On September 30 2008, parts of the new Trust Law regarding declarations of trust (trusts under which an entity acts as both the trustor and the trustee (jiko-shintaku)) took effect. Under Japan's previous Trust Law, the dominant view was that a declaration of trust was not allowed, but the new Trust Law explicitly states that a declaration of trust is allowed if certain criteria apply. Declarations of trust could have a big impact on certain types of business transactions, including securitisations.
Declarations of trust may provide new possibilities and solutions to some current business issues. First, by using a declaration of trust, certain types of securitisations can be achieved at lower cost. In a typical securitisation using a trust, the originator entrusts its assets to a third-party trustee (usually a trust bank), and the originator sells the beneficiary interests to investors. However, by using a declaration of trust, this can be achieved without involving a trust bank (the originator would entrust its assets to the originator itself and then sell the beneficiary interests to investors), and this will likely result in reduced costs. Also, where a creditor uses a servicer (an entity that collects receivables on behalf of such creditor), a declaration of trust can be used to mitigate the commingling risk associated with using a servicer.
In such transactions, there is a risk that the creditor will not be able to obtain all its receivables if the servicer becomes bankrupt before it has delivered all received cash to the creditor. However, by using a declaration of trust, the risk can be mitigated if the servicer entrusts the received cash (or the servicer's own receivables from the bank where such cash is deposited) to the servicer itself. In such cases, because trusts function to create bankruptcy remoteness (a creditor of a trustor cannot enforce a compulsory execution against property which is part of a trust), such cash or receivables are protected from the creditors of the servicer. Although there are still some theoretical or practical issues that need to be resolved, as described above, declarations of trust offer merit to current business models.
On the other hand, while use of a declaration of trust can be beneficial to business, allowing its use without limitation could have adverse effects. This is because, as creating bankruptcy remoteness is a general function of a trust, declarations of trust might be abused because they involve only a single party. For example, if declarations of trust are allowed without any restrictions, a trustor might be able to avoid a creditor's seizure of certain assets by claiming it had entrusted the assets to itself before the seizure.
In order to prevent this abuse, the new Trust Law permits declarations of trust only where certain criteria apply. For instance, unlike other types of trusts, a declaration of trust comes into effect only by declaring it in an authentic document or electromagnetic record and only from the time of its execution. Also, if the assets subject to the declaration are registerable assets, such as real estate, a declaration of trust can only be asserted if it is registered. By creating these restrictions, the new Trust Law prohibits the trustor from retroactively establishing an effective date of creation of the trust and thus abusing its use.
Because of the relative newness of the changes, it is still not clear how much overall impact the availability of declarations of trust will have on business. Regardless of impact, however, declarations of trust should provide new possibilities to improve business methods.