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Trust Receipts: Page 1 of 1

Under a trust receipt transaction: 1) An entruster (who owns goods) releases the goods to an entrustee who signs a trust receipt agreeing to hold the goods in trust for the entruster and sell the goods, using the proceeds to pay the entruster. 2) A trust receipt creates a security interest for the entruster over the goods. If the entrustee defaults, the entruster can cancel the trust and repossess the goods or their proceeds. 3) Trust receipts play an important role in business transactions by providing security for banks while allowing goods to be released for purposes like sale or manufacturing in order to ultimately be sold.

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146 views1 page

Trust Receipts: Page 1 of 1

Under a trust receipt transaction: 1) An entruster (who owns goods) releases the goods to an entrustee who signs a trust receipt agreeing to hold the goods in trust for the entruster and sell the goods, using the proceeds to pay the entruster. 2) A trust receipt creates a security interest for the entruster over the goods. If the entrustee defaults, the entruster can cancel the trust and repossess the goods or their proceeds. 3) Trust receipts play an important role in business transactions by providing security for banks while allowing goods to be released for purposes like sale or manufacturing in order to ultimately be sold.

Uploaded by

Rob
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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TRUST RECEIPTS

Under P.D. No. 115, otherwise known as the Trust Receipts Law, which took effect on 29 January 1973, a trust receipt transaction is
defined as "any transaction by and between a person referred to in this Decree as the entruster, and another person referred to in this
Decree as the entrustee, whereby the entruster, who owns or holds 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 signed document called the "trust receipt" wherein the entrustee binds himself to hold the designated goods, 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 as appears in the trust receipt or the goods,
instruments themselves if they are unsold or not otherwise disposed of, in accordance with the terms and conditions specified in the
trusts receipt, or for other purposes substantially equivalent to any one of the following: . . ."

A letter of credit-trust receipt arrangement is endowed with its own distinctive features and characteristics. Under that set-up, a bank
extends a loan covered by the letter of credit, with the trust receipt as security for the loan. In other words, the transaction involves a loan
feature represented by the letter of credit, and a security feature which is in the covering trust receipt. x x x.

A trust receipt, therefore, is a security agreement, pursuant to which a bank acquires a "security interest" in the goods. It secures an
indebtedness and there can be no such thing as security interest that secures no obligation.

The Trust Receipts Law was enacted to safeguard commercial transactions and to offer an additional layer of security to the lending bank.
Trust receipts are indispensable contracts in international and domestic business transactions. The prevalent use of trust receipts, the
danger of their misuse and/or misappropriation of the goods or proceeds realized from the sale of goods, documents or instruments
held in trust for entruster banks, and the need for regulation of trust receipt transactions to safeguard the rights and enforce the
obligations of the parties involved are the main thrusts of the Trust Receipts Law.

The second paragraph of Section 7 provides a statutory remedy available to an entruster in the event of 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. More
specifically, 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". The law further provides that "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. The proceeds of any such sale, whether public or private, shall be applied (a) to the payment of the expenses thereof; (b) to
the payment of the expenses of re-taking, keeping and storing the goods, documents or instruments; (c) 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."

In a trust receipt transaction, the goods are released by the entruster (who owns or holds absolute title or security interests over the said
goods) to the entrustee on the latter's execution and delivery to the entruster of a trust receipt. The trust receipt evidences the absolute
title or security interest of the entruster over the goods. As a consequence of the release of the goods and the execution of the trust receipt,
a two-fold obligation is imposed on the entrustee, namely: (1) to hold the designated goods, documents or instruments in trust for the
purpose of selling or otherwise disposing of them and (2) to turn over to the entruster either the proceeds thereof to the extent of the
amount owing to the entruster or as appears in the trust receipt, or the goods, documents or instruments themselves if they are unsold
or not otherwise disposed of, in accordance with the terms and conditions specified in the trust receipt. In the case of goods, they may
also be released for other purposes substantially equivalent to (a) their sale or the procurement of their sale; or (b) their manufacture or
processing with the purpose of ultimate sale, in which case the entruster retains his title over the said goods whether in their original or
processed form until the entrustee has complied fully with his obligation under the trust receipt; or (c) the loading, unloading, shipment
or transshipment or otherwise dealing with them in a manner preliminary or necessary to their sale. [4] Thus, in a trust receipt transaction,
the release of the goods to the entrustee, on his execution of a trust receipt, is essentially for the purpose of their sale or is necessarily
connected with their ultimate or subsequent sale.

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