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Also, the matters contained in the following were written in accordance with the law, rules, and jurisprudence prevailing at the time of writing and posting, and do not include any future developments on the subject matter under discussion.
AT A GLANCE:
The trust fund doctrine provides that the capital stock, property and other assets of a corporation are regarded as equity in trust for the payment of corporate creditor (Philip Turner v. Lorenzo Shipping Corporation, G.R. 157479, 2010)
The Trust Fund doctrine was for the first time announced in the year 1824 by Judge Story in the well-known case of Wood v. Dummer (3 Mason 309). In that case, the stockholders of a bank without paying its debts, had divided among themselves all the property of the corporation. Manifestly, a great injustice had been done to the creditors and on some theory or other they must be allowed to recover their claims from the persons who had so received the property of the corporation.
Apparently, Judge Story thought that none of the principles of law applicable to the ordinary relation of debtor and creditor were adequate to the situation. The stockholders did not owe the debt and how, therefore, could the creditor compel them to pay? If, however, the property of the company be regarded as a fund held by the corporation in trust for its creditors, then the difficulty was overcome, for trust property could be followed into the hands of persons who have notice of the trust. As Judge Story said:
“If I am right in this position, the principle difficulty in the cause is overcome. If the capital stock is a trust fund, then it may be followed into the hands of any persons having notice of the trust attaching to it.”
As this new theory was so convenient to resolution of this case, Judge Story proceeded to show that the property of a corporation was a fund held in trust by it for its creditors.
The law says –
Presently, under Section 139 of the Revised Corporation Code, it provides that no corporation shall distribute any of its assets or property except upon lawful dissolution and after payment of all its debts and liabilities.
Jurisprudence says –
As to scope, the trust fund doctrine is not limited to reaching the stockholder’s 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. All assets and property belonging to the corporation held in trust for the benefit of creditors that were distributed or in the possession of the stockholders, regardless of full payment of their subscriptions, may be reached by the creditor in satisfaction of its claim.
Also, under the trust fund doctrine, a corporation has no legal capacity to release an original subscriber to its capital stock from the obligation of paying for his shares, in whole or in part, without a valuable consideration, or fraudulently, to the prejudice of creditors. The creditor is allowed to maintain an action upon any unpaid subscriptions and thereby steps into the shoes of the corporation for the satisfaction of its debt. To make out a prima facie case in a suit against stockholders of an insolvent corporation to compel them to contribute to the payment of its debts by making good unpaid balances upon their subscriptions, it is only necessary to establish that the stockholders have not in good faith paid the par value of the stocks of the corporation.
(Philip Turner v. Lorenzo Shipping Corporation, G.R. 157479, November 24, 2010, JENNIFER M. ENANO-BOTE VS. JOSE CH. ALVAREZ et.al, G.R. No. 223572. November 10, 2020)
Related article: WHAT IS A TRUST FUND UNDER THE PRE-NEED CODE OF THE PHILIPPINES?
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