any personal claim against Taeko. (iv) She knows that Yamato Ltd has no authority to sell the painting.

Japan Assuming Taeko acquires knowledge before the sale contract is concluded, article 27(1) of the Japanese Trust Act applies. It allows Akiko to rescind the contract between Yamato Ltd and Taeko, and claim the painting from Taeko.

South Korea If Taeko obtains knowledge prior to concluding the contract with Yamato Ltd, Akiko will have the right to rescind the contract between Yamato Ltd and Taeko on the basis of article 75(1) of the Korean Trust Act. Upon rescission of the contract, Yamato Ltd or Akiko44 will have to claim the painting back from Taeko. If Taeko returns the painting to Yamato Ltd, Yamato Ltd will need to return the purchase price of US$2,000,000 to Taeko.

Taiwan Taeko’s knowledge of Yamato Ltd’s want of authority will entitle Akiko to exercise the right to revoke the contract between Yamato Ltd and Taeko, and claim the property back from Taeko.

China As discussed in Case 6, Alternative 1(a) (China), since the sale of the painting by Yamato Ltd is unauthorised, Akiko is entitled under article 22 of the Chinese Trust Law to annul it even if Taeko is not aware of the trustee’s want of authority. If Taeko has knowledge, she is additionally liable under article 22 to return the trust property to Akiko or compensate her loss. Since the Chinese Trust Law is silent on how these 44

It should be noted that Akiko needs to claim the property back only on behalf of Yamato Ltd since the property revests in the trustee (i.e., Yamato Ltd) rather than the beneficiary (i.e., Akiko).

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remedies operate, reference may be made to article 58 of the Chinese Contract Law, which provides that: ‘After a contract becomes invalid or is rescinded, any property obtained under the contract shall be returned. If it is impossible or unnecessary to return the property, compensation shall be made at an estimated price’. Accordingly, Taeko’s primary liability is to return the trust property (i.e., the painting), and she should compensate for the loss to the trust fund only if return of property is impossible or unnecessary. If compensation is available, it is unclear what the amount of compensation should be. It has been suggested previously that compensation at an ‘estimated price’ refers to compensation for the actual reduction of value of the relevant property.45 If the wrongdoer is unable to return the property because, say, it has been destroyed, one view is that he should compensate its full original value, being the direct loss suffered by the victim if the destruction is caused by the tortious act of the wrongdoer. However, if the current market value of the property is less than its original value, compensation should be assessed at the current market value, being the amount it takes to replace the property, and which amount will be sufficient to compensate the victim fully.46 Applying the above principles to the present scenario, Akiko could require Taeko to return the painting, failing which Taeko should make compensation at the painting’s estimated price, which is its original value of US$2,000,000 or, if its market value at the time of destruction is less than US$2,000,000, the lesser amount.

Hong Kong If Taeko has actual notice of Yamato Ltd’s want of authority, she will not be a bona fide purchaser for value without notice, and will hold the legal title of the painting as constructive trustee, that is, subject to the equity title of Akiko. (v) She knows about Yamato Ltd’s lack of authority to sell, but has now sold the painting to another person for US$4,000,000.

45 46

Case 3, Alternative 3 (China). Yang Lixin, Qinquanfa Shiwu Quanshu [Practice about Tort Law] (Changchun: Jilin People’s Publishing House, 1999), p. 381.

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Japan If the painting has already been sold on to an innocent third party as in the present scenario, Akiko will not be able to rescind the sale between Taeko and the third party; nor will Taeko be able to return the painting to Akiko. Akiko will only be able to claim compensation for loss to the trust fund from both Yamato Ltd and Taeko. To this end, Yamato Ltd must hand over the purchase price of US$2,000,000 it has obtained from Taeko. In addition, Taeko will need to compensate the shortfall from the market value of US$4,000,000, namely US$2,000,000.47 Recovery from both of them will add up to US$4,000,000.

South Korea Since Taeko acquires knowledge of the breach before the conclusion of the contract, Akiko is entitled to rescind the contract between Taeko and Yamato Ltd. Upon rescission of the contract, Akiko or Yamato Ltd may claim the painting back from Taeko. If Taeko is unable to return it because she has already sold the painting, she will need to restore the sale proceeds of US$4,000,000.

Taiwan Whether Akiko can rescind the sale between Taeko and the subsequent purchaser depends on whether the latter knows or is grossly negligent in not knowing about the breach of trust.48 If the subsequent purchaser is bona fide, Akiko cannot rescind the subsequent sale between him and Taeko. In addition, pursuant to article 215 of the Taiwanese Civil Code,49

47

48 49

Note that in general, loss should be assessed at the date of breach. However, where the tortfeasor has resold the subject matter at an increased price and obtained the profits from the resale as in the present scenario, art. 416(2) of the Japanese Civil Code applies. The article provides that special loss is also recoverable if it is reasonably foreseeable: see Imperial Court of Japan Case No. (O) 398 and 521 of 1923 (22 May 1926); Supreme Court of Japan Case No. (O) 1044 of 1968 (7 June 1973); and Ichiro Kato, Fuho Koi [Tort] (Tokyo: Yuhikaku Publishing, 1974), p. 155. Taeko’s profit of US$2,000,000 will be treated as loss suffered by Akiko, and therefore Taeko has to pay compensation of US $2,000,000 to Akiko. This in effect means that Akiko’s loss is assessed at the current value of the painting at the date of judgment. Taiwanese Trust Law, art. 18(2). Taiwanese Civil Code, art. 215: ‘If it is impossible or obviously and greatly difficult for the restoration of the status quo ante, the injury sustained shall be compensated in money’.

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if it is impossible to restore to the status quo ante, the damage suffered must be compensated in money. On the facts, since the painting is no longer held by Taeko, it is impossible for her to restore it to Akiko. Akiko can claim for the current market value of the painting, namely, US$4,000,000, as the actual damage she suffers.

China The analysis is the same as in Case 6, Alternative 1(b)(iv) (China), except that since Taeko has sold on the painting at double the price she bought it, an issue arises as to whether in compensating for Akiko’s loss, she should pay the amount she purchased or sold the painting for. There is academic support for the wrongdoer to compensate the original value of the property as measured by its value at the time of destruction. Applying this principle, since the on-sale renders it impossible for Taeko to return the painting, Akiko might argue that she should be compensated at the value of the painting at the time of sale.

Hong Kong If the subsequent purchaser from Taeko is a bona fide purchaser for value without notice, no claim can be made against him. The question is whether Akiko can claim the sale proceeds of US$4,000,000 in Taeko’s hands. As mentioned above, since Taeko has actual notice, she is not a bona fide purchaser and holds the painting on constructive trust. By the same token, she also holds the sale proceeds of US$4,000,000, being the traceable product of the painting, on constructive trust for Akiko. (vi) She knows about Yamato Ltd’s lack of authority to sell, but she herself has now become insolvent.

Japan According to article 27 of the Japanese Trust Act, Akiko can rescind the contract of sale between Yamato Ltd and Taeko, and Taeko will have to return the painting to Akiko if she still holds the painting. If Taeko has become insolvent before Akiko claims for the return of the painting, Akiko’s right to claim the painting will still have priority over the other creditors of Taeko based on Akiko’s real rights in the painting. But if

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Taeko has already sold on the painting to a bona fide third party, Akiko cannot claim it from that third party. She can only maintain a personal claim from Taeko which has no priority over the claims of Taeko’s creditors.

South Korea Upon rescission of the contract of sale between Yamato Ltd and Taeko, either Yamato Ltd or Akiko50 can claim for the return of the painting from Taeko. It must be noted that the title (i.e., ownership) to the painting revests to the trustee after the rescission. Therefore, Yamato Ltd’s proprietary interest (i.e., ownership) in the painting prevails over Taeko’s other personal creditors. This is so even if Akiko is acting on behalf of Yamato Ltd in exercising its ownership right over the painting.

Taiwan Akiko is entitled to exercise the right of revocation because Taeko is aware of Yamato Ltd’s breach of trust purpose. Once this right is exercised, Taeko will no longer own the painting. Akiko will therefore be entitled to exercise the right of recall against the bankruptcy administrator. Her claim will have priority over the other creditors of Taeko.

China As discussed above,51 Akiko is entitled to annul Yamato Ltd’s sale of the painting to Taeko within one year from the time she knows or should have known about the wrongful disposition, and ask Taeko to return the painting or make compensation.52 Akiko is still entitled to recover the painting even if Taeko has become insolvent. This is because once the sale is annulled, it is treated as void from the outset, and Taeko is treated as having only obtained possession but not ownership of the painting.53 Akiko may then invoke article 38 of the Chinese Enterprise Bankruptcy Law, which gives a right to owners to take back property held 50

51 53

It should be noted that Akiko needs to claim the property back only on behalf of Yamato Ltd since the property revests in the trustee (i.e., Yamato Ltd) rather than the beneficiary (i.e., Akiko). 52 Case 6, Alternative 1(b)(v) (China). Chinese Trust Law, art. 22. Article 59 of the Chinese General Principles of Civil Law provides that: ‘Rescinded civil acts shall be null and void from the very beginning’.

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in the possession of the insolvent debtor. She may therefore recover the painting even if her application is submitted after Taeko has already been declared bankrupt, as long as the bankruptcy administrator has not distributed the liquidation properties, including the painting. If distribution has already been made, the law is silent, however.

Hong Kong Since Taeko now holds the painting as a constructive trustee, not having been able to set up the defence of bona fide purchase, when she is declared bankrupt, the painting will not form part of her bankrupt assets to be distributed amongst Taeko’s personal creditors. Akiko as full beneficial owner under the constructive trust can require Taeko to deliver the painting over.

alternative 2 The facts are the same as in Alternative 1. However, the designer watch has already been destroyed before Akiko becomes aware of Yamato Ltd’s conduct. Yamato Ltd is now insolvent. The watch is insured for its market value. Can Akiko terminate the relationship and take the insurance claim?

Japan As discussed in Alternative 1 of the present Case, Akiko is entitled to terminate the trust contract under article 27 of the Japanese Trust Act, and claim for the return of the watch.54 Since the watch is now destroyed, Akiko can take the insurance claim, which is also trust property, for it is obtained as the result of administering trust property.55

South Korea If, as discussed in Case 6, Alternative 1 (South Korea), the arrangement creates a trust and the designer watch is treated as trust property, the insurance claim will also form part of trust property. This is because 54

55

Japanese Trust Act, art. 164(1): ‘A settlor and a beneficiary terminate a trust at any time by an agreement between them’. Ibid. art. 16(1): ‘In addition to property specified by the terms of trust as being among trust property, the following property shall be among the trust property: (i) any property obtained by the trustee as a result of the administration, disposition, loss or damage of, or any other events occurring to property that belongs to the trust property’.

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payment under the insurance policy is a surrogatum (substituted property) of the watch itself. Hence, Yamato Ltd holds the insurance on trust for Akiko, who may terminate the trust as sole settlor and beneficiary, and claim the insurance.

Taiwan Akiko as sole settlor and beneficiary is entitled to terminate the trust at any time.56 However, it is unclear whether she can claim the insurance payment in priority to other creditors of Yamato Ltd. According to article 9(2) of the Taiwanese Trust Law, which deals with substitution of trust property, ‘any property rights acquired by a trustee from the administration, disposal, destruction, [and] damage or otherwise of [the] trust property shall appertain to the trust property’. It may be said that the insurance payment is not derived from the administration or disposal of the trust property, but rather an independent insurance agreement between the trustee and the insurer. In fact, the insurance premium may even be paid out of the trustee’s own personal funds. On the other hand, the insurance payment is intended to compensate the loss caused to the trust property, and hence should be treated as its substitution. It is submitted that if the trust purpose is still capable of being performed after the occurrence of an insurable incident, the insurance payment will appertain to the trust property.57 Likewise, since the insurance payment is received as a result of the damage to the trust property, it will appertain to the trust fund. In light of this scenario, the Taiwanese Trust Law should be amended accordingly, as otherwise it will be possible for the trustee to enjoy the (insurance) benefit of the trust property even if the premium is paid out from the trust fund.

China Akiko is entitled to terminate the trust58 and also Yamato Ltd’s trusteeship.59 In particular, since Yamato Ltd has been declared bankrupt, its trusteeship terminates automatically, irrespective of express terms in the 56 57 58

59

Taiwanese Trust Law, art. 63(1). Wang, Xintuofa [Trust Law] (note 7 above), p. 144. Pursuant to art. 50 of the Chinese Trust Law, Akiko as sole settlor and beneficiary may terminate the trust at any time. Chinese Trust Law, art. 23 (wrongful disposition) and art. 39 (trustee bankruptcy).

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trust deed and without any need for court approval. If Akiko also terminates the trust, she will be entitled to the trust assets as sole beneficiary, and has the right to recall them from the liquidation property of Yamato Ltd.60 While it is clear that the watch is treated as a trust asset,61 being property obtained from the use of the trust fund, it is unclear whether the insurance claim should also be so treated. This depends on the scope of the prohibition against a trustee ‘seek[ing] interests for himself by using the trust property’.62 If use of the trust property is interpreted strictly to refer to actual expenditure of trust assets, the insurance claim will not belong to the trust fund, as the insurance premium was most probably paid from Yamato Ltd’s own funds. However, if it is interpreted broadly to include the trustee’s use of his position as apparent owner, Yamato Ltd must have represented itself to be owner of the watch in purchasing the insurance. It is submitted that the broad understanding should be adopted, because the rationale of the prohibition is to prevent the trustee from seeking his own rather than the beneficiary’s interest. The use of one’s position as trustee to obtain personal profits falls foul of this rationale just as much as expenditure of trust assets. In the present scenario, for example, if the prohibition is limited to actual expenditure of trust assets, Yamato will be able to pocket the benefits of the insurance claim himself while the trust property will bear the loss from the destruction of the designer watch. For the sake of completeness, it might be noted that since its purchase of the insurance is unauthorised, even though the insurance claim is treated as trust property, Yamato Ltd cannot invoke article 37 of the Chinese Trust Law63 to seek reimbursement of the premium.

Hong Kong Details about the termination of the trust have been discussed in Alternative 1 of the present Case. The issue that arises here is whether an unauthorised insurance claim obtained for trust property should also be treated as accruing to the trust fund. If the trust fund has not been used 60 63

61 62 Ibid. art. 54. Ibid. art. 26. Ibid. art. 26. Ibid. art. 37: ‘The charges paid and the debts owed to a third party by the trustee in the course of handling trust business shall be borne by the trust property. Where the trustee effects such payment in advance with his own property, he shall have the priority right to be paid with the trust property’.

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to pay any part of the insurance premium, it will not be possible to trace the fund through the watch into the insurance payment. Although the insurance payment seeks to compensate the insured for losses incurred by destruction to the watch, there is no transactional link between the trust fund and the payment, which is purchased solely from the personal funds of Yamato Ltd.

alternative 3 Without authority, Yamato Ltd uses US$10,000 from Akiko’s account and US$10,000 of its own to purchase a notebook computer, which is now worth US$10,000 only. Yamato Ltd has become insolvent. Can Akiko terminate the relationship and take the computer?

Japan As with Alternative 2 above, Akiko can terminate the relationship. However, she will have to compete with other creditors of Yamato Ltd over the computer. Article 18(1) of the Japanese Trust Act provides that if trust property and the trustee’s own property are mixed together and can no longer be distinguished, the mixed property will be co-owned under the trust property and the trustee’s own property. In the present scenario, Akiko will be able to claim at most a half share in the computer; the law will not overprotect her at the expense of Yamato Ltd’s personal creditors by giving her full ownership over the computer.

South Korea According to article 29 of the Korean Trust Act, if the trust property and the trustee’s own assets are mixed and become indistinguishable, the whole property is presumed to be trust property.64 The burden of proof is on the trustee to identify his share in the mixed fund in order to give him a proportionate right in it. In the present scenario, Akiko may claim that the notebook computer is presumed to be trust property. If Yamato Ltd wishes to establish a 50 per cent share in it, it will need to rebut such presumption. If it can do

64

Korean Trust Act, art. 29.

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so, Akiko’s ownership will be limited to a 50 per cent share, which is worth US$5,000. Since US$10,000 of the trust fund has been misapplied, she may make an additional claim against Yamato Ltd to recover the shortfall,65 but such a claim will not give her priority over other general creditors.

Taiwan Akiko is entitled to terminate the trust relationship at any time based on the reasons stated above.66 The question that arises is whether Akiko can claim part or the whole of the computer. According to traditional civil law principles on the mixing of movable properties (meaning all properties except real property pursuant to article 67 of the Taiwanese Civil Code and hence clearly including money as in the present scenario),67 when a person’s money is mixed with that of another person and forms a movable property whereby it is no longer possible to distinguish the sources of the mixture, at least not without incurring excessive expenses or damage, both parties will jointly own the composition in proportion to their contribution at the time of mixing.68 Alternatively, if there is a dominant component in the composition, the contributor of the dominant component acquires ownership of the whole composition.69 Although neither of these two provisions is directly on point, as the two funds contribute equally without any dominant component, and Yamato Ltd as trustee is already full owner of the computer, it is submitted that it should still be jointly owned by Yamato Ltd and the beneficiary. This is because Yamato Ltd’s ownership of the trust fund that has been used to acquire the computer is separate from its ownership of its own assets. As opposed to either giving full ownership to Yamato Ltd

65

66 67 68 69

Ibid. art 43(1): ‘Where there is damage to the trust property due to the trustee’s breach of duties, the settlor, the beneficiary or the other trustee in case multiple trustees exist may request the trustee to restore the trust property. Where the restoration is impossible or impracticable, where the cost of restoration is too high, or where restoration is not appropriate due to special circumstances, the settlor, the beneficiary or the other trustee may claim damages’. See the discussion in Case 6, Alternative 1 (Taiwan). Taiwanese Civil Code, art. 67: ‘Personal property is any thing except real property’. Ibid. arts. 812 and 813. Zheng Guan-yu, ‘Dongchan zhi Fuhe ji Hunhe’ [‘The mixture and attachment of movable property’] (2003) 2 Cross-Strait Law Review 29; Wang Ze-jian, Minfa Wuquan [Property Rights in Civil Law] (Taipei: San Min Book, 2001), p. 309.

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or treating the whole computer as appertaining to the trust property,70 co-ownership can achieve justice for both parties. If the computer is jointly owned by the beneficiary and the trustee, on termination of the trust Akiko will be entitled to exercise the right of recall against the bankruptcy administrator in relation to half of the computer in priority to other creditors. This will in effect give Akiko recovery to the amount of US$5,000. To recover the shortfall from the amount lost by the trust fund (US$10,000), Akiko can claim compensation based on article 23 of the Taiwanese Trust Law, but this claim will rank pari passu with other creditors.

China As discussed in Alternative 1 of the present Case, Akiko as sole settlor and beneficiary can clearly terminate the trust. She may also terminate Yamato Ltd’s trusteeship on the grounds of the latter’s wrongful disposition or bankruptcy. In general, the sole beneficiary is entitled upon termination to recall the trust property from the liquidation properties of the bankrupt trustee. However, because the notebook computer is purchased from the mixed funds of the trustee and the trust, there is no clear legal provision on point. In support of Akiko’s claim to the notebook computer, it may be said that it is a benefit obtained at least in part from the use of trust property (see article 26 of the Chinese Trust Law). On this view, it should belong to the trust fund and Yamato Ltd in equal shares. A contrary view, however, suggests that Yamato Ltd has already acquired valid ownership over the computer using partly its own funds. It therefore only owes a duty to compensate Akiko for loss caused to the trust fund.71 In the present scenario, such a claim is not worth pursuing, since Yamato Ltd is now insolvent.

Hong Kong Akiko as beneficiary can trace through the misappropriated trust assets into the computer, which was purchased partly with trust assets, and 70 71

Taiwanese Trust Law, art. 9(2). Akiko clearly has the right to claim restoration of the trust fund or compensation for loss under arts. 22 and 27 of the Chinese Trust Law, such rights are (personal) claims rather than real rights, and do not give Akiko priority over other general creditors of Yamato Ltd, which is now insolvent.

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assert her equitable interest in the computer. She may either claim a proportionate share of the computer or a lien over it to secure her personal claim against the trustee for the amount of the misapplied money.72 In the present scenario, since the computer has depreciated, a 50 per cent interest in the computer will only give Akiko US$5,000 rather than full recovery of the amount lost. Alternatively, since the original misapplied trust money has been substituted with a computer in which Akiko has a 50 per cent interest, Akiko can assert a lien over her share of the asset as security to secure her personal claim against Yamato Ltd for the restoration of the US$10,000 misapplied trust money.73 This means that the lien will give Akiko security for US$5,000 (which is half of the value of the computer), notwithstanding that her claim against the trustee is for US$10,000. Even if the computer sells at US$10,000, the other half of the sale proceeds will fall into the insolvent estate to be distributed to all general creditors of Yamato Ltd. Akiko can recover the shortfall of US$5,000 on a personal basis against Yamato Ltd, but such a claim is probably useless given Yamato Ltd’s insolvency. Consequently, either remedy will give Akiko the same measure of recovery on the facts of the present scenario.

alternative 4 Yamato Ltd borrows US$1,000,000 from its bank using the overdraft facility on its bank account. It uses the money to buy a flat. Later, without authority, it uses US$1,000,000 of Akiko’s money to pay the debt it owes to the bank. Yamato Ltd is now insolvent. Can Akiko take the flat?

Japan If the flat is registered as trust property by Yamato Ltd, its personal creditors cannot take the flat in priority over Akiko, provided that any mortgage over the flat has been fully redeemed. If, as is most likely in the case of wrongdoing trustees like Yamato Ltd, the flat is not or cannot be so registered, Akiko as beneficiary will not be able to assert any right over the flat as against Yamato Ltd or its creditors. She has a claim against Yamato Ltd for compensation of the lost (or 72 73

Foskett v. McKeown (note 22 above). See Mowbray et al., Lewin on Trusts (note 43 above), paras. 41-30–41-31.

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misappropriated) funds, but such a claim will only give Akiko the status of a general creditor of Yamato Ltd.

South Korea Akiko may terminate the relationship with Yamato Ltd. She cannot, however, take the flat since Yamato Ltd has made the purchase in its own capacity with its own money. There is no direct link between the purchase of the flat and the fact that Yamato Ltd has used Akiko’s money to settle its overdraft. Nevertheless, Yamato Ltd will be held liable for breach of trust since it has wrongfully disposed of trust assets (in its favour), and accordingly to compensate Akiko for loss incurred to the trust fund. However, on this basis, she will only be a general creditor of Yamato Ltd.

Taiwan Akiko is entitled to take the flat. According to article 9(2) of the Taiwanese Trust Law, if trust property is used to acquire property rights in a different form, the acquired property rights will appertain to the trust property. However, there is no express provision in the Taiwanese Trust Law as to whether this article applies also when trust property is used to settle personal debts already incurred in consideration of property. Given that the focus of the substitutive mechanism stipulated in article 9(2) is in changes in the form of the trust property, hence it should be irrelevant that there is no clean substitution between the original trust property and a new asset. If this analysis is accepted, Akiko will be entitled under article 110 of the Taiwanese Bankruptcy Law to exercise the right of recall against Yamato Ltd’s bankruptcy administrator in priority to other creditors.

China Upon its bankruptcy, Yamato Ltd’s trusteeship is terminated under article 39 of the Chinese Trust Law. Subject to provisions in the trust document, Akiko as settlor may appoint another person as replacement trustee.74 Yamato Ltd as the outgoing trustee owes the duty to hand over the trust assets to the new trustee.75

74

Chinese Trust Law, art. 40.

75

Ibid. art. 41.

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There is no Chinese provision expressly dealing with the present scenario. Two analyses are possible. First, article 26 of the Chinese Trust Law76 may be invoked to incorporate the flat into the trust fund to the extent of its contribution to the purchase of the flat, on the following ground. This article holds that benefits obtained from the use of the trust fund will belong to it. Here, the trust fund is used to extinguish the liability incurred by Yamato Ltd in purchasing the flat; it results in the benefits of having a flat (and saved expenses on the part of Yamato Ltd in acquiring it). On this basis, the flat clearly amounts to a benefit obtained from the use of the trust fund. Secondly, it may be argued that Yamato Ltd has already converted or destroyed Akiko’s trust property, and acquired ownership in a new property, namely, the flat. Akiko as beneficiary can therefore obtain compensation for loss pursuant to article 27 of the Chinese Trust Law.

Hong Kong The present scenario deals with backward tracing, that is the tracing of trust assets into property acquired before the misappropriation of the trust assets. Orthodox Anglo-Hong Kong law does not recognise the availability of backward tracing, on the ground that it is not plausible to trace misappropriated funds into assets that have already existed and which were acquired without the aid of such funds.77 However, there is dicta in case law suggesting that if at the time of incurring the debt used to pay for the asset, it was the intention of the defendant-trustee to misappropriate trust funds to repay the debt, or if the misappropriated funds free up the trustee’s overdraft limit and enable him to purchase the asset, then backward tracing should be allowed.78 76

77

78

Ibid. art. 26: ‘Where the trustee … seeks interests for himself by using the trust property, the interests gained therefrom shall be integrated into the trust property’. Bishopsgate Investment Management Ltd (in liquidation) v. Homan [1995] Ch. 211 (CA) (per Leggatt J). See, further, Mowbray et al., Lewin on Trusts (note 43 above), para. 41-109. Bishopsgate Investment Management Ltd (in liquidation) v. Homan (note 77 above) (per Dillon LJ). See also the dictum of Scott VC, that if it could be shown that trust money was used to acquire an asset, the order of events should not matter: Foskett v. McKeown [1998] Ch. 265 (CA), but on appeal the House of Lords did not address the issue of backward tracing and there was no conclusive ruling on the point. See also Federal Republic of Brazil and the Municipality of São Paulo v. Durant International Corporation and Kildare Finance Ltd [2012] JRC 211 at paras. 217–223, where the Royal Court of Jersey noted the state of uncertainty of backward tracing in English law, but was prepared

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In the present scenario, Yamato Ltd uses the trust fund to discharge an earlier loan of the same amount which was used to buy a flat. A claim to the flat will thus involve backward tracing. If the above dicta are adopted by a future court, and Akiko can show that, in incurring the overdraft facility, Yamato Ltd intends to repay it with the trust assets, Akiko will be able to claim a constructive trust pro rata to the contribution of the trust fund.

to depart from English jurisprudence to accept the validity of backward tracing in Jersey law if, as a matter of evidence, there is a clear link between the credits and debits in a mixed account that is not overdrawn, or subsequently overdrawn, throughout the relevant period.

PART III Conclusion

13 Emerging principles of Asian trust law lu s i na h o a n d re b e c c a l e e Introduction The standard view of an English trust is that it is a voluntary arrangement involving three dramatis personae: the settlor, the trustee and the beneficiary. The trustee is vested with legal ownership of the trust fund, but his ownership is subject to the right of the beneficiary who is the beneficial or equitable owner.1 The beneficiary’s right is a proprietary right attached to the trust fund. Since the trustee is only the legal – as opposed to full – owner of the trust fund, the fund does not fall within his estate if he dies or is declared insolvent. It is immune from the claims of his spouse, heirs and personal creditors. Furthermore, the beneficiary’s equitable title is enforceable against anyone in the whole world (including third party recipients) who seeks to derive title from the trustee without authorisation, except a bona fide purchaser for value without notice, the so-called ‘equity’s darling’. The trustee is subject to a range of personal duties towards the beneficiary, such as the duties to abide by the terms of the trust, to keep account, and to act with care and loyalty, breaches of which attract not only compensatory but also disgorgement liabilities. Any benefits obtained by the trustee by the use of trust property, information or his position are also accountable to the beneficiary on the basis that they are subject to a constructive trust. Based on this understanding of the trust, it is natural to have concerns about accommodating the trust institution within civilian principles. These include: the unitary and absolute nature of civilian ownership, which appears irreconcilable with dual (legal and beneficial) ownership; uncertainty as to whether the beneficiary’s right should be classified as a 1

Cf. Ben McFarlane and Robert Stevens, ‘The nature of equitable property’ (2010) 4 Journal of Equity 1 and Ben McFarlane, The Structure of Property Law (Oxford: Hart Publishing, 2008) for the view that the beneficiary’s right is not a property right itself, but a right against the specific right of the trustee over the property that can persist against third parties who derive title from the wrongdoing trustee.

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real right or just a claim (personal right); the enforceability of the beneficiary’s right against unauthorised third party recipients and in the event of the trustee’s bankruptcy; and compatibility with indigenous civil law concepts generally. Notwithstanding recent efforts in Europe to lay down model rules of trust law,2 some of these issues remain unresolved.3 The present concluding chapter seeks to make a modest contribution to the debate on these issues by drawing from the Asian approaches that have been examined in relative detail in Parts I and II of the present book. Since these Asian trust laws depart from their English counterpart in many significant aspects, they pose a fundamental challenge to the conventional methodology of evaluating civil law trusts by comparing them with the English trust. It is submitted that the English trust is but one type – perhaps even the ideal type – of trust; yet it is definitely not the only acceptable rendition of the trust concept. In so far as the Asian trusts omit some of the English features, it would be useful to examine whether the omissions involve the basic features of the trust that are minimally necessary for it to exist and to function. For the purpose of this evaluation, the present chapter treats the basic features as comprising two parts: (1) those that are essential for the trust to exist, and (2) those that are essential for it to be functional.4 The first part includes, for example, the trustee’s power to manage the trust property, for this is one of the most fundamental requirements of what it means to be a trust. In contrast, the trustee’s power to dispose of trust property falls under the second, expanded part of its basic features. This is because a trust that only empowers the trustee to preserve but not to sell trust property – such as a trust to preserve a 2

3

4

See, most recently, the publication of Book X, entitled ‘Trusts’, of the Draft Common Frame of Reference (hereafter DCFR): Christian von Bar and Eric Clive (eds.) Principles, Definitions and Model Rules of European Private Law: Draft Common Frame of Reference (DCFR) (Oxford: Oxford University Press/Sellier, 2010). For example, the DCFR trust has been criticised for being too strongly based on the English model and failing to take into account national idiosyncracies, and hence of limited utility to (European) civil law jurisdictions: see Alexandra Braun, ‘Trusts in the Draft Common Frame of Reference: the “best solution” for Europe?’ (2011) 70 Cambridge Law Journal 321. For discussion of the essential features of the trust, see Lusina Ho, ‘Trust: the essentials’ in Lionel Smith, (ed.), The Worlds of the Trust (Cambridge: Cambridge University Press (forthcoming)). Cf. Tony Honoré, ‘Trusts: the inessentials’ in Joshua Getzler (ed.), Rationalizing Property, Equity and Trusts: Essays in Honour of Edward Burn (Oxford: Oxford University Press, 2003), p. 7.

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historical monument – is still a trust, but it will not be able to realise the economic value of the trust property and hence be functional in practice. Nonetheless, both types form the basic features that can provide a yardstick for evaluating new species of trusts. The present chapter maintains that, save for the private purpose trust introduced recently in Japan and South Korea, Asian civil law trusts comprise all the basic features of a trust. The omitted features are not basic; they only make the trust more effective and attractive by enhancing the beneficiary’s rights against both the trustee and third parties.

Basic features of a trust It is submitted that the basic features of the trust are the following: • the trustee has powers to manage the trust property and to alienate it free from the beneficiary’s rights; • the trust property (which includes the initial settled sum and assets representing it from time to time) is immune from the claims of the trustee’s personal creditors (which include his heirs and spouses);5 • the trustee owes enforceable duties to act honestly, and in a way that he in good faith believes to be not detrimental to the interest of the beneficiaries; and • third parties who knowingly receive trust properties upon the trustee’s unauthorised disposition are subject to liability. Bearing these features in mind, the following aspects of the Asian civil law trust will be considered with the view to evaluating their compatibility with these basic features: (1) (2) (3) (4) (5)

creation of trust and empowerment of the trustee; independence of trust assets and nature of beneficiaries’ rights; trustee’s duties; personal claims against trustees and third parties; real claims against trust assets and their substitutions.

It is hoped that the examination will enable us to discern the broad contours of the ‘Asian’ principles of trust law. 5

Henry Hansmann and Ugo Mattei, ‘The functions of trust law: a comparative legal and economic analysis’ (1998) 73 New York University Law Review 434. Without this feature, the trust will just be like agency, whereby an agent manages property for the benefit of the principal.

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Evaluating the Asian civil law trusts (1)

Creation of trust and empowerment of the trustee

The essence of the economic function of the trust is to divide management from enjoyment of property. For this to happen, a trustee should have basic powers to manage and dispose of the trust property just as a full owner would. While there are several ways to endow the trustee with powers of management and alienation, this is achieved in the English trust by requiring the settlor to do everything within his power to transfer the title of the trust property to the trustee (that is, the constitution of trust).6 By vesting ownership of trust property (or the very specific right which is the subject matter of the trust) in the trustee, the arrangement allows him to act in his own name without the inconvenience of regularly seeking authorisation from the settlor or beneficiary for his dealings with the property. Most Asian civil law jurisdictions have adopted the same approach of vesting the trustee with ownership and with it the power to manage the trust assets.7 Having said that, this is but a common, if not the most effective way to give the trustee powers of management and alienation.8 It does not follow that it is the only way. Under the Québec Civil Code, for example, ownership is not vested with the trustee or indeed any party. Instead, the Code grants the trustee the full set of powers that are typically available to the owner.9 Seen in this light, even though the 6

7

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9

Re Rose, Rose v. Inland Revenue Commissioners [1952] Ch. 499. It appears, after the decision in Pennington v. Waine [2002] EWCA Civ 227; [2002] 1 WLR 2075, that if the settlor has acted in such a way towards the intended beneficiary as to make it unconscionable for him to recall a promised gift, he will hold the gift on constructive trust for the transferee. Note also that where the settlor declares himself a trustee, no transfer of assets is required. However, a sole settlor cannot be the sole trustee and beneficiary. In particular, see Taiwanese Trust Law, art. 9: ‘The property rights acquired by a trustee by virtue of a trust act shall be deemed to be a trust property’. See also Japanese Trust Act, art. 3(i) and Korean Trust Act, art. 2, which assign and transfer trust property to the trustee. See also art. X-1:201 of the DCFR which defines the trust as ‘a legal relationship in which a trustee is obliged to administer or dispose of one or more assets (the trust fund) in accordance with the terms governing the relationship (trust terms) to benefit a beneficiary or advance public benefit purposes’. The definition also makes no reference to a transfer of assets from the settlor to the trustee. Nonetheless, a subsequent article (art. X-1:203) does make it clear that ‘[t]he trustee is the person in whom the trust fund becomes or remains vested’. The Civil Code gives the trustee, in the broadest terms, the ‘exercise of all the rights pertaining to the patrimony’: see Civil Code of Québec (1994), arts. 1261 and 1278. See also the bewind-trust in South Africa where ownership is granted to the beneficiary but the trust property is ‘placed under the control of [the trustee] to be administered or disposed of according to’ the trust: Trust Property Control Act 1988 (South Africa), s. 1.

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Chinese Trust Law may appear heretical in defining a trust as the entrustment – as opposed to transfer – of the settlor’s property rights to the trustee,10 the lack of transfer of ownership is not per se repugnant to the trust concept. What matters most is whether the Chinese trustee is vested with the basic powers to manage and alienate the trust assets as a full owner would. In this connection, it is unfortunate that the closest one can find to an empowerment provision is the definition of the trust, namely, that the ‘settlor entrusts his property rights to the trustee’, for the latter ‘according to the will of the settlor and in the name of the trustee, to administer or dispose of such property’.11 Unlike the Québec Civil Code, which gives the trustee the right to ‘exercise all the rights pertaining to the patrimony’, the elliptical wording in the Chinese Trust Law is ambivalent as to whether the trustee is given the power or duty to do so, and in particular whether his management and disposal are subject to the overriding wishes of the settlor. In the Québec Civil Code, there is no concern of settlor interference, for the trust property is not owned by any party; however, since the settlor retains ownership in the situation contemplated in the Chinese Trust Law, the chances of such interference are very real. In practical reality, where the settlor retains ownership of the trust property, the trustee will have to obtain his consent and cooperation to deal with the property. This itself will give the settlor de facto power to veto the trustee’s decisions. As such, in the absence of specific provisions that grant the trustee management and disposal powers vis-àvis the settlor, the former is relegated to the position of an agent, who acts upon the specific instructions of the principal-settlor.

(2) Independence of trust assets and nature of beneficiaries’ rights It is also well accepted that one of the basic features of the trust is the immunity of the trust assets from the claims of the trustee’s spouse, heirs and personal creditors.12 The immunity arises from the segregation of the trust assets from the trustee’s own assets, so that the trust assets are 10

11

12

Chinese Trust Law, art. 2. Under Chinese Law, the term ‘entrustment’ also embraces the establishment of an entrustment agency, which does not mandate the transfer of property rights. The official translation, ‘to allow the trustee to manage and dispose of such property’ (emphasis added), suggests the grant of a power; however, the language used in the authoritative Chinese version, ‘you shoutuoren’ does not imply the grant of a power. Hansmann and Mattei, ‘Functions of trust law’ (note 5 above). See also art. X-1:202(2) of the DCFR which protects the trust fund from insolvency, divorce and death of the trustee.

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bankruptcy-remote. The segregation is necessary for the operation of the trust and protection of beneficiary’s rights, for otherwise the trust property may be affected by liability incurred for matters unrelated to the trust property, such as claims from the trustee’s creditors.13 In an English trust, trust assets (and their traceable product) are immune from the claims of the trustee’s personal creditors, heirs and spouse, unless that party is a bona fide purchaser of a legal estate for value without notice (equity’s darling). The immunity is traditionally justified on the basis of the nature of the beneficiary’s rights: his right (a right which is enforceable against the whole world except equity’s darling) is in effect an ownership right over the trust assets; and since this right is historically protected by equitable principles, the beneficiary is said to have equitable ownership/ equitable proprietary interest in the trust assets. The unanalysed, historical label of equitable ownership also finds its way to insolvency legislation in common law, which typically provides that only assets beneficially owned by the insolvent trustee-owner will fall within the bankrupt estate.14 On closer examination, however, the language of equitable ownership is but a convenient shorthand, for the common law does not establish two separate (legal vs equitable) patrimonies held in the name of the trustee. It is not the purpose of the trust to ring-fence the trustee’s own assets from trust liabilities; all of his assets are, without distinction, available to the claims of his trust as well as personal creditors. All that is necessary to ring-fence the trust assets is to provide that they are not available to the claims of the trustee’s personal creditors, which is the common law position.15 In light of these observations, it is not necessary for a jurisdiction to recognise dual ownership in order to preserve the independence of the trust assets. The notion of patrimony as recognised in civil law can be utilised to conceptualise and explain the immunity of the trust assets and the order of priority amongst the trust creditors, the beneficiary and the trustee’s personal creditors.16 A patrimony comprises both assets

13

14

15 16

See Maurizio Lupoi, Trusts: A Comparative Study (Cambridge: Cambridge University Press, 2000), p. 199. See s. 283(3)(a) of the English Insolvency Act 1986 in relation to individual trustees; the same assumption is adopted in relation to corporate trustees. Before express legislative provisions, the trustee for bankruptcy was treated as standing in exactly the same position as the bankrupt himself: Peter Watts, ‘Constructive trusts and insolvency’ (2009) 3 Journal of Equity 250, citing Copeman v. Gallant (1716) 1 P Wms 314; 24 ER 404. Lionel Smith, ‘Trust and patrimony’ (2009) 28 Estates, Trusts and Pensions Journal 332. Kenneth Reid, ‘Conceptualising the Chinese trust: some thoughts from Europe’ in Chen Lei, and C.H. van Rhee (eds.), Towards a Chinese Civil Code: Comparative and Historical

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and liabilities. In a trust arrangement, the trustee has two distinct patrimonies: the trust patrimony (comprising the trust assets and liabilities) and his own, private patrimony (comprising the trustee’s own assets and liabilities). Each patrimony has its own creditors; and thus the trustee’s personal creditors can only claim against the trustee’s private patrimony, and the trust creditors (beneficiaries) against the trustee’s trust patrimony.17 Beneficiaries have personal claims against the trust patrimony, which is immune from the trustee’s personal creditors (because the trustee’s personal creditors only have access to the trustee’s private patrimony). Beneficiaries do not have ‘real rights’ over the trust patrimony. On the basis of this view, it is not an issue that only absolute ownership can be vested in the civilian trustee, such that it is not possible to also give the beneficiaries any real rights in the trust property. This is because even in the English trust, it is not necessary to give the beneficiary any in rem right in the trust property.18 All that the beneficiary has is a claim against the segregated trust fund (or the trust patrimony), which is not available to the spouse, heirs or personal creditors of the trustee.19 Consequently, the creation of a trust would not violate the numerus classus principle of property rights adopted in many civil law jurisdictions. In fact, not even the concept of patrimony is necessary to preserve the independence of the trust assets, albeit it provides a natural platform within civilian concepts to do so. The Asian trust statutes under review merely confer independence on the trust assets by statutory provision, namely, that trust assets do not form part of the trustee’s bankruptcy estate,20 and are immune from the claims of the trustee’s heirs, spouse and personal

17

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19

20

Perspectives (Leiden: Martinus Nijhoff, 2012), p. 209; Kenneth Reid, ‘Patrimony not equity: the trust in Scotland’ (2000) 8 European Review of Private Law 427. See also art. X-1:202(1) of the DCFR which treats the trust fund ‘as a patrimony distinct from the personal patrimony of the trustee’. Thus, there is a duty to segregate and administer trust property from the trustee’s own property: see e.g., Japanese Trust Act, art. 34(1); Korean Trust Act, art. 4(2); Taiwanese Trust Law, art. 24. See McFarlane and Stevens, ‘The nature of equitable property’ (note 1 above), and McFarlane, Structure of Property Law (note 1 above) for the view that the beneficiary’s right is a right against the specific right of the trustee over the property, but not a property right itself. H.L.E. Verhagen, ‘Trusts in the civil law: making use of the experience of “mixed” jurisdictions’ (2000) 3 European Review of Private Law 477 at 488. See Japanese Trust Act, art. 25(1); Taiwanese Trust Law, art. 11; and Chinese Trust Law, art. 16.

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creditors.21 This means that the beneficiary’s right to the trust assets prevails over that of the trustee’s personal creditors (and heirs and spouses),22 even though his right is still subordinated to that of the trust creditors who are first to be paid from the trust. The concept of patrimony was not expressly invoked to justify or rationalise these statutory provisions. In this connection, despite clear announcements of the principles of segregated trust assets in their statutes, two incidences of the Asian trusts pose serious practical uncertainty as to how the principle will be observed. First, where a Chinese settlor retains ownership of the trust assets, it is unclear how far the trust assets are truly segregated from his personal assets as provided for in article 15 of the Chinese Trust Law. For example, what happens if the settlor wishes to transfer assets to the trustee upon trust, but dies before doing so?23 What are the duties of a settlor who still retains ownership of the trust assets: is he also subject to the irreducible core duties to act honestly and in good faith as a trustee?24 Given that the settlor is granted extensive powers but subject to relatively few duties, is the position of the trust beneficiaries sufficiently protected?25 These are questions that the Chinese Trust Law will need to address to ensure that the settlor’s ownership right is subject to adequate legal constraints in order to preserve the integrity of the trust property. Secondly, how is the independence of the trust assets maintained in the self-declared trust (jiko shintaku) in Japan and South Korea, whereby a sole settlor declares himself sole trustee of certain assets held by him on trust for the benefit of himself as the sole beneficiary? In common law principles, this is a void trust, for the sole beneficiary is unlikely to enforce his rights against himself as trustee. Japan and South Korea intended to use the self-declared trust in the specialised context of asset securitisation. It enables an originator of a securitisation plan to 21

22 23

24

25

For example, Japanese Trust Act, art. 25(1); Korean Trust Act, arts. 24 and 25; Taiwanese Trust Law, arts. 10 and 11; and Chinese Trust Law, arts. 16 and 17. However, it appears that divorce is omitted from art. 16 of the Chinese Trust Law. Article 15 of the Chinese Trust Law prohibits the trust assets from forming part of the settlor’s legacy. But there is also no mechanism for transferring the trust assets to the trustee. In a Chinese trust, the trustee is subject to the overriding duty to ‘handle trust business for the best interests of the beneficiary’: Chinese Trust Law, art. 25. For details, see Rebecca Lee, ‘Conceptualizing the Chinese trust’ (2009) 58 International and Comparative Law Quarterly 655 at 659–61; Lusina Ho, ‘The reception of trust in Asia: emerging Asian principles of trust?’ (2004) Singapore Journal of Legal Studies 287 at 295–6.

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self-declare itself as trustee of the underlying assets during the promotion period, so as to issue bonds to outside investors. Once the bonds are subscribed, the beneficial interest will vest with the investors. This arrangement obviates the need for the originator to bear the cost of establishing a special purpose vehicle to vest the trust assets with in the interim, while at the same time making the assets bankruptcy-remote.26 To provide safeguards from abuse, both trust statutes provide that the declaration must be evidenced by a notarial deed or any other document or electromagnetic record and in such form to be specified by the relevant authority.27 Furthermore, if the settlor/trustee holds the full beneficiary interest for over twelve months, the trust will be terminated.28 Confined to this context and subject to these safeguards, the self-declared trust may just barely meet the threshold of the basic features. First, even though in theory the beneficiary has no incentive to restrain the trustee (who is also himself) from misappropriation of the trust assets, if it is the originator’s wish to launch an asset securitisation plan, and if the trust is only to last for twelve months, the risk of misappropriation may be more theoretical than real. Secondly, in the civil law system, the notarial deed can significantly overcome evidential difficulties in identifying and hence segregating the trust assets from those of the settlor, albeit whether it can do so effectively depends on how much disclosure needs to be made in the notarial deed.

(3) Trustee’s duties To prevent the trustee from abusing his control over the trust property, he must be subject to basic duties to act honestly, and in a way that he in good faith believes to be not detrimental to the interest of the beneficiaries. All of the Asian civil law jurisdictions under review have incorporated these basic duties into their trust statutes. In fact, they have enacted the full range of duties typically seen in English law, such as duties to comply with the terms of the trust; to take care;29 to act honestly and in 26

27 28 29

Yuri Suzuki, Ryuichi Nozaki and Michiaki Hosoi, ‘Japan: aiming at diversity’ International Financial Law Review, 31 July 2012, available at www.iflr.com/Article/ 3068937/Japan-Aiming-at-diversity.html (last accessed 15 August 2012). Japanese Trust Act, art. 3(iii); Korean Trust Act, art. 3(2). Japanese Trust Act, art. 163(ii). Japanese Trust Act, art. 29(2); Korean Trust Act, art. 32; Taiwanese Trust Law, art. 22; and Chinese Trust Law, art. 25.

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good faith;30 to provide information to beneficiaries or interested parties; and to segregate the trust fund from his own or other assets held by him,31 albeit the scope of these individual duties may be narrower than those found in English law. Although the Asian trust statutes do not stipulate any rules pertaining to clauses that exonerate or limit trustee liability, relevant provisions of their respective contract laws might be applicable, at least to inter vivos trusts created by agreement. In English law, a trustee is subject to the fiduciary, no-profit or noconflict rules.32 This means that he is prohibited from making profits out of his fiduciary position, or placing himself in a position where his personal interest conflicts with that of his beneficiary. These fiduciary rules are wide enough to cover two aspects of prohibition, namely, misuse of trust assets and misuse of the trustee’s position. This means that not only is a trustee prohibited from using the trust assets for his own personal benefit and causing damage to the trust assets, he is also prohibited from using his position for personal profits where there is a conflict of interest. Thus, for example, he is prohibited from receiving bribes,33 or intercepting business opportunities of beneficiaries.34 English courts have adopted a strict approach that requires the trustee to pass on any relevant information to the beneficiaries,35 even if the information is obtained in his personal capacity.36 The rationale for these prohibitions is to remove from the trustee any temptation to breach his duty as trustee, and the trustee is said to owe a strict duty of loyalty to the beneficiaries. Besides, in general, there is a clear distinction between a trustee’s duty of loyalty and duty of care – the latter does not form part of his fiduciary obligation.37 30

31

32 33 34 35

36 37

Note also that the DCFR trust only stipulates a duty of the trustee to ‘act with the required care and skill, fairly and in good faith’ pursuant to art. X-6:101(2), without referring to fiduciary duty or a duty of loyalty. Japanese Trust Act, arts. 34 and 36–9; Korean Trust Act, arts. 37 and 39; Taiwanese Trust Law, arts. 24, 31 and 32; and Chinese Trust Law, arts. 20, 29, 33 and 49. Bray v. Ford [1896] AC 44; Breen v. Williams (1996) 186 CLR 71. Attorney General for Hong Kong v. Reid [1994] 1 AC 324. Boardman v. Phipps [1967] 2 AC 46. Industrial Development Consultants Ltd v. Cooley [1972] 1 WLR 443; CMS Dolphin Ltd v. Simonet [2001] EWHC (Ch) 4159; [2001] 2 BCLC 704; Bhullar v. Bhullar [2003] EWCA Civ 424; [2004] 2 BCLC 241. Bhullar v. Bhullar ibid. See Case 3, Alternative 1 for further discussions. Bristol & West Building Society v. Mothew [1998] Ch. 1 at 18. Accordingly, breach of a trustee’s duty of care is to be remedied differently (namely, by common law tort principles as opposed to equitable remedies) from breach of the duty of loyalty. The standard of care expected of a trustee is that of a prudent man of business, keeping

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In contrast, while the duty of honesty and good faith (loyalty/fiduciary duty) does exist in the Asian civil law jurisdictions under review, its scope is much narrower than that in common law jurisdictions. In order to invoke the fiduciary duty, misuse of trust assets (as opposed to trust information) is necessary.38 For example, although both the Japanese Trust Act and Chinese Trust Law contain express general stipulations on fiduciary duty,39 the examples of prohibited conflicts of interest in both statutes revolve around abuse of trust property and self-dealing transactions.40 The Taiwanese Trust Law does not even contain express stipulations on fiduciary duty, but only prohibitions on the trustee from entitlement to trust benefits and from converting trust property to his own use.41 Thus, the civil law trusts in Japan, Taiwan and China only expressly prohibit the use of trust assets and causing damage to trust property/making profits for the trustee himself; the making of profits out of the trust position or information is not covered.42 For Japan and China, which do have express general stipulations on fiduciary duty, the question is whether the general stipulation can be invoked as a fallback to deal with situations involving the use of trustee’s position, but without use of trust assets. For example, where a trustee uses his trust position (as opposed to trust assets) to make personal profits, it may be argued that the general stipulation on fiduciary

38

39

40

41

42

in mind that he is investing for someone for whom he feels morally bound to provide: Re Whiteley (1886) 33 Ch. D 347 at 355; affirmed by Learoyd v. Whiteley (1887) 12 App. Cas. 727; and professional trustees are subject to a higher standard of care: Bartlett v. Barclay’s Bank Trust Co. Ltd [1980] Ch. 515 at 534. Cf. art. X-6:109(1) of the DCFR which prohibits a trustee from ‘[making] use of the trust fund, or information or an opportunity obtained in the capacity of trustee, to obtain an enrichment’. See Japanese Trust Act, art. 30 (‘administer trust affairs and conduct any other act faithfully on behalf of the beneficiary’); and Chinese Trust Law, art. 25 (‘handle trust business for the best interests of the beneficiary’), respectively. See Japanese Trust Act, art. 31, where all four types of prohibited acts (misappropriating trust property, conflict of interest, etc.) involve use of trust property; and Chinese Trust Law, art. 26 (prohibits trustee from using trust property for personal benefit); art. 27 (prohibits trustee from converting the trust property into his own property); art. 28 (prohibits trustee from conducting transactions between his own property and trust property or between the trust properties of different settlors), respectively. Taiwanese Trust Law, art. 34: ‘A trustee shall on no account be entitled to any benefits arising out of a trust unless the trustee is a co-beneficiary of the trust’; art. 35: ‘A trustee shall not convert any of the trust property to his own property or create or acquire any right thereto except [for certain situations set out therein]’. See Case 3, Alternative 1 for further discussion.

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duty in article 25 of the Chinese Trust Law (to act in the best interests of the beneficiary) requires a trustee who acts in the best interests of the beneficiary to inform the beneficiary of any business opportunity he comes across as the result of his position as trustee. If he fails to do so but then exploits the opportunity for his own benefit, he prefers his own interests to those of the beneficiary.43 To the contrary, Japanese scholars took a different view, and suggested that Japanese trust law might not have embraced a broad notion of conflict of interest as in Anglo-American law to deal with such situations. Even if it does, to compel a trustee to disgorge profits obtained from using the trust position or information in the course of administering trust business, it is necessary that a loss has occurred to the trust property or the beneficiary in the first place.44 As to the position in South Korea, although the old Korean Trust Act 1961 also did not contain express stipulations on fiduciary duty, the new Korean Trust Act 2011 has added an express provision on a fiduciary duty of loyalty,45 and expressly prohibits a trustee from benefitting from his trustee position or putting himself in a position of conflict of interest.46 Thus, where the trustee makes a profit exclusively from information gathered in his capacity as trustee, as in the above example, he will still be held liable.47 Even though the provisions of the Asian statutes on trustee’s duties clearly match, if not exceed, the basic features of a trust, there must also be an adequate mechanism to ensure that these duties are in fact enforceable. This requirement is invariably met in a trust for the benefit of persons, for the beneficiaries who hold rights against the trustees have sufficient interest and motivation to enforce these duties to protect their interest. However, in relation to the private purpose trusts that have been 43

44 46

47

See Case 3, Alternative 1 (China) for further discussion of the argument and the limits of art. 25 in dealing with such situations. 45 See Case 3, Alternative 1 (Japan). Korean Trust Act, art. 33. Ibid. art. 36: ‘No trustee, whether he uses his own name or the name of others, may enjoy any benefits when administering the trust, except in a case where the trustee is one of the beneficiaries’; and art. 34: ‘(1) The trustee may not do the following acts in the name of any person; (i) Making the trust property his own property, or attributing any property thereto to his own property; (ii) making his own property the trust property or attributing any property thereto to the trust property; (iii) attributing the trust property of one trust or any property thereto to the trust property of another trust in case where multiple trusts were undertaken; (iv) representing a third person in an act regarding the third person’s trust property; (v) any acts contrary to the beneficiary’s interest in ways other than the aforementioned’. See Case 3, Alternative 1 (South Korea).

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introduced in the latest Japanese and Korean Trust Acts,48 there are serious doubts as to whether there is a party with sufficient motivation to do the same. The mechanisms available in these jurisdictions for enforcing the trustee’s duties are unlikely to provide sufficient replacement for enforcement by beneficiaries. For example, the Japanese Trust Act provides that the general rights the settlor has in enforcing a trust for persons are mandatory for purpose trusts and not open to modification by the terms of the trust.49 However, even though it is mandatory to vest the settlor with such rights, it is not mandatory for the settlor to exercise them. Nor does it impose a duty on the settlor to exercise such rights. Secondly, the Act provides that a trust caretaker must be appointed, by the trust instrument and in default by a court, to exercise the rights under private purpose trusts, and such rights are also not open to modification by the terms of the trust.50 Unlike in the case of settlors, the statute requires the trust caretakers to exercise their powers ‘with the due care of a prudent manager’ and ‘sincerely and equitably on behalf of the beneficiary’.51 Nonetheless, the question remains as to who monitors the trust caretaker or the settlor. While the settlor may use his power to remove the trust caretaker to ensure that the latter acts dutifully,52 he may also use the same power to ensure that the trust caretaker follows his wishes slavishly. Moreover, after the establishment of the trust, it is not uncommon that the settlor has second thoughts about it, or his interest does not align with that of the trust purpose. He is hardly a reliable party for enforcing the trust. In light of these, one cannot help see the twenty-year restriction of the duration of such trusts as a concession regarding their inadequacy.53

(4) Personal claims against trustees and third parties (i) Personal claims against trustee Turning to remedies for breach of duties by trustees, English trusts generally provide for disgorgement of profits made from breach,54 in 48 49 50

51 54

Japanese Trust Act, arts. 258–61; Korean Trust Act, art. 68(1). Japanese Trust Act, art. 260(1). Japanese Trust Act, arts. 258 and 269(2); the Korean provision (Korean Trust Act, art. 67 (1)) however, only provides that the trust protector ‘may’ be appointed. 52 53 Japanese Trust Act, art. 126. Ibid. art. 130(1)(ii). Ibid. art. 259. Regal (Hastings) Ltd v. Gulliver [1942] 1 All ER 378. In fact, traditional English principles went further to suggest that the trustee be liable to hold the profit and assets purchased with the profit on (constructive) trust for the beneficiaries in certain circumstances: Attorney General for Hong Kong v. Reid (note 33 above); disapproving Lister & Co. v.

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addition to compensation for loss arising from the breach. In fact, disgorgement of profits is more widely used. To invoke this remedy, it is irrelevant that the beneficiary has suffered no loss from the breach, or may even have made profits in the circumstances.55 There is English authority suggesting that it is not necessary to prove that but for the breach, the defendant would not have made the profit.56 It is submitted that the beneficiary’s right that the trustee disgorge profits obtained from breach is not a basic feature of the trust.57 This is because the disgorgement remedy only serves the purpose of providing additional deterrence to breach, by removing the trustee from the temptations to breach. Without disgorgement, the beneficiary can still rely on the compensatory remedy, albeit it is less extensive. In civil law trusts in Asia, trustees are primarily liable to a compensatory remedy. The Japanese Trust Act only stipulates the remedy of rescission in article 31 where the trustee has breached his duty of loyalty, and no mention is made of the disgorgement remedy.58 In contrast, there is a limited disgorgement remedy in the other jurisdictions under review. For example, article 35(2) of the Taiwanese Trust Law provides for a duty to disgorge profits to be included in the trust fund where the trustee has converted trust property to his own use.59 The Chinese Trust Law also contains a disgorgement remedy in article 26. The most recently revised Korean Trust Act has also added a disgorgement remedy by virtue of article 43(3) of the Act.60

55 56

57

58 59

60

Stubbs (1890) LR 45 Ch. D 1. But recently the English Court of Appeal reversed the position: Sinclair Investments (UK) Ltd v. Versailles Trade Finance Ltd [2011] EWCA Civ 347, [2011] 3 WLR 1153. Regal (Hastings) Ltd v. Gulliver (note 54 above). Murad v. Al-Saraj [2005] EWCA Civ 959; [2005] All ER (D) 503. The Hong Kong Court of Appeal in Kao, Lee and Yip v. Koo [2003] 3 HKLRD 296 has expressed the principle in a more circumspect manner, suggesting the need for reasonable approximation between the breach and the gain made. Cf. the DCFR which provides, in addition to the remedies of restoration (art. X-7:201) and compensation (art. X-7:202), disgorgement of profits (art. X-7:203) against the trustee for a breach of trust. Japanese Trust Act, art. 31(6) and (7). Taiwanese Trust Law, art. 35: ‘If the trustee uses or disposes of the trust property in violation of the first paragraph … the settlor, beneficiary or other trustees shall have the right to request the trustee to disgorge the benefit which the latter has acquired for incorporation into the trust property. The interest accrued from the benefit shall also be disgorged and incorporated into the trust property if the trustee is liable mala fide’. Korean Trust Act, art. 43(3): ‘Where the trustee is in breach of the duties stipulated in articles 33–37 [duty of loyalty and duty to segregate trust fund], even though there is no

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However, the scope of both the Chinese and Taiwanese statutes is limited in one way or another. In relation to the Chinese statute, article 26 of the Chinese Trust Law stipulates that profits obtained in breach of trust (by misuse of trust assets) automatically accrue to the trust fund if the breach involves misuse of trust assets (article 26). However, for other types of breaches (e.g., converting trust property into his own (article 27) and self-dealing transactions (article 28)), no disgorgement remedy is provided. Besides, the legislators might have intended to strengthen protection of the beneficiaries by not stipulating a mere personal right to disgorgement of profits, but providing that such profits are automatically included in the trust fund, and hence are real rights against the profits (article 26).61 Such a provision has the de facto effect of imposing the constructive trust commonly found in English trusts on wrongful profits held in the hands of the trustee, and hence provides a strong disincentive to breach. However, it overlooks the fact that being a real right, it will be extinguished if the trust property happens to be dissipated or destroyed through no fault of the trustee (e.g., accidentally by fire), hence leaving the beneficiary in a worse-off situation with no alternative remedy against the trustee. In this regard, the Taiwanese Trust Law seems to have offered better protection by providing for both disgorgement of profits and accrual of the profits to the trust fund. In another aspect, the Taiwanese provision is more restricted. It seems that article 35 provides for the benefits to be returned, but only on the condition that the trust property has suffered loss.62 This is different from disgorgement of profits irrespective of whether a loss has arisen. What if the profit exceeds the loss, such as where the trustees misappropriates US$10 from the trust fund to purchase a lottery ticket and win US$1,000,000? This can be contrasted with the position in South Korea, where the revised Korean Trust Act now requires a trustee to disgorge

61

62

damage to the trust property, the trustee shall disgorge the whole profit that the trustee or a third party has made due to the breach’. Chinese Trust Law, art. 26: ‘Where the trustee … seeks interests for himself by using the trust property, the interests gained therefrom shall be integrated into the trust property’. Article 35(2) of the Taiwanese Trust Law provides that if a trustee converts trust property to his own use, ‘the provisions of article 23 hereof shall apply mutatis mutandis; in addition, the settlor, beneficiary or other trustees shall have the right to request the trustee to disgorge the benefit’. Since art. 23 makes loss to trust property a condition for claiming compensation, it is arguable that, by referring back to art. 23, art. 35(2) also makes loss to trust property a condition for claiming disgorgement.

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any profits obtained from a breach of his duty of loyalty, even though no loss is made to the trust property.63 In summary, except for China and South Korea, if the disgorgement remedy is available at all, it is limited by proof that loss has incurred to the trust property. It remains to be seen whether this restriction will be removed, say, in future revisions of the Taiwanese Law.

(ii) Personal claims against third parties There are two groups of third parties that might interfere with the beneficiary’s right: unauthorised transferees of trust assets (such as volunteers and purchasers in bad faith), on the one hand, and third parties who interfere with the trustee-beneficiary relationship through assisting or otherwise intermeddling with trust affairs, on the other.64 Under English law, the title the former group derives from the wrongful trustee is subject to the beneficiary’s right. If they have the requisite degree of knowledge about the unlawfulness of the disposition at the time of receipt or subsequently when the property is still in their hands, they are also subject to personal liability on knowing receipt. The latter group – intermeddlers and knowing assisters – is subject to in personam liability.65 One might question whether any of these liabilities fall within the basic features of the trust. The question is irrelevant for the purposes of the present chapter, however, since all the Asian civil law jurisdictions under review have imposed liability on these two groups of third parties in varying degree. First, all four jurisdictions under review impose personal liability in tort on third parties who knowingly assist the trustee in his breach.66 Secondly, in relation to unauthorised transferees who at the time of receipt knew or were grossly negligent in not knowing that the property was disposed of in breach of trust, the beneficiary can rescind the relevant disposition and request the return of the property where feasible, or claim compensation if it is no longer feasible to return it.67 63 64

65

66

67

Korean Trust Act, art. 43(3). There are also, in common law terminology, intermeddlers of the trust, such as trustees de son tort and knowing assisters. Barnes v. Addy (1874) LR 9 Ch. App. 244; Grupo Torras SA v. Al-Sabah [1999] CLC 1469; El Ajou v. Dollar Land Holdings Plc [1994] 2 All ER 685. Japanese Civil Code, art. 709; Taiwanese Civil Code, art. 184; Korean Civil Code, art. 750; Chinese Tort Law, art. 6. Japanese Trust Act, art. 27(1); Korean Trust Act, art. 75(1): ‘In case where the trustee disposes of trust property in breach of the trust, the beneficiary can rescind the

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Article 22 of the Chinese Trust Law, for example, imposes liability on transferees who knowingly accept an unauthorised disposition.68 In contrast, if the transferees did not know about the breach at the time of receipt, they will not be subject to any liability towards the settlor or beneficiary; their position will not be compromised by any subsequent acquisition of knowledge.69 Significantly, even if they are subject to liability, these unauthorised transferees will only be subject to an in personam compensatory remedy (for loss).70 This means that if such a transferee is declared bankrupt while still holding the property in their hands, such property will be subject to claims of their personal creditors.71 As the next section will show, the absence of proprietary relief against unauthorised transferees does not affect the practical functioning, let alone existence, of the trust, for it is not after all a basic feature of the trust.

(5) Real claims against trust assets and their substitutions There are two main features in English trust principles in this regard. First, the trust fund includes the original settled sum and all assets representing it from time to time, whether derived lawfully or unlawfully. Thus, where a trustee breaches a trust and transfers property to a third party (e.g., substitutes trust property with a painting), the beneficiary can invoke the equitable tracing process and plaintiff-friendly tracing rules to identify the value of an original asset in a new, substituted asset even though the property has passed through several hands. These tracing rules often include artificial presumptions in favour of the beneficiaries, such as presumptions against the wrongdoing trustee when trust property is mixed with the trustee’s own property in order to protect the beneficiaries.72

68

69 70 71 72

disposition, provided that the other party or the subsequent purchaser knew, at the time of the breach, the disposition was concluded in breach of the trust or could have known about the breach through reasonable investigation’; Taiwanese Trust Law, art. 18(2): ‘the beneficiary has a right to apply for revocation of the disposal of trust property if the ‘transferee knew or failed to know by gross negligence that the trustee had disposed of the property against the stated purpose of the trust’. Chinese Trust Law, art. 22: ‘Where a transferee of the [misapplied] trust property accepts the property while knowing the violation of the purposes of the trust, he shall return the property or make compensation’. See Case 6, Alternative 1(b)(ii) (South Korea, Taiwan, China). See Chinese Trust Law, art. 22 (return the trust property or make compensation for loss). See Case 6, Alternative 1(b) for details. For example, where a trustee mixes trust monies with his own, the rule in Re Hallett (1880) 13 Ch. D 696 presumes that the trustee draws out his own monies first so that the

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In civil law trusts in Asia, although the statutory provisions do stipulate that the trust property includes its substituted assets resulting from the trustee’s lawful or unlawful conduct,73 they do not contain extensive tracing rules as found in common law trusts. Instead, there are no rules of (equitable) tracing to resolve evidential ambiguities and allocate losses to the defaulting trustees. Secondly, as long as the trust assets are traceable into exchange products (substitutions), beneficiaries can assert a proprietary (real) claim (in the form of a lien or constructive trust) against assets74 held in the hands of any recipient except a bona fide purchaser without notice. Even the third party is called a trustee (constructive trustee), and if he becomes bankrupt, the property he received will not be claimed by his heirs or personal creditors; instead it will continue to form part of the trust fund. In other words, the trust assets and their traceable products are also immune from the claims of the heirs, spouses and creditors of such transferees, and such transferees are also subject to duties to refrain from using the trust assets to meet their personal liabilities. Thus, the rights of the beneficiaries under an English trust can be enforceable against the whole world, except a bona fide purchaser for value without notice. As a matter of policy, English law therefore prefers the interest of the beneficiary over that of an innocent volunteer who receives the property, as well as the innocent creditors, both of whom will be prejudiced by hidden proprietary rights raised against them. To the contrary, notwithstanding the presence of provisions on liability of third parties, a constructive trust is invariably not adopted in the Asian civil law trust. In other words, a constructive trust is not imposed on traceable assets now in the hands of unauthorised third parties; there will only be personal liability against knowing recipients of trust property (to compensate loss),75 or a right to revoke the transaction.76

73

74

75 76

beneficiary may claim the balance of the fund. However, if property is purchased from the mixed fund and the remaining trust fund is then dissipated, the beneficiaries can claim against the property: Re Oatway [1903] Ch. 356. See generally, Lionel Smith, The Law of Tracing (Oxford: Oxford University Press, 1997). For example, Korean Trust Act, art. 27; Taiwanese Trust Law, art. 9(2); and Chinese Trust Law, arts. 14 and 26. The beneficiary can assert his beneficial title over the substituted trust asset by way of a constructive trust: Foskett v. McKeown [2001] 1 AC 102 at 127 (per Lord Millett). Needless to say, he may also bring a personal action to require the trustee to restore the trust fund. Chinese Trust Law, art. 22. Korean Trust Act, art. 75(1) (right to rescind the disposition); Japanese Trust Act, art. 27(1) (permitting the beneficiary to rescind the unauthorised disposition, and hence

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Accordingly, if the recipient goes bankrupt, such trust property will be subject to claims of the recipient’s personal creditors.77 Notwithstanding the more limited scope of rights against transferees in civil law jurisdictions in Asia, it is submitted that the proprietary (real) liability of transferees is not a basic feature of the trust. This is because the beneficiaries already have personal rights against their transferees. To stipulate that the traceable trust assets held in their hands are immune from their heirs, spouses and creditors is to allocate the loss arising from the trustee’s breach to this group of innocent third parties completely.

Conclusion: a model of civilian trust law for Asia As compared to the English trust, the civil law trust in Asia is still in a relatively embryonic stage. This is due in part to the perceived conceptual difficulties involved in embracing the common features of an English trust in civil law jurisdictions. However, based on the comparative observations of the Asian civil law trust drawn from Parts I and II of the book, the present chapter shows that only some of the common features of an English trust represent the minimum elements necessary for the existence of a trust, and that save for the private purpose trusts recently introduced in Japan and Korea, the Asian civil law trusts have met this minimum. While there are differences in the scope and approach of the civil law trusts under review, the fact that they all contain the basic features represents the first step towards identifying uniform rules of the Asian civil law trust. The broad principles in these rules may be stated as follows: • A trust can be created by a unilateral act of the settlor or by a trust contract or will, whereby the trustee is granted powers of management and alienation of the trust assets, irrespective of the location of the ownership of the trust assets. Vesting of ownership with the trustee is not necessary. • The trust fund is segregated from the trustee’s personal assets, so that it is immune from claims by the trustee’s spouse, heirs and private creditors. The fund is only available to satisfy claims of the trust’s

77

claim the substituted asset from the third party: see Case 6, Alternative 1(b) (Japan) for further details); Taiwanese Trust Law, art. 18(2) (right to apply for revocation of the disposition). The right to revoke is usually subject to stringent time limits. See Case 6, Alternative 1(a)(vi).

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•

•

conclusion

creditors, and thereafter the claims of the beneficiaries. Dual ownership of the trust property is not necessary. The trustee is subject to the duty of honesty and good faith, and prima facie duties of care and loyalty. The full scope of the English fiduciary rules covering prohibitions on the misuse of trust position is not necessary. The trustee is personally liable to pay compensation for loss to the trust property occasioned from his breach. Disgorgement of profits made from his breach is not necessary, even though it is an increasingly popular (and useful) feature in the Asian civil law trust. The trust fund consists not only of the original trust assets, but also all those substituted assets from time to time representing the original trust assets. Thus, the beneficiary has a right to enforce the trust in relation to the new, traceable products of the original trust assets. This right does not require any in rem explanation. Rather, the trustee’s personal obligations in relation to the original trust assets simply apply in relation to their substitutions. In so far as the trust assets and their traceable substitutes are in the hands of third parties, as in the case of unauthorised transfer to a third party, if the third party knows or is grossly negligent in not knowing about the trustee’s lack of authority, then the third party will be liable to return the trust property or, where infeasible, make compensation for its loss. Proprietary liability against the transferee is not necessary.

These principles represent an attempt to lay down the possible common denominators of the Asian civil law trust. The Asian civil law trust may impose less stringent duties on the trustee, and provide less extensive remedies against him and unauthorised transferees, but this does not affect the coherence of the trust concept that it puts in place, nor its practical functioning as a trust. Furthermore and significantly, since the Asian civil law trust is created mostly by way of trust contract, the trust is seen as a consensual agreement (which happens to involve management of property) rather than a property arrangement. Given that the above features of an Asian civil law trust can be fully accommodated by creating in personam rights and duties rather than by granting proprietary rights to the beneficiary in relation to the trust assets, it seems that the Asian civil law trust can be conceptualised satisfactorily within the law of obligations, in conjunction with the notion of it being a segregated fund. It is hoped that these principles will serve as a starting point for further research and discussion of a feasible and coherent template for the trust concept in Asia and beyond.

INDEX

absolute ownership, 48, 57–8, 98 account duties China, 128, 220 Hong Kong, 131 Japan, 122 South Korea, 122 Taiwan, 125 accounts, taking of; see compensation agency; see also contracts of mandate breach of duty by agents, 175 China, 108–9, 175, 215–17 commission agency; see commission agency entrusted agency, 108–9, 161–2, 175, 185–6, 192–3, 201–3 insolvency of agents, 102–3, 185–8, 192–3, 201–5 Japan, 195–7 misappropriation of managed property, 175 trust compared, 87, 108–12, 191, 216–17 agency by mandate; see also contracts of mandate breach of duty by mandataries, 158, 167, 174 China; see brokerage duties of mandataries, 156–7 insolvency of mandataries; see insolvency of agents Japan 102–3, 157, 172, 178–9, 189, 197 misappropriation of managed property, 172–4 South Korea 104, 139, 158, 174, 180–1 Taiwan 181–2 trust compared 102–3 annul, see rescission

assignment of settlors’ rights, 83 audits; see account duties backward tracing, 255–6 bank deposits, ownership of, 197 bankruptcy; see also insolvency of agents; insolvency of mandataries; insolvency of trustees mandates versus trusts, 102 real claims against trust property, 38 rescission and, 59 right of exemption and, 187 right of recall and, 185, 188, 192, 199–203, 204 segregation of trust property and, 30–2, 52–3, 94, 182–5 beneficial interest security-issuing trusts, 43 beneficiaries China, 93–5 Korea, 49, 57–60 removal of, 92 rights, 57–60, 93–5 who can be, 49 beneficiaries’ meetings, 39–40 beneficiary agents, 20, 42–3 bona fide purchasers, 237–9, 241–2 breach of trust; see also contracts of mandate; specific types of breach disloyalty, 157–63, 165, 167–71 negligence, 138, 140, 143–4, 148, 150–5 remedies China, 91, 95–7, 144–6, 164, 177, 220–1, 228–30, 235–6, 242–3, 245–9, 252

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breach of trust (cont.) Hong Kong, 148–9, 165–6, 177, 223–4, 231, 236–7, 243, 245, 247, 249–50, 252–3 Japan, 36–8, 138, 151, 173, 210, 213, 225–6, 242, 244–7, 250 South Korea, 56, 58, 140–1, 152, 159, 168, 174, 232–3, 242, 244, 246–8, 250–1 Taiwan, 78, 159–61, 169, 174–5, 213–14, 233–5, 242, 244–6, 248, 251–2 torts and, 38 unauthorised disposition, Ch 12 brokerage China, 162, 176, 186, 203–4 disloyalty of brokers, 162, 170 cash, ownership of property and, 179, 196–7, 201, 216–17 certificates of beneficial interests, 44 charities, 21, 47 China agency entrusted agency, 109, 161–2, 175, 185–6, 192–3, 201–3 insolvency of agents, 185–6, 192–3 misappropriation of managed property, 175 remedies for an agent’s breach of duty, 175 trust compared, 87, 108–11 beneficiaries powers, 93–5 rights, 92–5, 118–19 brokerage, 162, 176, 185–6, 193, 203–4 Case 1 Alternative 1, 108–11, 117–19 Alternative 2, 126–8 Alternative 3, 133–4 Case 2 Alternative 1, 142–7 Alternative 2, 154 Case 3 Alternative 1, 161–4 Alternative 2, 170–1 Alternative 3, 175–7

Case 4 Alternative 1, 185–8, 192–4 Alternative 2, 201–5 Case 5, 214–21 Case 6 Alternative 1, 228–30, 235–6, 238–43, 245–7 Alternative 2, 248–9 Alternative 3, 252 Alternative 4, 254–5 collective capital trusts, 18, 80–1, 219–21 collective investment funds 18–19, 82 contract commission contract, see agency; entrustment contract entrustment contract, 85, 108–9 trust contract, 82–3 remedies breach of trust; see breach of trust, remedies settlors assignment of rights, 83 refusal to fund, 117 rights, 91–3, 266 trustees appointment, 147 breach of trust disloyalty, 90–1, 162–3 improper management, 90, 143–4 misappropriation of trust property, 175–7, 220–1, 228–30, 235–6, 254–5 negligence, 143–4, 154 unauthorised disposition of trust property, 228, 235–6, 238, 240, 246 duties, 89–92 account, 128 confidentiality, 89 duty of care; see negligence duty of loyalty conflict of interest, 90–1, 162–4, 170–1

index English law compared, 90–1, 269 secret commission, 90 self-dealing, 90 standard of care, 143–4, 154 insolvency exemption, rights of, 187 insolvency of agents, 185–8, 192–3, 201–5 insolvency of trustees, 193–4, 215, 218–21, 246–9, 252 priority in, 252 recall, rights of, 192, 202–3, 204 remedies compensation for loss, 96, 145–6, 154, 164, 177, 245 disgorgement of profits, 96–7, 164, 272 remedies for breach, 91, 95–7, 145–6, 154, 170 rescission, 235–6, 242–3, 246–7 removal of trustees, 127, 146, 154 trust agency compared, 109–11 creation, 82–5, 108–11, 117–18, 185 creditors and, 87–8, 93–4 defined, 85, 108–9 formality, 82, 117–18 history and enactment of Chinese Trust Law, 80–2 knowing receipt of trust property 96, 242–3 ownership of trust property, 85–8 registration, 84, 95, 117 segregation of trust property, 87–9, 96, 110, 220–1, 228 termination, 110, 126–8, 193, 228, 248–9, 252 third party protection (third party purchasers of trust property), 238, 240–1, 245 third party wrongdoers, 97 tracing property, 235–6, 254–5 civil law, common law compared, 10 civil law trusts; see also specific countries and trust laws

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basic features of, generally, 261 beneficiaries’ rights, 263–7 English trusts and, 259 essential elements of trusts, 9, Ch 13 obstacles to reception; see obstacles to reception of trusts personal claims against third parties, 274–5 personal claims against trustees, 271–4 real claims against trust property, 275–7 segregation of trust property, 263–7 trustee empowerment, 261–3 trustees’ duties under, 267–71 collective investment funds, 18–20, 66, 82, 210–13, 218, 222 commingling; see segregation of trust property commission agency, 105, 108–9, 190–1 commission contracts; see contracts of commission Common Core of European Private Law, 7 Common Frame of Reference, 4, 260 common law, civil law compared, 10 compensation for breach of trust China, 96, 145–6, 154, 164, 177, 242–3 disgorgement of profits compared, 164, 272 falsification of accounts, 236–7 Hong Kong, 148–9, 236–7 increases in value and, 175 Japan, 138, 151, 173, 210, 231–2 South Korea, 141, 152, 168, 174, 232–3 surcharge of accounts, 171, 236 Taiwan, 159–61, 169, 174–5, 233–5 confidentiality, 89 constructive trusts, 58, 60, 78–9, 96, 165–6, 169, 231, 243, 245, 249–50, 252–3, 276 consumption deposits, 181, 186–7 contracts; see also entrustment contracts; gift contracts; mandatory contracts Chinese Trust Law and, 82–5, 98 Korean Trust Act and, 49 privity in, 109, 115

282

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contracts of commission, 105 contracts of mandate, see mandatory contracts account duties, 122 defined, 102, 104, 114, 181 disloyalty of mandataries, 158–9, 167–9 insolvency of mandataries, 102–3, 180–2, 189 misappropriation of managed property, 173–4 negligence of mandataries, 139, 151–2, 167, 172 trusts compared, 102 corporatisation, 19–20, 38–41 creditor-debtor relationships, 217–18 creditors; see also insolvency of asset managers; insolvency of owners; insolvency of third parties China 87–8, 94 Hong Kong 188–9 Japan 31 revocation of trusts, 77–8 segregation of property and, 30–2, 87–9 self-declared trusts and, 29 South Korea, 52–3, 106 Taiwan, 68, 72, 74 trust creditors, rights of, 43, 66, 106 trustees’ personal creditors, rights of 68 delegation of trustee duties, 35–6, 55 disgorgement of profits China, 98, 164 compensation compared, 164, 272 disloyalty of managers, 78, 158, 164 English law compared, 271 Hong Kong 165–6 Japan 36–7 South Korea, 57–8, 159, 168 Taiwan, 67, 71, 159–61, 169 dual ownership absolute ownership and, 22, 98 as unnecessary for trust reception, 22, 85, 264 China, 85, 98 South Korea, 57–8 Taiwan, 67, 71

duty of care, breach of, 150–1, 154 China, 90, 154, 162–4 defined, 53, 75 gross negligence and breach of, 127, 147 Hong Kong 155 Japan, 19, 23–4, 34–5, 135, 138, 151, 157, 172 risky investments and, 139, 142–4 South Korea, 54, 140, 152, 159 Taiwan, 76, 142, 153, 159–61 duty of confidentiality 89 duty of good faith, 139, 269 duty of impartiality, 54 duty of loyalty China, 90, 162–4 Hong Kong 165, 171 Japan, 19, 23–4, 34–5, 157–8, 167 South Korea, 54, 159, 168 Taiwan, 76, 159–61, 169–70 elderly, encouragement to use trusts, 17, 44–5 English trusts beneficiaries’ rights, 264 disgorgement of profits, 271 generally, 259 knowing receipt of trust property 274–5 proprietary claims against trust property, 275–6 third party wrongdoers, 274 tracing 231 trustee empowerment, 262 trustees’ duties under, 268 entrusted agency defined, 161–2, 185, 192–3, 201–3 disloyalty of agents, 161 insolvency of agents, 185–8, 192 misappropriation of managed property, 175–6 entrustment, 85, 109 equitable tracing, see tracing, 17, 45 estate planning, 17, 45 Europe, trust law in, 3–4, 48 exemption, rights of 187

index falsification of accounts, 237 fee tails, 20 fiduciary discretionary investment business, 108 fiduciary duty, 164–6, 171, 268 see duty of loyalty forced heirship, 3, 20 foundations, 47 gift contracts, 113, 115–16 gifts, 113, 120 gratuitous contracts; see gift contracts gross negligence, 127, 147, 238 Hague Convention on the Law Applicable to Trusts and on their Recognition, 4 history of trusts, 10–16, 27, 46–8, 80–2 Hong Kong agency, 194–5, 205–7 beneficiaries power to remove trustees, 129 right to compel transfer of trust property, 119–20 Case 1 Alternative 1, 111–12, 119–20 Alternative 2, 128–32 Alternative 3, 134–7 Case 2 Alternative 1, 148–50 Alternative 2, 154–5 Case 3 Alternative 1, 164–6 Alternative 2, 171 Alternative 3, 177 Case 4 Alternative 1, 188–9, 194–5 Alternative 2, 205–8 Case 5, 221–4 Case 6 Alternative 1, 230–1, 236–7, 239, 241–3, 245, 247 Alternative 2, 249–50 Alternative 3, 252–3 Alternative 4, 255–6 trustees breach of trust conflict of interest, 164–6, 171

283

disloyalty; see conflict of interest misappropriation of trust property, 177, 222, 230–1, 236–7, 239–43, 249–50, 252–3, 255–6 negligence, 148, 154–5 unauthorised disposition; see also misappropriation of trust property 236–7, 247 duties, account, 131, 171, 177 duty of care, see negligence fiduciary duty, see conflict of interest, disloyalty standard of care, 135, 148, 155 insolvency insolvency of trustees, 188–9, 194–5, 205–8, 247, 249–50, 252–3 priority in, 252–3 remedies disgorgement of profits, 165–6 compensation, 148–9, 171, 177, 236–7 remedies for breach, 171, 177 removal of trustees, 128–30, 149–50, 155 trust agency compared, 112 creation, 111, 119–20, 207–8 formality, 111–12 knowing receipt of trust property, 243 termination, 130–1, 150, 155, 230 third party protection (third party purchasers of trust property), 239, 241, 245 third party wrongdoers, 274–5 tracing property, 223–4, 231, 236–7, 243, 245, 247, 249–50, 252–3, 255–6 hypothecation transactions, 68–70 implied trusts, 32–3 inferred trusts, 32–3 infringement of property rights, 175–6 injunctive remedies, 37, 97, 130

284

index

insolvency of agents China, 185–6, 192–3, 201–3, 204, 214–21 Hong Kong, 206, 221–4 Japan, 190, 195–7, 209–10 priority in, 250–3 South Korea, 180–1, 190–1, 210–13 Taiwan, 182, 199–201, 213–14 insolvency of trustees China, 193, 205, 220–1, 246–9, 252 Hong Kong, 188–9, 195, 223–4 Japan, 30, 179–80, 210, 245–7, 250 South Korea, 181, 213 Taiwan, 182–5, 192, 199–201, 213–14 investment selection decisions China, 133–4, 142–7 Hong Kong, 134–7, 148–50 Japan, 132, 138–9 South Korea, 132, 140–1 Taiwan, 133, 141–2 Japan agency agency by mandate, 102–3, 157, 172, 178–9, 189 compensatory principle, 138, 157 direct agency, 195 gifts and, 113 indirect agency and, 178–9, 189, 197 mandatory contracts, 102, 157, 172, 178–9, 189 Case 1 Alternative 1, 101–4, 112–14 Alternative 2, 120–2 Alternative 3, 132 Case 2 Alternative 1, 138 Alternative 2, 150–1 Case 3 Alternative 1, 156–8 Alternative 2, 166–7 Alternative 3, 172–3 Case 4 Alternative 1, 178–80, 189–90 Alternative 2, 195–7 Case 5, 209–10

Case 6 Alternative 1, 225–6, 231–2, 237, 239, 241–2, 244–6 Alternative 2, 247 Alternative 3, 250 Alternative 4, 253–4 civil law adopted by, 10, 27 increased regulation in, 15–16, 19 trustees breach of trust disloyalty, 19, 34, 157, 167 misappropriation of trust property, 172–3, 225–6, 231–2, 253 negligence, 33, 138, 150–1 unauthorised disposition, 225–6, 231–2, 245 duties, 33–6, 121 account, 122, 210 duty of care; see negligence fiduciary duty; see disloyalty good faith as narrower than in English trusts, 269 fiduciary duty as narrower than in English trusts, 269 investment selection decisions, 132, 138–9 standard of care, 151 insolvency insolvency of trustees, 30, 179–80, 209–10, 245–7, 250 priority in, 250 remedies compensation, 36, 138, 151, 173, 210, 231–2 disgorgement of profits, 36–7, 157, 272 injunctive relief, 37 real claims against trust property, 38 rescission, 37–8, 225–6, 231–2, 242, 244–6 remedies for breach, 36–8, 138 restoration, 138, 151 return of property, 173 removal, 120–2, 139, 151 trust agency compared, 102–3

index appointment of supervisors, caretakers, and agents, 20, 42–3 beneficial interest security-issuing trusts, 43 beneficiaries’ meetings, 39–40 commercial applications of, 44 company law features of, 38 creation, 28–30, 101–4, 112 creditors and, 29, 31 defined, 28–9, 102 formality, 28, 102 history enactment of Japanese Trust Act (1922), 12, 15, 27, 46 enactment of Japanese Trust Act (2006), 12, 19–21, 27–8 as model for others, 28, 46 trust companies and, 27 implied and inferred trusts and, 32–3 knowing receipt of trust property, 38, 242 limited liability trusts, 30–1, 43 mandates compared, 102 modification, consolidation, and division of trusts, 40–1 non-commercial applications of, 44–5 ownership of property, 29 private purpose trusts, 270–1 registration, 23, 30 segregation of trust property, 30–2, 179–80, 210 self-declared trusts, 21, 64, 266–7 termination, 31–2, 113, 120–2, 225–6, 247, 250 third party protection (third party purchasers of trust property), 237, 239, 241, 244 third party wrongdoers, 38 tracing property, 225–6, 250, 253–4 trust property defined, 29 Korea; see South Korea liquidation reports, 128 loan contracts, 217

285

mandatory contracts; see contracts of mandate Meiji Restoration, 10 misappropriation of trust property China; see China Hong Kong; see Hong Kong Japan; see Japan South Korea; see South Korea Taiwan; see Taiwan money, ownership of property and, 196–7, 201 negligence; see duty of care, trustees–duty of care nominal trusts, 8, 13–14, 74–5 numerus classus, 5, 48, 67, 98 obstacles to reception of trusts, 5, 22–6, 49–50, 60, 67–8, 71–4, 82–4, 85, 98, 259–60 passive trusts, 74–5 patrimony, 31, 53, 62, 88, 106, 221, 264 People’s Republic of China, see China Principles of European Trust Law, 4 private purpose trusts, 21, 25, 270–1 privity, 109, 115, 118 property rights; see also trust property agency versus trust, 216–17 cash, 196–7, 201 registration of, see registration transfer of, 182, 191 proxies, 39 prudence; see also duty of care delegation of judgement, 153–5 risky investments and, 141, 143, 148 quasi-mandate agreements, 179 Quistclose trusts, 189, 195 real subrogation, 52, 78–9, 88, 106, 228–30, 233–5, 247–8, 275–7 reasonable prudence, 135; see also duty of care recall right of, 185, 188, 192, 199–205, 213–14, 246

286

index

reception of trusts for asset management, 15–16, 27, 47, 82 historical overview, 4–5, 10–16, 27, 47, 63, 67–8, 80–2 nominal trusts, 13–14 registration of trust China, 84, 95, 117 Japan, 23, 30 South Korea, 23, 51 Taiwan, 23, 72–4, 183–4 reimbursement of trustees, 31–2, 56 remedies, see specific laws China, 92, 127, 144–6, 154, 164, 170, 177, 235–6, 242–3, 245–7 Hong Kong, 128–30, 148–50, 155, 171, 223–4, 236–7, 243, 245, 247 Japan, 36–8, 138, 151, 173, 225–6, 231–2, 242, 244–7, 250 South Korea, 57–60, 124, 141, 152, 159, 168, 174, 232–3, 242, 244, 246 Taiwan, 78, 125–6, 142, 154, 160, 169, 174–5, 233–5, 242, 244–6 trust, breach of; personal claims against third parties 38, 60, 97, 244, 274–5 personal claims against trustees 36–8, 78, 95, 138, 141, 144–6, 148–9, 151, 152, 154, 159–61, 164, 169–71, 173–5, 177, 213, Ch 12, 271–4 injunction 37 real claims against trust property 38, 78–9, 169, 173, 177, 210, 213–14, 220–1, 223–4, 228–31, 233–5, 242–3, 245, 247, 275–7 removal of trustees China, 92, 127, 146, 154 Hong Kong, 128–30, 149–50, 155 Japan, 120–2, 139, 151 South Korea, 124, 141, 152 Taiwan, 125–6, 142

remuneration of trustees, 56, 78, 90 Republic of China; see Taiwan Republic of Korea; see South Korea rescission China, 94–5, 97, 235–6, 242–3 Hong Kong 236–7 Japan, 37–8, 225–6, 231–2, 242 misappropriation of trust property, 225 protection of third party purchasers, 237–9, 241–2, 244–5 South Korea, 56–8, 232–3, 242 Taiwan, 242 unauthorised disposition 95, Ch 12 resulting trust, 61 return of property, 173, 177, 242–3, 244 right of exemption; see exemption, right of right of recall; see recall, right of right of restoration China, 145–6, 154, 177, 235–6 Hong Kong, 148–9, 177, 236–7 Japan, 36, 138, 151 South Korea, 56, 141, 152, 174 Taiwan, 78, 142, 174–5 risky investments China, 142–7 Hong Kong, 148–50 Japan, 138–9 Korea, 140–1 Taiwan, 141–2 securities securities investment funds in China, 82 securities investment trust companies in Taiwan, 64, 108 securitisation of beneficial interests in Japan, 21, 29 of beneficial interests in Korea, 49 laws in Taiwan, 66 segregation of property China, 88–9, 110, 202–3, 220–1, 262–3 Hong Kong 195, 222 insolvency of asset managers and failure of, 202–3, 209–10 Japan, 29–32, 38, 210

index mandatory contracts and, 103 South Korea, 51, 106, 181, 211 Taiwan, 74, 200–1, 213 self-benefit trusts, 8, 182, 227 self-declared trusts Japan, 21, 29–30, 64, 263–7 South Korea, 49, 263–7 sequential beneficial trusts (successive giving), 20 settlors assignment of rights by, 83 duties lacking in China, 87 monitoring of trustees by, 84 refusal to fund, 112–14, 117 rights in China of, 91–3, 266 South Korea agency, 190–1, 197–8 brokers, 180 contracts of mandate, 104, 114–15, 139, 180–1, 197–8 gift contracts, 115 insolvency 180–1 termination of contracts, 115, 122–3, 152 voluntary trust termination and, 123 beneficiary powers, 116 rights, 57–60, 116 Case 1 Alternative 1, 104–7, 114–16, 122–4 Alternative 2, 139–41 Alternative 3, 151–2 Case 2 Alternative 1, 139–41 Alternative 2, 151–2 Case 3 Alternative 1, 158–9 Alternative 2, 167–9 Alternative 3, 173–4 Case 4 Alternative 1, 180–1, 190–1 Alternative 2, 197 Case 5 210–13 Case 6 Alternative 1, 226, 232–3, 237–9, 241–2, 244, 246

287 Alternative 2, 247–8 Alternative 3, 250–1 Alternative 4, 254 trustees as beneficiaries, 49 breach of trust conflict of interest, 159, 168 negligence, 152 risky investments, 139–41 misappropriation of trust property, 160, 173–4, 226, 232–3, 254 unauthorised disposition, 226, 232–3, 246 commercial trustees, 56 discretionary investment contracts and, 133, 210–13 duties, 53–7, 62 duty of care, 53, 140, 152 investment selection decisions, 56, 133, 140–1 fiduciary duty fiduciary duty as narrower than in English trusts, 54, 168, 270 standard of care, 139–40, 152 insolvency insolvency of trustees, 52, 210, 213, 245–8, 250–1 priority in, 250 liabilities of trustees, 52–7, 141, 152, 168, 174, 213 licensing, 106 powers, 53–7 remedies for breach of trust, 168, 174, 232–3 compensation, 141, 151, 168, 174, 213, 232–3 disgorgement of profits, 158, 168, 272 real claims against trust property, 213, 232–3, 247–8, 250–1 rescission, 237–8, 242, 244, 246 removal, 124, 141, 152 remuneration, 56 trust broadening trust application in, 17, 46

288

index

South Korea (cont.) contract law and, 49 creation, 49, 105–7 creditors and, 50, 52–3, 250–1 dual ownership, 57–8 formality, 49 history enactment of Korean Trust Act (1961), 4, 12, 46 enactment of Korean Trust Act (2011), 12, 46–8 influence of Japan on, 46 revision of Korean Trust Act (1961); see Korean Trust Act (2011) influence of Japan on, 11, 16 knowing receipt of trust property, 242 nominal trusts in, 14 ownership of trust property, 105 private purpose trusts, 270–1 prohibited trusts under, 50–1 property-holding devices, 13 registration, 23, 51 reimbursement, 56 segregation of trust property, 51, 106, 181 self-declared trusts, 49, 266–7 termination, 60–1, 116, 123, 226, 247–8, 250–1 third party protection (third party purchasers of trust property), 237, 239, 241, 244 third party wrongdoers, 60 tracing property, 226, 247–8, 250–1, 254 trust property defined, 51–3 trusts defined, 48 specified rights, 48 subrogation, 52, 78–9, 88, 96, 106, 228–31, 233–5, 247–8, 275–7 succession planning, 3, 21, 25, 45, 47 successive giving (sequential beneficial trusts), 20 surcharge of accounts, 171, 236 suretyships, 187

Taiwan, 11, 17–18 agency, 181–2, 198–9 Case 1 Alternative 1, 107–8, 116–17 Alternative 2, 124–6 Alternative 3, 133 Case 2 Alternative 1, 141–2 Alternative 2, 153 Case 3 Alternative 1, 159–61 Alternative 2, 169–70 Alternative 3, 174–5 Case 4 Alternative 1, 181–5, 191–2 Alternative 2, 198–201 Case 5, 213–14 Case 6 Alternative 1, 227–8, 233–5, 238, 240–2, 244–6 Alternative 2, 248 Alternative 3, 251–2 Alternative 4, 254 trustees breach of trust conflict of interest, 76–7, 159–61 disloyalty, 159–61, 169–70 negligence, 75, 142, 153 misappropriation of trust property, 174, 213, 227–8, 233–5, 254 risky investments and, 142 unauthorised disposition, 227–8, 233–5, 246 damages to trustee for removal, 126 duties, 75–7 account, 125 duty of care; see negligence fiduciary duty; see disloyalty good faith, 169 good faith as narrower than in English trusts, 269 standard of care, 75, 142, 153 insolvency insolvency of trustees, 68, 74, 182–5, 192, 199–201 priority in, 251–2

index investment selection decisions, 133, 141–2 remedies compensation for loss, 78, 142, 153, 169, 174–5, 213, 233–5 disgorgement of profits, 78, 213, 272–3 real claims against trust property, 78–9, 169, 213–14, 227–8, 233–5 remedies for breach, 78, 153, 169, 227–8, 233–5 removal, 125, 142, 153 trust agency compared, 191 creation, 70–1, 107–8, 116, 182, 191–2, 199 creditors and, 68, 74, 77–8 defined, 65, 70, 107 formality, 71 history enactment of Taiwanese Trust Enterprise Act, 65 enactment of Taiwanese Trust Law, 12, 63, 65 difficulties in reception, 67–70 knowing receipt of trust property, 242 nominal trust, 74–5 ownership of property, 67, 143 protection of third parties, 238, 240–1, 244 registration, 23, 72–4, 182–5, 183–4 revocation of trusts, 151 segregation of trust property, 74, 182–5, 200–1, 213 termination of trusts, 124–6, 185, 227–8 tracing property, 248, 251–2, 254 taking of accounts, see compensation tax laws, 66, 68 termination of trusts China, 126–8, 193, 248–9, 252 Hong Kong, 130–1, 136, 150, 155, 252–3

289

Japan, 113, 120–2, 247, 250 South Korea, 60–1, 116, 123, 247–8, 250–1 Taiwan, 124–6, 185, 248 terminology issues, 8 third party purchasers in bad faith, 242–7 third party, protection of China; see China Hong Kong; see Hong Kong Japan; see Japan South Korea; see South Korea Taiwan; see Taiwan torts, 38, 234 tracing, 236, 255–6, 275 civil law compared, 96 Hong Kong, 223–4 transplantation of trusts; see obstacles to reception of trusts Trento trust project, 7 trust caretakers, 20, 42–3; see Japan; Korea trust companies China, 80–1 Japan, 15–16, 27 South Korea, 106 Taiwan, 63–5, 108, 214 trust contracts, 49, 71, 82–3 trust enterprises; see trust companies (Taiwan) trust funds, 104 trust property; see also property rights defined, 29, 51 in self-declared trusts, 29, 49 real subrogation of, 52, 78–9, 88, 96 registration; see registration segregation of, 30, 53, 74, 78–9, 87–9, 106, 210–11, 213, 220–2, 263–7 transfer of, 22, 73, 84–8, 113, 116, 118–20, 191, 262–3 unauthorised disposition of, 94, 226, 229 trust supervisors, 20, 42–3; see Japan; Korea trustees as beneficiaries, 49 delegation by, 35–6, 55, 73

290

index

trustees (cont.) duties, 267–71 China, 89–92, 142–7, 162–3 duty of care, 19 China, 143–4, 154, 162–3 Hong Kong, 148, 155 Japan, 138, 151 South Korea, 140, 152 Taiwan, 142, 153 fiduciary duty; see duty of loyalty Hong Kong, 165, 171 Japan, 33–6, 138, 151, 157–8, 167, 173 South Korea, 53–7, 62, 140, 152, 159, 168, 174, 177 standard of care, 135, 139, 142–4, 148, 152, 154–5 Taiwan, 75–7, 141–2, 153, 159, 174 insolvency of, 30, 52, 68 liabilities of, 143–4, 148, 151–2 monitoring by settlors of, 84 patrimonies of, 265 personal assets and, 43, 66 reimbursement, 31–2, 56 removal of; see removal of trustees rescission, role in, 59–60 who can be, 85

trusts; see also civil law trusts and specific laws agency compared, 109–12, 191 defined, 28, 48, 182, 185 England; see English trusts essential elements, 24–6 formality, 111, 117–20 mandate compared, 102–3 nominal trusts; see nominal trusts property ownership, agency compared, 216–17 termination, 60–1, 116, 123 third party, protection of, 237, 239, 241, 244 third party wrongdoers, 38, 60, 97, 274–5 tracing property; see tracing transplantation of; see obstacles to reception of trusts trust funds, 51–3 variation, 132–4 unauthorised disposition, see misappropriation of trust property; specific laws unjust enrichment, 60–1 unspecified money trusts, 211