i. Trust Fund Doctrine

Trust Fund Doctrine

The subscriptions to the capital stock of a corporation constitute a fund to which the creditors have a right to look for satisfaction of their claims and that the assignee in insolvency can maintain an action upon any unpaid stock subscription in order to realize assets for the payment of its debts. (Philippine Trust Company v. Rivera, G.R. No. 19761, 29 January 1923)¹

[Hence,] there can be no distribution of assets among the stockholders without first paying corporate creditors; any disposition of corporate funds to the prejudice of creditors is null and void. (Boman Environmental Development Corporation v. COURT OF APPEALS and NILCAR Y. FAJILAN, G.R. No. 77860, 22 November 1988)². This is without prejudice to the ability of a corporation to effect distributions to its stockholders by way of dividends charged against unrestricted retained earnings.

Coverage of the Trust Fund Doctrine

• In case of Solvency: The coverage of the trust fund doctrine is only up to the extent of the “subscribed capital stock” of the corporation. In this sense, the unrestricted retained earnings do not constitute part of the capital stock. Hence, the corporation is at liberty to pay out assets to the stockholders by way of dividends up to the extent of the unrestricted retained earnings.
• In case of Insolvency: The trust fund doctrine is not limited to reaching the stockholders’ unpaid subscriptions. The scope of the doctrine when the corporation is insolvent encompasses not only the capital stock, but also other property and assets generally regarded in equity as a trust fund for the payment of corporate debts. Thus, the Trust Fund Doctrine extends to all assets (not just subscribed capital stock) when a corporation becomes insolvent. (Halley v. Printwell, Inc., G.R. No. 157549, 30 May 2011)³
• Releasing Subscribers: The corporation cannot release subscribers from their obligation to pay their subscriptions without valuable consideration, to the prejudice of corporate creditors. (Yong v. Tiu, G.R. No. 144476, 18 October 2004)⁴

Trust Fund Doctrine

The subscriptions to the capital stock of a corporation constitute a fund to which the creditors have a right to look for satisfaction of their claims and that the assignee in insolvency can maintain an action upon any unpaid stock subscription in order to realize assets for the payment of its debts. (Philippine Trust Company v. Rivera)⁵

[Hence,] there can be no distribution of assets among the stockholders without first paying corporate creditors; any disposition of corporate funds to the prejudice of creditors is null and void. (Boman Environmental Development Corporation v. COURT OF APPEALS and NILCAR Y. FAJILAN)⁶. This is without prejudice to the ability of a corporation to effect distributions to its stockholders by way of dividends charged against unrestricted retained earnings.

Coverage of the Trust Fund Doctrine

• In case of Solvency: The coverage of the trust fund doctrine is only up to the extent of the “subscribed capital stock” of the corporation. In this sense, the unrestricted retained earnings do not constitute part of the capital stock. Hence, the corporation is at liberty to pay out assets to the stockholders by way of dividends up to the extent of the unrestricted retained earnings.
• In case of Insolvency: The trust fund doctrine is not limited to reaching the stockholders’ unpaid subscriptions. The scope of the doctrine when the corporation is insolvent encompasses not only the capital stock, but also other property and assets generally regarded in equity as a trust fund for the payment of corporate debts. Thus, the Trust Fund Doctrine extends to all assets (not just subscribed capital stock) when a corporation becomes insolvent. (Halley)⁷
• Releasing Subscribers: The corporation cannot release subscribers from their obligation to pay their subscriptions without valuable consideration, to the prejudice of corporate creditors. (Yong)⁸

Trust Fund Doctrine On Watered Stocks

The Trust Fund Doctrine is the basis for the prohibition on issuing watered stock.

A Corporation has no power to release an original subscriber of its capital stock from the obligation of paying for his shares, without a valuable consideration for such release; and as against creditors, a reduction of the capital stock can take place only in the manner and under the conditions prescribed by the statute or the charter or the articles of incorporation (Philippine Trust Company v. Rivera)⁹.