Use of Reorganization Service Trusts in Bankruptcy

Since its beginning during the Bohai Steel Group bankruptcy reorganization case in 2016 this trust system has often been used in bankruptcy reorganizations with a high profile like the ones from Tewoo Group, Founder Group and HNA Group, with the purpose of effectively balancing the interests of both parties and to proceed with ease in the restructuring. Check more about this article here: https://bankruptcyhq.com/state-laws/difference-chapter-7-chapter-13/, this will examine the legal aspects of trust mechanisms in the receivership process.

Effectively connects the functions of trusts and also the demand for receivership

Reorganization of mega-corporations is a process where investors often aren’t able or unable to purchase all the assets of the targeted company. If assets that aren’t essential and can’t be backed by investors need to be sold in a hurry then the value of these assets will decrease dramatically which could harm the interest of creditors. The sale of non-essential assets may impact the receivership process.

Ren Guobing
Partner
Jingtian and Gongcheng

This issue can be swiftly resolved by the special nature of trusts. Independence of fiduciary ownership means non-essential assets are able to be free of the essential assets once they are put in trust and utilized solely for debt repayment the establishment of trusts doesn’t require approval prior to its creation and speeds the process of reorganization; The flexibility offered by the distribution of profits mechanism in trusts allows proceeds from the disposal from trust property to be easily divided among creditors, based on various types of rights granted to creditors after the assets that are not essential have been put in trust. The design of trusts to use by third-party beneficiaries permits the trust’s assets to be removed by a trustee who is not part of the bankruptcy reorganization process for the trust, thus ensuring fair interests for all those involved in the bankruptcy reorganization.

The most effective Joint Trust structure in insolvency projects. In practice, corporate restructuring generally falls into subsistence, sale liquidation, and pre-reorganization prior to the judicial restructuring. The article below will discuss the process of creating a Reorganization Service Trust with non-essential assets in common cases of reorganization via sale.

Confident

The debts and assets of the newly reorganized company prior to the establishment of a trust are usually stored under the name the SPV firm, which is the trust as trustee. It is worth noting this that the PRC Trust Law grants trustees with a wide range of powers, like the right to dissolve the trust and removing the trustee. Therefore, when drafting the trust, consideration must be paid to the authority of the trustee while the trust is in existence. trust, taking into consideration the condition of the trust project.

Trustees

The trust business in China is governed by the licensing system. In order to establish trust companies an approval as well as a financial license have to be obtained by the China Banking and Insurance Regulatory Commission. Concerning the qualifications of trustees, in the main trust companies that have obtained trust licenses may be trustees of reorganization trusts.

Beneficiaries

Currently, the trustee acts as the primary beneficiary in most reorganization trusts. Creditors acquire trust units and become beneficiaries after signing an agreement to repay the debt of trust units arrangement together with the trustee. If the creditor is granted this beneficial rights, rights of creditors to sue their trustee (debtor) will be considered to be extinguished.

Trust duration

The trust’s duration is typically determined by the assets that are to be transferred. Prior to the expiration date of the trust, the trust’s beneficiaries could choose to prolong the time of the trust based on the condition of disposal of assets. Trusts generally provide more time as the assets transferred are able to be cashed out in a steady manner as well as distributed to the creditors in a continuous manner.

The determination of rights as a beneficiary

In line with creditor rights being divided as rights of secured creditors and right of regular creditors as well as rights of lessor creditors, the rights of the beneficiaries are split between preferred trust units regular trust units, and smaller trust units. It is worth noting that the arrangement of a reorganization-based service trust differs from that of an investment or finance trust. It is founded on the entirety of the assets of the trust. Reorganization trusts are reorganized service trusts. the proceeds of trust property are divided into specific funds (i.e. proceeds from the disposal of property in connection with preferential trust units) as well as non-specific funds ( i.e. any other product that is not the particular product).

The particular product must be distributed preferentially and exclusively to the appropriate preferential beneficiaries. A preferred distribution will be provided to each secured creditor in relation to the profits of the security that it has securities prior to creation in trust. The structural provisions permit the secured creditor of an initial asset (i.e. the preferred beneficiaries) to receive a preferred repayment out of the sale of its guarantee prior to the date of issue due to the order of benefits of the beneficiary as well as the distribution preference of fiduciary interest corresponding to certain assets specified in the trust agreement to cancel the preferred repayment of the proceeds from the security assignment that is a legal requirement, to demonstrate the versatility in trust structure.

Trust Governance Agreement

The the governing bodies of reorganization services trusts usually comprise of the beneficiaries’ assembly and their management committee. A gathering of beneficiaries comprising all creditors to whom shares of the trust are assigned, is the top authority and supervisory body for the administration of the trust. It is empowered to make decisions on all major concerns of the trust. In general, the assembly of beneficiaries creates a management committee, which acts as the executive and decision-making organ that oversees trust operations in accordance with the resolution and the authorization of the gathering of beneficiaries. Management committee members are typically chosen by creditors. Due to the importance of the management committee in the initial administration of the funds, the management committee could include obligors as members in the event that it is it is appropriate.

In fact, it is the function of bankruptcy reorganization and restructuring of trusts as part of the change of the trust business

As the transitional period for the new rules on asset management draws to an end, the question of how to improve the performance of the real economy can be an engine and a factor in the rapid change in the trust business. Participation of trust businesses in the restructuring of bankruptcies of corporations is an excellent illustration of trusts that serve the real economy, and fulfilling their initial goals. We have high hopes for reorganization service trusts, and we anticipate regulators releasing regulations for the service trust industry, which includes the reorganization trust as soon as they can.

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