Use of Reorganization Service Trusts in Bankruptcy

SSince its inception in the Bohai Steel Group bankruptcy reorganization case in 2016, the trust mechanism has regularly appeared in high-profile bankruptcy reorganizations such as those of Tewoo Group, Founder Group and HNA Group, with the aim of to effectively balance the interests of the parties and proceed smoothly with the reorganization. This article will explore the legal aspect of the trust mechanism in the receivership service.

Effectively join the function of trusts and the request for receivership. When reorganizing mega-corporations, reorganization investors are often unwilling or unable to acquire all of the assets of the target company. If non-essential assets that cannot be supported by investors have to be sold hastily, the value of these assets will depreciate severely, which will harm the interests of creditors. Disposal of non-essential assets can also affect the entire receivership process.

Ren Guobing
Jingtian and Gongcheng

This problem can be quickly solved by the unique nature of trusts: independence of fiduciary ownership means that non-essential assets can be independent of essential assets after being placed in trust and used exclusively for debt repayment; the creation of a trust does not require prior approval, which speeds up the reorganization procedure; the flexibility of the profit allocation mechanism in trusts allows the proceeds of disposal of trust assets to be flexibly allocated among different creditors based on different types of creditor rights after non-essential assets have been placed in trust; the legal structure of trusts for the benefit of third parties allows the assets of the trust to be held and disposed of by a trustee outside the bankruptcy reorganization relationship on behalf of the trust, ensuring balanced interests for all parties to the reorganization of bankruptcy.

Effective Joint Trust Structures in Insolvency Projects. In practice, corporate reorganization is generally divided into sale, subsistence, liquidation and pre-reorganization before judicial reorganization. This article will briefly analyze the establishment of a reorganization service trust with non-essential assets in typical cases of reorganization by sale.


The assets and debts of the reorganized business before the formation of a trust are generally collected under the name of an SPV company, which constitutes the trust as trustor. It should be noted that the PRC Trust Law grants trustees relatively high powers, such as revoking the trust and dismissing the trustee. Thus, when structuring the trust, attention should be paid to the authority of the trustor during the existence of the trust taking into account the status of the project.


The trust industry in China operates under a licensing regime, and for the establishment of a trust company, approval and a financial license must be obtained from the China Banking and Insurance Regulatory Commission. With regard to the qualification of a trustee, in principle, trust companies having obtained trust licenses can generally become trustees of reorganization service trusts.


Currently, the trustee serves as the initial beneficiary in the majority of reorganization service trusts. Creditors obtain trust units and become beneficiaries by signing a trust unit debt repayment agreement with the trustee. When the creditor obtains the beneficial right, the creditors’ rights against the fiduciary (debtor) are considered extinguished.

Duration of trust

The duration of the trust is generally fixed according to the assets to be transferred. Before the expiration of the trust, the assembly of beneficiaries may decide to extend the duration of the trust depending on the state of disposal of the assets. Using a trust generally offers more time because the assets to be transferred can be cashed in stably and distributed to creditors continuously.

Determination of beneficiary rights

Lin Shulan
Jingtian and Gongcheng

Corresponding to the rights of creditors being classified into rights of secured creditors, rights of ordinary creditors and rights of lesser creditors, the rights of beneficiaries are divided into preferred trust units, ordinary trust units and lesser trust units. It should be noted that the structural arrangement of a reorganization service trust is different from that of a general investment and financing trust, which is based on the entire property of the trust. In reorganization service trusts, proceeds from trust property are divided into specific proceeds (i.e. proceeds from the disposition of property corresponding to preferred trust units) and non-specific proceeds ( i.e. any product other than the specific product).

The specific product should be preferentially and exclusively distributed to the corresponding preferential beneficiaries. A preferential distribution will be made to each secured creditor with respect to the proceeds of the security over which it holds security prior to the establishment of the trust. These structural provisions allow the creditor secured by an original asset (i.e. the preferential beneficiaries) to receive preferential repayment from the proceeds of the assignment of its original guarantee thanks to the hierarchy of the rights of the beneficiary and the preferential distribution of fiduciary interests corresponding to specific assets stipulated in the contract of trust to cancel the preferential repayment of the proceeds of the assignment of security provided by law, further demonstrating the flexibility of trust structures.

Trust Governance Agreement

The governing bodies of reorganization service trusts generally include the assembly of beneficiaries and the management committee. A meeting of beneficiaries, which includes all creditors to whom shares in the trust have been allocated, is the highest authority and the supervisory body for the operation of the trust, empowered to decide on all important questions of the trust. Generally, the assembly of beneficiaries establishes a management committee, which is the decision-making and executive body that manages the trust affairs according to the resolution and authorization of the assembly of beneficiaries. The members of the management committee are generally appointed by the creditors. Given the role of the original management in the management of the underlying assets, the committee may include obligors as members, if appropriate.

Indeed, the service of bankruptcy reorganization of trusts during the transformation of the trust industry. As the transition period for new asset management regulations draws to a close, how to better serve the real economy is both a driver and a source of activity for the accelerated transformation of the trust industry. The active participation of trust companies in the reorganization of corporate bankruptcies is a good example of trusts serving the real economy, fulfilling their original objectives. Great expectations await reorganization service trusts, while we also look forward to regulators issuing regulatory guidance for the service trust industry, including the reorganization service trust, as soon as possible.

Ren Guobing is Partner and Lin Shulan is Partner at Jingtian and Gongcheng


Jingtian and Gongcheng

34/F, Tower 3, China Central Place

77 Jianguo Road, Beijing 100025, China

Tel: +86 10 5809 1175


[email protected]

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