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Trust Fund Doctrine

Trust Fund Doctrine considers the subscribed capital as a trust fund for the payment of debts of the corporation to which the creditors may look for satisfaction. (NTC vs. CA)

How can Trust Fund Doctrine be violated in declaring dividends?

If dividends are declared out of capital. Dividends must be declared out of retained earnings that are not restricted for (a) the payment of loans to creditors as covered by loan agreements, (b) appropriation by the Directors for corporate expansion programs, (c) retained under special circumstances for probable contingencies.

In other words, dividends must not be declared to compromise creditors and capital owners (stockholders).

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