DISCUSSION OUTLINE OF THE TRUST RECEIPTS LAW

(Presidential Decree 115, January 29, 1973)

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 realized
from the sale of goods, documents or instruments released under trust receipts
as a criminal offense punishable under Article 315 of the Revised Penal Code
(i.e., swindling or estafa)

Trust Receipt Defined

1. A trust receipt is a commercial document whereby the bank releases the

goods in the possession of the entrustee but retains ownership thereof while the
entrustee shall sell the goods and apply the proceeds for the full payment of the
liability to the bank.

1.1 It is a security 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 may not be able to acquire credit, except
through utilization, as collaterals, of the merchandise imported or purchased
(Nacu vs. CA, 231 SCRA 237)

Trust Receipt Transaction

1. A trust receipt transaction is a transaction between an entruster and an

entrustee whereby the entruster, who owns or hold absolute title or security
interests over certain specified goods, documents or instruments, releases the
same to the possession of the entrustee upon the latter’s execution and delivery
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 extent of the amount
owing to the entruster, or the goods, documents or instruments themselves if
they are unsold or not otherwise disposed of (Section 4)

1.1 A Security Interest means a property 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 expressed
to be absolute, whenever such title is in substance taken or retained for security
only.

2. A trust receipt transaction distinguished from:

(a) A pledge-in a pledge, the person doing the financing has possession of the
property; in a trust receipt, the property is in the possession of the person
financed.

(b) A conditional sale-in a conditional sale, there is a sale of the property from
the seller to the buyer; in a trust receipt, there is no sale of the property from
the entruster to the entrustee.

(c) A chattel mortgage-a chattel mortgage involves the creation of a lien upon
the property; a trust receipt does not involve the creation of a lien.

(d) A consignment-in a consignment, the consignor retains title to the

property to secure the indebtedness due from the consignee; in a trust receipt,
the seller does not retain title to the property but transfers such title to the
entruster (not to the entrustee)

Parties to a Trust Receipt Transaction

1. The parties to a trust receipt transaction are:

1.1 The entruster- is the person holding title over the goods, documents or
instruments subject to a trust receipt transaction, and any successor in interest
of such person (Section 3 [c])

(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 extent of the amount owing to the entruster;

1.1 The entruster holding a security interest shall not, merely by virtue of
such interest or having given the entrustee liberty 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 any sale or contract
to sell made by the entrustee. (Section 8)

1.2 Although the entrustee is not the owner of the goods under a trust receipt
(ownership is retained by the entrustor) anyone who acquires the goods from
the entrustee acquires good title (ownership) over the goods, which fact runs
counter to the provisions of Article 1505 of the Civil Code, where there is a
contract of sale, the buyer is to acquire only whatever title the seller had at the
time the sale was perfected.

1.3 Note also that the risk of loss shall be borne by the entrustee. Loss of
goods, documents, or instruments which are the subject 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 extinguish his obligation to the entruster
for the value thereof (Section 10). This is not in accordance with the civil law
principle that it is generally the owner who must bear the risk of loss of the
object.

1.4 A trust receipt arrangement does not involve a simple loan transaction
between a creditor and debtor-importer. The law warrants the validity of the
trust receipt agreement. Consequently, the goods covered by the trust receipt
cannot be levied upon by the creditors of the entrustee. (Prudential Bank v.
NLRC, 251 SCRA 421 [1995])

Validity of entruster’s security interest as against creditors-the entruster’s

security 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 (Section 12)

2. To the return of the said goods, in case they could not be sold; and

3. To cancel the trust in case the entrustee defaults, take possession of the
goods, and sell the same at public or private sale (Section 7).

3.1 The process of taking possession and selling the goods is as follows:

(a) The entruster may cancel the trust and take possession of the goods,
documents or instruments subject of the trust or of the proceeds realized
therefrom at any time upon default or failure of the entrustee to comply with any
of the terms and conditions of the trust receipt or any other agreement between
the entruster and the entrustee.

(b) The entruster in possession of the goods, documents or instruments may,

on or after default, give notice to the entrustee of the intention to sell, and may,
not less than five days after serving or sending of such notice, sell the goods,
documents or instruments at public or private sale, and the entruster may, at a
public sale, become a purchaser. Notice of the sale shall be deemed sufficiently
given if in writing, and either personally served on the entrustee or sent by post-
paid ordinary mail to the entrustee’s last known business address.
(c) The proceeds of any such sale, whether public or private, shall be applied
(1) to the payment of the expenses thereof; (2) to the payment of the expenses
of re-taking, keeping and storing the goods, documents or instruments; (3) to
the satisfaction of the entrustee’s indebtedness to the entruster. The entrustee
shall receive any surplus but shall be liable to the entruster for any deficiency.

1.2 The entrustee – is the person having or taking possession of goods,

documents or instruments under a trust receipt transaction, and any successor in
interest of such person for the purpose or purposes specified in the trust receipt
(Section 3 [b])

(a) The obligations of the entrustee are as follows:

1. To hold the goods in trust for the entruster and to dispose of them strictly
in accordance with the terms of the trust receipt; This includes the authority 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. It also includes authority to load, unload, ship or transship or otherwise
deal with the goods in a manner preliminary or necessary to their sale

2. 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 extent of the amount owing to
the entruster;

3. To insure the goods for their total value against loss from fire, theft,
pilferage or other casualties;

4. To keep the goods or the proceeds thereof, whether in money or

whatever form, separate and capable of identification as property of the
entruster; and

5. To return the goods,to the entruster in case they could not be sold or
upon demand of the entruster (Section 9)

Form of a Trust Receipt

1. As to form, a trust receipt need not be in any particular form, but every
such receipt must substantially contain (a) a description of the goods, documents
or instruments subject of the trust receipt; (b) the total invoice value of the
goods and the amount of the draft to be paid by the entrustee; (c) an
undertaking or a commitment of the entrustee (1) to hold in trust for the
entruster the goods, documents or instruments therein described; (2) to dispose
of them in the manner provided for in the trust receipt; (3) to turn over the
proceeds of the sale of the goods, documents or instruments to the entruster to
the extent 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
non-sale within the period specified therein.

2. The trust receipt may contain other terms and conditions agreed upon by
the parties in addition to those hereinabove enumerated provided that such
terms and conditions shall not be contrary to the provisions of this Decree, any
existing laws, public policy or morals, public order or goods customs (Section 5)

Penal Sanctions for Violation of the Trust Receipts Law

1. The acts punishable by the Trust Receipts Law as Estafa as defined by

Article 315, Section 1(b) of the Revised Penal Code are:

(a) The failure to comply with the provision referring to the obligation
involving the duty to deliver (entregaria) the money received to the owner of the
merchandise sold, or

(b) The failure to comply with the provision referring to the obligation
involving the duty to return (devolvera) the goods to the owner if not disposed
of in accordance with the terms of the trust receipt.

2. There is no need to prove intent to defraud (Pp vs. Cuervo, 104 SCRA
312). The offense is malum prohibitum (Metropolitan Bank vs. Tonda, 338 SCRA
254)

3. 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 banking community in case of a violation thereof is the basis for the criminal
offense.

4. It does not seek to enforce payment of the loan, rather it punishes the
dishonesty or abuse of confidence in the handling of money or goods to the
prejudice of another regardless of whether the latter is the owner (Colinares vs.
CA, 339 SCRA 623)

5. Consequently, the law has consistently been declared as not violating the
constitutional proscription against imprisonment for non-payment of debt. It is a
declaration by the legislative authority that, as a matter of public policy, the
failure of a person to turn over the proceeds of the sale of goods covered by the
receipt or to return the goods if not sold is a public nuisance to be abated by
penal sanctions (Tiomico vs. CA, 304 SCRA 216)