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Revised Trust Law

Japan's 80-year-old Trust Law is expected to be significantly revised next year to provide a more modern and sophisticated trust system to facilitate the wider use of trusts. Last July, the Ministry of Justice published, for public comment, an outline summarising many of the provisions that are expected to be included in the new law.

The revision is expected to set out certain obligations of trustees, which will apply unless they are abrogated in the constituting trust agreement. Under the current Trust Law, such obligations are mandatory and cannot be modified. For example, a trustee cannot, directly or indirectly, acquire trust assets for its own account. The revised law is expected to allow a trustee to enter into and carry out transactions that might put the trustee in a conflict of interest with beneficiaries where (i) such transactions are permitted in the trust agreement, (ii) the trustee discloses the material facts relevant to such transactions to the beneficiaries and the beneficiaries provide their consent, or (iii) such transactions clearly do not prejudice the interests of beneficiaries and are reasonably necessary. Also, under the current law trustees cannot delegate any of their duties unless the delegation is expressly provided for in the trust agreement, or certain limited circumstances exist. Under the revised law, it is expected that trustees will be able to delegate many of their duties so long as such delegation is appropriate in light of the purpose of the trust. However, unless the Trust Business Law is revised, commercial trustees will still be bound by the mandatory restrictions contained in the Trust Business Law, which restrict trustees' ability to enter into conflicting transactions, delegate their obligations and operate the trust generally.

The revised Trust Law is expected to enhance the bankruptcy remoteness of trust assets. When a trust is used in a securitization or other financing transaction, achieving bankruptcy remoteness of the trust assets is essential to ensure the viability of the overall structure. However, the dated provisions of the current law create uncertainty and risks regarding the bankruptcy remoteness of the trust assets. For example, the current law provides that where a single beneficiary holds the beneficial interest and this beneficiary becomes insolvent, the court can terminate the trust. This risk has resulted in complications in structuring trust-related transactions. Under the revised law, it is expected that a court will only be able to terminate a trust in limited circumstances. Also, the revision is expected to provide a more balanced approach for voiding a trust due to fraudulent conveyance. Under the current law, a trust can be voided if the settlor knew that the creation of the trust would prejudice the settlor's creditors. The distribution from the trust received by the beneficiary must be returned unless the beneficiary was ignorant of the fraudulent conveyance at the time of such distribution, or grossly negligent. However, the new Trust Law is expected to provide that a trust will not be voided where the beneficiary did not learn of the fraudulent conveyance before becoming the beneficiary (unless the beneficiary was grossly negligent). There is still discussion as to whether the revision will include a provision that provides that a trust will not be deemed to be a fraudulent conveyance so long as it was created under fair conditions. As for the commingling risk arising from a trustee's bankruptcy, in the event of a bankruptcy of the trustee, the revision is expected to specifically provide for the separation of the trustee's assets and the trust assets.

The revised law is also expected to introduce new types of trusts, such as security trusts. Many lawyers have argued the current law does not authorize the use of security trusts. The use of declarations of trust, purpose trusts and limited liability trusts might also be allowed under the revised law.

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