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  • 1. Chapter 1 – General Provisions Article 1768 The partnership has a juridical personality separateArticle 1767 and distinct from that of each of the partners, even in By the contract of partnership two or more persons case of failure to comply with the requirements of article bind themselves to contribute money, property, or 1772, first paragraph. (n) industry to a common fund, with the intention of dividing the profits among themselves. Example Two or more persons may also form a partnership - If A and B form a partnership with X & Co., the property for the exercise of a profession. (1665a). of X & Co. is not A & B’s property and likewise, A & B’s property is not X & Co.’s. NOMINATE - Since X & Co is a juridical entity, it can acquire any - There is a name given by the law property since the partners are merely agents. - Contract of Partnership: CONSENSUAL (meaning it is - Thus the obligations of X & Co are not those of A & B’s. perfected by both parties) - The partnership of X & Co can file against A & B and be PERSONS sued by A & B, likewise, if a third party sues X & Co., A - Includes not only natural persons but also JURIDICAL & B are not affected. persons. A corporation may NOT be a partner but it may - The partnership will still be a juridical entity even without engage in JOINT VENTURES. compliance with A1772. BIND THEMSELVES - If X & Co. is exempted from certain things, it does not - Must be capable and competent, meaning, the following follow that A & B are included. may are not included: Consequences of being a Juridical Person 1. Minors - Can sue and be sued 2. Emancipated Minors - Acquire any kind of property 3. Those under civil interdiction – accessory penalty of - Insolvency of a partnership does not mean that the being convicted of crimes partners themselves are insolvent. 4. Insane persons 5. Incompetent persons (see oblicon notes) Article 1769 - HOWEVER, if the person is only a SUSPECT, he may In determining whether a partnership exists, these still bind himself into a contract since there is no final rules shall apply: verdict yet. (1) Except as provided by article 1825, persons who are TO CONTRIBUTE MONEY, PROPERTY OR INDUSTRY not partners as to each other are not partners as to - Makes the contract onerous since this is MUTAL and third persons. ALL must give either one of the above (2) Co-ownership or co-possession odes not of itself - Examples: establish a partnership, whether such co-owners or 1. A and B create a partnership with a promise of co-possessors do or do not share any profits made contributing P10,000 each in cash. A gave his by the use of the property share while B gave a check worth P10,000. Is the (3) The sharing of gross returns does not of itself issuance a contribution of money? establish a partnership, whether or not the persons No, unless the check is encashed. sharing them have a joint or common right or 2. Considering the same information above but with B interest in any property from which the returns are contributing P10,000 in equivalent dollars. derived No, the contribution must be made using the legal (4) The receipt by a person of a share in the profits of a tender, in this case, Philippine pesos. business is prima facie evidence that he is partner - Property contributed may be movable, immovable or in the business, but no such inference shall be intangible property. (Ex: equipment, land, patents, etc.) drawn if such profits were received in payment: - If the partnership did not contribute money or property, (a) As a debt by installments or otherwise; then industry was contributed. (b) As wages of an employee or rent to a landlord - Note: Contributions may differ for each of the partners. (c) As an annuity to a widow or representative of a TO A COMMON FUND TO DIVIDE PROFITS AMONGST deceased partner EACH OTHER (d) As interest on a loan, though the amounts of - The primary objective of partnerships is to make profits. payment vary with the profits of the business Sharing profits need not be equal. (e) As consideration for the sale of a goodwill of a - Sharing ratios are determined by the partner’s business or other property by installments or agreement, and if there was no agreement, then the otherwise. (n) ratios will be based on the ratio of the partners’ contributions. Provides the rule in determining partnerships - Sharing ratios for losses will be the same as the sharing Example for (1) ratios for profits. - If A & B say PUBLICLY that they are not partners, then - The industrial partner shall NOT share in losses. according to A1825, if they told C that they are and C - The industrial partner is exempt only to the partners but enters into a contract of partnership with them, then A rd not to 3 parties without prejudice to his right. A1816 and B are in a PARTNERSHIP OF ESTOPPEL. CONSENT (DELECTUS PERSONAE) Example for (2) - You can’t join a partnership without the consent of ALL - If A & B inherited land from their parents and partners. subsequently leased the land out for P50,000/month, Why? then it can be said that they share profits, but are they in Because the partnership will need to be dissolved a partnership? before you are admitted and a new partnership will be No, they are merely co-owners. The P50,000 profit is made in its place. merely incidental and besides, it was not derived from BUSINESS OPERATIONS.
  • 2. - If they bought the land for P1,000,000 each to build a Can a partnership be created orally? house but instead opted to sell it for P2,500,000 then Yes. A partnership may be constituted in any form (as stated they have a profit of P500,000 but are they partners? in Article 1771) No, because even if there was a profit of P500,000, this Partnerships are not covered by the Statute of Fraud since is merely incidental to the sale and not from business these are not necessarily required to be in writing (contract operations of A&B. of partnership can be in any form) - If the land was instead used to build an apartment that If immovable property and/or real rights are contributed to is rented out? the partnership, then the contract must be in a public Yes, because A & B share profits from RENTING, this instrument (notarized documents) can be considered as ordinary business operations. rd In order to bind 3 persons, the transfer of OWNERSHIP of Example for (3) immovable property MUST BE REGISTERED with the - If a person owns a big tract of land for planting rice and REGISTRY OF PROPERTY in the province or city where the entered into an agreement with a farmer that they will property is located divide the harvest, is the farmer partners with the owner The article shows that partnerships can be perfected by of the land? MERE CONSENT. No because of the following reasons: (1) The farmer had no contribution Article 1772 (2) The farmer has no say in the disposition of the land Every contract of partnership having a capital of (3) The farmer has no say in management P3,000.00 or more, in money or property, shall appear in (4) In case of loss, the owner shall carry the entire a public instrument, which must be recorded in the office burden and the farmer need not pay anything of the Securities and Exchange Commission. Example for (4) Failure to comply with the requirements of the - A partnership borrowed P50,000 and instead of giving preceding paragraph shall not affect the liability of the the creditor a specific amount to be repaid, they agreed partnership and the members thereof to third persons. (n) that the creditor will receive 1% of the partnership’s annual gross profit. Is the creditor a partner? If the partnership’s capital is P3, 000.00 or more (in any No because the receipt of share in net income happens form), it must be in a public instrument, recorded with the to be because of an existing debt. SEC and note that property referred to here is MOVABLE To determine whether a person is a partner: since immovable property is covered by Article 1771. (1) Required contribution Failure to comply with the requirements of Article 1772 will (2) Say in management rd not affect the liability of the partnership to 3 persons. (3) Share in losses  Isn’t this inconsistent with Article 1358? No, remember that in Article 1358, if the contract termsArticle 1770 exceed P500.00 then the contract must be in writing. A partnership must have a lawful object or purpose, This is merely for purposes of convenience and not and must be established for the common benefit or validity or enforceability of the law. Also note that interest of the partners. according to Article 1768, the partnership will still be When an unlawful partnership is dissolved by a valid and have a juridical entity. judicial decree, the profits shall be confiscated in favor  How do we reconcile this with Article 1358 and 1357? of the State, without prejudice to the provisions of the Article 1358 is for purposes of convenience and not for Penal Code governing the confiscation of the validity or enforceability of the law. instruments and effects of a crime. (1666a) Article 1357 states that contracting parties have the right to compel each other to place the contract into writing. The partnership must have a lawful object or purpose Purpose of Registration: - Lawful object refers to CAPITAL (1) Condition for obtaining a license to engage in business - Lawful purpose refers to the BUSINESS itself and in trade There must be common interest and benefit rd (2) 3 persons want proof that the partnership is existent, Unlawfulness of the partnership will cause it to be dissolved who the partners are and what the capitalization is and profits shall be confiscated before they enter into contracts/engage in business. Example of unlawful purpose: (3) The government requires this so that tax liabilities may - GAMBLING not be avoided (BIR) A & B are partners where A contributed P100,000 in Failure to comply with the Article’s requirements will not cash and B contributes gambling paraphernalia. They prevent the formation of the partnership were raided and the gambling paraphernalia was The Statute of Fraud will only apply if there was an confiscated. Can the P100,000 also be confiscated? agreement made by the contracting parties No because the P100,000 was not the reason for the Example: crime in anyway. The state is therefore required to A and B promise to contribute to their partnership money return this amount to A. worth P10,000.00 each within one year from their Legal effects of a Judicial Dissolution agreement. A contributes early but when the time comes for - Partnership is considered void from the beginning B to contribute his share, he refuses to do so. Can A compel - Profit and instrument of the crime is confiscated B to give his contribution? - The only returnable items are those that were never No, A cannot compel B to pay his contribution to the related to or connected with the crime committed partnership. Why?Article 1771 Because the contract/agreement between the two parties A partnership may be constituted in any form, was purely ORAL and never really written, and it has already except where immovable property or real rights are been one year since they agreed to their contract terms. contributed thereto, in which case, a public instrument shall be necessary (1667a)
  • 3. Article 1773 (a) Universal Partnership of All Present Property – A contract of partnership is void, whenever defined in Article 1778 immovable property is contributed thereto, if an (b) Universal Partnership of All Profits – defined in inventory of said property is not made, signed by the Article 1780 parties and attached to the public instrument. (1668a) (c) Particular Partnerships – defined in Article 1783 (2) As to the Liability: Refers specifically where one or both of the parties (a) General – general partners are liable PRO-RATA contribute immovable property. The requirements are: and subsidiarily, sometimes solitarily, with their own (1) The contract must be in a public instrument property/assets if the partnership is insolvent. (may (2) An inventory of the immovable property must be made, include industrial partners) signed by BOTH parties and attached to the public (b) Limited – limited partners are liable only up to the instrument, otherwise the partnership is VOIDED. extent of their contribution Actual Case in Applying Article 1773: (3) As to Duration: A and B agree to form a partnership engaging in a fish pond (a) At will – no particular undertaking, can be dissolved business where both partners will contribute cash; the cash at any time is later used to buy land that is converted into a fish pond. C (b) With a Fixed Term – may only be dissolved upon comes along and points out that the partnership is void the end of its term unless continued by the partners because no inventory of the land was made. Is the (4) As to Legality of Existence: partnership really void? (a) De Jure – complied with ALL requirements No, the partnership is not void because according to the (b) De Facto – failed to comply with ALL requirements Supreme Court, Article 1773 need not apply since the land (5) As to Representation to Others: was BOUGHT from the CASH CONTRIBUTION. (a) Ordinary/Real – actually exists Suppose a partnership contributes immovable property but (b) Ostensible/by Estoppel – exists only to partners does not conduct an inventory and enters into a contract with (6) As to Publicity: A. The partnership does not fulfill its obligation to A and A (a) Secret – some partners are not known to the public sues the partnership. Was A right in suing the partnership? (b) Open/Notorious – all partners are known to the No, since the partnership was void from the beginning. A public should instead file against the “partners” themselves. They (7) As to Purpose: will be sued under the legal basis of them being partners by (a) Commercial/Trading – business transactions estoppels, as stated in Article 1825. (b) Professional/Non-Trading – exercise of professions If A wishes to be in a partnership with B and promises to Kinds of Partners: contribute land but subsequently sells the same plot to C, (1) Under the Civil Code: who immediately registers the transfer, who owns the land? (a) Capitalist – contributes money/property C owns the land because A never registered the transfer. (b) Industrial – contributes industry Estafa: when the owner of a property sells the same to two (c) General – liability extends to personal assets or more different persons. (d) Limited – liability up to contribution only (e) Managing – manages the partnershipArticle 1774 (f) Liquidating – responsible during dissolution Any immovable property or an interest therein may (g) By Estoppel – not really a partner be acquired in the partnership name. Title so acquired (h) Continuing – continues business after dissolution can be conveyed only in the partnership name. (n) (i) Surviving – remains after partner’s death (j) Sub-partner – contracts with partners, Article 1804 Being a juridical entity, a partnership can acquire property (2) Other Classifications: and subsequently become its owner. (a) Ostensible – active, known to the public (b) Secret – active, unknown to the publicArticle 1775 (c) Silent – inactive, known to the public Associations and societies whose articles are kept (d) Dormant – inactive, unknown to the public secret among members, and wherein anyone of the (e) Original – member at time of organization members may contract in his own name with third (f) Incoming – about to become a member persons, shall have no juridical personality and shall be (g) Retiring – about to withdraw governed by the provisions relating to co-ownership. (1669) Article 1777 A universal partnership may refer to all the present There is no juridical entity since the members can contract property or to all the profits. (1672) rd with 3 persons in their own name without binding others. In a partnership: Article 1778 (1) The partners are merely agents who cannot act alone A partnership of all present property is that in which (2) Articles of Partnership are known to ALL partners AND the partners contribute all the property which actually to the GENERAL PUBLIC. belongs to them to a common fund, with the intention of dividing the same among themselves, as well as theArticle 1776 profits which they may acquire therewith. (1673) As to its object, a partnership is either universal or particular. Article 1779 As regards to the liability of the partners, a In a universal partnership of all present property, partnership may be general or limited. (1671a) the property which belongs to each of the partners at the time of the constitution of the partnership becomes Classifications of Partnerships: the common property of all the partners, as well as all (1) As to the Object: the profits which they may acquire therewith.
  • 4. A stipulation for the common enjoyment of any If the articles of universal partnership are doubtful or unclear other profits may also be made; but the property which then the presumption is that it is a universal partnership of all the partners may acquire subsequently by inheritance, profits. legacy or donation cannot be included in such - Because a universal partnership of all profits require stipulation, except the fruits thereof. (1674a) less obligations and is less onerous since the partners get to retain ownership over the property that they Why is the universal partnership of all present property not contribute. popular in the Philippines? Property owned at the time of contribution will become Article 1782 common property of the partnership eventually because only Persons who are prohibited from giving each other the profits acquired through the contribution will become any donation or advantage cannot enter into a universal common property, unless there was a stipulation that says partnership. (1677) otherwise. Example: A husband and wife cannot join a universal partnership. A and B form a Universal Partnership of All Present Property - They are not allowed to donate to each other and a and stipulate that property and profits that are acquired universal partnership essentially requires that the during business operations will become common property partners donate to each other. even if these were not due to their contributions and that if - They can join a particular partnership instead. anyone inherits property, it will become common property as A partnership formed in violation of this article shall be null well. A acquires land as part of his compensation package and void. It shall not have any legal personality either. from AyalaLand and B inherits land from his parents. Whose Illustrative Case: property will become common property? A, B and C form a partnership to engage in the importation, Only A’s land will become common property because it was marketing and operation of automatic phonographs, radios, essentially PAYMENT while B’s was inherited. The article television sets, amusement machines and their parts prohibits donations to become common property, only fruits accessories, with B and C as limited partners. Subsequently, of such can become common property. A and B got married and thereafter, C sold his share to A In a partnership, contributions must be determinate/certain and B for a nominal amount. Was the partnership dissolved and partners are akin to donors. Donations cannot after the marriage of A and B and C’s sale to them of his comprehend future property but profits can be stipulated. share in the partnership? No, the firm was not a universal partnership but a particularArticle 1780 one. A universal partnership of profits comprises all that Pertinent Legal Provisions the partners may acquire by their industry or work (1) Article 87: Every donation or grant of gratuitous during the existence of the partnership. advantage, direct or indirect, between spouses during Movable or immovable property which each of the their marriage, valid or not, shall be void except partners may possess at the time of the celebration of moderate gifts which the spouses may give each other the contract shall continue to pertain exclusively to on the occasion of any family rejoicing. each, only the usufruct passing to the partnership. (2) Article 739: The following donations shall be void: (1675) (a) Those made between persons who were guilty of adultery or concubinage at the time of the donation Example: (b) Those made between persons found guilty of the Suppose A and B form a Universal Partnership of All Profits same criminal offense, in consideration thereof and A wins in the lotto, P100,000.00. B tries to share in 50% (c) Those made to a public officer or his wife, citing the existence of their partnership and that A used the descendants and ascendants by reason of his partnership’s money to purchase the lottery ticket. Can B office really share in the lotto winnings? No, B cannot since it came from CHANCE, not WORK. Article 1783 If the P100,000.00 instead came from A’s work in DLSU, can A particular partnership has for its object B share in the profits of A? determinate things, their use or fruits, or a specific Yes, because it came from WORK. undertaking, or the exercise of a profession or vocation As long as it is PROFIT, the profit becomes common (1678) property to the partners UNLESS there was a stipulation in their agreement Defines what a particular partnership is If A and B form a Universal Partnership of All Profits for a Particular partnerships are those that are: Taxi-Cab business and both contribute vehicles that will - Neither a universal partnership for all present property serve as the taxi, what they were actually contributing is the nor a universal partnership for all profits USE or the RIGHT TO USE their vehicles. Upon dissolution, - Example: Those that are formed for the acquisition and the vehicles will be returned to them since there was never a sale of property, Accounting Firms, Law Firms, etc. transfer of ownership. - Popular because it is easy to join Unique feature of the Universal Partnership of All Profits: - The partners retain the title of ownership. Chapter 2 – Obligations of the PartnersArticle 1781 Section 1 – Obligations of the Partners amongst Articles of Universal Partnership, entered into Themselves without specification of its nature, only constitute a Relations created by a contract of partnership universal partnership of profits (1676) (1) Relations among the partners themselves (2) Relations of the partners with the partnership (3) Relations of the partnership with third persons (4) Relations of the partners with third persons
  • 5. Every partner is a debtor of the partnership forArticle 1784 whatever he may have promised to contribute thereto. A partnership begins from the moment of the He shall also be bound for warranty in case of execution of the contract, unless it is otherwise eviction with regard to specific and determinate things stipulated. (1679) which he may have contributed to the partnership, in the same cases and in the same manner as the vendor is Partnership is perfected by mere consent and if ALL the bound with respect to the vendee. He shall also be liable requirements are met for the fruits thereof from the time they should have Notwithstanding the fact that the partners have not given been delivered, without the need of any demand. (1681a) their contributions yet Example: Article 1787 A and B agree to form a partnership that will begin on When the capital or a part thereof which a partner is December 1 and upon the arrival of certain machinery bound to contribute consists of goods, their appraisal needed by the business. In this situation, are A and B in must be made in the manner prescribed in the contract already in a partnership? of partnership, and in the absence of stipulation, it shall As long as the agreement remains executory, then A and B be made by experts chosen by the partners, and are NOT partners therefore there is no partnership yet. according to current prices, the subsequent changes Partners may agree to form a partnership to take effect in thereof being the account of the partnership. (n) the future Example: Article 1788 A and B agree to form a partnership 1.5 years later, with A partner who has undertaken to contribute a sum contributions of P100,000.00 each. A contributes his share of money and fails to do so becomes a debtor for the early but when the time comes for B to contribute his share, interest and damages from the time he should have he refuses and says he no longer wants to partake in the complied with his obligation. partnership. Can A compel B to contribute his share to the The same rule applies to any amount he may have partnership? taken from the partnership coffers, and his liability shall NO. Because they cannot enforce the contract since it was begin from the time he converted the amount to his own perfected 1.5 years ago and the contract was only oral. use. (1682) Since the contract was for 1.5 years, it was greater than 1 year and should have been written instead. Suppose A, B and C are partners. A promises to contribute a The Statute of Fraud does not usually apply but to some RED CAR, B promises to contribute GOODS WORTH particular cases such as the example above, it will. P50,000.00 and C promises to contribute P50,000.00 IN If the contribution is immovable property, comply with Article CASH on October 2011. On October 2011, none of them 1773 otherwise the partnership will be void. comply. What happens? A, B and C thus become debtors to the partnership.Article 1785 Suppose B and C contribute their parts but A does not. Can When a partnership for a fixed term or particular B and C ask for the recission or annulment of the contract? undertaking is continued after the termination of such NO. If one of the partners fails to comply with his term or particular undertaking without any express requirements, then the others can request for specific agreement, the rights and duties of the partners remain performance with damages from the defaulting partner A. the same as they were at such termination, so far as is What are the obligations of A before October 2011? consistent with a partnership at will. (1) To contribute what he promised A continuation of the business by the partners or (2) To be held liable to answer for eviction if the partnership such of them as habitually acted therein during the term, is deprived of his contribution without any settlement or liquidation of the partnership (3) To take care of the contribution with the diligence of a affairs, is prima facie evidence of a continuation of the good father of a family. partnership. (n) Suppose A leased the car out and gets it back by December 2011. A partnership with a fixed term/particular undertaking is Then A must deliver the car and the fruits (profits from lease) continued without express agreement to the partnership because there was a delay. rd - Rights and duties remain the same as they were at Suppose that after A contributes the car, a 3 person, D termination. claims to the real owner of the car and is able to prove so. Example: Then A is held liable for eviction because the partnership is If A and B form a partnership to last until December 30, 2011 deprived for a specific thing. A is also held liable for and A is the manager and they share profits 50-50 and after damages to BOTH the partnership and to D. December 30, 2011 they continue with their partnership. What about B? Can the partnership determine the value of What happens? the goods he contributed? A and B retain their rights, meaning A is still the manager In Article 1787, it clearly states that the goods SHOULD be and they still share profits 50-50. appraised by the partnership. If there was no If there was express agreement for the term of existence, agreement/stipulation, then the partnership shall have the then when the term expires, the partnership is dissolved and goods appraised by an expert. becomes a partnership at will What if the goods appreciate/depreciate? Continuation is when there is NO settlement/liquidation. It will be charged to the partnership’s account. There must be prima facie evidence, meaning it must be What will happen if C fails to comply with his obligation? seen on first glance. C will be liable for his contribution plus interest and damages from the date he was supposed to contribute. The same ruleArticle 1786 will apply if the partners take money from the partnership’s funds without everyone’s consent. He will however, not be charged for theft or estafa and his obligation will only be to
  • 6. return the money he took plus interest and damages from the capital, except an industrial partner, to sav4e the the time he took the money. venture, shall be obliged to sell his interest to the other When will a partner be held criminally liable? partners. (n) Suppose the partners set aside P10,000.00 for payment to one of their creditors. A takes this amount from the fund and If there is an imminent loss in the partnership, the partner is subsequently discovered to have done so. who refuses to contribute additional funds, IF HE IS - Then A can be charged for estafa since he CAPABLE TO DO SO, shall sell his share TO THE misappropriated the money ALREADY SET ASIDE. PARTNERS, unless he is an industrial partner. - Imminent LossArticle 1789  There is a need for the capitalist partners to An industrial partner cannot engage in business for contribute additional funds to save the partnership himself, unless the partnership expressly permits him to  The industrial partner need not do so because he do so; and if he should do so, the capitalist partners has already given 100% of his efforts may either exclude him from the firm or avail  If the capitalist partner is WILLING but NOT themselves of the benefits which he may have obtained FINANCIALLY CAPABLE, the article will NOT apply in violation of this provision, with a right to damages in to him because he is already insolvent either case. (n) - Selling of interest  Refusal to contribute additional funds to save the An industrial partner contributes his industry partnership means that the partner no longer has - Partnership has the EXCLUSIVE RIGHT to his industry any interest in the partnership - Prohibited from the engaging in business of ANY kind  He should not be allowed to reap the benefits that unless the partnership has expressly permitted him to the other partners have worked hard for because do so. he had not done anything to help anyway Example:  He cannot complain of being removed from the Suppose that a partnership is engaged in a automobile partnership because he will be paid what is due to repair shop. A is the industrial partner (chief mechanic) and him for his share in the interest of the partnership works only up to 5PM every working day. Can he go home - Agreement that the partner need not contribute and work on the partnership’s customers’ autos, even if he additional funds in cases of loss says it to the capitalist partners EVERY DAY before he  The capitalist partner will not be required since it leaves? was in their agreement in the first place. The law says that there must be EXPRESSED permission,  Note that more contribution to the partnership in this situation, all A has is IMPLIED permission. The capital would mean you share more in the profits capitalist partners’ remedy is therefore to either: (only one) but this should be voluntary (1) Avail of the benefits from A’s “business” Things to consider: (2) Exclude A from the partnership and demand for (1) There must be an IMMINENT LOSS damages (2) The partner who is unwilling to contribute must be Capitalist partners are prohibited from engaging in SIMILAR SOLVENT/FINANCIALLY CAPABLE businesses only. (3) There was no agreement that the partners will not have Industrial partners have the same remedies as capitalist to contribute additional funds in cases of loss partners. If the purpose of additional contribution is simply to raise capital, then this article will not apply.Article 1790 Unless there is a stipulation to the contrary, the Article 1792 partners shall contribute equal shares to the capital of If a partner authorized to manage collects a the partnership. (n) demandable sum, which was owed to him in his own name, from a person who owed the partnership another The partners shall contribute to the capital of the partnership sum also demandable, the sum thus collected shall be as per their agreement, except if there was no agreement in applied to the two credits in proportion to their amounts, the first place, in which case, they shall contribute equally. even though he may have given a receipt for his own Example: credit only; but should he have given it for the account A and B decide to form a partnership and agree to contribute of the partnership credit, the amount shall be fully to the capital in the ratio of 60:40, how much should the applied to the latter. partners contribute to the partnership? The provisions of this article are understood to be The partners shall contribute in the ratio of 60:40, meaning if without prejudice to the right granted to the debtor by their partnership capital is a combined total of P10, 000.00 Article 1252, but only if the personal credit of that then A contributed P6, 000.00 and B contributed P4, 000.00. partner should be more onerous to him. (1684) A and B decide to form a partnership but did not say how much the other should contribute, how much should each A and B are in a partnership where A is the managing partner contribute to the partnership? partner. C owes A a sum of P5,000.00 and the partnership a Since the partners did not give any sort of agreement as to sum of P10,000.00. The credit to A is due on September 1 the ratio of their capital contribution, we shall assume that while the partnership’s is due on September 15, both debts they will contribute in equal proportions, meaning if the are due and demandable. A collects from C a total of partnership capital is a combined total of P10, 000.00, then P3,000.00 only and A subsequently issues a receipt in his each partner contributed P5, 000.00. name. Is the partnership entitled to share in the P3,000.00? Yes but in proportion to their respective debts so A getsArticle 1791 P1,000.00 and the partnership gets P2,000.00. If there is no agreement to the contrary, in case of Supposing there was no mention as to who the managing imminent loss of the business of the partnership, any partner is, will the requisites of Article 1792 still be present? partner who refuses to contribute an additional share to
  • 7. Yes, in the absence of information relating to the identity of painted RED. Damages are suffered by the partnership for the managing partner, the assumption shall be that ALL P30,000.00 due to the repainting. Can A compensate this partners are managing partners. loss using the profits he earned for the partnership? If A issues a receipt on the name of the partnership instead, A cannot compensate it with the profits he earned because it to whose credit will the P3,000.00 be put? is his obligation to bring profits in the first place. The The entire P3,000.00 will go to the partnership. responsibility of the P30,000.00, however, may be mitigated Supposing the credit of A carries 18% while that of the by the court if by other activities, A is able to bring about partnership carries only 10%. C pays A and says that the unusual or extraordinary profits, meaning, he may be P3,000.00 shall be applied to A’s credit. Is the partnership allowed by the courts to pay back just P15,000.00 instead. entitled to share in the P3,000.00 still? Follows that if the partner is guilty of fraud or damages, he No, the debtor is given the right to apply payment to shall be liable for that. whichever debt is more onerous. Things to remember: Article 1795 The two conditions should be both present in order for the The risk of specific and determinate things which Article to apply, otherwise, the entire amount will go to are not fungible, contributed to the partnership so that whoever collects payment from the debtor. only their use and fruits may be for the common benefit, (1) 2 debts and both are due and demandable shall be borne by the partner who owns them. (2) The one collecting should be the managing partner If the things contributed are fungible, or cannot be kept without deteriorating, or if they were contributed toArticle 1793 be sold, the risk shall be borne by the partnership. In the A partner who was received, in whole or in part, his absence of stipulation, the risk of things brought and share of a partnership credit, when the other partners appraised in the inventory, shall also be borne by the have not collected theirs, shall be obliged, if the debtor partnership, and in such case the claim shall be limited should thereafter become insolvent, to bring to the to the value at which they were appraised. (1687) partnership capital what he received even though he may have given receipt for his share only. (1685a) Refers to rules as to who bears the risks made by contributions In this case, there is only ONE debt but 2 or more debtors, If the contribution is determinate and non-fungible but only both of which are partners. the use is contributed, when it is lost, then the one who Example: contributes it is liable for it. A and B are partners and C owes the partnership a sum of If fungible things are contributed, the partnership shall be the P10,000.00. B is the managing partner but A collects his one to shoulder the risks share in the P10,000.00 and C pays A P5,000.00 to which A The partnership shall also be the one to bear the risk for issues a receipt in his name. When B’s turn to collect comes, items brought for sale in inventory for appraisal for the value C is already insolvent. What should A do? at which they were appraised. A shall return his P5,000.00 to the partnership and split it with B because C has already become insolvent. Article 1796 Take not that whoever collects doesn’t matter as it doesn’t The partnership shall be responsible to every make a difference partner for the amounts he may have disbursed on If you get your share early and the other parties cannot get behalf of the partnership and for the corresponding theirs because the debtor has become insolvent, then you interest from the time the expenses are made; it shall must return YOUR share to the partnership so that no one also answer to each partner for the obligations he may gets more than he should have. have contracted in good faith in the interest of the partnership business, and for the risks in consequenceArticle 1794 of its management. (1688a) Every partner is responsible to the partnership for Refers to the obligation of the partnership to the partners damages suffered by it through his fault, and he cannot The partners are merely agents so they are not personally compensate them with the profits and benefits which he liable except if they are at fault or if they exceeded their may have earned for the partnership by his industry. expressed authority However, the courts may equitably lessen this Obligations of the Partnership: responsibility if through the partner’s extraordinary (1) To reimburse any amount disbursed by the partners in efforts in other activities of the partnership, unusual behalf of the partnership profits have been realized. (1686a) - Example: A partnership borrows from the bank a sum of Why compensation will not apply: P10,000.00 for additional funds but cannot pay it Compensation will not apply because in compensation, you back when it is due to be paid back. A pays back should be both a debtor and a creditor at the same time. the P10,000.00 using his personal funds. Should he However, the partner here is only a DEBTOR for damages be reimbursed by the partnership? and he cannot compensate using his profits and benefits Yes, the partnership should reimburse A for the earned for the partnership because it IS HIS DUTY to do so sum of P10,000.00 PLUS legal interest starting in the first place. from the date A disbursed the P10,000.00. Responsibility may be equitably mitigated by the courts if, (2) To answer for any obligation contracted in good faith through extraordinary efforts of the partner, unusual profits - Example: are recognized/realized. A partnership needs office supplies so B contracts Example: for P10,000.00 worth of supplies. Who will pay for A partnership between A and B is engaged in an autoshop the contract price of P10,000.00? business. A customer brought his car in to be painted The partnership shall be the one to shoulder the YELLOW but A bought RED paint instead and the car is cost as it was made in good faith and B did not overstep his authority.
  • 8. If it was stated that the partners cannot contract for A P 30,000.00 3/6 P 7,500.00 - P 7,500.00 more than P5,000.00 worth of supplies and B still contracts for P10,000.00, how much will the B P 20,000.00 2/6 P 5,000.00 - P 5,000.00 partnership pay? C P 10,000.00 1/6 P 2,500.00 P 2,000.00 P 4,500.00 The partnership will only pay what was allowed, that is, P5,000.00 and B will pay the remaining P TOTAL P 60,000.00 6/6 P 15,000.00 P 2,000.00 balance since B overstepped his authority. 17,000.00 (3) To answer for risks in management - Example: The same rules shall apply for losses in the partnership’s A partnership is engaged in selling goods and a operations, however the industrial partner shall not share in customer keeps asking for discounts and an the losses as there is no way for him to retract his industry argument ensues between the customer, C and the and in the event of losses, his efforts would have been for partner A. A gets injured and is brought to the vain and it can thus be said that he has already shared. hospital. Who shall shoulder the hospital bills? What is the legal effect of having a stipulation that excludes The partnership shall shoulder the hospital bills as it a partner from sharing in the profits or losses? was during A’s time in managing the business that Under Article 1799, the stipulation shall be void because he was injured. there must be mutual sharing of profits and losses.Article 1797 Can the partners appoint a 3rd person to designate the division of their profits and losses? The losses and profits shall be distributed in Yes and they will not be allowed to question his decisions conformity with the agreement. If only the share of each partner in the profits has been agreed upon, the share of unless the designation of shares is manifestly inequitable. each in the losses shall be in the same proportion. 2 cases where partners ABSOLUTELY cannot question In the absence of stipulation, the share of each designated shares by the 3rd parties: partner in the profits and losses shall be in proportion to (1) When a partner begins to execute the 3rd party’s what he may have contributed, but the industrial partner decision shall not be liable for the losses. As for the profits, the (2) When complaints are raised AFTER three months from industrial partner shall receive such share as may be the point of knowledge of the designation just and equitable under the circumstances. If besides Can the partners designate one of themselves to distribute his services, he has contributed capital, he shall also profits or losses? receive a share in the profits in proportion to his capital. No, the law prohibits this situation because there may be (1689a) disparities when it comes to the distribution of net profits.Article 1798 Article 1800 If the partners have agreed to entrust to a third The partner who has been appointed manager in the person the designation of the share of each one in the articles of partnership may execute all acts of profits and losses, such designation may be impugned administration despite the opposition of his partners, only when it is manifestly inequitable. In no case may a unless he should act in bad faith; and his power is partner who has begun to execute the decision of the irrevocable without just and lawful cause. The vote of third person, or who has not impugned the same within the partners representing the controlling interest shall a period of three months from the time he had be necessary for such revocation of power. knowledge thereof, complain of such decision. A power granted after the partnership has been The designation of losses and profits cannot be constituted may be revoked any time. (1692a) entrusted to one of the partners. (1690) 2 Kinds of Managing Partners:Article 1799 (1) Appointed DURING the Constitution of the PartnershipA stipulation which excludes one or more partners from - May execute all administrative acts unless he acted inany share in the profits or losses is void. (1691) bad faith. His power may not be revoked unless there is a JUST and LAWFUL cause and the vote Lays out the rules in the distribution of profits and losses of the partners with controlling interest A, B and C are partners with the following capital - Even if there are objections as to his decisions contributions, P30,000.00, P20,000.00 and P10,000.00 coming from the partners, his authority will prevail respectively, where C is a capitalist-industrialist partner. For UNLESS he has acted in bad faith one year of their operations, their partnership had earned net - Acts of administration: ordinary business and profits of P17,000.00. How shall these profits be divided administrative transactions among the partners? (C is entitled to receive P2,000.00 out - Why can he note be revoked for no reason? of the entire P17,000.00) Because if you revoke his power, you are in effect (1) In accordance with any existing agreement between the changing the terms of the contract of partnership. partners as to how they shall share. (2) Appointed AFTER the Constitution of the Partnership (2) If there was no agreement, then the partners shall share - May have his power revoked with or without cause on a pro-rata basis - Decided upon by those partners who own controlling (3) The industrial partner shall get what is JUST and interest in the partnership EQUITABLE in the circumstances. (BONUS TO PARTNER) Article 1801 If two or more partners have been entrusted with the management of the partnership without specification of SHARE IN TOTAL P CAPITAL RATIO DISTRIBUTABLE BONUS SHARE IN their respective duties, or without stipulation that one of CONTRIBUTION PROFIT PROFITS them shall not act without the consent of the others, each one may separately execute all acts of
  • 9. administration, but if any of them should oppose the shall bind the partnership, without prejudice to acts of the others, the decision of the majority shall the provisions of article 1801. prevail. In case of tie, the matter shall be decided by the (2) None of the partners may, without the consent of partners owning the controlling interest. (1693a) the others, make any important alteration in the immovable property of the partnership, even if it Assume that A, B, C and D are all managing partners. A may be useful to the partnership. But if the appoints E as a secretary but B objects to this. Is the refusal of consent by the other partners is appointment of E valid? manifestly prejudicial to the interest of the Yes since majority votes are first counted by head. If C&D partnership, the court’s intervention may be were the ones to object, and they owned a combined total of sought. (1695a) 51% of partnership interest, then the appointment will not be valid. However, if B was still the one who objected and he If there is no agreement as to who will be the managing owns 51% of partnership interest, the appointment will still partners, during constitution and after constitution of the be valid because majority votes are first counted by head. partnership, then the assumption shall be that ALL the If the partnership cannot make a decision and ends up in a partners are managing partners, without prejudice to Article tie (head count and interest), then the partnership is to be 1801, meaning Article 1801 will then apply to their case. dissolved. This will be the only remedy, unless one of the The second paragraph of this article provides that the other partners will relent. partners cannot simply alter immovable property owned by the partnership without the consent of the other partnersArticle 1802 because this is NOT an act of administration but of In case it should have been stipulated that none of OWNERSHIP. the managing partners shall act without the consent of Note that consent here is no qualified, so it may be the others, the concurrence of all shall be necessary for expressed or it may be implied. the validity of the acts, and the absence or disability of Example: any one of them cannot be alleged, unless there is Suppose A, B, C and D are in a partnership where the imminent danger of grave or irreparable injury to the managing partner is not specified and A decides to put up a partnership. (1694) warehouse in a piece of land owned by the partnership without consent of other partners because he believes it to This is a case wherein two partners, A and B, stipulate that be useful and beneficial to the partnership. His partners one cannot act without the consent of the other. Thus, there come over, once the warehouse is finished, to look at it and must always be concurrence between the two before any did not object to its existence. Was this valid? transactions may be entered into, the absence of the other’s Yes, since the partners did not object, then there is IMPLIED consent shall not be used as an excuse. consent. Since consent was never qualified in the article, it is Illustrative Case: assumed that implied consent is enough. A sold to B, one of the managing partners of Partnership X, Suppose before A builds the warehouse, he asks for the the other being C, a certain number of mining claims without consent of the other partners, who refuse to give it. When A the consent of C. In an action by A to recover the unpaid tries to convince them and asks why they refuse to give balance of the purchase price against Partnership X, C consent, they simply say that they do not want it to be there, claims that the contract is not binding upon the partnership making their objection manifestly prejudicial, meaning, there for the reason that under the articles of partnership, there is is really no reason for their objection, what then, is the a stipulation that one of the partners cannot bind the firm by remedy of A in this situation? a written contract without the consent of others. Is the A may bring the matter to court. If the court finds the other transaction made by B binding upon the partnership? partners of having no solid reason to object, it may compel According to the Supreme Court, the stipulation applies only the other partners to give their consent. to B and C. A has the right to assume that B was authorized to complete the transaction. Therefore, the partnership is Article 1804 liable, and since B violated the terms of contract between Every partner may associate another person with himself and C, he is required to reimburse C for the amount him in his share, but the associate shall not be admitted C will be paying A on behalf of the partnership, the reason into the partnership without the consent of all the other being, it would be unfair to C who had no knowledge of B’s partners, even if the partner having an associate should transaction to have to pay when he never agreed anyway. be a manager. (1696) The only instance in which a partner may transact without concurrence is when there is imminent danger of grave or Refers to SUBPARTNERSHIP irreparable damage to the partnership if he does not do so. A, B and C are in a partnership wherein A is the managing However, the party involved must be able to prove so else partner. A enters into a contract with D that states D will he shall become liable for what he has done. receive 50% of A’s share in partnership profits. Can A do this Example: even without the consent of the other partners? A and B are in a partnership where they sell fruits, B notices Yes, because a sub-partnership will not affect the that the fruits in the warehouse are starting to rot so, without composition of the partnership and D will not be able to consent of A, he sells them. interfere with the partnership’s management anyway. This will be alright because if the fruits rot, then it would have When are you required to share your partnership profits with rd been bad on the part of the partnership. 3 persons? rd When you contract with 3 persons because perhaps inArticle 1803 some past event you needed money and they provided you When the manner of management has not been with it, and in your contract, it was agreed upon that you will agreed upon, the following rules shall be observed: share in the partnership profits. rd (1) All of the partners shall be considered agents The 3 person can also opt to receive ALL profits. and whatever any one of them may do alone Can D become a partner without the consent of the other partners, if he associates with the managing partner?
  • 10. No, D would need to get the consent of all partners because Example: this would change the partnership composition. A and B are partners engaged in the operation of a cinema business. The theater was mortgaged to C who foreclosedArticle 1805 the mortgaged debt. A, in his own behalf, redeemed the The partnership books shall be kept, subject to any property with his own private funds. Subsequently, A files a agreement between the partners, at the principal place petition for the cancellation of the old title of the partnership of business of the partnership, and every partner shall and the issuance of a new title in HIS name alone. Did A at any reasonable hour have access to and may inspect become the absolute owner of the property? and copy any of them. (n) No, the law says that he will only hold the property as the trustee and will be entitled to reimbursement plus interest The partnership books shall be kept in the following places, from the time he redeemed the property. in order: (1) In accordance with partnership agreements Article 1808 (2) If there were no agreements, then the partnership books The capitalist partners cannot engage for their own shall be kept in the principal place of business of the account in any operation which is of the kind of partnership (ex: headquarters) business in any operation which is of the kind of Each partner will have access to ALL partnership books. business in which the partnership is engaged, unless When will the partner be allowed to access the partnership there is a stipulation to the contrary. books? Any capitalist partner violating this prohibition shall The partner is allowed to access partnership books during bring to the common fund any profits accruing to him REASONABLE HOURS OF BUSINESS (8am-5pm), from his transaction, and shall personally bear all the according to the law. The one who is keeping the partnership losses. (n) books cannot state when it can be inspected. The article is with regards to a capitalist partner engaging inArticle 1806 other businesses. Partners shall render on demand true and full Is the capitalist partner allowed to engage in other information of all things affecting the partnership to any businesses aside from the one he has with the partnership? partner or legal representative of any deceased partner Yes, as long as the business he engages in is something or of any partner under legal disability. (n) dissimilar or different from the of the partnership’s. What will happen if the capitalist partner violates the law The article does not mean that the partners need wait for regarding his ability to engage in other businesses? demands before disclosing information, when they get hold Then he shall have to bring the profits he gained from the of the information, they should disclose it immediately, other business to the partnership and be liable for losses although additional details may be demanded. suffered by the partnership. If information is not disclosed and it is found out later on, the Why is the capitalist partner not allowed to engage in a partner/s who did not disclose such will be held liable for it similar line of business? and be charged for misrepresentation. Because he might take advantage of the information in the Suppose A, B and C are in a partnership wherein A is sent to partnership or of their clients, resulting in a conflict of interest inspect partnership property in Mindanao. A realizes that the between himself and the other partners. property contains oil deposits and does not disclose this The capitalist partner can engage in a business similar to the information to B and C. He also lies and says that the partnership if there was a stipulation in the contract of property is completely useless for their business and offers partnership and if the business he operates exists in a to buy B and C’s interests in the partnership. When A is the different area or place. only one holding the business, he develops the land and gains substantial profits from the oil deposits. B and C later Article 1809 on learn about the information A kept hidden from them and Any partner shall have the right to a formal account demand that they be given their shares in the oil profits. The as to partnership affairs: question now is, can B and C, after having sold their (1) If he is wrongfully excluded from the partnership interests in the partnership, still share in the profits? business or possession of its property by his co- Yes, they will be allowed to share in the profits because the partners information regarding oil deposits was present when they (2) If the right exists under the terms of any sold their share to A, just that it was hidden from them. agreement (3) As provided by Article 1807Article 1807 (4) Whenever other circumstances render it just and Every partner must account to the partnership for reasonable. (n) any benefit, and hold as trustee for it any profits derived by him without the consent of the other partners from General Rule: any transaction connected with the formation, conduct During existence, a partner is not required to demand for an or liquidation of the partnership or from any use by him accounting because his interest is already protected by two of its property. (n) Articles of the law, Article 1805 and Article 1806. But for specific cases, the law provides that he can DEMAND for an A partner who receives benefits or profits derived without accounting of the partnership books. consent of others shall account for it as the partnerships. 4 Cases where a partner can demand for an accounting: If particular property is mortgaged and foreclose, the partner (1) When he is wrongfully excluded from the partnership who uses personal funds is able to get the property back will operations (business and property possession) not become the new owner, he will only be its trustee. (2) If the right exists under their agreement If the partner gets the property back after ONE year from the (3) Under Article 1807 rd 3 party involved, then it shall become his as it was a private (4) Other circumstances which render it just and transaction, so long as he uses his own funds. reasonable.
  • 11. (1) DURING operations, the partner’s interest is his share inSection 2 – Property Rights of a Partner profits and losses (2) AFTER operations/LIQUIDATION/DISSOLUTION, hisArticle 1810 interest is in the surplus of partnership assets after all The property rights of a partner are: debts have been cleared. (1) His rights in specific partnership property Interest can be subject to attachment or execution because it (2) His interest in the partnership belongs to the partner, not the partnership. (3) His right to participate in the management. (n) Article 1813 The partner has the following rights: A conveyance by a partner of his whole interest in (1) Right to the ownership of partnership property the partnership does not of itself dissolve the partner, (2) Right to his interest in the partnership or, as against the other partners in the absence of (3) Right to participate in partnership management agreement, entitle the assignee, during the continuance of the partnership, to interfere in the management orArticle 1811 administration of the partnership business or affairs, or A partner is co-owner with his partners of specific to require any information or account of partnership partnership property. transactions, or to inspect the partnership books but it The incidents of this co-ownership are such that: merely entitles the assignee to receive in accordance (1) A partner, subject to the provisions of this Title with his contract the profits to which the assigning and to any agreement between the partners, has partner would otherwise be entitled. However, in case of an equal right with his partners to possess fraud in the management of the partnership, the specific partnership property for partnership assignee may avail himself of the usual remedies. purposes; but he has no right to possess such In case of dissolution of the partnership, the property for any other purpose without the assignee is entitled to receive his assignor’s interest consent of his partners; and may require an account from the date only of the (2) A partner’s right in specific partnership last account agreed to by all the partners. (n) property is not assignable except in connection with the assignment of rights of all the partners How can a partner convey his interest in the partnership in the same property; without getting the partnership dissolved? (3) A partner’s right in specific partnership rd (1) By selling it to a 3 person rd property is not subject to attachment or (2) By donating it to a 3 person rd execution, except on a claim against the (3) By using it as security on a loan from a 3 person partnership. When partnership property is Example: attached for a partnership debt the partners, or D offers to buy A’s interest of P50,000.00 for P1,000,000.00 any of them, or the representatives of a and A agrees to sell his interest. What happens now? deceased partner, cannot claim any right under D becomes the assignee and A becomes the assignor but the homestead or exemption laws; the partnership will not be dissolved because his interest in (4) A partner’s right in specific partnership profits and surplus is the one being sold. A will also continue property is not subject to legal support under to be the partner but D will be the one to receive his profits. Article 291. (n) This is similar to sub-partnerships, so the consent of others is not required for interest to be conveyed. The partners are considered co-owners of specific The assignee does not have any say in the management partnership property Rights of the Assignee: If A, B and C are partners who own specific property under (1) He shall get the assignor’s share in profits/surplus the partnership’s name, what are their rights? (2) He may avail of legal remedies of the partners in cases (1) They can use it for partnership business purposes of fraud by the assignor (2) They cannot use it for personal purposes WITHOUT the (3) He can demand for an accounting upon dissolution but consent of others. only starting from the date of the last accounting Why can’t A simply assign his right with respect to the undertaken by the partnership partnership’s property? (4) Can ask for the dissolution of the partnership if it has (1) It doesn’t belong to him reached the end term or anytime if the partnership is (2) The extent of his interest with regards to the property one at will, because he is interested in the surplus. cannot be determined before dissolution The assignee, however, cannot become a partner without rd The partnership can altogether assign a 3 party with the the consent of the other partners because it will entail a right to use the property for partnership business purposes. change in the partnership’s composition. The right of the partners as to the property is not subject to attachment unless it is a claim against the partnership due to Article 1814 the reason that any one partner is not the owner of it. Without prejudice to the preferred rights of a Under Article 291, the specific partnership property cannot partnership creditor under Article 1827, on due be used as the subject of legal support because it does not application to a competent court by any judgment belong to any one of the partners. creditor of a partner, the court which entered the judgment, or any other court, may charge the interest ofArticle 1812 the debtor partner with payment of the unsatisfied A partner’s interest in the partnership is his share of amount of such judgment debt with interest thereon; the profits and surplus. (n) and may then or later appoint a receiver of his share of the profits, and of any other money due or to fall due to The article defines what the partner’s interest in the him in respect of the partnership, and make all other partnership is. orders, directions, accounts and inquiries which the What is the partner’s interest in the partnership?
  • 12. debtor partner might have made, or which the Any stipulation against the liability laid down in the circumstances of the case may require. preceding article shall be void, expect as among the The interest charged may be redeemed at any time partners. (n) before foreclosure, or in case of a sale being directed by rd the court, may be purchased without thereby causing As to 3 persons, ALL partners are liable pro-rata and dissolution: subsidiary, but as to each other, they are liable in proportion (1) With separate property, by any one or more of to their capital contribution. the partners Examples: (2) With partnership property, by any one or more of (1) A, B and C are in a partnership where C is the industrial the partners with the consent of all the partners partner and a sum of P26,000.00 is owed to D. A and B whose interests are not so charged or sold contributed P15,000.00 and P5,000.00 respectively. Nothing in this Title shall be held to deprive a How shall the debt be shared? partner of his right, if any, under the exemption laws, as As to D, the partners will share equally in the debt left regards his interest in the partnership. (n) after exhausting all assets (P6,000.00) so they will each have to pay P2,000.00 regardless of C being an rd Refers to a partner who obtained a loan from a 3 person industrial partner. If C is insolvent, or if B died, or if A and was unable to repay such. has left the country, the liability of the partners cannot For example, PARTNER A failed to pay CREDITOR C a be increased. sum of P50,000.00, so C files against A, knowing that A, As to each other, they are liable in proportion to their being a partner, will receive his interest. C wins the case but capital contribution, so B and C will be reimbursed by A. A is still unable to pay, so C asks that A’s interest be (2) A, B, C, D and E are sued in court but E is later cleared attached so that it goes to C and cancels out A’s debt. of his charges. The court orders A, B, C and D to pay - Done to protect C’s interest their creditor, but C moves to reconsider that all should - Attached interest can be redeemed using the property of be charged, but this move was denied. Can A, B, C and the partners or the partnership’s property, as long as all D alone be liable for the debt? partners consent to this, and are given reimbursement According to the Supreme Court, the 4 partners cannot from the defaulting partner alone be liable for the debt because in excluding E, they - Amount charged must e sufficient to pay the loan plus have increased the other partners’ liability and this is legal interest prohibited by the law. The law states that the liability of the partners cannot be increased such that they rdSECTION 3 – Obligations of the Partners as to 3 Persons shoulder the liability of another partner. (3) What if there was an agreement that stated B is onlyArticle 1815 liable up to P5,000.00? How will A, B and C share in Every partnership shall operate under a firm name, their liability? rd which may or may not include the name of one or more The stipulation shall be void as to 3 persons, so they of the partners. will still share pro-rata. Anyway, B and C will be Those who, not being members of the partnership, reimbursed by A, because as among themselves, the include their names in the firm name, shall be subject to stipulation is valid and C is an industrial partner. the liability of a partner. (n) Article 1818 Firm names are required for partnerships because they are Every partner is an agent of the partnership for the juridical persons in need of separate names so that they are purpose of its business, and the act of every partner, distinguishable from the partners and other partnerships. including the execution in the partnership name of any rd The name can come from any of the partners or 3 persons. instrument, for apparently carrying on in the usual way rd If a 3 person’s name is used with his consent, then he shall the business of the partnership of which he is a member be liable as a partner without the rights of a partner because binds the partnership, unless the partner so acting has the partnership uses his name. in fact no authority to act for the partnership in the Partnership name must be registered with the (DTI) particular matter, and the person with whom he is DEPARTMENT OF TRADE AND INDSUTRY because if dealing has no knowledge of the fact that he has no there was already such an existing name, there might be such authority. cases of duplication. An act of a partner which is not apparently for the You cannot choose the name of a deceased partner as his carrying on of business of the partnership in the usual death caused the partnership’s dissolution. way does not bind the partnership unless authorized by Sample General and Limited Partnership Names: the other partners. (1) GENERAL – A & Company Except when authorized by the other partners or (2) LIMITED – A, Ltd. unless they have abandoned the business, one or more but less than all the partners have no authority to:Article 1816 (1) Assign the partnership property in trust for All partners, including industrial ones, shall be creditors or o the assignee’s promise to pay the liable pro-rata with all their property and after all the debts of the partnership partnership assets have been exhausted, for the (2) Dispose of the goodwill of the business contracts which may be entered into in the name and for (3) Do any other act which would make impossible the account of the partnership under its signature and to carry on the ordinary business of a by a person authorized to act for the partnership. partnership However, any partner may enter into a separate (4) Confess a judgment obligation to perform a partnership contract. (n) (5) Enter into a compromise concerning a partnership claim or liabilityArticle 1817 (6) Submit a partnership claim or liability to arbitration
  • 13. (7) Renounce a claim of the partnership (4) Land title belongs to one or more or all of the partners or rd No act of a partner in contravention of a restriction a 3 person in trust for the partnership. on authority shall bind the partnership to persons Only the equitable title will pass to D if the seller had no having knowledge of the restriction. (n) authority to sell such to D. (5) A, B and C ALL sell the land to D, with the land title Qualifies the authority of partners. belonging to ALL of them. Authority must be in the usual course of business. Title passes to D because ALL partners sell to him. Transactions beyond a partner’s authority is binding if it is in rd Article 1820 the usual course of business because the 3 person is assumed to have no knowledge of his lack of authority. An admission or representation made by any When are transactions not binding? partner concerning the partnership affairs within the (1) When a transaction is not in the usual course of scope of his authority in accordance with this Title is business and has no consent from all other partners evidence against the partnership. (n) rd (2) When the 3 person had knowledge of the lack of authority of the acting partner Anything a partner says or admits, as long as it is concerning the partnership affairs and it is within the scope of hisArticle 1819 authority, is sufficient evidence against the partnership. Where title to real property is in the partnership This article is a rule of evidence name, any partner may convey title to such property by In order that admission/representation made can be used as a conveyance executed in the partnership name; but the evidence, the existence of the partnership must be partnership may recover such property unless the established and proved first. partner’s act binds the partnership under the provisions Example: of Article 1818, or unless such property has been (1) Partner A borrows money from the bank and declares conveyed by the grantee or a person claiming through that the money borrowed is for the partnership. such grantee to a holder for value without knowledge This statement, made by A, is enough evidence against that the partner, in making the conveyance, has the partnership and the bank may use this in case the exceeded his authority. partnership does not pay back the money borrowed. Where title to real property is in the name of the (2) A, B, and C are partners. A told D, a 3rd person, that the partnership, a conveyance executed by a partner, in his debtor already paid his obligation to the partnership. Is own name, passes the equitable interest of the this enough evidence against the partnership? partnership, provided the act is one within the authority YES, since it concerns partnership affairs and the of the partner under the provisions of Article 1818. partner has authority to say so. Where title to real property is in the name of one or more but not all the partners, and the record does not Article 1821 disclose the right of the partnership, the partners in Notice to any partner of any matter relating to whose name the title stands may convey title to such partnership affairs, and the knowledge of the partner property, but the partnership may recover such property acting in the particular matter, acquired while a partner if the partner’s act does not bind the partnership under or then present to his mind, and the knowledge of any Article 1818, unless the purchaser of his assignee, is a other partner who reasonably could and should have holder for value without knowledge. communicated it to the acting partner, operate his Where title to real property is in the name of one or notice to or knowledge of the partnership, except in the more or all partners, or in a 3trd person in trust for the case of a fraud on the partnership, committed by or with partnership, a conveyance executed by a partner in the the consent of that partner. (n) partnership name, or in his name, passes the equitable interest of the partnership, provided the act is one IN SHORT, notice to ANY of the partners is notice to the within the authority of the partner under Article 1818. partnership. (You dont have to notify EVERY partner in Where title to real property is in the names of all the relation to partnership affairs). partners a conveyance executed by all the partners Knowledge of a partner acting in a particular manner passes all their rights in such property. (n) (meaning the partner is a managing partner), or knowledge of any partner who SHOULD HAVE communicated it to the Refers to the conveyance of immovable property managing partner, is knowledge to the partnership. Suppose A, B and C are partners engaged in the buying and This is so EVEN IF the non-managerial partner does not selling of property, and the following situations occur: communicate the information he knows regarding (1) A, without authority, sells land to D in the partnership’s partnership affairs. The partner SHOULD have name but D immediately sells it to E. The land title was communicated this. Non knowledge by other partners is not originally under the partnership’s name. Can the a reason to evade from obligations. partnership recover the land? If notice is delivered to a partner, that is an effective Title passes to D, then to E. The partnership cannot communication to the partnership, notwithstanding the failure recover the land once it has transferred to E but if the of the partner to communicate such notice or knowledge to land was still with D, they could have recovered it if the the other partners. contract was not binding . Example: (2) What if A sells the property under his name? (1) A, B, and C are partners where B is the managing Only the equitable title passes to D. partner. D, a 3rd person, filed a case against the (3) What if A sells the property and the land title is partners AND the partnership for some unknown registered under his name? reason. Does D need to notify all of them? Title passes to D because land is registered under the If this is done, D just needs to notify either A, B, or C, partner’s names. This will hold true if A, B and C are co- but doesnt have to notify ALL OF THEM (imagine if owners of the land, even if only A sold it to D. there are 100 partners, it would be burdensome and costly to notify all 100). So if A is notified about the
  • 14. case, that is considered by D as notice to EVERYONE (a) A, B, and C are partners. A made an act of even if A is not a managerial partner (since A should omission with D as the victim. He caused communicate this to all partners). P50,000 worth of injury to D. What can D do? (2) Suppose D wants to sell a piece of land to the D can go to A for the full amount of P50,000 partnership and notifies B (the managing partner) about OR FROM B OR C. it, but warns him that the land is under litigation and (b) Can D go to B for the whole e P50,000 since B there is a possibility of the land to be claimed by E. B is the richest among the partners? took the risk and purchased the land. Later on, E still This is allowable since the partners have a claimed the land. Can the partners reclaim this? solidary obligation through A’s act of omission. Even though ALL partners were not informed about the B will be entitled for reimbursement from the litigation, the partnership cannot get the land anymore one responsible, A. since B was informed about it. Notice to B, the acting - Any one of A, B, OR C, or all partners including the partner, is already notice to the partnership. partnership can pay without prejudice to the rights (3) Suppose before B became a partner, D was able to talk of partners to get reimbursement from the one to him about the piece of land under litigation. Later on, responsible for the crime B became a managing partner and purchased the land (2) A partner, within the scope of his authority, receives D told him about a long time ago. E won the litigation money or property from a third person and misapplies it. and was able to claim the land. Can the partnership - Example: reclaim the land? A partnership is engaged in a pawnshop business. The partnership cannot get it anymore. Even if D was D, a 3rd person, pawned his watch to A and A sells not informed WHILE he was a partner, the information it. Who is liable for the watch? was still present in his mind. The issue here would be: If All partners are solidarily liable to D since A B can still recall the conversation he had with D before misapplies the watch received from D. he became a managing partner. (3) The partnership, in its ordinary course of business, rd (4) Suppose D informed C (who is not a managing partner) receives money or property from a 3 person and a about the land under litigation. Later on, D sold the land partner misapplies it while in the custody of the to B, the managing partner, without informing him that partnership. the land was under litigation (take note: the information - Example: was given to C). Is notice to C, a notice to B? The partnership is engaged in a pawnshop YES, because C should have communicated the business where it received a watch from D to be information. pawned. The watch is placed in the partnership In cases (2), (3) and (4), the partnership cant file action VAULT. B, a partner, gets the watch from the vault for damages against D since the "partnership had and sells it. Who is liable for the watch? knowledge" about the litigation but the partners still took All partners are solidarily liable. the risk of buying the land. Article 1825Article 1822 When a person, by words spoken or written or by Where, by any wrongful act or omission of any conduct, represents himself, or consents to another partner acting in the ordinary course of the business of representing him to anyone, as a partner in an existing the partnership or with the authority of his co-partner, partnership or with one or more persons not actual loss or injury is caused to any person, not being a partners, he is liable to any such persons to whom such partner in the partnership, or any penalty is incurred, the representation has been made, who has, on the faith of partnership is liable therefore to the same extent as the such representation, given credit to the actual or partner so acting or omitting to act. (n) apparent partnership, and if he has made such representation or consented to its being made in aArticle 1823 public manner he is liable to such person, whether the The partnership is bound to make good the loss: representation has or has not been made or (1) Where one partner acting within the scope of his communicated to such person so giving credit by or apparent authority receives money or property of with the knowledge of the apparent partner making the a third person and misapplies it; and representation or consent to its being made: (2) Where the partnership in the course of its (1) When a partnership liability results, he is liable business receives money or property of a third as though he were an actual member of the person and the money or property so received is partnership; misapplied by any partner while it is in the (2) When no partnership liability results, he is liable custody of the partnership. (n) pro rata with the other persons, if any, so consenting to the contract or representation asArticle 1824 to incur liability, otherwise separately. All partners are liable solidarily with the partnership When a person has been thus represented to be a for everything chargeable to the partnership under partner in an existing partnership, or with one or more Articles 1822 and 1823. (n) persons not actual partners, he is an agent of the persons consenting to such representation to bind them In the following cases, obligation is not pro-rata or equal, but to the same extent and in the same manner as though a solidary obligation. Any partner MAY pay for the obligation he were a partner in fact, with respect to persons who (Unlike in article 1816, each partner should only pay for their rely upon the representation. When all the members of SHARE): the existing partnership consent to the representation, a (1) When by an unlawful act or omission, loss or injury is partnership act or obligation results; but in all other rd caused to 3 person. cases it is the joint act or obligation of the person acting - Example: and the persons consenting to the representation. (n)
  • 15. 2 things being mentioned: Personal creditors of partners have BETTER RIGHT than a (1) PARTNERSHIP by estoppels partnership creditor with regards to PERSONAL PROPERTY - There is an existing partnership, and partners of the partner. misrepresent themselves together with a 3rd EXAMPLE: person. (1) A, B, and C are partners. A OWES E P6,000.00. The - EXAMPLE: PARTNERSHIP OWES D P28,000.00. The total (a) Suppose there is a partnership, X, with partnership assets amount to P40,000.00. Who has partners A, B, and C. D told E that he is a better right to the partnership property? partner of A, B, and C. E verified from the In this case, D, the partnership creditor, has a better actual partners of X partnership if D is really a right to the partnership property. When obligation to D partner, A, B, and C consented. E entered in a is paid, what will be left for the partners to share is contract with D, believing he was a partner. P4,000.00. If E, the personal creditor of A, demands This is partnership by estoppels since A, B, to be paid out of partnership property, he will only get and C verified D as a partner. In this case, E P4,000.00 from it since the priority is the partnership can go after A, B, and C. creditor. The P2,000.00 will be paid out from A’s (b) Suppose only A and B consented, is there a personal property. partnership by estoppels? (2) If total partnership assets is only P28,000.00, and the There will be no partnership by estoppels since liability of the partnership is P40,000,, how shall the only A and B, not all partners, consented to D’s debt be paid? misrepresentation. A, B, and C will have to pay E P6,000.00 each. (2) PARTNERS by estoppels (3) If A only had P6,000.00 of personal property, who will - 2 or more persons pretend to be partners in the eyes have the better right to this? rd of 3 persons. A’s priority is his personal creditor, E. So D cannot - Example: collect A’s share of P4,000.00. D cannot, also, A, B, AND C said they were partners to D and increase the obligation of the other partners to be able entered in a contract with the “partners”. When it to collect their debt. was time for them to pay D for their obligation, they cannot for the reason that they are not partners. Chapter 3 – Dissolution and Winding Up What is their obligation to D? Their obligation to D will be pro rata, as if they were Article 1828 partners (since they are partners by estoppels) The dissolution of a partnership is the change in the relation of partners caused by any partner ceasing to beArticle 1826 associated in the carrying on as distinguished from the A person admitted as a partner into an existing winding up of business. (n) partnership is liable for all the obligation of the partnership arising before his admission as though he Article 1829 had been a partner when such obligation were incurred, On dissolution, the partnership is not terminated, except that this liability shall be satisfied only out of but continues until the winding up of partnership affairs partnership property, unless there is a stipulation to the is completed. (n) contrary. (n) Article 1830 A new partner admitted to an existing partnership is also Dissolution is caused: liable to the obligations existing before he was admitted, but (1) Without violation of the agreement between the his liability only extends to his contribution to the partnership partners: UNLESS stipulated. (2) In contravention of the agreement between the A new partner is liable to his separate property when the partners, where the circumstances do not obligation was incurred when he was already a partner. permit a dissolution under any other provision Example of this article, by the express will of any partner A, B, and C are the original partners of the partnership X at any time; with contributions of P10,000.00 each. X partnership owes (3) By any event which makes it unlawful for the D P40,000.00. Later on, E entered the partnership and business of the partnership to be carried on or contributed P4,000.00. How shall the debt be paid? the members to carry it on in partnership; P34,000.00 will be paid to D out of the partnership assets, (4) When a specific thing, which a partner had and the P6,000 will be paid through A, B, and C’s personal promised to contribute to the partnership, assets. The P6,000.00 will be divided among the 3 original perishes before the delivery; in any case by the partners pro rata. loss of the thing, when the partner who contributed it having reserved the ownershipArticle 1827 thereof, has only transferred to the partnership The creditors of the partnership shall be preferred the use or enjoyment of the same; but the to those of each partner as regards the partnership partnership shall not be dissolved by the loss of property. Without prejudice to this right, the private the thing when it occurs after the partnership creditors of each partner may ask for the attachment has acquire the ownership thereof; and public sale of the share of the latter in the (5) By the death of any partner; partnership assets. (n) (6) By the insolvency of any partner or of the partnership Partnership creditors have BETTER RIGHTS to partner (7) By the civil interdiction of any partner; obligation WITH REGARD TO PARTNERSHIP PROPERTY. (8) By degree of court under the following article. (1700a and 1701a)
  • 16. Dissolution is usually caused by change a change of relation (1) After the termination of the specific term or between partners. particular undertaking If there is dissolution, no new partnership business may be (2) At any time the partnership was a partnership at undertaken will when the interest was assigned or when the Upon dissolution, partnership continues until winding up and charging order was issued. (n) liquidation is completed. CAUSES OF DISSOLUTION: When can a partnership be dissolved judicially? (1) WITHOUT VIOLATION OF AGREEMENT (1) When a partner is DECLARED insane (a) Termination/expiration of term or specific (2) When he becomes incapable of performing his part in undertaking the partnership (b) Upon express will of any partner if there is no term (3) Misconduct of a partner prejudicially to the business or specific undertaking AS LONG AS PARTERS (4) Persistent breach of partnership agreement ACT IN GOOD FAITH. (5) The business can only be carried out on a loss (c) Upon the will of the partners whose interest is not (6) Other circumstances: assigned or charged. (a) Abandonment of the business - Example: (b) Fraud A sold his interest to E, and B’s interest is (c) Refusal to render an accounting rd charged to F because he borrowed P50,000 (7) On application of 3 parties’ (who purchased or have from him. C and D are the only ones who can charged a partner’s interest) right as per Articles 1813 ask for dissolution since their interest is not and 1814 assigned or charged. (d) Expulsion bona fide of a partner (a partner is Article 1832 expelled in good faith in accordance with Except so far as may be necessary to wind up agreement. partnership affairs or to complete transactions begun (e) Expulsion has the effect of decreasing the # of but not then finished, dissolution terminates all partners. authority of any partner to act of the partnership: (2) IN VIOLATION OF THE AGREEMENT (1) With respect to the partners - Example: (a) When the dissolution is not by the act, A, B, and C agreed that the term of their insolvency or death of a partner partnership is only until Dec. 31, 2011. A goes to (b) When the dissolution is by such act, premature resignation (resigns early from insolvency or death of a partner, in cases partnership). No one can prevent A from resigning, where Article 1833 so requires but the partners can ask for damages for not (2) With respect to persons not partners, as staying with the agreement. declared in Article 1834 (3) When it becomes unlawful for a partnership to carry on the business or partner to carry on his role General Rule: (4) When specific thing is contributed, and before deliver, it When partnerships are dissolved, partners cannot engage in is lost. new business transactions because their authority to do so - If it is lost after delivery, partnership is not dissolved. terminates upon the occurrence of dissolution. - If use is contributed, it is lost before or after delivery (it 2 Cases with are Contrary to the General Rule: doesn’t matter when it was lost), partnership is (1) During the WINDING UP of Business dissolved. - Transactions relating to the winding up of business - If what is to be contributed is generic, and it is lost, such as the liquidation of partnership assets can be there is no dissolution. entered into because the partners’ authorities to do so shall continue.Article 1831 (2) To complete unfinished transactions during dissolution On application by or for a partner, the court shall - Example: decree dissolution whenever: A and B are in a partnership where they have (1) A partner has been declared insane in any contracted with C to deliver goods in two judicial proceeding or is shown to be of unsound installments. B resigns after the first delivery is mind; made, thus dissolving the partnership. Can A and B (2) A partner becomes in any other way incapable of cease to continue with their obligation? performing his part of the partnership contract; NO. A and B must continue on with their obligation (3) A partner has been guilty of such conduct as to complete unfinished transactions. tends to affect prejudicially the carrying on of the If dissolution is not by an act, insolvency or death, the business; authority of partners as among themselves is terminated. (4) A partner willfully or persistently commits - Example: breach of the partnership agreement, or A partnership was dissolved due to the expiration of the otherwise so conducts himself in matters term. If C transacts with D after this and he defaults, he relating to the partnership business that it is not will be the only one liable AS TO THE PARTNERS. If A reasonably practicable to carry on the business & B are to pay D, C shall reimburse them. in partnership with him; (5) The business of the partnership can only be Article 1833 carried on at a loss Where the dissolution is caused by the act, death or (6) Other circumstances that will render dissolution insolvency of a partner, each partner is liable to his co- equitable partners for his share of any liability created by any On the application of the purchaser of a partner’s partner acting for the partnership as if the partnership interest under Article 1813 or 1814: had not been dissolved unless:
  • 17. (1) The dissolution being by act of any partner, the act is appropriate for winding up partnership partner acting for the partnership had affairs; or knowledge of the dissolution (2) Where the partner has become insolvent; or (2) The dissolution being by death or insolvency of (3) Where the partner had no authority to wind up a partner, the partner acting for the partnership partnership affairs; except by a transaction with had knowledge or notice of the death or one who – insolvency (a) Had extended credit to the partnership prior to dissolution and had no knowledge or If dissolution is caused by an act, insolvency or death, then notice of his want of authority; or each partner shall share in the liability of the partnership due (b) Had not extended credit to the partnership to the actions of a partner, unless he had knowledge of an prior to dissolution, and, having no act, insolvency or death, or notice of the insolvency or death. knowledge or notice of his want of Example: authority, the fact of his want of authority (1) B told A that he is resigning TODAY. The partnership is has not been advertised in the manner thus dissolved. Should A enter into a contract with D, provided for advertising the fact of who shall be liable? dissolution in the first paragraph, No. 2 (b). As among themselves, only A because he had Nothing in this article shall affect the liability under knowledge of B’s resignation, thus knowing that they are article 1825 of any person who after dissolution no longer in a partnership. represents himself or consents to another representing (2) If B texts his resignation to A because A is in Mindanao him as a partner in a partnership engaged in carrying on and A contracts with D, was his authority terminated business (n) when the text arrived? No, A’s authority was not terminated as he has only Partners may still bind the partnership to transactions even received a NOTICE. Mere notice cannot terminate the after dissolution if the transactions are with respect to the authority of partners because the grounds are BY AN winding up or the completion of unfinished transactions. ACT, and because of this it should be PERSONALLY The transaction will be binding if: KNOWN by the acting partner. (1) Credit was extended without knowledge of the (3) If C texts A that B had died, does their authority dissolution before the dissolution terminate once A gets the text message? (2) No credit was extended but there was knowledge of the Their authority is terminated because in this case, the partnership’s existence and none of the dissolution cause of dissolution is death. Mere notice is sufficient to The partnership is required to have the dissolution be terminate authority if the grounds are due to the announced in general circulation newspapers of the place of insolvency or to the death of a partner. operations. As long as they do this, then it is sufficient notice to all third persons. (If you don’t read broadsheets, that’sArticle 1834 your fault, not the partnership’s) After dissolution, a partner can bind the Liabilities shall be satisfied out of partnership assets alone if partnership, except as provided in the third paragraph of the partner being dealt with is a DORMANT partner. this article: Upon dissolution, the partnership is no longer bound by (1) By an act appropriate for winding up transactions : partnership affairs or completing transactions (1) When it becomes unlawful to carry on the business unfinished at dissolution (2) Insolvency of a partner (2) By any transaction which would bind the (3) Unauthorized winding up, except when partnership is dissolution had not taken place, (a) Credit was extended and there was no knowledge provided the other party to the transaction: of the lack of authority (a) Had extended credit to the partnership prior (b) No credit was extended and there was no to dissolution and had no knowledge or knowledge of the dissolution because there was no notice of the dissolution; or advertisement of such (b) Though he had not so extended credit, had In the case wherein “A” still represents himself as a partner nevertheless known of the partnership prior even if the partnership has already been dissolved, then he to dissolution, and, having no knowledge or is a PARTNER BY ESTOPPEL. notice of dissolution, the fact of dissolution had not been advertised in a newspaper of Article 1835 general circulation in the place (or in each The dissolution of the partnership does not of itself place if more than one) at which the discharge the existing liability of any partner. partnership was regularly carried on. A partner is discharged from any existing liability The liability of a partner under the first paragraph, upon dissolution of the partnership by an agreement to No. 2, shall be satisfied out of partnership assets alone that effect between himself, the partnership creditor and when such partner had been prior to dissolution: the person or partnership continuing the business; and (1) Unknown as a partner to the person with whom such agreement may be inferred from the course of the contract is made; and dealing between the creditor having knowledge of the (2) So far unknown and inactive in partnership dissolution and the person or partnership continuing affairs that the business reputation of the the business. partnership could not be said to have been in The individual property of a deceased partner shall any degree due to his connection with it be liable for all obligations of the partnership incurred The partnership is in no case bound by any act of a while he was a partner, but subject to the prior payment partner after dissolution: of his separate debts. (n) (1) Where the partnership is dissolved because it is unlawful to carry on the business, unless the Dissolution does not discharge the partnership and/or the partners from existing liabilities
  • 18. EXAMPLE: manner indemnify him against all present or Suppose A, B and C are in a partnership (X & Co.) and owe future partnership liabilities. D a sum of P 26,000.00. Total partnership assets equate to (3) A partner who has caused the dissolution a sum of P 20,000.00. wrongfully shall have: (1) What if C dies and his total assets are worth P2,000.00? (a) If the business is not continued under the The law says that C’s individual property shall be used provisions of the second paragraph, No. 2, to clear his liabilities when he was still alive. In all cases, all the rights of a partner under the first the PERSONAL CREDITOR has priority. paragraph, subject to liability for damages (2) What if A resigns? Can he ask to be discharged from his in the second paragraph, No. 1 (b), of this obligation to pay D? article. A can only be discharged from his obligation to pay D (b) If the business is continued under the the sum of P2,000.00 if it was agreed upon by all second paragraph, No. 2, of this article, the concerned parties. Agreement can be EXPRESSED or right as against his co-partners and all IMPLIED, based on our interpretation of the law. claiming through them in respect of their interests in the partnership, to have theArticle 1836 value of his interest in the partnership, less Unless otherwise agreed, the partners who have not any damage caused to his co-partners by wrongfully dissolved the partnership or the legal the dissolution ascertained and paid to him representative of the last surviving partner, not in cash, or the payment secured by a bond insolvent, has the right to wind up the partnership approved by the court, and to be released affairs, provided, however, that any partner, his legal from all existing liabilities of the representative or his assignee, upon cause shown, may partnership; but in ascertaining the value of obtain winding up by the court. (n) the partner’s interest the value of the goodwill of the business shall not be Who can wind up partnership affairs? considered. (n) (1) Whoever is so assigned by the agreement (2) Partners who did not wrongfully cause the dissolution Suppose there is a situation wherein A, B and C are in a (3) Legal representatives of the last surviving partner (who partnership, X & Co., with total assets of P 26,000.00 and is not insolvent) liabilities to D amounting to P 20,000.00. If the partnership is (4) The court in a judicial winding up of partnership affairs. dissolved WITHOUT VIOLATION OF ANY AGREEMENTS, naturally, the liability will be cleared because the partnershipArticle 1837 assets are more than enough, and the surplus will be given When dissolution is caused in any way, except in to each of the partners in proportion to their interest in the contravention of the partnership agreement, each partnership or as per their agreement. partner, as against his co-partners and all persons What if the partnership was dissolved due to EXPULSION? claiming through them in respect of their interests in the Suppose that A was the one expelled from the partnership, partnership, unless otherwise agreed, may have the then he can only get a share in the NET PROCEEDS of the partnership property applied to discharge its liabilities, surplus that would have originally been his. and the surplus applied to pay in cash the net amount What if the partnership was dissolved due to VIOLATION owing to the respective partners. But if dissolution is OF AGREEMENTS? caused by expulsion of a partner, bona fide under the Determine the rights of the INNOCENT and GUILTY parties. partnership agreement and if the expelled partner is Suppose that in this situation, A was the one guilty of discharged from all partnership liabilities, either by violating an agreement. Then B and C will be allowed the payment or agreement under the second paragraph of following rights: Article 1835, He shall receive in cash only the net (1) Apply partnership assets to partnership liabilities and amount due him from the partnership. distribute the cash surplus amongst themselves. When dissolution is caused in contravention of the (2) To be indemnified for the damages that A has caused. partnership agreement the rights of the partners shall be (3) To continue the business up to the agreed term. as follows: (4) To possess partnership property. (1) Each partner who has not caused dissolution While A will have the following rights: wrongfully shall have: (1) Partners decide not to continue the business (a) All the rights specified in the first (a) Right to claim his share in the cash surplus, but paragraph of this article, and only the net proceeds of such meaning, the cash (b) The right, as against each partner who surplus less damages. caused the dissolution wrongfully to (2) Continue the business damages for breach of the agreement (a) Ascertain his interest in the business. (2) The partners who have not caused the (b) Freedom from existing and future liabilities of the dissolution wrongfully, if they all desire to partnership. continue the business in the same name either by themselves or jointly with others, may do so, Article 1838 during the agreed term for the partnership and Where a partnership contract is rescinded on the for that purpose may possess the partnership ground of the fraud or misrepresentation of one of the property, provided they secure the payment by parties thereto, the party entitled to rescind is, without bond approved by the court, or pay to any prejudice to any other right, entitled: partner who has caused the dissolution (1) To a lien on, or right of retention of, the surplus wrongfully, the value of his interest in the of the partnership property after satisfying the partnership at the dissolution, less any partnership liabilities to third persons for any damages recoverable under the second sum of money paid by him for the purchase of paragraph, No. 1 (b) of this article, and in like
  • 19. an interest in the partnership and for any capital (b) Those owing to partnership creditors or advances contributed by him; (c) Those owing to partners by way of (2) To stand, after all liabilities to third persons contribution (n) have been satisfied, in the place of the creditors of the partnership for any payments made by Considers the case of liquidation and the distribution of him in respect of the partnership liabilities; and partnership assets (3) To be indemnified by the person guilty of the Liquidation is when all the assets of the partnership is fraud or making the representation against all converted to cash. debts and liabilities of the partnership. (n) Total assets will include GOODWILL as well as the original CONTRIBUTIONS of the partners. Considers a case wherein a partner was induced to join the Order of payment during liquidation: partnership by means of fraud or misrepresentation rd (1) 3 persons/outside creditors The victim can ask for the recision or restitution of the (2) Partner creditors (partners who have claims) contract of partnership (return of all his contributions) (3) Normal partners (all partners) He has the right to the surplus for certain purposes (a) In accordance with the agreement rd He has the rights of a 3 person or a subrogated creditor (b) In proportion to their contribution after the liabilities have already been paid to recollect what he paid when he entered into the partnership. Article 1840 He is entitled to be indemnified for all debts and liabilities In the following cases, creditors of the dissolved that he paid for during his time in the partnership. partnership are also creditors of the person or partnership continuing the business:Article 1839 (1) When any new partner is admitted into an In settling accounts between the partners after existing partnership, or when any partner dissolution, the following rules shall be observed, retires and assigns (or the representative of the subject to any agreement to the contrary: deceased partner assigns) his rights in (1) The assets of the partnership are: partnership property to two or more of the (a) The partnership property partners, or to one or more of the partners and (b) The contributions of the partners necessary one or more third persons, if the business is for the payment of all the liabilities continued without liquidation of the partnership specified in No. 2 affairs; (2) The liabilities of the partnership shall rank in (2) When all but one partner retire and assign (or order of payment, as follows: the representative of a deceased partner (a) Those owing to creditors other than assigns) their rights in partnership property to partners the remaining partner, who continues the (b) Those owing to partners other than for business without liquidation of partnership capital and profits affairs, either alone or with others; (c) Those owing to partners in respect of (3) When any partner retires or dies and the capital business of the dissolved partnership is (d) Those owing to partners in respect of continued as set forth in Nos. 1 and 2 of this profits article, with the consent of the retired partner or (3) The assets shall be applied in the order of their the representative of the deceased partner, but declaration in No. 1 of this article to the without any assignment of his right in satisfaction of the liabilities partnership property; (4) The partners shall contribute, as provided by (4) When all the partners or their representatives Article 1797, the amount necessary to satisfy assign their rights in partnership property to the liabilities one or more third persons who promise to pay (5) An assignee for the benefit of the cr4editor or the debts and who continue the business of the any person appointed by the court shall have dissolved partnership; the right to enforce the contributions specified (5) When any partner wrongfully causes a in the preceding number. dissolution and the remaining partners continue (6) Any partner or his legal representative shall the business under the provisions of Article have the right to enforce the contributions 1837, second paragraph, No. 2, either alone or specified in No. 4, to the extent of the amount with others, and without liquidation of the which he has paid in excess of his share of the partnership affairs; liability. (6) When a partner is expelled and the remaining (7) The individual property of a deceased partner partners continue the business either alone or shall be liable for the contributions specified in with others without liquidation of the No. 4 partnership affairs. (8) When partnership property and the individual The liability of a third person becoming a partner in properties of the partners are in possession of a the partnership continuing the business, under this court for distribution, partnership creditors article, to the creditors of the dissolved partnership shall have priority on partnership property and shall be satisfied out of the partnership property only, separate creditors on individual property, unless there is a stipulation to the contrary. saving the rights of lien or secured creditors When the business of a partnership after (9) Where a partner has become insolvent or his dissolution is continued under any conditions set forth estate is insolvent, the claims against his in this article, the creditors of the dissolved partnership, separate property shall rank in the following as against the separate creditors of the retiring or order: deceased partner or the representative of the deceased (a) Those owing to separate creditors partner, have a prior right to any claim of the retired
  • 20. partner or the representative of the deceased partner against the person or partnership continuing the Who can demand to know how much his interest is in the business, on account of the retired or deceased partnership and from whom? partner’s interest in the dissolved partnership or on All involved parties can demand to know how much his account of any consideration promised for such interest interest is. He can demand to know these from the or for his right in partnership property. SURVIVING, CONTINUING and WINDING UP partners. Nothing in this article shall be held to modify any right of creditors to set aside any assignment on the CHAPTER 4 – LIMITED PARTNERSHIP ground of fraud. The use by the person or partnership continuing the Article 1843 business of the partnership name, or the name of a A limited partnership is one formed by two or more deceased partner as part thereof, shall not of itself make persons under the provisions of the following article, the individual property of the deceased partner liable for having as members one or more general partners and any debts contracted by such person or partnership. (n) one or more limited partners. The limited partners as such shall not be bound by the obligations of the Explains the rights of the creditor in case of partnership partnership. dissolution because of membership changes and the business is continued without liquidation. Defines what a limited partnership is. The membership changes include RETIREMENT, It is sufficient that there is 1 general and 1 limited partner in EXPULSION, DEATH or ADDITION. a limited partnership. Note that the creditor of the OLD partnership will still be the The reason for the existence of a limited partnership is to creditor of the NEW partnership if there is still an old address the needs of all those who wish to join a partnership partner/original partner with the NEW partnership. (debt will without the risk of losing any personal property. not be cleared or discharged) Characteristics: The creditor will continue to be the creditor of the (1) Comply with the statutory requirements of Article 1824 remaining/new partnership in all cases except when: (2) General partners control the partnership and are (1) Rights are assigned to other people (no old partners) personally liable for partnership debts. (2) Unless there is a promise to pay debt from the new (3) Limited partners contribute capital and are not liable partners or if the creditor can set aside the right of the personally for partnership debts. new partners on the ground of fraud. Article 1844Article 1841 Two or more persons desiring to form a limited When any partner retires or dies, and the business partnership shall: is continued under any of the conditions set forth in the (1) Sign and swear to a certificate, which shall state preceding article, or in Article 1837, second paragraph, (a) The name of the partnership, adding thereto No. 2, without any settlement of accounts as between the word “Limited” him or his estate and the person or partnership (b) The character of the business continuing the business, unless otherwise agreed, he or (c) The location of the principal place of his legal representative as against such person or business partnership may have the value of his interest at the (d) The name and place of residence of each date of dissolution ascertained, and shall receive as an member, general and limited partners being ordinary creditor an amount equal to the value of his respectively designated interest in the dissolved partnership with interest, or, at (e) The term for which the partnership is to his option or at the option of his legal representative, in exist lieu of interest, the profits attributable to the use of his (f) The amount of cash and a description of right in the property of the dissolved partnership; and the agreed value of the other property provided that the creditors of the dissolved partnership contributed by each limited partner as against the separate creditors, or the representative (g) The additional contributions, if any, to be of the retired or deceased partner, shall have priority on made by each limited partner and the times any claim arising under this article, providing by Article at which or events on the happening of 1840, third paragraph. (n) which they shall be made (h) The time, if agreed upon, when the Suppose that A retires but B and C continue the business contribution of each limited partner is to be without liquidation. What are the rights of A? returned The rights of A are as follows: (i) The share of the profits or the other (1) That his interest be ascertained as of dissolution date compensation by way of income which (2) Collect his interest in the partnership plus interest or each limited partner shall receive by reason profits by the use of his right to these as a creditor of his contribution If A dies, and the same situation occurs (he did not retire), (j) The right, if give, of a limited partner to then his legal representatives have the same rights as substitute an assignee as contributor in his mentioned above. place, and the terms and conditions of the substitutionArticle 1842 (k) The right, if given, of the partners to admit The right to an account of his interest shall accrue additional limited partners to any partner, or his legal representative as against the (l) The right, if given, of one or more of the winding up partners or the surviving partners or the limited partners to priority over other person or partnership continuing the business, at the limited partners, as to contributions or as to date of dissolution, in the absence of any agreement to compensation b way of income, and the the contrary. (n) nature of such priority
  • 21. (m) The right, if given, of the remaining general If the certificate contains a false statement, one who partner or partners to continue the suffers loss by reliance on such statement may hold business on the death, retirement, civil liable any party to the certificate who knew the interdiction, insanity or insolvency of a statement to be false: general partner (1) At the time he signed the certificate (n) The right, if given, of a limited partner to (2) Subsequently, but within a sufficient time demand and receive property other than before the statement was relied upon to enable cash in return for his contribution him to cancel or amend the certificate, or to file (2) File for record the certificate in the Office of the a petition for its cancellation or amendment as Securities and Exchange Commission. provided in Article 1865. A limited partnership is formed if there has been rd substantial compliance in good faith with the foregoing If there are false statements in the certification and 3 requirements. persons should suffer loss due to these, then he can hold liable all those who had knowledge of the false statement at Two requirements in a limited partnership: the time certification was signed. (1) Sign and swear to a certificate containing the data The same shall apply if the partners concerned had sufficient mentioned in the article (a) to (n) time to have the certificate cancelled but did not do so. (2) Have the certificate recorded with the SEC Can a limited partnership be formed orally? Article 1848 No. A limited partnership contract is not perfected by mere A limited partner shall not become liable as a agreement as it requires formal proceedings. general partner unless, in addition to the exercise of his Partnership must SUBSTANTIALLY comply with the rights and powers as a limited partner, he takes part in requirements. the control of the business. What if the partnership does not comply with the requirements? Will it be void? The limited partner who, aside from his powers, participates No, it will only become a GENERAL PARTNERSHIP. in the management of the partnership becomes liable as a Why is it that the certificate must be registered? general partner. rd Registration is the notice, to all 3 persons who will be dealing with or are dealing with the partnership, that there Article 1849 are partners with limited liability. After the formation of a limited partnership, rd additional limited partners may be admitted upon filing The presumption is that when a partnership deals with a 3 person, the partnership is a GENERAL partnership. an amendment to the original certificate in accordance with the requirements of Article 1865.Article 1845 The contributions of a limited partner may be cash Suppose that in a limited partnership, there are only 2 or other property, but not services. general partners and 1 limited partner. Can you add another limited partner? Limited partners can only contribute cash or other property, Yes, amend the certificate under Article 1865 and do so. not services because if he does so, then he shall become a GENERAL INDUSTRIAL PARTNER. Article 1850 Contribution must be given immediately. If he has promised A general partner shall have all the rights and additional contribution, then it should be given on the date powers and be subject to all the restrictions and promised or agreed upon. liabilities of a partner in a partnership without limited partners. However, without the written consent orArticle 1846 ratification of the specific act by all the limited partners, The surname of a limited partner shall not appear in a general partner or all of the general partners have no the partnership name unless: authority to: (1) It is also the surname of a general partner (1) Do any act in contravention of the certificate (2) Prior to the time when the limited partner (2) Do any act which would make it impossible to became such, the business had been carried on carry on the ordinary business of the under a name in which his surname appeared partnership A limited partner whose surname appears in a (3) Confess a judgment against the partnership partnership name contrary to the provisions of the first (4) Possess partnership property, or assign their paragraph is liable as a general partner to partnership rights in specific partnership property, for other creditors who extend credit to the partnership without than a partnership purpose actual knowledge that he is not a general partner. (5) Admit a person as a general partner (6) Admit a person as a limited partner, unless the The surname of the limited partner should not appear except right to do so is given in the certificate if it is also the surname of a general partner or if at the time (7) Continue the business with partnership of his admission, it was already being used. property on the death, retirement, insanity, civil If the limited partner allows that his surname be used, then interdiction or insolvency of a general partner, rd he shall be held liable as a general partner as to 3 persons unless the right to do so is given in the who extended credit not knowing he was a limited partner. certificate If the creditor has knowledge of his being a limited partner, then this rule shall not apply. Refers to the power, liabilities and limitations of general partners in a limited partnership.Article 1847 A general partner has the same rights, powers and limitations in a limited partnership as when he would have been in a general partnership.
  • 22. A general partner, without written consent from ALL limited Suppose A, B and C form a limited partnership, with C being partners, cannot: the limited partner with a contribution of P20,000.00. The (1) Do any act in contravention of the certificate certificate that they sign says that C is a general partner. (2) Do any act which would make it impossible to carry on What, then, if C, believing himself to be a limited partner, the ordinary business of the partnership begins to exercise his rights as such? (3) Confess a judgment against the partnership C cannot be held liable, as a general partner, if upon his (4) Possess partnership property, or assign their rights in realization of the error, he promptly renounces his specific partnership property involvement with the partnership, except: (5) Admit a person as a general partner (1) If he participates in the management of the partnership (6) Admit a person as a limited partner, unless the right to (2) If his surname is used in the partnership name do so is given in the certificate Consider the situation above, but this time, C’s name is not (7) Continue the business with partnership property on the mentioned at all. What happens then? death, retirement, insanity, civil interdiction or insolvency If that is the case, then there is no limited partnership of a general partner, unless the right to do so is given in because there is no limited partner mentioned . the certificate The law anticipates a situation where in the person is a If there are 100 general partners and 1 dies, the partnership limited partner but his name is not mentioned as such or not will be dissolved. However, this rule will not apply in the case mentioned at all in the certificate. of limited partners. If there are 5 limited partners and 1 dies, then the partnership will still continue. Article 1853 A limited partnership will continue (not dissolve) even in A person may be a general partner and a limited cases of the death of a limited partner as long as there is still partner in the same partnership at the same time, ONE surviving limited partner in the partnership. provided that this fact shall be stated in the certificate provided for in Article 1844.Article 1851 A person who is a general, and also at the same A limited partner shall have the same rights as a time a limited partner, shall have all the rights and general partner to: powers and be subject to all the restrictions of a general (1) Have the partnership books kept at the principal partner; except that, in respect to his contribution, he place of business of the partnership, and at a shall have the rights against the other members which reasonable hour to inspect and copy any of he would have had if he were not also a general partner. them (2) Have on demand true and full information of all A partner can be a limited and general partner at the same things affecting the partnership, and a formal time provided that this fact is STATED IN THE account of partnership affairs whenever CERTIFICATE that he signs. rd circumstances render it just and reasonable Who are they to 3 persons then? rd (3) Have dissolution and winding up by decree of They are general partners as to 3 persons but as amongst court the partners themselves, they are seen as limited partners A limited partner shall have the right to receive a with regards to their contribution. share of the profits or other compensation by way of income and to the return of his contribution as provided Article 1854 in Articles 1856 and 1857. A limited partner also may loan money to and transact with other businesses with the partnership, This Article is important as far as the limited partner is and, unless he is also a general partner, receive on concerned as it shows them what rights they have. account of resulting claims against the partnership, with A limited partner is given the same rights as the general general creditors, a pro rata share of the assets. No partner, that is: limited partner shall in respect to any such claim: (1) They can require that the partnership books be kept at (1) Receive or hold as collateral security any the principal place of business. partnership property (2) Inspect and copy partnership books. (2) Receive from a general partner or the (3) Demand true and full information regarding all matters partnership any payment, conveyance, or concerning the partnership. release from liability, if at the time the assets of (4) Demand for legal winding up or dissolution the partnership are not sufficient to discharge (5) Share in profits, other compensation by way of income partnership liabilities to persons not claiming and the return of contributions. as general or limited partners. The receiving of collateral security, or a payment,Article 1852 conveyance or release in violation of the foregoing Without prejudice to the provisions of Article 1848, provisions is a fraud on the creditors of the partnership. a person who has contributed to the capital of a business conducted by a person or partnership Provides that a limited partner can extend credit or transact erroneously believing that he has become a limited with partnerships that he is part of. partner in a limited partnership, is not, by reason of his He is also entitled to partnership assets pro rata to creditors exercise of the rights of a limited partner, a general but it cannot be used as collateral from the partnership. partner with the person or in the partnership carrying on Suppose X & Co. owes D a sum of P20,000.00 and C, a the business, or bound by the obligations of such limited partner, P20,000.00. The total assets of the person or partnership, provided that on ascertaining the partnership is P50,000.00. How shall these be settled? mistake he promptly renounces his interest in the Both C and D can simultaneously collect from the profits of the business, or other compensation by way of partnership as partnership assets are sufficient to cover income. BOTH. However, if partnership assets are only P20,000.00, C cannot share in it because it would prejudice D’s claim. Refers to a failure to create a limited partnership.
  • 23. Article 1855 partner, irrespective of the nature of his contribution, Where there are several limited partners the has only the right to demand and receive cash in return members may agree that one or more of the limited for his contribution. partners shall have a priority over other limited partners A limited partner may have the partnership as to the return of their contributions, as to their dissolved and its affairs wound up when: compensation by way of income, or as to any other (1) He rightfully but unsuccessfully demands the matter. If such an agreement is made, it shall be stated return of his contribution in the certificate, and in the absence of such a (2) The other liabilities of the partnership have not statement, all the limited partners shall stand upon been paid, or the partnership property is equal footing. insufficient for their payment as required by the first paragraph, No. 1, and the limited partner Suppose that there are three limited partners. These would otherwise be entitled to the return of his partners can agree (because there are more than 1) that one contribution. of them can have priority over the others provided that such SHOULD BE STATED IN THE CERTIFICATE. What are the requisites for the limited partner to be entitled to the return of his contribution?Article 1856 (1) When, after deducting partnership liabilities, partnership A limited partner may receive from the partnership assets are sufficient to do so. the share of the profits or the compensation by way of (2) If he has the consent of all partners unless the right can income stipulated for in the certificate; provided, that be demanded. after such payment is made, whether from the property (3) The certificate must be amended to reflect the return of of the partnership or that of a general partner, the his contribution. partnership assets are in excess of all liabilities of the When may a limited partner rightfully demand the return of partnership except liabilities to limited partners on his contribution? account of their contributions and to general partners. (1) During dissolution (2) Upon arrival of the date of return of his contribution The limited partner is entitled to share in payment by share (3) After he has given 6 months’ notice, WRITTEN, and in profits or other compensation by way of income provided there was no date of return nor dissolution that the partnership assets are sufficient to meet such. The limited partner is only entitled to the return of his To determine total liability, do not deduct contributed capital. contribution, IN CASH, except: Liabilities owed to general partners are not considered part (1) If it was agreed upon of the partnership’s total liabilities. (2) He has the consent of all the partners The ability of the limited partner to share is based on the When can a limited partner ask for dissolution? total liability, which must be known. (1) He rightfully but unsuccessfully demanded the return Suppose that A, B and C are in partnership wherein C is the (2) If he was entitled to receive his contribution and the limited partner and total assets are P50,000.00. They owe D certificate was already amended but partnership assets a sum of P10,000.00, C P15,000.00 and A P50,000.00, is C are not sufficient to pay off partnership creditors. still entitled to share in the surplus after clearing liabilities? Yes, because total liabilities in this case is only P25,000.00 Article 1858 and the assets are still sufficient to pay out the surplus. A limited partner is liable to the partnership: (1) For the difference between his contribution asArticle 1857 actually made and that stated in the certificate A limited partner shall not receive from a general as having been made partner or out of partnership property any part of his (2) For any unpaid contribution which he agreed in contribution until: the certificate to make in the future of the time (1) All liabilities of the partnership, except liabilities and on the conditions stated in the certificate to general partners and to limited partners on A limited partner holds as trustee for the account of their contributions, have been paid partnership: or there remains property of the partnership (1) Specific property stated in the certificate as sufficient to pay them contributed by him, but which was not (2) The consent of all members is had, unless the contributed or which has been wrongfully return of the contribution may be rightfully returned demanded under the provisions of the second (2) Money or other property wrongfully paid or paragraph conveyed to him on account of his contribution (3) The certificate is cancelled or so amended as to The liabilities of a limited partner as set forth in this set forth the withdrawal or reduction article can be waived or compromised only by the Subject to the provisions of the first paragraph, a consent of all members; but a waiver or compromise limited partner may rightfully demand the return of his shall not affect the right of a creditor of a partnership contribution: who extended credit or whose claim arose after the (1) On the dissolution of a partnership filing and before a cancellation or amendment of the (2) When the date specified in the certificate for its certificate, to enforce such liabilities. return has arrived When a contributor has rightfully received the (3) After he has given six months’ notice in writing return in whole or in part of the capital of his to all other members, if no time is specified in contribution, he is nevertheless liable to the partnership the certificate, either for the return of the for any sum, not in excess of such return with interest, contribution or for the dissolution of the necessary to discharge its liabilities to all creditors who partnership. extended credit or whose claims arose before such In the absence of any statement in the certificate to return. the contrary or the consent of all members, a limited
  • 24. Suppose A promises to contribute P20,000.00 but only pays (2) If the limited partner is empowered by the certificate to P15,000.00. What is his obligation to the partnership? constitute a substituted limited partner, and the Then A must pay the P5,000.00 difference NOW. certificate is amended under Article 1865 Suppose C, the limited partner, promises to contribute What are the rights of a substituted limited partner? P20,000.00 more. What should be done? He has all the powers, limitations and liabilities as his It should be paid on the date he promised to pay it. assignor except those which he was ignorant of at the time When can a limited partner be held as trustee? he became a limited partner and those that could not be (1) When he promises specific things but does not follow ascertained from the certificate. through with the promise of delivery What about the assignor? (2) In circumstances of wrongful returns The assignor is still liable for false statements and claims (3) In cases of money and/or property that is wrongfully before the admittance of a substitute limited partner, as in conveyed Articles 1847 and 1858. Can the partnership waive the difference of contributions? (EX: the first situation) Article 1860 Yes, as long as it will not affect creditors who had extended The retirement, death, insolvency, insanity or civil credit before the waiver of such. interdiction of a general partner dissolves the Can the partnership reclaim the returns if it is needed? (EX: partnership, unless the business is continued by the C’s contribution was already returned but the partnership remaining general partners: needs it to finish paying off D, a creditor) (1) Under a right so to do stated in the certificate Yes, as long as the claim came into existence before the (2) With the consent of all the members return of contribution. Again, this does not apply to limited partners because asArticle 1859 long as there is ONE limited partner still living, then the A limited partner’s interest is assignable. partnership is continued. A substituted limited partner is a person admitted to General partners can only continue the business if: all the rights of a limited partner who has died or has (1) The right was stated in the certificate assigned his interest in a partnership. (2) All partners consent to such. An assignee, who does not become a substituted limited partner, has no right to require any information Article 1861 or account of the partnership transactions or to inspect On the death of a limited partner, his executor or the partnership books; he is only entitled to receive the administrator shall have the rights of a limited partner share of the profits or other compensation by way of for the purpose of settling his estate, and such power as income, or return of his contribution, to which his the deceased had to constitute his assignee a assignor would otherwise be entitled. substituted limited partner. An assignee shall have the right to become a The estate of a deceased limited partner shall be substituted limited partner if all the members consent liable for all his liabilities as a limited partner. thereto or if the assignor, being thereunto empowered by the certificate, gives the assignee that right. The executor/administrator has the power to settle the dead An assignee becomes a substituted limited partner partner’s estate and those to constitute his assignee as a when the certificate is appropriately amended in substituted limited partner, if the limited partner originally had accordance with Article 1865. the power to do so, or was allowed such. The substituted limited partner has all the rights and The estate of a limited partner will pay for all his liabilities as powers, and is subject to all the restrictions and a limited partner. liabilities of his assignor, except those liabilities of which he was ignorant at the time he became a limited Article 1862 partner and which could not be ascertained from the On due application to a court of competent, certificate. jurisdiction by any creditor of a limited partner, the court The substitution of the assignee as a limited partner may charge the interest of the indebted limited partner does not release the assignor from liability to the with payment of the unsatisfied amount of such claim, partnership under Articles 1847 and 1858. and may appoint a receiver, and make all other orders, directions, and inquiries which the circumstances of the The interest of a limited partner can be assigned. His interest case may require. is his share in profits, other compensation by way of income The interest may be redeemed with the separate or his return. property of any general partner, but may not be A substituted limited partner is the person admitted and has redeemed with partnership property. all the rights of a limited partner who dies or has assigned The remedies conferred by the first paragraph shall his interest. not be deemed exclusive of others which may exist. What if the person is not qualified to be a substituted limited Nothing in this Chapter shall be held to deprive a partner? limited partner of his statutory exemption. Then he shall remain an assignee with the following rights and limitations: Similar to Article 1814 for general partnerships. rd (1) Receive share in profits, other compensation by way of If a 3 person files a case against the limited partners for income or return of contribution non-payment or non-compliance with their contract, he can (2) Cannot demand information on partnership activities nor ask for the partners’ interests to be attached. inspect partnership books. The attached interest may be redeemed using separate When will the assignee become a substituted limited general partners’ property but not partnership property partner? UNLESS all partners have consented to such. (1) If consent from all other partners was given Article 1863
  • 25. In settling accounts after dissolution, the liabilities (1) Upon DISSOLUTION of the partnership shall be entitled to payment in the (2) When ALL limited partners cease to be such following order: When should the certificate be amended? (1) Those to creditors, in the order of priority as In all cases other than those that will cause the certificate to provided by the law, except those to limited be cancelled. partners on account of their contributions, and to general partners Article 1865 (2) Those to limited partners in respect to their The writing to amend a certificate shall: share of the profits and other compensation by (1) Conform to the requirements of Article 1844 as way of income on their contributions far as necessary to set forth clearly the change (3) Those to limited partners in respect to the in the certificate which it is desired to make capital of their contributions (2) Be signed and sworn to by all members, and an (4) Those to general partners other than for capital amendment substitution a limited partner or and profits adding a limited or general partner shall be (5) Those to general partners in respect to profits signed also by the member to be substituted or (6) Those to general partners in respect to capital added, and when a limited partner is to be Subject to any statement in the certificate or to substituted, the amendment shall also be subsequent agreement, limited partners share in the signed by the assigning limited partner. partnership assets in respect to their claims for capital, The writing to cancel a certificate shall be signed by and in respect to their claims for profits or for all members. compensation by way of income on their contribution A person desiring the cancellation or amendment of respectively, in proportion to the respective amounts of a certificate, if any person designated in the first and such claims. second paragraphs as a person who must execute the writing refuses to do so, may petition the court to order Who has priority over distribution of assets in a limited a cancellation or amendment thereof. partnership? If the court finds that the petitioner has a right to (1) Creditors, including limited partners who have a claim have the writing executed by a person who refuses to do against the partnership. so, it shall order the Office of the Securities and (2) Limited partners’ share in profits Exchange Commission where the certificate is recorded, (3) Limited partners’ return of capital contribution to record the cancellation or amendment of the (4) General partners who have claims against the certificate; and when the certificate is to be amended, partnership the court shall also cause to be filed for record in the (5) General partners’ share in profits said office a certified copy of its decree setting forth the (6) General partners’ return of capital contribution amendment. The difference of this with general partnerships is that in a A certificate is amended or cancelled when there is general partnership, capital contributions are returned filed for record in the Office of the Securities and BEFORE profits from surplus are shared. Exchange Commission where the certificate is recorded: (1) A writing in accordance with the provisions ofArticle 1864 the first or second paragraph The certificate shall be cancelled when the (2) A certified copy of the order of court in partnership is dissolved or all limited partners cease to accordance with the provisions of the fourth be such. paragraph A certificate shall be amended when: (3) After the certificate is duly amended in (1) There is a change in the name of the accordance with this article, the amended partnership or in the amount or character of the certificate shall thereafter be for all purposes contribution of any limited partner the certificate provided for in this Chapter. (2) A person is substituted as a limited partner (3) An additional limited partner is admitted What are the requisites for certificates to be amended or (4) A person is admitted as a general partner cancelled? (5) A general partner retires, dies, becomes (1) It must be in writing insolvent or insane, or is sentenced to civil (2) It must be signed AND sworn by ALL concerned parties interdiction and the business is continued (3) It must be registered with the SEC under Article 1860 (6) There is a change in the character of the Article 1866 business of the partnership A contributor, unless he is a general partner, is not (7) There is a false or erroneous statement in the a proper party to proceedings by or against a certificate partnership, except where the object is to enforce a (8) There is a change in the time as stated in the limited partner’s right against or liability to the certificate for the dissolution of the partnership partnership. or for the return of a contribution (9) A time is fixed for the dissolution of the A limited partner is a mere contributor, meaning, he is partnership, or the return of a contribution, no practically a stranger. This is because he has no time having been specified in the certificate participation in management and control and is only liable to rd (10) The members desire to make a change in any the partnership, not to 3 persons and if he is filed against other statement in the certificate in order that it as a general partner, he can file a counterclaim for wrongful shall accurately represent the agreement inclusion. among them. 2 exceptions to this rule: (1) To enforce his right against the partnership When should a certificate be cancelled?
  • 26. (2) If he refuses to restore his contribution when the partnership assets are not sufficient to pay creditorsArticle 1867 A limited partnership formed under the law prior to the effectivity of this Code, may become a limited partnership under this Chapter by complying with the provisions of Article 1844, provided the certificate sets forth: (1) The amount of the original contribution of each limited partner and the time when the contribution was made (2) That the property of the partnership exceeds the amount sufficient to discharge its liabilities to persons not claiming as general or limited partners by an amount greater than the sum of the contributions of its limited partners. A limited partnership formed under the law prior to the effectivity of this Code, until or unless it becomes a limited partnership under this Chapter, shall continue to be governed by the provisions of the old law. This is a transitory law. Articles 145 to 150 of the Code of Commerce used to govern limited partnerships. What happens to a limited partnership existing before the Civil Code? The partnership must first comply with the following requirements before they can become a limited partnership under the Civil Code: (1) State the amount of contribution and the time it was contributed (2) After paying off all liabilities, the total assets of the partnership must be greater than the contribution of all limited partners, otherwise, it will continue to be governed by the Code of Commerce.