The promulgation of a new Trust Law, effective October 1 2001, represents an important step forward for China and its legal development. The Trust Law will have implications for many aspects of structuring investments and financings (including the taking of security) within China. The new law applies to civil, business and charitable trusts and is intended to pave the way for a new investment funds law to further stimulate the Chinese economy.
It should be noted, however, that a Chinese trust cannot be used to circumvent mandatory provisions of Chinese law prohibiting foreign investment or participation in restricted industry sectors. Additionally, a trust will be void if found to be contrary to public interest.
While the new law confirms that entrusted property will not be the property of the trustee in the event of its bankruptcy, creditors can ask a court to nullify a trust if it is shown that, by establishing it, the settlor is in fact prejudicing the interests of creditors. A key timing issue arises here in that such creditors need to bring action within a year of the date they became aware or ought to have become aware of the grounds for nullification.
Significantly, the sections of the new law on charitable trusts deserve mention to the extent that private investment can be structured to exploit this area. In addition to humanitarian purposes, charitable trusts can be established in the fields of education, science and technology, culture, arts and sports, all potentially growth industries.