Legal Nature of Trust in English Law. Correlation of Trust in English Law and Trust Management in Russian Law

Dynamic business development amid active globalization forces entrepreneurs and modern market players to pay attention to institutions of law used in international practice, including in common law systems. Trust institution is one of such institutions. There is no denying the leading role of trust in the common law system, which defines the relevance of its study. Processes associated with international expansion further promote the relevance of study of this institution and the problems of its practical application according to legislations of the countries outside the common law system.

Trust Institution. The Concept of Trust

The concept of trust is the fundamental concept of Anlgo-Saxon law system. Trust is regulated on the basis of equity, and the notion of trust itself can also be interpreted literally as trust. The classical model of trust looks as follows: a settlor of the trust seeks to establish a special regime in respect of his/her property, the contents of which would include management of such property by one or more trustees, for the benefit of one or more parties being beneficiaries.

Trust institution is not just popular in England, it has there the required legal basis for the application of the relevant regulations. It is applicable as it can be used to achieve the whole range of different practical purposes.

In England trust institution goes back to the 11th – 12th centuries. There are several theories of its origin, but they all are inextricably linked to the will of the owner for the other person to manage his/her property. Trust was also consolidated in the countries of Romano-Germanic law system, but only in the 20th century. However, it was not consolidated in its classic form – the concept and contents of this institution were used with exceptions.

The concept of trust is not legally formalized. But based on the legal nature of trust institution and the existing doctrinal interpretations, it is possible to identify certain features of trust in English law:

  • First, trust is regulated by equity;
  • Second, beneficiary’s rights to property are protected by ownership, whilst liabilities are entrusted with the trustee in equity;
  • Third, obligations of the trustee are fiduciary due to their legal nature.

Thus, trust relations look as follows:

Trust Agreement

Trust agreement is the legal form of trust consolidation. Like any other civil agreement, trust agreement contains a number of certain elements and prerequisites, and sometimes even a number of specific conditions.

Subject is a mandatory element of the trust agreement. Although initially mostly land and immovable property were a subject of trust, at present time it can be any property of the owner.

Parties to the trust agreement include the founder (owner, settlor of the trust) and trustee/settlor (a person controlling the subject of the trust agreement for management purposes).

Within the developed legal culture and subject to a large number of security procedures, another party to trust relations emerged – a protector, whose presence is not essential for the agreement. Nevertheless, the possibility of his/her inclusion into the agreement results from a range of important functions, which he/she can perform (the settlor may appoint him/her for the purposes of control over the actions, which the trustee makes for the benefit of the beneficiary, or review of their reasonability and empower him/her to dismiss the trustee and appoint the new one, or to change beneficiaries taking into account opinion of the trust settlor). However, in practice, powers of the protector are quite limited and mostly come down to observation.

Back to parties to the trust agreement

Founder is a person, who creates trust management by transferring all his/her property or parts thereof to the trustee (trust owner) who, in his/her turn, shall own, use and dispose of the transferred property for the benefit of the beneficiary. Founders can be both individuals and legal entities subject to certain statutory exceptions.

Trustee is the analogue of a notion of the “trust owner” (not to be confused with the “settlor” under the Russian legislation). Trustee is a person professionally performing duties of the trustee, or a person, who is in trust relations with the founder without performing such functions professionally and permanently. In the first case, a lot of professions somehow related to legal activities meet the criteria of a person rendering such services: providers of corporate services, lawyers, legal advisers, notaries public, auditors, and etc. A specific feature of trust agreement is a possibility to adjust independently the number of trustees. The only condition is that their total number shall not exceed four people. The subject of the trust agreement may be transferred to them by turn or divided among all trustees. The trustee may be both a person, appointed on a contractual basis based on the will of the founder, and a person appointed by the law, i.e. based on court decision.

The fact that the trust owner is empowered to manage property and dispose of it according to theoretical foundations of English law suggests that the trust owner becomes the owner of the property along with the founder of trust. In England the exact set of elements of ownership is not determined, and the number of combinations of such elements as well as the number of owners of the same object or other property is also not limited. Not all of them, but only some of the elements and combinations thereof can be reasonably deemed the elements constituting full-fledged ownership. Practicing lawyers and scientists estimate more than 1 500 of such combinations.

Appendix to chart:

However, the following thesis is best suited for clear understanding and application of trust relations in practice: “The owner shall not lose his/her rights while reserving his/her status, however, he/she shall not exercise the powers of the owner or act as the owner in relations with third parties, while trustee shall fully exercise the powers of the owner, while meeting the terms of distribution of performance results and other terms stipulated by the trust agreement”.

The powers of trustee and the real owner cannot be equated. However, consideration of these aspects allows implementing new mechanisms of use of trust peculiarities.

Beneficiary, as well as the protector, is more a party to legal relationship rather than a party to the trust agreement, as the agreement is executed directly by the founder and the trustee. Usually rights of beneficiaries do not appear directly in the agreement, but they correspond to obligations of the trustee established by equity and trust agreement.

Trust institution can be implicitly called an applied legal institution, as it is used to achieve a whole range of different practical purposes: safety of family property, income security of disabled or partially disabled persons without the transfer of the right of control over property to them, donations, gifts, money management for the benefit of third parties, or guarantee of confidentiality of the person receiving income.

Today, the most relevant objective is to protect assets from creditors. Transfer of property to trust means a formal separation of property from the owner, and, therefore, from his/her obligations. Such mechanism is usually used in order to exclude the possibility of execution against such property. Within Russian legislation application of this mechanism is impossible, which further complicates the correlation of two different in content, but homonymous concepts of “trust” in English law and “trust” in law of the Russian Federation. Many firms providing legal services offer to use “benefits” of trust to entrepreneurs, legal entities and now, with the introduction of bankruptcy of individuals, also to such customers. Conventional definition of trust, its specific features, and translation of notions related to relations regulated by English law, developed under the influence of the process of harmonization of national legal systems, fail to clarify the definition of essential differences between trust management in Russian law and trust in English law.

Trust (English Law) and Trust Management in Russian Law

To separate the notions of “trust” and “trust management”, let us try to compare the two definitions.

The following features can be identified in the legal definition of trust management:

1) Urgent nature.

This feature is not inherent in trust agreement, as urgency is an additional condition, while it is essential in the trust management agreement.

2) The trustee acts in his/her own name and for the benefit of the founder or beneficiary.

This feature is common, which creates the illusion of identity of the given concepts.

3) Founder retains the ownership.

In the event of transfer of property into trust management, the trustee does not become the property owner. The management founder becomes the owner. The Russian law does not contain the model of parallel ownership, which exists in English law, which is why it is impossible to apply the abovementioned mechanisms for the protection of assets from creditors, recovery and for the establishment of confidentiality of persons in practice. In addition, the founder shall retain the status of the owner of the property transferred by him/her and, therefore, shall be entitiled to determine the powers of the trustee, or impose restrictions in terms of disposal of the transferred property. Thus, in applicable registers, which reflect information about the owners, it is stated that the property has been registered with the nominee holder and is under trust management. Such regulation provides the greatest transparency in the application of the institution of trust management in Russia.

4) The trustee shall have rights and obligations in respect of the actions taken.

5) Trustee’s liability to the founder and third parties.

6) When taking actions with the transferred property, including transactions, trustee shall specify his/her status (trustee).

Suppression of such fact shall entail personal liability of the trustee with all his/her property.

Subjects of trust management include a wide range of items, which is open and can be represented by property complexes, immovable property, exclusive rights, securities, and etc. with certain legal exceptions (property under the party’s economic management or operational administration cannot be transferred into trust management – it is possible only upon termination of rights of economic management or operational administration due to liquidation of legal entity or other grounds stipulated by law and upon return of the property into the owner’s ownership).

In contrast with trust as the phenomenon of English law, in Russia the so-called non-commercial trust management is quite common. In this type of trust management, relations are outside the business sector, and the party owns and disposes of property of other person without any material benefits for itself, it acts by helping others, or by performing its civil duty. A person entitled to become a founder of management by law, does not have any subjective civil right to the property transferred by it to the trustee. Such trust management agreements may be executed in respect of property of a ward, a person under patronage, a missing person, i.e. in cases when grounds for the origin of the considered relations are stipulated by law.

Provisions of legal acts of the Russian Federation dedicated to regulation of legal relations arising out of trust management agreement do not contain direct reference to the trustee’s obligation to derive income from property management. But, as a general rule, trust management agreements, being pro-bono, include an essential condition of the amount and type of remuneration paid to the trustee. The main obligation of the management founder is to ensure the payment of the remuneration stipulated by the agreement and of compensation for necessary expenses incurred in the course of property management. However, the law stipulates that the source of reimbursement of the specified payments is income received from the use of property transferred into trust management. Which means that in the event of poor management, trustee shall be entitled to receive neither the remuneration for his/her services nor the compensation for the necessary expenses.

Article 1022 of the Civil Code of the Russian Federation is dedicated to liability of a trustee, which seems to be reasonable – a wide scope of authority involves considerable liability. Thus, it requires payment of compensation for the loss of profit during the trust management to the beneficiary in the event of failure to display due care of the beneficiary’s or founder’s interests, and compensation for losses incurred by loss or damage of property with regard to its natural wear-and-tear as well as for the loss of profit to the founder.

Of great practical importance is the statutory presumption of guilt of a trustee, who is exempt from liability only if he/she proves that the damages resulted from actions either of the beneficiary or the founder, or due to force majeure. This provision corresponds to all logical laws, however, it is quite difficult to calculate the loss of profit in practice. It could be calculated based on the minimum profit specified in the agreement, but such indication would be contrary to the trust management relations and would unreasonably bring it close to the commission, credit, loan agreements or diapositive agreement. Rate of profit is also directly related to the inflation rate which is impossible to be foreseen within the economic conditions in our country.

Trustees can be individual entrepreneurs and commercial organizations except unitary enterprises, while individuals can act as such only in cases expressly stipulated by law (if trust management is established for the purposes of management of inheritance property, for the purposes of management of ward’s property, and etc.). As mentioned earlier, English trust has no such restrictions.

In judicial practice, there are issues concerning the powers of the management founder regarding the management subject during the validity term of the agreement. On the one hand, transfer of property into trust management does not involve the transfer of ownership thereof to the trustee. On the other hand, provisions contain reference to the right of the trustee to take any legal or physical acts regarding the property pursuant to the agreement for the benefit of the beneficiary and exercise powers of the owner. In this regard the property transferred into trust management shall be separated from other property of the management founder as well as from the property of the trustee. In addition, most notably, it cannot be seized for the settlement of debts of the management founder except insolvency (bankruptcy) of this person, and, which is especially important, including an individual who is not an individual entrepreneur. With reference to the foregoing, in judicial practice the question arises as to the possibility of the management founder to exercise powers of the owner regarding the management subject, particularly powers to own, use and dispose of the property in accordance with law setting forth the relevant scope of rights. The practical conclusion which can be made from judicial practice is that the transfer of property into trust management does not restrict the right of the management founder to dispose of the management object, including if the person has become a management founder as a result of acquisition of property encumbered with trust management.

Creation and contents of powers of trustee to own, use and dispose of the property transferred to him/her shall be determined by the agreement executed between the parties, but not by law as is the case in proprietary interests. There are also no other essential features of proprietary interests, like compulsory recognition of this right in law as proprietary, absolute nature of the right, its perpetuity, and the holder’s possibility to influence the object without any assistance of any other person. Thus, transfer of property to the trustee does not mean that the founder shall lose the ownership, but it constitutes a form of exercise of the owner’s rights. In this regard, the main difference of trust management from trust under English law is that the owner does not transfer his/her powers to the trustee, but imposes certain liabilities regarding property management on him/her by executing an agreement.

It is known that initially Russia planned to follow the same path, which was once selected by the USA, i.e. use the trust institution to organize major corporations and holding companies: Decree of the President of the Russian Federation On Trust (dated December 24, 1993) offered introduction of the concept of trust into national civil turnover, and stipulated that only blocks of shares of joint stock companies established in the course of privatization of state enterprises were subject to transfer into trust. It is believed that the essential contradiction of trust to the Russian proprietary interest led to inability to establish this institution in Russia.

Based on the history of the Russian trust and dynamics of current changes in civil legislation, it is possible to distinguish a practically important process – the process of mutual influence of the common law and civil law institutions. Thus, changes in Chapter 4 of the Civil Code of the Russian Federation (dated 2014) dedicated to legal entities consolidated the division of business entities into public and non-public, which is absolutely new to the Russian law but more common in the United States. Hence, a step has been taken to approximation to the U.S. legal framework.

Despite the inclusion of provisions concerning trust management of property, the alleged equivalent of trust, into the Civil Code of the Russian Federation, Russian lawyers and representatives of business continue to pay close attention to the specified item. As already mentioned herein, the institution under consideration is increasingly used in acquisition of movable and immovable property abroad, which is then transferred to the management of trustees, but with a focus on legislation of other countries which, due to a number of considered reasons, may be in conflict with the legislation of the Russian Federation.

Legal experts are mostly focused on practical side of the issue by analyzing the potential of the trust institution in various areas, including inheritance, family and liability relations. In its turn, the reality is that the considered institution, being quite flexible, may be applied to relations regulated by the provisions of common and other law. However, it is not feasible to apply it in a similar way as in the English law system.

Ekaterina Pazemova

Master of International Private Law

Legal and Tax Advisor

Saint-Gobain Group

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