Trust Receipt Agreements in the Philippines: When Unpaid Corporate Trade Financing Can Trigger Estafa Charges

Introduction: Why trust receipts can expose importers and distributors to criminal prosecution

Importers, wholesalers, and distributors often treat a trust receipt as “just another bank accommodation” that can be rolled over, restructured, or paid later like an ordinary loan. Philippine law treats many trust receipt arrangements differently: if the entrustee fails to turn over the sales proceeds to the bank (entruster) or return the goods if not sold, that failure may be prosecuted as estafa (swindling) under the Trust Receipts Law. This is a recurring enforcement tool used by banks when goods have been sold but proceeds were not remitted.

Governing law and policy: why a trust receipt is regulated more strictly than a regular loan

The primary statute is Presidential Decree No. 115 (Trust Receipts Law), 1973. The law expressly declares a state policy to promote trust receipts as a financing device while also declaring the misuse or misappropriation of goods or sale proceeds released under trust receipts as a criminal offense punishable as estafa under the Revised Penal Code (PD No. 115, Sec. 2, 1973).

Under PD No. 115, the penal trigger is not simply “non-payment.” It is the breach of an entrustee’s obligation to either: (a) deliver the proceeds of sale to the entruster up to the amount due, or (b) return the goods if they were not sold or disposed in accordance with the trust receipt. The law states that such failure “shall constitute the crime of estafa”under Article 315(1)(b) of the Revised Penal Code (PD No. 115, Sec. 13, 1973; Tan II v. People of the Philippines, G.R. No. 242866, 2022).

How banks typically use trust receipts in import and distribution transactions

In common trade setups, a bank finances importation or local purchase of inventory, then releases the goods to the importer/distributor under a trust receipt so the business can sell the goods and remit proceeds to the bank. Tax guidance also recognizes that a trust receipt is treated as a separate contract between the importer and the bank, “in the nature of a contract loan” where the imported goods serve as collateral, with distinct documentary stamp tax implications (RMC No. 51-2010, 2010).

When corporate debt becomes a criminal case: the statutory basis for estafa under PD 115

PD No. 115 makes it risky to think of a trust receipt as a mere extension of credit. The law provides that the entrustee’s failure to turn over sale proceeds (to the extent owed) or to return the goods if unsold constitutes estafa punishable under the Revised Penal Code (PD No. 115, Sec. 13, 1973; Tan II v. People of the Philippines, G.R. No. 242866, 2022).

Jurisprudence emphasizes that trust receipts are used widely in domestic and international commerce, and the statute aims to deter misuse because it affects not only the bank but broader public confidence in trade and banking channels (Metropolitan Bank and Trust Company v. Tonda, G.R. No. 134436, 2000).

What banks usually allege in criminal complaints for trust receipt violations

In many prosecutions, banks allege a straightforward narrative: (1) goods were released to the corporate customer under signed trust receipts; (2) the customer sold or disposed of the goods; (3) the customer did not remit proceeds to the bank or return the goods; and (4) demand was made but remained unpaid. Under PD No. 115, the violation can proceed even when the transaction also resembles a financing facility (Tan II v. People of the Philippines, G.R. No. 242866, 2022).

Why “we restructured the loan” may not stop the criminal case

Businesses sometimes assume that a restructuring, rollover, or approval of a payment proposal cancels exposure. The Supreme Court has cautioned that novation is never presumed, and the mere approval of a restructuring proposal—especially if not clearly established as extinguishing the trust receipt relationship—does not automatically extinguish criminal liability arising from a trust receipt violation (Philippine National Bank v. Soriano, G.R. No. 164051, 2012).

Why “we already paid (or offered to pay)” often does not bar prosecution

Payment or settlement after the violation does not necessarily prevent criminal prosecution. The Supreme Court has treated the Trust Receipts Law as addressing a public policy concern—deterring misuse of trust receipts in commerce—so settlement of civil liability does not by itself erase criminal liability once the offense is deemed committed (Metropolitan Bank and Trust Company v. Tonda, G.R. No. 134436, 2000).

Who can be held liable: exposure of corporate directors and officers

A frequent misconception is that only the corporation can be blamed. PD No. 115 provides that if the violation is committed by a corporation or other juridical entity, the penalty is imposed on the directors, officers, employees, or other persons responsible for the offense (PD No. 115, Sec. 13, 1973).

The Supreme Court has affirmed that a corporate officer who signs trust receipts on behalf of the corporation may be held criminally liable for failure to remit proceeds or return goods, even if the officer claims to have acted only in an official capacity or as a surety (Ching v. Secretary of Justice, G.R. No. 164317, 2006).

Limits of criminal liability: when the arrangement is treated as a simple loan instead

Not every document labeled “trust receipt” results in PD 115 criminal liability. The Supreme Court has recognized situations where the arrangement is not the kind of trust receipt transaction the law penalizes—particularly when the parties knew from the start that the return of the goods is not possible, or that the goods are not held for resale or manufacture for sale, making the deal closer to a simple loan.

Common scenarios where courts have treated the transaction as a loan (not punishable under PD 115)

• Goods not intended for resale or manufacture for sale, but for the borrower’s own use: If both parties knew the goods were solely for the borrower’s use, the arrangement is treated as a simple loan and non-payment does not constitute estafa under PD 115 (Hur Tin Yang v. People of the Philippines, G.R. No. 195117, 2013).
• Return of the goods is impossible and both parties knew it: If the parties entered into the arrangement knowing that the return of the goods is not possible even without the trustee’s fault, it is not a trust receipt transaction penalized under PD 115; the obligation is effectively to return proceeds, making it akin to a loan (Dela Cruz v. Planters Products, Inc., G.R. No. 158649, 2013; Hur Tin Yang v. People of the Philippines, G.R. No. 195117, 2013).
• Transaction is transparently for fabrication/contract performance rather than sale of goods as merchandise: Where the subject materials were to be used to fabricate items for specific contracts (not held for sale as goods), the Court has found PD 115 inapplicable and treated the transaction as a simple loan with purely civil liability (Ng v. People of the Philippines, G.R. No. 173905, 2010).

Quick comparison: trust receipt violation vs. ordinary loan default

Point of comparison	Trust receipt (PD 115 exposure)	Ordinary loan default (generally civil)
Typical purpose	Financing of goods held for sale or for processing for ultimate sale; goods released under trust for remittance of proceeds or return of goods (PD No. 115, 1973; Tan II v. People of the Philippines, 2022).	Borrower receives funds and undertakes to repay; no statutory duty to return goods or sales proceeds as trustee.
Act punished	Failure to turn over proceeds or return goods as required by the trust receipt (PD No. 115, Sec. 13, 1973).	Failure to pay money generally gives rise to collection, foreclosure, or other civil remedies.
Effect of settlement after breach	Often does not bar prosecution once the offense is considered committed (Metropolitan Bank and Trust Company v. Tonda, 2000).	Settlement typically ends the dispute unless other crimes are involved.
Potential liable persons	Responsible corporate directors/officers/employees; signatories can be prosecuted (PD No. 115, Sec. 13, 1973; Ching v. Secretary of Justice, 2006).	Usually the borrower and contractual obligors; criminal liability uncommon unless fraud/other crimes are present.

Typical red flags for importers and distributors

• Signing trust receipts routinely without internal controls on inventory-to-cash remittance timelines.
• Using proceeds to fund operating expenses or other payables before remitting the bank’s share.
• Assuming that a rollover, restructuring, or “approval in principle” automatically cancels trust receipt duties (Philippine National Bank v. Soriano, 2012).
• Believing that only the corporation is exposed, not the signing officer (Ching v. Secretary of Justice, 2006).
• Treating goods as if fully owned and freely disposable, ignoring the trust character of the arrangement reflected in PD 115’s policy against misappropriation (PD No. 115, Sec. 2, 1973).

Compliance guidance: how to reduce exposure to trust receipt criminal complaints

The goal is to align daily operations with the legal obligations the trust receipt creates. The following steps reduce the risk of an “unremitted proceeds” allegation:

• Ring-fence collections: Use a dedicated account or control mechanism where sales proceeds from trust receipt inventory are tracked and prioritized for remittance to the bank.
• Document inventory movement: Maintain records showing what was sold, what remains, and where goods are stored to support the ability to return goods if required.
• Clarify the commercial purpose upfront: If goods are for the company’s own use (not for resale or manufacturing for sale), ensure documentation reflects the real transaction, because mislabeling can create avoidable risk (Hur Tin Yang v. People of the Philippines, 2013; Ng v. People of the Philippines, 2010).
• Be cautious with restructurings: If a restructuring is intended to extinguish the trust receipt relationship, insist on clear written terms; do not rely on assumptions that it automatically erases exposure (Philippine National Bank v. Soriano, 2012).
• Train signatories and approvers: Officers who sign trust receipts should understand that liability can attach to responsible individuals (PD No. 115, Sec. 13, 1973; Ching v. Secretary of Justice, 2006).

Common example scenarios

• Distributor sells goods, uses proceeds for payroll, then misses bank remittance: This is a classic fact pattern that banks may treat as a PD 115 violation if the proceeds were not turned over as required (PD No. 115, Sec. 13, 1973; Tan II v. People of the Philippines, 2022).
• Importer signs trust receipts, later “restructures” and believes criminal risk is gone: Without clear novation that extinguishes the trust receipt relationship, restructuring may not end the possibility of prosecution (Philippine National Bank v. Soriano, 2012).
• Company obtains materials to fabricate towers for a client contract, not for sale as merchandise: Courts may treat this as a simple loan rather than a penal trust receipt transaction, depending on the documented purpose and parties’ understanding (Ng v. People of the Philippines, 2010).

Final observations: treat trust receipts as compliance-heavy financing, not ordinary credit

The Trust Receipts Law is designed to protect commerce by deterring misuse of goods or proceeds held under trust. For importers and distributors, the main lesson is straightforward: if you sign a trust receipt and sell the goods, failing to remit proceeds (or return goods if unsold) can be framed not merely as a collection case but as estafa under PD 115 (PD No. 115, Sec. 13, 1973; Tan II v. People of the Philippines, 2022).

Businesses should implement internal controls for proceeds remittance, ensure transaction documentation matches actual commercial purpose, and treat restructurings as legally sensitive events requiring clear written terms (Philippine National Bank v. Soriano, 2012). Officers who sign trust receipts should assume personal exposure if they are responsible for the breach and manage the arrangement accordingly (Ching v. Secretary of Justice, 2006).

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