TRUST FUND DOCTRINE

The trust fund doctrine considers the subscribed capital stock of the corporation as a trust fund for the
payment of the debts of the corporation, and to which creditors of the corporation have a right to look
up to for the satisfaction of their credits. Hence, the corporation cannot dissipate it to the prejudice of its
creditors in the sense

1) that there can be no distribution of such corporate assets among the stockholders without
provision being first made for the payment of corporate debts; and
2) that any such disposition of it is a fraud on the creditors who extend credit to the corporation.

The creditors may sue the stockholders directly for the latter’s unpaid subscription.

Exceptions to the trust fund doctrine

The Code allows distribution of corporate capital only in these instances:

1. Amendment of the AOI to reduce authorized capital stock;

2. Purchase of redeemable shares by the corporation regardless of existence of unrestricted retained

earnings; and

3. Dissolution and eventual liquidation of the corporation.

4. In the case of close corporation, when there should be a deadlock and the SEC orders the purchase at
their fair value of shares of any stockholder by the corporation regardless of the availability of unrestricted
retained earnings in its books.

Application of the TFD

1. Where the corporation has distributed its capital among the stockholders without providing for
the payment of creditors;
2. When there is payment of the dividends without unrestricted retained earnings;
3. When the corporation releases or condones payment of the unpaid subscription;
4. Where it has transferred corporate property in fraud of its creditors;
5. When properties are disposed or undue preference is given to some creditors even if the
corporation is insolvent;
6. Prohibition against the issuance of watered stocks;
7. Purchase of a corporation of its own shares; and
8. Decrease of authorized capital stock to the prejudice of the corporation’s creditors.
GAMBOA v. TEVES

"Capital" refers to the voting stock or controlling interest of a corporation. Mere legal title is insufficient
to meet the 60 percent Filipino-owned "capital" required in the Constitution. Full beneficial ownership of
60 percent of the outstanding capital stock, coupled with 60 percent of the voting rights, is required. The
legal and beneficial ownership of 60 percent of the outstanding capital stock must rest in the hands of
Filipino nationals in accordance with the constitutional mandate.
RIGHT TO INSPECT

The right to inspect is the right of a stockholder to inspect the books of the corporation is subject to the
following limitations:

1. The right must be exercised during reasonable hours on business days.

2. The requesting party is a director, trustee, stockholder or member of the corporation who may
inspect in person or by representative
3. The person demanding the right has not improperly used any information secured through any
prior examination of the records or minutes of the corporation.
4. The demand is made in good faith or for legitimate purpose.
5. The inspecting party shall remain bound by confidentiality rules under prevailing laws such as
the rule on trade secrets or processes under the Intellectual Property Code of the Philippines,
as amended, the Data Privacy Act of 2012, the Securities Regulation Code and the Rules of Court.
6. The person demanding to examine is not a competitor, director, officer, controlling stockholder
or otherwise represents the interests of a competitor.

NOTE: The statutory right of a stockholder to inspect books and records of a corporation extends— in
compliance with equity, good faith, and fair dealing— to a foreign subsidiary wholly-owned by the
corporation and therefore under its control. However, this right does not apply where the corporation
is not organized under the Philippine law as in such a case, the right of the stockholder is governed by
the inspection requirements in the jurisdiction in which the corporation was organized. (De Leon, 2010)