Legal Definitions - trust-fund doctrine

The trust-fund doctrine is a principle that states that the assets of an insolvent company, including paid and unpaid subscriptions to the capital stock, are held as a trust fund. This fund is used to pay the company's creditors. The creditors may follow the property constituting this fund and use it to reduce the debts, unless it has passed into the hands of a bona fide purchaser without notice. This principle is also known as the trust-fund theory.

Let's say a company goes bankrupt and owes money to its creditors. The trust-fund doctrine ensures that the assets of the company are held in trust for the benefit of the creditors. This means that the creditors can use the assets to pay off the debts owed to them. For example, if the company owns a building, the creditors can sell the building to pay off the debts.

Another example is if a company has received money from investors for shares in the company. If the company becomes insolvent, the trust-fund doctrine ensures that the money paid by the investors is held in trust for the benefit of the creditors. The creditors can use this money to pay off the debts owed to them.

These examples illustrate how the trust-fund doctrine works in practice. It ensures that the assets of an insolvent company are used to pay off the debts owed to the creditors.