To Be, Rather Than to Seem: Analysis of Trustee Fiduciary Duty in Reorganization and Its Implications on the New Chinese Bankruptcy Law

Xiao-chuan Charlie Weng, ECUPL & Penn Law

Abstract

Reorganization trustees play a crucial role in bankruptcy procedure. The trustees try to resurrect deteriorating businesses by managing remaining resources for the benefit of beneficiaries, usually unsecured creditors and shareholders. More or less, a trustee’s role is similar to that of the officers/managers of a solvent company. Fiduciary duty arises between the residual claimers, the stakeholders on the one hand, and the operator, the trustee on the other hand. Astonishingly, under current U.S. bankruptcy law, reorganization trustee’s fiduciary duty is not well defined, although this duty has been widely litigated. The vagueness is primarily due to misinterpretation of the Mosser case adjudicated by the U.S. Supreme Court. Fortunately, there are multitudes of academic literature on fiduciary duty in corporate law explaining the application issues, which are perfect references for clarifying the vagueness of trustee fiduciary duty. However, fiduciary duty is highly context specific. Corporate fiduciary duty cannot be arbitrarily applied to the bankruptcy context without necessary modification.

In China, unclear definition of the trustee fiduciary duty has greatly dampened the efficacy of the reorganization mechanism of the New Bankruptcy Law. Given the pressures of the current global financial crisis, it is imperative to amend the duty into a more viable and practical one. Given that the current Chinese reorganization mechanism is transplanted from U.S. bankruptcy regulation, retrospection to its origin is helpful in improving the trustee fiduciary duty. Finally, this Article also explores the use of the Case Directive to facilitate the adaptation and increase the flexibility of such duty in practice.