Trust Fund Doctrine Law and Legal Definition

Trust fund doctrine is a principle of judicial invention which says that corporate assets are held as a trust fund for the benefit of shareholders and creditors and that the corporate officers have a fiduciary duty to deal with them properly. The subscribed capital stock of the corporation is a trust fund for the payment of debts of the corporation which the creditors have the right to look up to satisfy their credits. The creditors can use it to reduce the debts, unless it has passed into the hands of a bona fide purchaser without notice.

The trust fund doctrine usually applies in four cases:

(a) Where the corporation has distributed its capital among the stockholders without providing for the payment of creditors;

(b) where it had released the subscribers to the capital stock from their subscriptions;

(c) where it has transferred the corporate property in fraud of its creditors;

(d) where the corporation is insolvent.