DISCUSSION OUTLINE OF THE TRUST RECEIPTS LAW

(Presidential Decree 115, an!ar" #$, 1$%&'

Purpose of the Law and Preliminaries
1. As to purpose, it aims to: (a) To encourage and promote the use of trust
receipts as an additional convenient aid to commerce and trade (b) To regulate
trust receipt transactions in order to assure the protection of the rights and
enforcement of the obligations of the parties involved therein and (c) To declare
the misuse and!or misappropriation of goods or the proceeds reali"ed from the
sale of goods, documents or instruments released under trust receipts as a
criminal offense punishable under Article #1$ of the %evised Penal &ode (i.e.,
swindling or estafa)
Trust %eceipt 'efined
1. A trust receipt is a commercial document whereb( the ban) releases the
goods in the possession of the entrustee but retains ownership thereof while the
entrustee shall sell the goods and appl( the proceeds for the full pa(ment of the
liabilit( to the ban).
1.1 *t is a securit( transaction intended to aid in financing importers and retail
dealers who do not have sufficient funds or resources to finance the importation
or purchases of merchandise, and who ma( not be able to ac+uire credit, e,cept
through utili"ation, as collaterals, of the merchandise imported or purchased
(-acu vs. &A, .#1 /&%A .#0)
Trust %eceipt Transaction
1. A trust receipt transaction is a transaction between an entruster and an
entrustee whereb( the entruster, who owns or hold absolute title or securit(
interests over certain specified goods, documents or instruments, releases the
same to the possession of the entrustee upon the latter1s e,ecution and deliver(
to the entruster of a trust receipt wherein the entrustee binds himself to hold the
specified gods, documents or instruments in trust for the entruster and to sell or
otherwise dispose of the goods, documents or instruments with the obligation to
turn over to the entruster the proceeds thereof to the e,tent of the amount owing
to the entruster, or the goods, documents or instruments themselves if the( are
unsold or not otherwise disposed of (/ection 2)
1.1 A /ecurit( *nterest means a propert( interest in goods, documents or
instruments to secure performance of some obligations of the entrustee or of
some third persons to the entruster and includes title, whether or not e,pressed
to be absolute, whenever such title is in substance ta)en or retained for securit(
onl(.
.. A trust receipt transaction distinguished from:
(a) A pledge3in a pledge, the person doing the financing has possession of
the propert( in a trust receipt, the propert( is in the possession of the person
financed.
(b) A conditional sale3in a conditional sale, there is a sale of the propert( from
the seller to the bu(er in a trust receipt, there is no sale of the propert( from the
entruster to the entrustee.
(c) A chattel mortgage3a chattel mortgage involves the creation of a lien upon
the propert( a trust receipt does not involve the creation of a lien.
(d) A consignment3in a consignment, the consignor retains title to the propert(
to secure the indebtedness due from the consignee in a trust receipt, the seller
does not retain title to the propert( but transfers such title to the entruster (not to
the entrustee)
Parties to a Trust %eceipt Transaction
1. The parties to a trust receipt transaction are:
1.1 The entruster3 is the person holding title over the goods, documents or
instruments sub4ect to a trust receipt transaction, and an( successor in interest of
such person (/ection # 5c6)
(a) The rights of the entruster are as follows:
1. To receive the proceeds of the sale of the goods released under a trust
receipt to the entrustee to the e,tent of the amount owing to the entruster
1.1 The entruster holding a securit( interest shall not, merel( b( virtue of such
interest or having given the entrustee libert( of sale or other disposition of the
goods, documents or instruments under the terms of the trust receipt transaction,
be responsible as principal or as vendor under an( sale or contract to sell made
b( the entrustee. (/ection 7)
1.. Although the entrustee is not the owner of the goods under a trust receipt
(ownership is retained b( the entrustor) an(one who ac+uires the goods from the
entrustee ac+uires good title (ownership) over the goods, which fact runs counter
to the provisions of Article 1$8$ of the &ivil &ode, where there is a contract of
sale, the bu(er is to ac+uire onl( whatever title the seller had at the time the sale
was perfected.
1.# -ote also that the ris) of loss shall be borne b( the entrustee. Loss of
goods, documents, or instruments which are the sub4ect of a trust receipt,
pending their disposition, irrespective of whether or not it was due to the fault or
negligence of the entrustee, shall not e,tinguish his obligation to the entruster for
the value thereof (/ection 18). This is not in accordance with the civil law
principle that it is generall( the owner who must bear the ris) of loss of the ob4ect.
1.2 A trust receipt arrangement does not involve a simple loan transaction
between a creditor and debtor3importer. The law warrants the validit( of the trust
receipt agreement. &onse+uentl(, the goods covered b( the trust receipt cannot
be levied upon b( the creditors of the entrustee. (Prudential 9an) v. -L%&, .$1
/&%A 2.1 51::$6)
;alidit( of entruster1s securit( interest as against creditors3the entruster1s securit(
interest in goods, documents, or instruments pursuant to the written terms of a
trust receipt shall be valid as against all creditors of the entrustee for the duration
of the trust receipt agreement (/ection 1.)
.. To the return of the said goods, in case the( could not be sold and
#. To cancel the trust in case the entrustee defaults, ta)e possession of the
goods, and sell the same at public or private sale (/ection 0).
#.1 The process of ta)ing possession and selling the goods is as follows:
(a) The entruster ma( cancel the trust and ta)e possession of the goods,
documents or instruments sub4ect of the trust or of the proceeds reali"ed
therefrom at an( time upon default or failure of the entrustee to compl( with an(
of the terms and conditions of the trust receipt or an( other agreement between
the entruster and the entrustee.
(b) The entruster in possession of the goods, documents or instruments ma(,
on or after default, give notice to the entrustee of the intention to sell, and ma(,
not less than five da(s after serving or sending of such notice, sell the goods,
documents or instruments at public or private sale, and the entruster ma(, at a
public sale, become a purchaser. -otice of the sale shall be deemed sufficientl(
given if in writing, and either personall( served on the entrustee or sent b( post3
paid ordinar( mail to the entrustee1s last )nown business address.
(c) The proceeds of an( such sale, whether public or private, shall be applied
(1) to the pa(ment of the e,penses thereof (.) to the pa(ment of the e,penses of
re3ta)ing, )eeping and storing the goods, documents or instruments (#) to the
satisfaction of the entrustee1s indebtedness to the entruster. The entrustee shall
receive an( surplus but shall be liable to the entruster for an( deficienc(.
1.. The entrustee < is the person having or ta)ing possession of goods,
documents or instruments under a trust receipt transaction, and an( successor in
interest of such person for the purpose or purposes specified in the trust receipt
(/ection # 5b6)
(a) The obligations of the entrustee are as follows:
1. To hold the goods in trust for the entruster and to dispose of them strictl(
in accordance with the terms of the trust receipt This includes the authorit( to
manufacture or process the goods with the purpose of ultimate sale. Provided,
however, that the entruster retains title over the goods whether in its original or
processed form until the entrustee has complied with the obligation under the
receipt. *t also includes authorit( to load, unload, ship or transship or otherwise
deal with the goods in a manner preliminar( or necessar( to their sale
.. To receive the proceeds of the sale of the goods in trust for the entruster
and to turn over the same to the entruster to the e,tent of the amount owing to
the entruster
#. To insure the goods for their total value against loss from fire, theft,
pilferage or other casualties
2. To )eep the goods or the proceeds thereof, whether in mone( or whatever
form, separate and capable of identification as propert( of the entruster and
$. To return the goods,to the entruster in case the( could not be sold or upon
demand of the entruster (/ection :)

=orm of a Trust %eceipt
1. As to form, a trust receipt need not be in an( particular form, but ever(
such receipt must substantiall( contain (a) a description of the goods, documents
or instruments sub4ect of the trust receipt (b) the total invoice value of the goods
and the amount of the draft to be paid b( the entrustee (c) an underta)ing or a
commitment of the entrustee (1) to hold in trust for the entruster the goods,
documents or instruments therein described (.) to dispose of them in the
manner provided for in the trust receipt (#) to turn over the proceeds of the sale
of the goods, documents or instruments to the entruster to the e,tent of the
amount owing to the entruster or as appears in the trust receipt or to return the
goods, documents or instruments in the event of their non3sale within the period
specified therein.
.. The trust receipt ma( contain other terms and conditions agreed upon b(
the parties in addition to those hereinabove enumerated provided that such terms
and conditions shall not be contrar( to the provisions of this 'ecree, an( e,isting
laws, public polic( or morals, public order or goods customs (/ection $)
Penal /anctions for ;iolation of the Trust %eceipts Law
1. The acts punishable b( the Trust %eceipts Law as >stafa as defined b(
Article #1$, /ection 1(b) of the %evised Penal &ode are:
(a) The failure to compl( with the provision referring to the obligation involving
the dut( to deliver (entregaria) the mone( received to the owner of the
merchandise sold, or
(b) The failure to compl( with the provision referring to the obligation involving
the dut( to return (devolvera) the goods to the owner if not disposed of in
accordance with the terms of the trust receipt.
.. There is no need to prove intent to defraud (Pp vs. &uervo, 182 /&%A
#1.). The offense is malum prohibitum (?etropolitan 9an) vs. Tonda, ##7 /&%A
.$2)
#. There is also no need to prove damage to the entrustor because the
nature of a trust receipt transaction and the damage caused to trade circles and
the ban)ing communit( in case of a violation thereof is the basis for the criminal
offense.
2. *t does not see) to enforce pa(ment of the loan, rather it punishes the
dishonest( or abuse of confidence in the handling of mone( or goods to the
pre4udice of another regardless of whether the latter is the owner (&olinares vs.
&A, ##: /&%A @.#)
$. &onse+uentl(, the law has consistentl( been declared as not violating the
constitutional proscription against imprisonment for non3pa(ment of debt. *t is a
declaration b( the legislative authorit( that, as a matter of public polic(, the failure
of a person to turn over the proceeds of the sale of goods covered b( the receipt
or to return the goods if not sold is a public nuisance to be abated b( penal
sanctions (Tiomico vs. &A, #82 /&%A .1@)