A trust receipt is a financing arrangement, common in importation and trade, in which a bank (the entruster) releases goods or documents of title to a borrower (the entrustee) who receives them in trust, with the obligation to either sell the goods and turn over the proceeds to the bank up to the amount owed, or return the goods if unsold. Under Presidential Decree No. 115, the Trust Receipts Law, the entrustee holds the goods and proceeds in trust for the bank. The significance is that failure to turn over the proceeds of the sale or to return the goods is not treated as a mere civil debt — it may constitute estafa (a criminal offense), because the entrustee misappropriates property held in trust. This criminal exposure is what makes trust receipt violations serious, though the arrangement must be a genuine trust receipt and not merely a simple loan.
Businesses that import or finance inventory through banks often sign a trust receipt. Few realize that violating it can lead to criminal liability, not just a civil debt.
What a Trust Receipt Is
A trust receipt is a financing arrangement in which a bank (the entruster) releases goods or documents of title to a borrower (the entrustee), who receives them in trust. It is common in importation and trade finance: the bank pays for the goods, and the businessperson gets the goods to sell, promising to account for them.
The Entrustee's Two Obligations
Under a trust receipt, the entrustee undertakes to either:
- Sell the goods and turn over the proceeds to the bank, up to the amount owed; or
- Return the goods to the bank if they remain unsold.
Until then, the entrustee holds the goods (and any proceeds) in trust for the bank.
The Governing Law
Presidential Decree No. 115, the Trust Receipts Law, governs these transactions. It defines the trust relationship and the consequences of breaching it.
Why Violation Can Be Estafa
The most important feature: failing to turn over the proceeds or to return the goods is not treated as a mere civil debt — it may constitute estafa (a criminal offense). The rationale is that the entrustee holds the goods and proceeds in trust; misappropriating or failing to account for them is a breach of trust, which the law criminalizes. This is a striking exception to the general rule that non-payment of a debt is not a crime.
Genuine Trust Receipt vs. Simple Loan
An important limit: the transaction must be a genuine trust receipt. Where the arrangement is, in substance, merely a simple loan secured by the goods — for instance, where the goods were already owned or used by the borrower and the “trust receipt” was a device to obtain security — courts may treat the obligation as civil, not criminal. The true nature of the transaction controls over the label.
Practical Takeaways
- A trust receipt lets a bank release goods to a borrower who must sell and remit proceeds or return the goods;
- Under PD 115, failing to do so can be estafa — a criminal offense, not just a civil debt;
- The arrangement must be a genuine trust receipt; a disguised simple loan may be treated as a civil obligation only.
Frequently Asked Questions
What is a trust receipt? A financing arrangement, common in importation and trade, where a bank releases goods or documents of title to a borrower who receives them in trust, with the duty to sell and turn over the proceeds or return the goods if unsold.
What are the entrustee's obligations? To either sell the goods and turn over the proceeds to the bank up to the amount owed, or return the goods if they remain unsold. Until then, the entrustee holds the goods and proceeds in trust for the bank.
Can violating a trust receipt be a crime? Yes. Under PD 115, failing to turn over the proceeds or return the goods may constitute estafa, because the entrustee misappropriates property held in trust. This is an exception to the rule that non-payment of a debt is not a crime.
Is every trust receipt violation criminal? No. The transaction must be a genuine trust receipt. If it is in substance a simple loan secured by goods the borrower already owned or used, courts may treat the obligation as civil rather than criminal.
This commentary is for general informational purposes only and does not constitute legal advice. For guidance specific to your situation, please consult a licensed attorney.
If you have questions about your rights or options under Philippine law, our firm is available to assist. You may reach us via Viber or WhatsApp, call us at 0995 433 5550, or send an email to vivasnobles@gmail.com. We look forward to hearing from you.