Transplant of the Quistclose trust into Chinese law: a critical assessment

Abstract

The Quistclose doctrine is a relatively recent creature of equity representing the application of a trust as a device for the purpose of conferring priority to lenders against an insolvent’s pre-existing creditors. Due to the lack of a comparable model in the existing Chinese regimes, recent proposals have been made for the transplantation of the Quistclose trust into Chinese law. Yet there is a widespread misconception in the reasoning among many Chinese academics as to the notion of ‘split ownership’. Another theoretical problem is that no category of trusts under Chinese legislation would be able to contain the Quistclose sub-category. Explanations on the nature of the Quistclose trust also contradict orthodoxies in English trust law, whether it is explained as an express trust with third party beneficiaries, an express purpose trust enforceable by third party creditors, a resulting trust subject to borrower’s power, or a constructive resulting trust. Although the use of trust to achieve conferment of priority of the aforementioned type of lenders remains problematic, the intrinsic idea of priority-conferring in such cases is nevertheless commendable, because priority-conferring generates an incentive for corporate rescue creditors, and it creates no negative externality to the existing unsecured creditors under any circumstances. It is proposed that an explanation based on the theory of retention of title, or one based on a new level of priority in insolvency distribution order would be ideal alternatives that could provide for the theoretical basis of a law that is more favourable to lenders in such circumstances without resorting to the contrivance of trusts.