TRUST FUND DOCTRINE

Nature
 Under the trust fund doctrine, the capital stock, property and other assets of
the corporation are regarded as equity in trust for the payment of the
corporate creditors. Comm. of Internal Revenue v. Court of Appeals, 301
SCRA 152 (1999).
 The “trust fund” doctrine considers the subscribed capital stock as a trust
fund for the payment of the debts of the corporation, to which the creditors
may look for satisfaction. Until the liquidation of the corporation, no part of
the subscribed capital stock may be turned over or released to the
stockholder (except in the redemption of the redeemable shares) without
violating this principle. Thus dividends must never impair the subscribed
capital stock; subscription commitments cannot be condoned or remitted;
nor can the corporation buy its own shares using the subscribed capital as
the consideration therefore. NTC v. Court of Appeals, 311 SCRA 508 (1999).
 The requirement of unrestricted retained earnings to cover the shares is
based on the trust fund doctrine which means that the capital stock, property
and other assets of a corporation are regarded as equtiy in trust for the
payment of corporate creditors. The reason is that creditors of a corporation
are preferred over the stockholders in the distribution of corporate assets.
There can be no distribution of assets among the stockholders without first
paying corporate creditors. Hence, any disposition of corporate funds to the
prejudice of creditors is null and void. Boman Environmental Dev. Corp. v.
CA, 167 SCRA 540 (1988).
 To Purchase Own Shares (Secs. 8, 41, 43 and 122, last paragraph; Phil.
Trust Co. v. Rivera, 44 Phil. 469 [1923]; Steinberg v. Velasco, 52 Phil. 953
[1929])
 Rescission of Subscription Agreement Based on Breach
◦ The violation of terms embodied in a subscription agreement, with are
personal commitments, do not constitute legal ground to rescind the
subscription agreement since such would violate the Trust Fund Doctrine
and the procedures for the valid distribution of assets and property under
the Corporation Code. “In the instant case, the rescission of the Pre-
Subscription Agreement will effectively result in the unauthorized
distribution of the capital assets and property of the corporation, thereby
violating the Trust Fund Doctrine and the Corporation Code, since the
rescission of a subscription agreement is not one of the instances when
distribution of capital assets and property of the corporation is allowed.”
Ong Yong v. Tiu, 401 SCRA 1 (2003).
 Distribution of Corporate Assets
◦ “The distribution of corporate assets and property cannot be made to
depend on the whims and caprices of the stockholders, officers or
directors of the corporation, or even, for that matter, on the earnest
desire of the court a quo ‘to prevent further squabbles and future
litigations’ unless the indispensable conditions and procedures for the
 protection of the corporate creditors are followed. Otherwise, the
‘corporate peace’ laudably hoped for by the court will remain nothing but
a dream because this time, it will be the creditors’ turn to engage in
‘squabbles and litigations’ should the court order an unlawful distribution
in blatant disregard of the Trust Fund Doctrine.” Ong Yong v. Tiu, 401
SCRA 1 (2003).
 IMPORTANT: The subscribed capital stock of the corporation is a trust fund
for the payment of debts of the corporation which the creditors have the
right to look up to satisfy their credits, and which the corporation may not
dissipate. The creditors may sue the stockholders directly for the latter’s
unpaid subscription.
 Application of the TFD:
1. Where the corporation has distributed its capital among the
stockholders without providing for the payment of creditors;
2. Where it had released the subscribers to the capital stock from their
subscriptions;
3. Where it has transferred the corporate property in fraud of its
creditors; and
4. Where the corporation is insolvent.
 Coverage of the TFD:
1. If the corporation is solvent, the TFD extends to the capital stock
represented by the corporation’s legal capital.
2. If the corporation is insolvent, the TFD extends to the capital stock of
the corporation as well as all of its property and assets.
 Exceptions to the TFD:
1. Redemption of redeemable shares (Sec. 8)
2. In close corporation, when there should be a deadlock and the SEC
orders the payment of the appraised value of the stockholder’s share.
(Sec. 104)