The Criminal Trap of Trust Receipts: Why Selling Financed Goods Can Lead to Imprisonment in the Philippines
Introduction: When an ordinary sale becomes a criminal case
In Philippine commerce, it is common for banks and financing institutions to fund the importation or purchase of goods intended for resale, then release those goods to the borrower under a trust receipt. Many business owners assume this is only a financing arrangement with civil consequences if payments are missed.
Under Presidential Decree No. 115 or the Trust Receipts Law, however, the rules are different: once goods are released under a trust receipt, the entrustee’s failure to either turn over the sale proceeds (to the extent owed) or return the goods (if unsold) can constitute estafa—a criminal offense that may lead to imprisonment. This is why trust receipt transactions can become a “criminal trap” for corporations and their officers.
Governing law: Presidential Decree No. 115 (Trust Receipts Law)
The Trust Receipts Law declares a state policy to promote trust receipts in trade while protecting parties and treating the misuse or misappropriation of goods or proceeds as a criminal offense punishable under the Revised Penal Code provisions on estafa (Presidential Decree No. 115, 1973).
Two provisions are central to understanding criminal exposure:
- Policy and criminalization: The law expressly treats misuse/misappropriation of goods or proceeds under trust receipts as punishable under Article 315 of the Revised Penal Code (Presidential Decree No. 115, Section 2, 1973).
- Penalty clause: If the entrustee fails to deliver the proceeds of sale (up to the amount owed) or fails to return the goods if not sold as agreed, that failure constitutes estafa under Article 315(1)(b) of the Revised Penal Code (Presidential Decree No. 115, Section 13, 1973).
What a trust receipt really is: title stays with the entruster
A trust receipt transaction is not merely “a loan with collateral” in the ordinary sense. It is built on the concept that the entruster (commonly a bank) retains legal title over the goods, while the entrustee (the buyer/borrower) receives possession under an obligation to hold the goods in trust, sell them or dispose of them as permitted, and then remit the proceeds to the entruster to the extent of the obligation—or return the goods if they are not sold (Chua, et al. v. Secretary of Justice, et al., G.R. No. 214960, 2022).
This structure is why selling trust receipt goods is not itself illegal; what creates criminal liability is selling and then failing to remit the proceeds as required (or failing to return the goods if unsold).
Why selling financed goods can lead to imprisonment: the “mere failure” rule (malum prohibitum)
The Supreme Court has repeatedly emphasized that violation of the Trust Receipts Law is malum prohibitum: criminal liability attaches upon the mere failure to turn over proceeds or return goods as required, and intent to defraud is immaterial (Chua, et al. v. Secretary of Justice, et al., G.R. No. 214960, 2022; Gonzalez v. Hongkong & Shanghai Banking Corporation, G.R. No. 164904, 2007).
In plain terms, a typical pattern leading to prosecution looks like this:
- Goods are released to the business under a trust receipt.
- The business sells the goods in the ordinary course.
- The business uses proceeds to pay suppliers, payroll, overhead, or other debts.
- The bank demands remittance or settlement under the trust receipt.
- The business cannot remit the proceeds or return goods (because they were sold).
- A criminal complaint for estafa is filed under PD 115 in relation to Article 315(1)(b) of the Revised Penal Code (Presidential Decree No. 115, Section 13, 1973; Tan II v. People of the Philippines, G.R. No. 242866, 2022).
Who may be prosecuted: corporate liability often falls on officers who signed
A frequent misconception is that only the corporation is exposed. PD 115 expressly provides that when the violation is committed by a corporation or other juridical entity, the penalty is imposed on the directors, officers, employees, or other officials/persons responsible for the offense (Presidential Decree No. 115, Section 13, 1973).
Supreme Court rulings recognize criminal exposure for corporate officers who signed trust receipts on the corporation’s behalf or are shown to be responsible for the violation (Gonzalez v. Hongkong & Shanghai Banking Corporation, G.R. No. 164904, 2007; Ching v. Secretary of Justice, et al., G.R. No. 164317, 2006).
Conversely, criminal liability must be anchored on proof—e.g., that the accused personally signed the trust receipt, or that trust receipts were executed by authorized representatives in a manner attributable to the accused (Barlin v. People of the Philippines, G.R. No. 207418, 2021).
Civil and criminal liability can proceed together
Trust receipt disputes often begin as collection issues, but PD 115 overlays a penal consequence. Jurisprudence recognizes that the trust receipt arrangement can produce both civil liability (to pay) and criminal liability (estafa) if the statutory failure occurs (Tan II v. People of the Philippines, G.R. No. 242866, 2022).
When criminal liability may not attach: transactions treated as simple loans
Not every document labeled “trust receipt” automatically triggers PD 115 criminal consequences. The Supreme Court has ruled that when both parties know from the start that the goods are not intended for resale or manufacture for sale, but are really for the borrower’s own use—and return of the goods is not realistically contemplated—the arrangement is treated as a simple loan. In that situation, failure to pay does not constitute estafa under PD 115 (Hur Tin Yang v. People of the Philippines, G.R. No. 195117, 2013).
This doctrine is highly fact-sensitive and often turns on the true commercial purpose of the goods and the parties’ understanding at the time of transaction.
Common scenarios that trigger PD 115 exposure
Below are recurring fact patterns in Philippine prosecutions involving trust receipts:
- Retail inventory financing: A store sells inventory covered by a trust receipt, but uses the cash for operating expenses and cannot remit when the bank demands payment (Presidential Decree No. 115, Section 13, 1973).
- Importation via letters of credit: A local bank pays the exporter; the importer withdraws goods from customs by executing a trust receipt; goods are sold; proceeds are not turned over (Revenue Memorandum Circular No. 51-2010, 2010, discussing trust receipts as a separate contract following LC-related importation flow).
- Corporate group cash management: Proceeds are “temporarily” transferred to affiliated companies, leaving the entrustee unable to remit to the bank upon demand—creating a basis for complaint under PD 115.
Summary table: what triggers criminal liability under PD 115
| Situation | Typical result under PD 115 | Main authority |
|---|---|---|
| Goods sold; proceeds not remitted as required | May constitute estafa; intent to defraud not required | Presidential Decree No. 115, Section 13 (1973); Chua v. Secretary of Justice, G.R. No. 214960 (2022) |
| Goods not sold; goods not returned as required | May constitute estafa | Presidential Decree No. 115, Section 13 (1973); Chua v. Secretary of Justice, G.R. No. 214960 (2022) |
| Officer signs trust receipts for a corporation | Officer may be prosecuted as a responsible person | Ching v. Secretary of Justice, G.R. No. 164317 (2006); Gonzalez v. HSBC, G.R. No. 164904 (2007) |
| Transaction only a “trust receipt” in form; goods are for borrower’s own use (not for resale/manufacture for sale) | May be treated as simple loan; PD 115 estafa theory may fail | Hur Tin Yang v. People, G.R. No. 195117 (2013) |
Payment restructuring and “novation”: why it often does not erase criminal exposure
Businesses sometimes negotiate revised payment terms after default and assume the criminal risk disappears. The Supreme Court has stressed that novation must be clearly established either by unequivocal terms or by absolute incompatibility between old and new obligations; mere modification of payment terms does not automatically extinguish criminal liability for violation of the Trust Receipts Law (Chua, et al. v. Secretary of Justice, et al., G.R. No. 214960, 2022).
Compliance guidance for businesses and corporate officers
Trust receipts require discipline in cash handling and documentation. The following measures reduce the risk of a PD 115 complaint:
- Segregate trust receipt proceeds: Treat sale proceeds as “earmarked” for remittance to the entruster up to the amount due, consistent with the trust character of the arrangement (Presidential Decree No. 115, Section 13, 1973).
- Track inventory covered by each trust receipt: Maintain a schedule showing which items were released under which trust receipt and their sales status.
- Do not sign blindly: Corporate officers should confirm the mechanics for remittance, deadlines, and who controls proceeds before signing trust receipts, given potential personal exposure (Ching v. Secretary of Justice, G.R. No. 164317, 2006).
- Document returns and partial remittances: Where goods are unsold or defective, document return attempts and acknowledgments.
- Assess whether the transaction is truly a trust receipt: If goods are for internal use and not for resale/manufacture for sale, clarify the transaction form early to avoid an arrangement that does not match business reality (Hur Tin Yang v. People, G.R. No. 195117, 2013).
Final observations
The Trust Receipts Law is unusual because it converts what many perceive as a financing shortfall into potential criminal liability once the statutory conditions are met. The Supreme Court has consistently treated the violation as malum prohibitum: once an entrustee fails to remit proceeds or return goods as required, a criminal complaint for estafa may follow—even without proof of intent to defraud (Chua, et al. v. Secretary of Justice, et al., G.R. No. 214960, 2022; Gonzalez v. Hongkong & Shanghai Banking Corporation, G.R. No. 164904, 2007).
For corporations, the risk is not abstract: officers who sign trust receipts or are deemed responsible can be prosecuted (Presidential Decree No. 115, Section 13, 1973; Ching v. Secretary of Justice, G.R. No. 164317, 2006). The safest approach is to treat trust receipt proceeds as controlled funds, monitor inventory tightly, and seek early restructuring solutions—with written terms—before default hardens into a demand-and-non-remittance scenario that invites criminal action.
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