Chapter 1 – General Provisions

Article 1767By the contract of partnership two or more persons

bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves.

Two or more persons may also form a partnership for the exercise of a profession. (1665a).

NOMINATE- There is a name given by the law- Contract of Partnership: CONSENSUAL (meaning it is

perfected by both parties) PERSONS

- Includes not only natural persons but also JURIDICAL persons. A corporation may NOT be a partner but it may engage in JOINT VENTURES.

BIND THEMSELVES- Must be capable and competent, meaning, the following

may are not included:1. Minors2. Emancipated Minors3. Those under civil interdiction – accessory penalty of

being convicted of crimes4. Insane persons5. Incompetent persons (see oblicon notes)

- HOWEVER, if the person is only a SUSPECT, he may still bind himself into a contract since there is no final verdict yet.

TO CONTRIBUTE MONEY, PROPERTY OR INDUSTRY- Makes the contract onerous since this is MUTAL and

ALL must give either one of the above- Examples:

1. A and B create a partnership with a promise of contributing P10,000 each in cash. A gave his share while B gave a check worth P10,000. Is the issuance a contribution of money?No, unless the check is encashed.

2. Considering the same information above but with B contributing P10,000 in equivalent dollars.No, the contribution must be made using the legal tender, in this case, Philippine pesos.

- Property contributed may be movable, immovable or intangible property. (Ex: equipment, land, patents, etc.)

- If the partnership did not contribute money or property, then industry was contributed.

- Note: Contributions may differ for each of the partners. TO A COMMON FUND TO DIVIDE PROFITS AMONGST

EACH OTHER- The primary objective of partnerships is to make profits.

Sharing profits need not be equal.- Sharing ratios are determined by the partner’s

agreement, and if there was no agreement, then the ratios will be based on the ratio of the partners’ contributions.

- Sharing ratios for losses will be the same as the sharing ratios for profits.

- The industrial partner shall NOT share in losses.- The industrial partner is exempt only to the partners but

not to 3rd parties without prejudice to his right. A1816 CONSENT (DELECTUS PERSONAE)

- You can’t join a partnership without the consent of ALL partners.Why?Because the partnership will need to be dissolved before you are admitted and a new partnership will be made in its place.

Article 1768The partnership has a juridical personality separate

and distinct from that of each of the partners, even in case of failure to comply with the requirements of article 1772, first paragraph. (n)

Example- If A and B form a partnership with X & Co., the property

of X & Co. is not A & B’s property and likewise, A & B’s property is not X & Co.’s.

- Since X & Co is a juridical entity, it can acquire any property since the partners are merely agents.

- Thus the obligations of X & Co are not those of A & B’s. - The partnership of X & Co can file against A & B and be

sued by A & B, likewise, if a third party sues X & Co., A & B are not affected.

- The partnership will still be a juridical entity even without compliance with A1772.

- If X & Co. is exempted from certain things, it does not follow that A & B are included.

Consequences of being a Juridical Person- Can sue and be sued- Acquire any kind of property- Insolvency of a partnership does not mean that the

partners themselves are insolvent.

Article 1769In determining whether a partnership exists, these

rules shall apply:(1) Except as provided by article 1825, persons who are

not partners as to each other are not partners as to third persons.

(2) Co-ownership or co-possession odes not of itself establish a partnership, whether such co-owners or co-possessors do or do not share any profits made by the use of the property

(3) The sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived

(4) The receipt by a person of a share in the profits of a business is prima facie evidence that he is partner in the business, but no such inference shall be drawn if such profits were received in payment:(a) As a debt by installments or otherwise;(b) As wages of an employee or rent to a landlord(c) As an annuity to a widow or representative of a

deceased partner(d) As interest on a loan, though the amounts of

payment vary with the profits of the business(e) As consideration for the sale of a goodwill of a

business or other property by installments or otherwise. (n)

Provides the rule in determining partnerships Example for (1)

- If A & B say PUBLICLY that they are not partners, then according to A1825, if they told C that they are and C enters into a contract of partnership with them, then A and B are in a PARTNERSHIP OF ESTOPPEL.

Example for (2)- If A & B inherited land from their parents and

subsequently leased the land out for P50,000/month, then it can be said that they share profits, but are they in a partnership?No, they are merely co-owners. The P50,000 profit is merely incidental and besides, it was not derived from BUSINESS OPERATIONS.

- If they bought the land for P1,000,000 each to build a house but instead opted to sell it for P2,500,000 then they have a profit of P500,000 but are they partners?No, because even if there was a profit of P500,000, this is merely incidental to the sale and not from business operations of A&B.

- If the land was instead used to build an apartment that is rented out?Yes, because A & B share profits from RENTING, this can be considered as ordinary business operations.

Example for (3)- If a person owns a big tract of land for planting rice and

entered into an agreement with a farmer that they will divide the harvest, is the farmer partners with the owner of the land?No because of the following reasons:(1) The farmer had no contribution(2) The farmer has no say in the disposition of the land(3) The farmer has no say in management(4) In case of loss, the owner shall carry the entire

burden and the farmer need not pay anything Example for (4)

- A partnership borrowed P50,000 and instead of giving the creditor a specific amount to be repaid, they agreed that the creditor will receive 1% of the partnership’s annual gross profit. Is the creditor a partner?No because the receipt of share in net income happens to be because of an existing debt.

To determine whether a person is a partner:(1) Required contribution(2) Say in management(3) Share in losses

Article 1770A partnership must have a lawful object or purpose,

and must be established for the common benefit or interest of the partners.

When an unlawful partnership is dissolved by a judicial decree, the profits shall be confiscated in favor of the State, without prejudice to the provisions of the Penal Code governing the confiscation of the instruments and effects of a crime. (1666a)

The partnership must have a lawful object or purpose- Lawful object refers to CAPITAL- Lawful purpose refers to the BUSINESS itself

There must be common interest and benefit Unlawfulness of the partnership will cause it to be dissolved

and profits shall be confiscated Example of unlawful purpose:

- GAMBLINGA & B are partners where A contributed P100,000 in cash and B contributes gambling paraphernalia. They were raided and the gambling paraphernalia was confiscated. Can the P100,000 also be confiscated?No because the P100,000 was not the reason for the crime in anyway. The state is therefore required to return this amount to A.

Legal effects of a Judicial Dissolution- Partnership is considered void from the beginning- Profit and instrument of the crime is confiscated- The only returnable items are those that were never

related to or connected with the crime committed

Article 1771A partnership may be constituted in any form,

except where immovable property or real rights are contributed thereto, in which case, a public instrument shall be necessary (1667a)

Can a partnership be created orally?Yes. A partnership may be constituted in any form (as stated in Article 1771)

Partnerships are not covered by the Statute of Fraud since these are not necessarily required to be in writing (contract of partnership can be in any form)

If immovable property and/or real rights are contributed to the partnership, then the contract must be in a public instrument (notarized documents)

In order to bind 3rd persons, the transfer of OWNERSHIP of immovable property MUST BE REGISTERED with the REGISTRY OF PROPERTY in the province or city where the property is located

The article shows that partnerships can be perfected by MERE CONSENT.

Article 1772Every contract of partnership having a capital of

P3,000.00 or more, in money or property, shall appear in a public instrument, which must be recorded in the office of the Securities and Exchange Commission.

Failure to comply with the requirements of the preceding paragraph shall not affect the liability of the partnership and the members thereof to third persons. (n)

If the partnership’s capital is P3, 000.00 or more (in any form), it must be in a public instrument, recorded with the SEC and note that property referred to here is MOVABLE since immovable property is covered by Article 1771.

Failure to comply with the requirements of Article 1772 will not affect the liability of the partnership to 3rd persons. Isn’t this inconsistent with Article 1358?

No, remember that in Article 1358, if the contract terms exceed P500.00 then the contract must be in writing. This is merely for purposes of convenience and not validity or enforceability of the law. Also note that according to Article 1768, the partnership will still be valid and have a juridical entity.

How do we reconcile this with Article 1358 and 1357?Article 1358 is for purposes of convenience and not for validity or enforceability of the law.Article 1357 states that contracting parties have the right to compel each other to place the contract into writing.

Purpose of Registration:(1) Condition for obtaining a license to engage in business

and in trade(2) 3rd persons want proof that the partnership is existent,

who the partners are and what the capitalization is before they enter into contracts/engage in business.

(3) The government requires this so that tax liabilities may not be avoided (BIR)

Failure to comply with the Article’s requirements will not prevent the formation of the partnership

The Statute of Fraud will only apply if there was an agreement made by the contracting parties

Example:A and B promise to contribute to their partnership money worth P10,000.00 each within one year from their agreement. A contributes early but when the time comes for B to contribute his share, he refuses to do so. Can A compel B to give his contribution?No, A cannot compel B to pay his contribution to the partnership.Why?Because the contract/agreement between the two parties was purely ORAL and never really written, and it has already been one year since they agreed to their contract terms.

Article 1773

A contract of partnership is void, whenever immovable property is contributed thereto, if an inventory of said property is not made, signed by the parties and attached to the public instrument. (1668a)

Refers specifically where one or both of the parties contribute immovable property. The requirements are:(1) The contract must be in a public instrument(2) An inventory of the immovable property must be made,

signed by BOTH parties and attached to the public instrument, otherwise the partnership is VOIDED.

Actual Case in Applying Article 1773:A and B agree to form a partnership engaging in a fish pond business where both partners will contribute cash; the cash is later used to buy land that is converted into a fish pond. C comes along and points out that the partnership is void because no inventory of the land was made. Is the partnership really void?No, the partnership is not void because according to the Supreme Court, Article 1773 need not apply since the land was BOUGHT from the CASH CONTRIBUTION.Suppose a partnership contributes immovable property but does not conduct an inventory and enters into a contract with A. The partnership does not fulfill its obligation to A and A sues the partnership. Was A right in suing the partnership?No, since the partnership was void from the beginning. A should instead file against the “partners” themselves. They will be sued under the legal basis of them being partners by estoppels, as stated in Article 1825.If A wishes to be in a partnership with B and promises to contribute land but subsequently sells the same plot to C, who immediately registers the transfer, who owns the land?C owns the land because A never registered the transfer.

Estafa: when the owner of a property sells the same to two or more different persons.

Article 1774Any immovable property or an interest therein may

be acquired in the partnership name. Title so acquired can be conveyed only in the partnership name. (n)

Being a juridical entity, a partnership can acquire property and subsequently become its owner.

Article 1775Associations and societies whose articles are kept

secret among members, and wherein anyone of the members may contract in his own name with third persons, shall have no juridical personality and shall be governed by the provisions relating to co-ownership. (1669)

There is no juridical entity since the members can contract with 3rd persons in their own name without binding others.

In a partnership:(1) The partners are merely agents who cannot act alone(2) Articles of Partnership are known to ALL partners AND

to the GENERAL PUBLIC.

Article 1776As to its object, a partnership is either universal or

particular.As regards to the liability of the partners, a

partnership may be general or limited. (1671a)

Classifications of Partnerships:(1) As to the Object:

(a) Universal Partnership of All Present Property – defined in Article 1778

(b) Universal Partnership of All Profits – defined in Article 1780

(c) Particular Partnerships – defined in Article 1783(2) As to the Liability:

(a) General – general partners are liable PRO-RATA and subsidiarily, sometimes solitarily, with their own property/assets if the partnership is insolvent. (may include industrial partners)

(b) Limited – limited partners are liable only up to the extent of their contribution

(3) As to Duration:(a) At will – no particular undertaking, can be dissolved

at any time(b) With a Fixed Term – may only be dissolved upon

the end of its term unless continued by the partners(4) As to Legality of Existence:

(a) De Jure – complied with ALL requirements(b) De Facto – failed to comply with ALL requirements

(5) As to Representation to Others: (a) Ordinary/Real – actually exists(b) Ostensible/by Estoppel – exists only to partners

(6) As to Publicity: (a) Secret – some partners are not known to the public(b) Open/Notorious – all partners are known to the

public(7) As to Purpose:

(a) Commercial/Trading – business transactions(b) Professional/Non-Trading – exercise of professions

Kinds of Partners:(1) Under the Civil Code:

(a) Capitalist – contributes money/property(b) Industrial – contributes industry(c) General – liability extends to personal assets(d) Limited – liability up to contribution only(e) Managing – manages the partnership(f) Liquidating – responsible during dissolution(g) By Estoppel – not really a partner(h) Continuing – continues business after dissolution(i) Surviving – remains after partner’s death(j) Sub-partner – contracts with partners, Article 1804

(2) Other Classifications:(a) Ostensible – active, known to the public(b) Secret – active, unknown to the public(c) Silent – inactive, known to the public(d) Dormant – inactive, unknown to the public(e) Original – member at time of organization(f) Incoming – about to become a member(g) Retiring – about to withdraw

Article 1777A universal partnership may refer to all the present

property or to all the profits. (1672)

Article 1778A partnership of all present property is that in which

the partners contribute all the property which actually belongs to them to a common fund, with the intention of dividing the same among themselves, as well as the profits which they may acquire therewith. (1673)

Article 1779In a universal partnership of all present property,

the property which belongs to each of the partners at the time of the constitution of the partnership becomes the common property of all the partners, as well as all the profits which they may acquire therewith.

A stipulation for the common enjoyment of any other profits may also be made; but the property which the partners may acquire subsequently by inheritance,

legacy or donation cannot be included in such stipulation, except the fruits thereof. (1674a)

Why is the universal partnership of all present property not popular in the Philippines?

Property owned at the time of contribution will become common property of the partnership eventually because only the profits acquired through the contribution will become common property, unless there was a stipulation that says otherwise.

Example:A and B form a Universal Partnership of All Present Property and stipulate that property and profits that are acquired during business operations will become common property even if these were not due to their contributions and that if anyone inherits property, it will become common property as well. A acquires land as part of his compensation package from AyalaLand and B inherits land from his parents. Whose property will become common property?Only A’s land will become common property because it was essentially PAYMENT while B’s was inherited. The article prohibits donations to become common property, only fruits of such can become common property.

In a partnership, contributions must be determinate/certain and partners are akin to donors. Donations cannot comprehend future property but profits can be stipulated.

Article 1780A universal partnership of profits comprises all that

the partners may acquire by their industry or work during the existence of the partnership.

Movable or immovable property which each of the partners may possess at the time of the celebration of the contract shall continue to pertain exclusively to each, only the usufruct passing to the partnership. (1675)

Example:Suppose A and B form a Universal Partnership of All Profits and A wins in the lotto, P100,000.00. B tries to share in 50% citing the existence of their partnership and that A used the partnership’s money to purchase the lottery ticket. Can B really share in the lotto winnings?No, B cannot since it came from CHANCE, not WORK.If the P100,000.00 instead came from A’s work in DLSU, can B share in the profits of A?Yes, because it came from WORK.

As long as it is PROFIT, the profit becomes common property to the partners UNLESS there was a stipulation in their agreement

If A and B form a Universal Partnership of All Profits for a Taxi-Cab business and both contribute vehicles that will serve as the taxi, what they were actually contributing is the USE or the RIGHT TO USE their vehicles. Upon dissolution, the vehicles will be returned to them since there was never a transfer of ownership.

Unique feature of the Universal Partnership of All Profits:- The partners retain the title of ownership.

Article 1781Articles of Universal Partnership, entered into

without specification of its nature, only constitute a universal partnership of profits (1676)

If the articles of universal partnership are doubtful or unclear then the presumption is that it is a universal partnership of all profits.- Because a universal partnership of all profits require

less obligations and is less onerous since the partners

get to retain ownership over the property that they contribute.

Article 1782Persons who are prohibited from giving each other

any donation or advantage cannot enter into a universal partnership. (1677)

A husband and wife cannot join a universal partnership.- They are not allowed to donate to each other and a

universal partnership essentially requires that the partners donate to each other.

- They can join a particular partnership instead. A partnership formed in violation of this article shall be null

and void. It shall not have any legal personality either. Illustrative Case:

A, B and C form a partnership to engage in the importation, marketing and operation of automatic phonographs, radios, television sets, amusement machines and their parts accessories, with B and C as limited partners. Subsequently, A and B got married and thereafter, C sold his share to A and B for a nominal amount. Was the partnership dissolved after the marriage of A and B and C’s sale to them of his share in the partnership?No, the firm was not a universal partnership but a particular one.

Pertinent Legal Provisions(1) Article 87: Every donation or grant of gratuitous

advantage, direct or indirect, between spouses during their marriage, valid or not, shall be void except moderate gifts which the spouses may give each other on the occasion of any family rejoicing.

(2) Article 739: The following donations shall be void:(a) Those made between persons who were guilty of

adultery or concubinage at the time of the donation(b) Those made between persons found guilty of the

same criminal offense, in consideration thereof(c) Those made to a public officer or his wife,

descendants and ascendants by reason of his office

Article 1783A particular partnership has for its object

determinate things, their use or fruits, or a specific undertaking, or the exercise of a profession or vocation (1678)

Defines what a particular partnership is Particular partnerships are those that are:

- Neither a universal partnership for all present property nor a universal partnership for all profits

- Example: Those that are formed for the acquisition and sale of property, Accounting Firms, Law Firms, etc.

- Popular because it is easy to join

Chapter 2 – Obligations of the Partners

Section 1 – Obligations of the Partners amongst Themselves Relations created by a contract of partnership

(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

Article 1784A partnership begins from the moment of the

execution of the contract, unless it is otherwise stipulated. (1679)

Partnership is perfected by mere consent and if ALL the requirements are met

Notwithstanding the fact that the partners have not given their contributions yet

Example:A and B agree to form a partnership that will begin on December 1 and upon the arrival of certain machinery needed by the business. In this situation, are A and B in already in a partnership?As long as the agreement remains executory, then A and B are NOT partners therefore there is no partnership yet.

Partners may agree to form a partnership to take effect in the future

Example:A and B agree to form a partnership 1.5 years later, with contributions of P100,000.00 each. A contributes his share early but when the time comes for B to contribute his share, he refuses and says he no longer wants to partake in the partnership. Can A compel B to contribute his share to the partnership?NO. Because they cannot enforce the contract since it was perfected 1.5 years ago and the contract was only oral. Since the contract was for 1.5 years, it was greater than 1 year and should have been written instead.

The Statute of Fraud does not usually apply but to some particular cases such as the example above, it will.

If the contribution is immovable property, comply with Article 1773 otherwise the partnership will be void.

Article 1785When a partnership for a fixed term or particular

undertaking is continued after the termination of such term or particular undertaking without any express agreement, the rights and duties of the partners remain the same as they were at such termination, so far as is consistent with a partnership at will.

A continuation of the business by the partners or such of them as habitually acted therein during the term, without any settlement or liquidation of the partnership affairs, is prima facie evidence of a continuation of the partnership. (n)

A partnership with a fixed term/particular undertaking is continued without express agreement- Rights and duties remain the same as they were at

termination. Example:

If A and B form a partnership to last until December 30, 2011 and A is the manager and they share profits 50-50 and after December 30, 2011 they continue with their partnership. What happens?A and B retain their rights, meaning A is still the manager and they still share profits 50-50.

If there was express agreement for the term of existence, then when the term expires, the partnership is dissolved and becomes a partnership at will

Continuation is when there is NO settlement/liquidation. There must be prima facie evidence, meaning it must be seen on first glance.

Article 1786Every partner is a debtor of the partnership for

whatever he may have promised to contribute thereto.He shall also be bound for warranty in case of

eviction with regard to specific and determinate things which he may have contributed to the partnership, in the same cases and in the same manner as the vendor is bound with respect to the vendee. He shall also be liable

for the fruits thereof from the time they should have been delivered, without the need of any demand. (1681a)

Article 1787When the capital or a part thereof which a partner is

bound to contribute consists of goods, their appraisal must be made in the manner prescribed in the contract of partnership, and in the absence of stipulation, it shall be made by experts chosen by the partners, and according to current prices, the subsequent changes thereof being the account of the partnership. (n)

Article 1788A partner who has undertaken to contribute a sum

of money and fails to do so becomes a debtor for the interest and damages from the time he should have complied with his obligation.

The same rule applies to any amount he may have taken from the partnership coffers, and his liability shall begin from the time he converted the amount to his own use. (1682)

Suppose A, B and C are partners. A promises to contribute a RED CAR, B promises to contribute GOODS WORTH P50,000.00 and C promises to contribute P50,000.00 IN CASH on October 2011. On October 2011, none of them comply. What happens?A, B and C thus become debtors to the partnership.

Suppose B and C contribute their parts but A does not. Can B and C ask for the recission or annulment of the contract?NO. If one of the partners fails to comply with his requirements, then the others can request for specific performance with damages from the defaulting partner A.

What are the obligations of A before October 2011?(1) To contribute what he promised(2) To be held liable to answer for eviction if the partnership

is deprived of his contribution(3) To take care of the contribution with the diligence of a

good father of a family. Suppose A leased the car out and gets it back by December

2011.Then A must deliver the car and the fruits (profits from lease) to the partnership because there was a delay.

Suppose that after A contributes the car, a 3rd person, D claims to the real owner of the car and is able to prove so.Then A is held liable for eviction because the partnership is deprived for a specific thing. A is also held liable for damages to BOTH the partnership and to D.

What about B? Can the partnership determine the value of the goods he contributed?In Article 1787, it clearly states that the goods SHOULD be appraised by the partnership. If there was no agreement/stipulation, then the partnership shall have the goods appraised by an expert.

What if the goods appreciate/depreciate?It will be charged to the partnership’s account.

What will happen if C fails to comply with his obligation?C will be liable for his contribution plus interest and damages from the date he was supposed to contribute. The same rule 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 return the money he took plus interest and damages from the time he took the money.

When will a partner be held criminally liable?Suppose the partners set aside P10,000.00 for payment to one of their creditors. A takes this amount from the fund and is subsequently discovered to have done so.

- Then A can be charged for estafa since he misappropriated the money ALREADY SET ASIDE.

Article 1789An industrial partner cannot engage in business for

himself, unless the partnership expressly permits him to do so; and if he should do so, the capitalist partners may either exclude him from the firm or avail themselves of the benefits which he may have obtained in violation of this provision, with a right to damages in either case. (n)

An industrial partner contributes his industry- Partnership has the EXCLUSIVE RIGHT to his industry- Prohibited from the engaging in business of ANY kind

unless the partnership has expressly permitted him to do so.

Example:Suppose that a partnership is engaged in a automobile repair shop. A is the industrial partner (chief mechanic) and works only up to 5PM every working day. Can he go home and work on the partnership’s customers’ autos, even if he says it to the capitalist partners EVERY DAY before he leaves?The law says that there must be EXPRESSED permission, in this situation, all A has is IMPLIED permission. The capitalist partners’ remedy is therefore to either: (only one)(1) Avail of the benefits from A’s “business”(2) Exclude A from the partnership and demand for

damages Capitalist partners are prohibited from engaging in SIMILAR

businesses only. Industrial partners have the same remedies as capitalist

partners.

Article 1790Unless there is a stipulation to the contrary, the

partners shall contribute equal shares to the capital of the partnership. (n)

The partners shall contribute to the capital of the partnership as per their agreement, except if there was no agreement in the first place, in which case, they shall contribute equally.

Example:A and B decide to form a partnership and agree to contribute to the capital in the ratio of 60:40, how much should the partners contribute to the partnership?The partners shall contribute in the ratio of 60:40, meaning if their partnership capital is a combined total of P10, 000.00 then A contributed P6, 000.00 and B contributed P4, 000.00.A and B decide to form a partnership but did not say how much the other should contribute, how much should each partner contribute to the partnership?Since the partners did not give any sort of agreement as to the ratio of their capital contribution, we shall assume that they will contribute in equal proportions, meaning if the partnership capital is a combined total of P10, 000.00, then each partner contributed P5, 000.00.

Article 1791If there is no agreement to the contrary, in case of

imminent loss of the business of the partnership, any partner who refuses to contribute an additional share to the capital, except an industrial partner, to sav4e the venture, shall be obliged to sell his interest to the other partners. (n)

If there is an imminent loss in the partnership, the partner who refuses to contribute additional funds, IF HE IS

CAPABLE TO DO SO, shall sell his share TO THE PARTNERS, unless he is an industrial partner.- Imminent Loss

There is a need for the capitalist partners to contribute additional funds to save the partnership

The industrial partner need not do so because he has already given 100% of his efforts

If the capitalist partner is WILLING but NOT FINANCIALLY CAPABLE, the article will NOT apply to him because he is already insolvent

- Selling of interest Refusal to contribute additional funds to save the

partnership means that the partner no longer has any interest in the partnership

He should not be allowed to reap the benefits that the other partners have worked hard for because he had not done anything to help anyway

He cannot complain of being removed from the partnership because he will be paid what is due to him for his share in the interest of the partnership

- Agreement that the partner need not contribute additional funds in cases of loss The capitalist partner will not be required since it

was in their agreement in the first place. Note that more contribution to the partnership

capital would mean you share more in the profits but this should be voluntary

Things to consider:(1) There must be an IMMINENT LOSS(2) The partner who is unwilling to contribute must be

SOLVENT/FINANCIALLY CAPABLE(3) There was no agreement that the partners will not have

to contribute additional funds in cases of loss If the purpose of additional contribution is simply to raise

capital, then this article will not apply.

Article 1792If a partner authorized to manage collects a

demandable sum, which was owed to him in his own name, from a person who owed the partnership another sum also demandable, the sum thus collected shall be applied to the two credits in proportion to their amounts, even though he may have given a receipt for his own credit only; but should he have given it for the account of the partnership credit, the amount shall be fully applied to the latter.

The provisions of this article are understood to be without prejudice to the right granted to the debtor by Article 1252, but only if the personal credit of that partner should be more onerous to him. (1684)

A and B are in a partnership where A is the managing partner. C owes A a sum of P5,000.00 and the partnership a sum of P10,000.00. The credit to A is due on September 1 while the partnership’s is due on September 15, both debts are due and demandable. A collects from C a total of P3,000.00 only and A subsequently issues a receipt in his name. Is the partnership entitled to share in the P3,000.00?Yes but in proportion to their respective debts so A gets P1,000.00 and the partnership gets P2,000.00.

Supposing there was no mention as to who the managing partner is, will the requisites of Article 1792 still be present?Yes, in the absence of information relating to the identity of the managing partner, the assumption shall be that ALL partners are managing partners.

If A issues a receipt on the name of the partnership instead, to whose credit will the P3,000.00 be put?The entire P3,000.00 will go to the partnership.

Supposing the credit of A carries 18% while that of the partnership carries only 10%. C pays A and says that the P3,000.00 shall be applied to A’s credit. Is the partnership entitled to share in the P3,000.00 still?No, the debtor is given the right to apply payment to whichever debt is more onerous.

Things to remember:The two conditions should be both present in order for the Article to apply, otherwise, the entire amount will go to whoever collects payment from the debtor.(1) 2 debts and both are due and demandable(2) The one collecting should be the managing partner

Article 1793A partner who was received, in whole or in part, his

share of a partnership credit, when the other partners have not collected theirs, shall be obliged, if the debtor should thereafter become insolvent, to bring to the partnership capital what he received even though he may have given receipt for his share only. (1685a)

In this case, there is only ONE debt but 2 or more debtors, both of which are partners.

Example:A and B are partners and C owes the partnership a sum of P10,000.00. B is the managing partner but A collects his share in the P10,000.00 and C pays A P5,000.00 to which A issues a receipt in his name. When B’s turn to collect comes, C is already insolvent. What should A do?A shall return his P5,000.00 to the partnership and split it with B because C has already become insolvent.

Take not that whoever collects doesn’t matter as it doesn’t make a difference

If you get your share early and the other parties cannot get theirs because the debtor has become insolvent, then you must return YOUR share to the partnership so that no one gets more than he should have.

Article 1794Every partner is responsible to the partnership for

damages suffered by it through his fault, and he cannot compensate them with the profits and benefits which he may have earned for the partnership by his industry. However, the courts may equitably lessen this responsibility if through the partner’s extraordinary efforts in other activities of the partnership, unusual profits have been realized. (1686a)

Why compensation will not apply:Compensation will not apply because in compensation, you should be both a debtor and a creditor at the same time. However, the partner here is only a DEBTOR for damages and he cannot compensate using his profits and benefits earned for the partnership because it IS HIS DUTY to do so in the first place.

Responsibility may be equitably mitigated by the courts if, through extraordinary efforts of the partner, unusual profits are recognized/realized.

Example:A partnership between A and B is engaged in an autoshop business. A customer brought his car in to be painted YELLOW but A bought RED paint instead and the car is painted RED. Damages are suffered by the partnership for P30,000.00 due to the repainting. Can A compensate this loss using the profits he earned for the partnership?A cannot compensate it with the profits he earned because it is his obligation to bring profits in the first place. The responsibility of the P30,000.00, however, may be mitigated by the court if by other activities, A is able to bring about

unusual or extraordinary profits, meaning, he may be allowed by the courts to pay back just P15,000.00 instead.

Follows that if the partner is guilty of fraud or damages, he shall be liable for that.

Article 1795The risk of specific and determinate things which

are not fungible, contributed to the partnership so that only their use and fruits may be for the common benefit, shall be borne by the partner who owns them.

If the things contributed are fungible, or cannot be kept without deteriorating, or if they were contributed to be sold, the risk shall be borne by the partnership. In the absence of stipulation, the risk of things brought and appraised in the inventory, shall also be borne by the partnership, and in such case the claim shall be limited to the value at which they were appraised. (1687)

Refers to rules as to who bears the risks made by contributions

If the contribution is determinate and non-fungible but only the use is contributed, when it is lost, then the one who contributes it is liable for it.

If fungible things are contributed, the partnership shall be the one to shoulder the risks

The partnership shall also be the one to bear the risk for items brought for sale in inventory for appraisal for the value at which they were appraised.

Article 1796The partnership shall be responsible to every

partner for the amounts he may have disbursed on behalf of the partnership and for the corresponding interest from the time the expenses are made; it shall also answer to each partner for the obligations he may have contracted in good faith in the interest of the partnership business, and for the risks in consequence of its management. (1688a)

Refers to the obligation of the partnership to the partners The partners are merely agents so they are not personally

liable except if they are at fault or if they exceeded their expressed authority

Obligations of the Partnership:(1) To reimburse any amount disbursed by the partners in

behalf of the partnership- Example:

A partnership borrows from the bank a sum of P10,000.00 for additional funds but cannot pay it back when it is due to be paid back. A pays back the P10,000.00 using his personal funds. Should he be reimbursed by the partnership?Yes, the partnership should reimburse A for the sum of P10,000.00 PLUS legal interest starting from the date A disbursed the P10,000.00.

(2) To answer for any obligation contracted in good faith- Example:

A partnership needs office supplies so B contracts for P10,000.00 worth of supplies. Who will pay for the contract price of P10,000.00?The partnership shall be the one to shoulder the cost as it was made in good faith and B did not overstep his authority.If it was stated that the partners cannot contract for more than P5,000.00 worth of supplies and B still contracts for P10,000.00, how much will the partnership pay?The partnership will only pay what was allowed, that is, P5,000.00 and B will pay the remaining balance since B overstepped his authority.

(3) To answer for risks in management- Example:

A partnership is engaged in selling goods and a customer keeps asking for discounts and an argument ensues between the customer, C and the partner A. A gets injured and is brought to the hospital. Who shall shoulder the hospital bills?The partnership shall shoulder the hospital bills as it was during A’s time in managing the business that he was injured.

Article 1797The losses and profits shall be distributed in

conformity with the agreement. If only the share of each partner in the profits has been agreed upon, the share of each in the losses shall be in the same proportion.

In the absence of stipulation, the share of each partner in the profits and losses shall be in proportion to what he may have contributed, but the industrial partner shall not be liable for the losses. As for the profits, the industrial partner shall receive such share as may be just and equitable under the circumstances. If besides his services, he has contributed capital, he shall also receive a share in the profits in proportion to his capital. (1689a)

Article 1798If the partners have agreed to entrust to a third

person the designation of the share of each one in the profits and losses, such designation may be impugned only when it is manifestly inequitable. In no case may a partner who has begun to execute the decision of the third person, or who has not impugned the same within a period of three months from the time he had knowledge thereof, complain of such decision.

The designation of losses and profits cannot be entrusted to one of the partners. (1690)

Article 1799A stipulation which excludes one or more partners from any share in the profits or losses is void. (1691)

Lays out the rules in the distribution of profits and losses A, B and C are partners with the following capital

contributions, P30,000.00, P20,000.00 and P10,000.00 respectively, where C is a capitalist-industrialist partner. For one year of their operations, their partnership had earned net profits of P17,000.00. How shall these profits be divided among the partners? (C is entitled to receive P2,000.00 out of the entire P17,000.00)(1) In accordance with any existing agreement between the

partners as to how they shall share.(2) If there was no agreement, then the partners shall share

on a pro-rata basis(3) The industrial partner shall get what is JUST and

EQUITABLE in the circumstances. (BONUS TO PARTNER)

P CAPITAL CONTRIBUTION RATIO

SHARE IN DISTRIBUTABLE

PROFITBONUS

TOTAL SHARE IN PROFITS

A P 30,000.00 3/6 P 7,500.00 - P 7,500.00

B P 20,000.00 2/6 P 5,000.00 - P 5,000.00

C P 10,000.00 1/6 P 2,500.00 P 2,000.00 P 4,500.00

TOTAL P 60,000.00 6/6 P 15,000.00 P 2,000.00 P 17,000.00

The same rules shall apply for losses in the partnership’s operations, however the industrial partner shall not share in the losses as there is no way for him to retract his industry and in the event of losses, his efforts would have been for vain and it can thus be said that he has already shared.

What is the legal effect of having a stipulation that excludes a partner from sharing in the profits or losses?Under Article 1799, the stipulation shall be void because there must be mutual sharing of profits and losses.

Can the partners appoint a 3rd person to designate the division of their profits and losses?Yes and they will not be allowed to question his decisions unless the designation of shares is manifestly inequitable.

2 cases where partners ABSOLUTELY cannot question designated shares by the 3rd parties:(1) When a partner begins to execute the 3rd party’s

decision(2) When complaints are raised AFTER three months from

the point of knowledge of the designation Can the partners designate one of themselves to distribute

profits or losses?No, the law prohibits this situation because there may be disparities when it comes to the distribution of net profits.

Article 1800The partner who has been appointed manager in the

articles of partnership may execute all acts of administration despite the opposition of his partners, unless he should act in bad faith; and his power is irrevocable without just and lawful cause. The vote of the partners representing the controlling interest shall be necessary for such revocation of power.

A power granted after the partnership has been constituted may be revoked any time. (1692a)

2 Kinds of Managing Partners:(1) Appointed DURING the Constitution of the Partnership

- May execute all administrative acts unless he acted in bad faith. His power may not be revoked unless there is a JUST and LAWFUL cause and the vote of the partners with controlling interest

- Even if there are objections as to his decisions coming from the partners, his authority will prevail UNLESS he has acted in bad faith

- Acts of administration: ordinary business and administrative transactions

- Why can he note be revoked for no reason?Because if you revoke his power, you are in effect changing the terms of the contract of partnership.

(2) Appointed AFTER the Constitution of the Partnership- May have his power revoked with or without cause- Decided upon by those partners who own

controlling interest in the partnership

Article 1801If two or more partners have been entrusted with the

management of the partnership without specification of their respective duties, or without stipulation that one of them shall not act without the consent of the others, each one may separately execute all acts of administration, but if any of them should oppose the acts of the others, the decision of the majority shall prevail. In case of tie, the matter shall be decided by the partners owning the controlling interest. (1693a)

Assume that A, B, C and D are all managing partners. A appoints E as a secretary but B objects to this. Is the appointment of E valid?

Yes since majority votes are first counted by head. If C&D were the ones to object, and they owned a combined total of 51% of partnership interest, then the appointment will not be valid. However, if B was still the one who objected and he owns 51% of partnership interest, the appointment will still be valid because majority votes are first counted by head.

If the partnership cannot make a decision and ends up in a tie (head count and interest), then the partnership is to be dissolved. This will be the only remedy, unless one of the other partners will relent.

Article 1802In case it should have been stipulated that none of

the managing partners shall act without the consent of the others, the concurrence of all shall be necessary for the validity of the acts, and the absence or disability of any one of them cannot be alleged, unless there is imminent danger of grave or irreparable injury to the partnership. (1694)

This is a case wherein two partners, A and B, stipulate that one cannot act without the consent of the other. Thus, there must always be concurrence between the two before any transactions may be entered into, the absence of the other’s consent shall not be used as an excuse.

Illustrative Case:A sold to B, one of the managing partners of Partnership X, the other being C, a certain number of mining claims without the consent of C. In an action by A to recover the unpaid balance of the purchase price against Partnership X, C claims that the contract is not binding upon the partnership for the reason that under the articles of partnership, there is a stipulation that one of the partners cannot bind the firm by a written contract without the consent of others. Is the transaction made by B binding upon the partnership?According to the Supreme Court, the stipulation applies only to B and C. A has the right to assume that B was authorized to complete the transaction. Therefore, the partnership is liable, and since B violated the terms of contract between himself and C, he is required to reimburse C for the amount C will be paying A on behalf of the partnership, the reason being, it would be unfair to C who had no knowledge of B’s transaction to have to pay when he never agreed anyway.

The only instance in which a partner may transact without concurrence is when there is imminent danger of grave or irreparable damage to the partnership if he does not do so. However, the party involved must be able to prove so else he shall become liable for what he has done.

Example:A and B are in a partnership where they sell fruits, B notices that the fruits in the warehouse are starting to rot so, without consent of A, he sells them.This will be alright because if the fruits rot, then it would have been bad on the part of the partnership.

Article 1803When the manner of management has not been

agreed upon, the following rules shall be observed:(1) All of the partners shall be considered agents

and whatever any one of them may do alone shall bind the partnership, without prejudice to the provisions of article 1801.

(2) None of the partners may, without the consent of the others, make any important alteration in the immovable property of the partnership, even if it may be useful to the partnership. But if the refusal of consent by the other partners is manifestly prejudicial to the interest of the

partnership, the court’s intervention may be sought. (1695a)

If there is no agreement as to who will be the managing partners, during constitution and after constitution of the partnership, then the assumption shall be that ALL the partners are managing partners, without prejudice to Article 1801, meaning Article 1801 will then apply to their case.

The second paragraph of this article provides that the partners cannot simply alter immovable property owned by the partnership without the consent of the other partners because this is NOT an act of administration but of OWNERSHIP.

Note that consent here is no qualified, so it may be expressed or it may be implied.

Example:Suppose A, B, C and D are in a partnership where the managing partner is not specified and A decides to put up a warehouse in a piece of land owned by the partnership without consent of other partners because he believes it to be useful and beneficial to the partnership. His partners come over, once the warehouse is finished, to look at it and did not object to its existence. Was this valid?Yes, since the partners did not object, then there is IMPLIED consent. Since consent was never qualified in the article, it is assumed that implied consent is enough.Suppose before A builds the warehouse, he asks for the consent of the other partners, who refuse to give it. When A tries to convince them and asks why they refuse to give consent, they simply say that they do not want it to be there, making their objection manifestly prejudicial, meaning, there is really no reason for their objection, what then, is the remedy of A in this situation?A may bring the matter to court. If the court finds the other partners of having no solid reason to object, it may compel the other partners to give their consent.

Article 1804Every partner may associate another person with

him in his share, but the associate shall not be admitted into the partnership without the consent of all the other partners, even if the partner having an associate should be a manager. (1696)

Refers to SUBPARTNERSHIP A, B and C are in a partnership wherein A is the managing

partner. A enters into a contract with D that states D will receive 50% of A’s share in partnership profits. Can A do this even without the consent of the other partners?Yes, because a sub-partnership will not affect the composition of the partnership and D will not be able to interfere with the partnership’s management anyway.

When are you required to share your partnership profits with 3rd persons?When you contract with 3rd persons because perhaps in some past event you needed money and they provided you with it, and in your contract, it was agreed upon that you will share in the partnership profits.The 3rd person can also opt to receive ALL profits.

Can D become a partner without the consent of the other partners, if he associates with the managing partner?No, D would need to get the consent of all partners because this would change the partnership composition.

Article 1805The partnership books shall be kept, subject to any

agreement between the partners, at the principal place of business of the partnership, and every partner shall

at any reasonable hour have access to and may inspect and copy any of them. (n)

The partnership books shall be kept in the following places, in order:(1) In accordance with partnership agreements(2) If there were no agreements, then the partnership books

shall be kept in the principal place of business of the partnership (ex: headquarters)

Each partner will have access to ALL partnership books. When will the partner be allowed to access the partnership

books?The partner is allowed to access partnership books during REASONABLE HOURS OF BUSINESS (8am-5pm), according to the law. The one who is keeping the partnership books cannot state when it can be inspected.

Article 1806Partners shall render on demand true and full

information of all things affecting the partnership to any partner or legal representative of any deceased partner or of any partner under legal disability. (n)

The article does not mean that the partners need wait for demands before disclosing information, when they get hold of the information, they should disclose it immediately, although additional details may be demanded.

If information is not disclosed and it is found out later on, the partner/s who did not disclose such will be held liable for it and be charged for misrepresentation.

Suppose A, B and C are in a partnership wherein A is sent to inspect partnership property in Mindanao. A realizes that the property contains oil deposits and does not disclose this information to B and C. He also lies and says that the property is completely useless for their business and offers to buy B and C’s interests in the partnership. When A is the only one holding the business, he develops the land and gains substantial profits from the oil deposits. B and C later on learn about the information A kept hidden from them and demand that they be given their shares in the oil profits. The question now is, can B and C, after having sold their interests in the partnership, still share in the profits?Yes, they will be allowed to share in the profits because the information regarding oil deposits was present when they sold their share to A, just that it was hidden from them.

Article 1807Every partner must account to the partnership for

any benefit, and hold as trustee for it any profits derived by him without the consent of the other partners from any transaction connected with the formation, conduct or liquidation of the partnership or from any use by him of its property. (n)

A partner who receives benefits or profits derived without consent of others shall account for it as the partnerships.

If particular property is mortgaged and foreclose, the partner who uses personal funds is able to get the property back will not become the new owner, he will only be its trustee.

If the partner gets the property back after ONE year from the 3rd party involved, then it shall become his as it was a private transaction, so long as he uses his own funds.

Example:A and B are partners engaged in the operation of a cinema business. The theater was mortgaged to C who foreclosed the mortgaged debt. A, in his own behalf, redeemed the property with his own private funds. Subsequently, A files a petition for the cancellation of the old title of the partnership

and the issuance of a new title in HIS name alone. Did A become the absolute owner of the property?No, the law says that he will only hold the property as the trustee and will be entitled to reimbursement plus interest from the time he redeemed the property.

Article 1808The capitalist partners cannot engage for their own

account in any operation which is of the kind of business in any operation which is of the kind of business in which the partnership is engaged, unless there is a stipulation to the contrary.

Any capitalist partner violating this prohibition shall bring to the common fund any profits accruing to him from his transaction, and shall personally bear all the losses. (n)

The article is with regards to a capitalist partner engaging in other businesses.

Is the capitalist partner allowed to engage in other businesses aside from the one he has with the partnership?Yes, as long as the business he engages in is something dissimilar or different from the of the partnership’s.

What will happen if the capitalist partner violates the law regarding his ability to engage in other businesses?Then he shall have to bring the profits he gained from the other business to the partnership and be liable for losses suffered by the partnership.

Why is the capitalist partner not allowed to engage in a similar line of business?Because he might take advantage of the information in the partnership or of their clients, resulting in a conflict of interest between himself and the other partners.

The capitalist partner can engage in a business similar to the partnership if there was a stipulation in the contract of partnership and if the business he operates exists in a different area or place.

Article 1809Any partner shall have the right to a formal account

as to partnership affairs:(1) If he is wrongfully excluded from the partnership

business or possession of its property by his co-partners

(2) If the right exists under the terms of any agreement

(3) As provided by Article 1807(4) Whenever other circumstances render it just and

reasonable. (n)

General Rule:During existence, a partner is not required to demand for an accounting because his interest is already protected by two Articles of the law, Article 1805 and Article 1806. But for specific cases, the law provides that he can DEMAND for an accounting of the partnership books.

4 Cases where a partner can demand for an accounting:(1) When he is wrongfully excluded from the partnership

operations (business and property possession)(2) If the right exists under their agreement(3) Under Article 1807(4) Other circumstances which render it just and

reasonable.

Section 2 – Property Rights of a Partner

Article 1810The property rights of a partner are:(1) His rights in specific partnership property

(2) His interest in the partnership(3) His right to participate in the management. (n)

The partner has the following rights:(1) Right to the ownership of partnership property(2) Right to his interest in the partnership(3) Right to participate in partnership management

Article 1811A partner is co-owner with his partners of specific

partnership property.The incidents of this co-ownership are such that:(1) A partner, subject to the provisions of this Title

and to any agreement between the partners, has an equal right with his partners to possess specific partnership property for partnership purposes; but he has no right to possess such property for any other purpose without the consent of his partners;

(2) A partner’s right in specific partnership property is not assignable except in connection with the assignment of rights of all the partners in the same property;

(3) A partner’s right in specific partnership property is not subject to attachment or execution, except on a claim against the partnership. When partnership property is attached for a partnership debt the partners, or any of them, or the representatives of a deceased partner, cannot claim any right under the homestead or exemption laws;

(4) A partner’s right in specific partnership property is not subject to legal support under Article 291. (n)

The partners are considered co-owners of specific partnership property

If A, B and C are partners who own specific property under the partnership’s name, what are their rights?(1) They can use it for partnership business purposes(2) They cannot use it for personal purposes WITHOUT the

consent of others. Why can’t A simply assign his right with respect to the

partnership’s property?(1) It doesn’t belong to him(2) The extent of his interest with regards to the property

cannot be determined before dissolution The partnership can altogether assign a 3rd party with the

right to use the property for partnership business purposes. The right of the partners as to the property is not subject to

attachment unless it is a claim against the partnership due to the reason that any one partner is not the owner of it.

Under Article 291, the specific partnership property cannot be used as the subject of legal support because it does not belong to any one of the partners.

Article 1812A partner’s interest in the partnership is his share of

the profits and surplus. (n)

The article defines what the partner’s interest in the partnership is.

What is the partner’s interest in the partnership?(1) DURING operations, the partner’s interest is his share in

profits and losses(2) AFTER operations/LIQUIDATION/DISSOLUTION, his

interest is in the surplus of partnership assets after all debts have been cleared.

Interest can be subject to attachment or execution because it belongs to the partner, not the partnership.

Article 1813A conveyance by a partner of his whole interest in

the partnership does not of itself dissolve the partner, or, as against the other partners in the absence of agreement, entitle the assignee, during the continuance of the partnership, to interfere in the management or administration of the partnership business or affairs, or to require any information or account of partnership transactions, or to inspect the partnership books but it merely entitles the assignee to receive in accordance with his contract the profits to which the assigning partner would otherwise be entitled. However, in case of fraud in the management of the partnership, the assignee may avail himself of the usual remedies.

In case of dissolution of the partnership, the assignee is entitled to receive his assignor’s interest and may require an account from the date only of the last account agreed to by all the partners. (n)

How can a partner convey his interest in the partnership without getting the partnership dissolved?(1) By selling it to a 3rd person(2) By donating it to a 3rd person(3) By using it as security on a loan from a 3rd person

Example:D offers to buy A’s interest of P50,000.00 for P1,000,000.00 and A agrees to sell his interest. What happens now?D becomes the assignee and A becomes the assignor but the partnership will not be dissolved because his interest in profits and surplus is the one being sold. A will also continue to be the partner but D will be the one to receive his profits.

This is similar to sub-partnerships, so the consent of others is not required for interest to be conveyed.

The assignee does not have any say in the management Rights of the Assignee:

(1) He shall get the assignor’s share in profits/surplus(2) He may avail of legal remedies of the partners in cases

of fraud by the assignor(3) He can demand for an accounting upon dissolution but

only starting from the date of the last accounting undertaken by the partnership

(4) Can ask for the dissolution of the partnership if it has reached the end term or anytime if the partnership is one at will, because he is interested in the surplus.

The assignee, however, cannot become a partner without the consent of the other partners because it will entail a change in the partnership’s composition.

Article 1814Without prejudice to the preferred rights of a

partnership creditor under Article 1827, on due application to a competent court by any judgment creditor of a partner, the court which entered the judgment, or any other court, may charge the interest of the debtor partner with payment of the unsatisfied amount of such judgment debt with interest thereon; 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 him in respect of the partnership, and make all other orders, directions, accounts and inquiries which the debtor partner might have made, or which the circumstances of the case may require.

The interest charged may be redeemed at any time before foreclosure, or in case of a sale being directed by the court, may be purchased without thereby causing dissolution:

(1) With separate property, by any one or more of the partners

(2) With partnership property, by any one or more of the partners with the consent of all the partners whose interests are not so charged or sold

Nothing in this Title shall be held to deprive a partner of his right, if any, under the exemption laws, as regards his interest in the partnership. (n)

Refers to a partner who obtained a loan from a 3rd person and was unable to repay such.

For example, PARTNER A failed to pay CREDITOR C a sum of P50,000.00, so C files against A, knowing that A, being a partner, will receive his interest. C wins the case but A is still unable to pay, so C asks that A’s interest be attached so that it goes to C and cancels out A’s debt.- Done to protect C’s interest- Attached interest can be redeemed using the property of

the partners or the partnership’s property, as long as all partners consent to this, and are given reimbursement from the defaulting partner

- Amount charged must e sufficient to pay the loan plus legal interest

SECTION 3 – Obligations of the Partners as to 3rd Persons

Article 1815Every partnership shall operate under a firm name,

which may or may not include the name of one or more of the partners.

Those who, not being members of the partnership, include their names in the firm name, shall be subject to the liability of a partner. (n)

Firm names are required for partnerships because they are juridical persons in need of separate names so that they are distinguishable from the partners and other partnerships. The name can come from any of the partners or 3rd persons.

If a 3rd person’s name is used with his consent, then he shall be liable as a partner without the rights of a partner because the partnership uses his name.

Partnership name must be registered with the (DTI) DEPARTMENT OF TRADE AND INDSUTRY because if there was already such an existing name, there might be cases of duplication.

You cannot choose the name of a deceased partner as his death caused the partnership’s dissolution.

Sample General and Limited Partnership Names:(1) GENERAL – A & Company(2) LIMITED – A, Ltd.

Article 1816All partners, including industrial ones, shall be

liable pro-rata with all their property and after all the partnership assets have been exhausted, for the contracts which may be entered into in the name and for the account of the partnership under its signature and by a person authorized to act for the partnership. However, any partner may enter into a separate obligation to perform a partnership contract. (n)

Article 1817Any stipulation against the liability laid down in the

preceding article shall be void, expect as among the partners. (n)

As to 3rd persons, ALL partners are liable pro-rata and subsidiary, but as to each other, they are liable in proportion to their capital contribution.

Examples:(1) A, B and C are in a partnership where C is the industrial

partner and a sum of P26,000.00 is owed to D. A and B contributed P15,000.00 and P5,000.00 respectively. How shall the debt be shared?As to D, the partners will share equally in the debt left after exhausting all assets (P6,000.00) so they will each have to pay P2,000.00 regardless of C being an industrial partner. If C is insolvent, or if B died, or if A has left the country, the liability of the partners cannot be increased.As to each other, they are liable in proportion to their capital contribution, so B and C will be reimbursed by A.

(2) A, B, C, D and E are sued in court but E is later cleared of his charges. The court orders A, B, C and D to pay their creditor, but C moves to reconsider that all should be charged, but this move was denied. Can A, B, C and D alone be liable for the debt?According to the Supreme Court, the 4 partners cannot alone be liable for the debt because in excluding E, they have increased the other partners’ liability and this is prohibited by the law. The law states that the liability of the partners cannot be increased such that they shoulder the liability of another partner.

(3) What if there was an agreement that stated B is only liable up to P5,000.00? How will A, B and C share in their liability?The stipulation shall be void as to 3rd persons, so they will still share pro-rata. Anyway, B and C will be reimbursed by A, because as among themselves, the stipulation is valid and C is an industrial partner.

Article 1818Every partner is an agent of the partnership for the

purpose of its business, and the act of every partner, including the execution in the partnership name of any instrument, for apparently carrying on in the usual way the business of the partnership of which he is a member binds the partnership, unless the partner so acting has in fact no authority to act for the partnership in the particular matter, and the person with whom he is dealing has no knowledge of the fact that he has no such authority.

An act of a partner which is not apparently for the carrying on of business of the partnership in the usual way does not bind the partnership unless authorized by the other partners.

Except when authorized by the other partners or unless they have abandoned the business, one or more but less than all the partners have no authority to:

(1) Assign the partnership property in trust for creditors or o the assignee’s promise to pay the debts of the partnership

(2) Dispose of the goodwill of the business(3) Do any other act which would make impossible

to carry on the ordinary business of a partnership

(4) Confess a judgment(5) Enter into a compromise concerning a

partnership claim or liability(6) Submit a partnership claim or liability to

arbitration(7) Renounce a claim of the partnershipNo act of a partner in contravention of a restriction

on authority shall bind the partnership to persons having knowledge of the restriction. (n)

Qualifies the authority of partners. Authority must be in the usual course of business.

Transactions beyond a partner’s authority is binding if it is in the usual course of business because the 3rd person is assumed to have no knowledge of his lack of authority.

When are transactions not binding?(1) When a transaction is not in the usual course of

business and has no consent from all other partners(2) When the 3rd person had knowledge of the lack of

authority of the acting partner

Article 1819Where title to real property is in the partnership

name, any partner may convey title to such property by a conveyance executed in the partnership name; but the partnership may recover such property unless the partner’s act binds the partnership under the provisions of Article 1818, or unless such property has been conveyed by the grantee or a person claiming through such grantee to a holder for value without knowledge that the partner, in making the conveyance, has exceeded his authority.

Where title to real property is in the name of the partnership, a conveyance executed by a partner, in his own name, passes the equitable interest of the partnership, provided the act is one within the authority of the partner under the provisions of Article 1818.

Where title to real property is in the name of one or more but not all the partners, and the record does not disclose the right of the partnership, the partners in whose name the title stands may convey title to such property, but the partnership may recover such property if the partner’s act does not bind the partnership under Article 1818, unless the purchaser of his assignee, is a holder for value without knowledge.

Where title to real property is in the name of one or more or all partners, or in a 3trd person in trust for the partnership, a conveyance executed by a partner in the partnership name, or in his name, passes the equitable interest of the partnership, provided the act is one within the authority of the partner under Article 1818.

Where title to real property is in the names of all the partners a conveyance executed by all the partners passes all their rights in such property. (n)

Refers to the conveyance of immovable property Suppose A, B and C are partners engaged in the buying and

selling of property, and the following situations occur:(1) A, without authority, sells land to D in the partnership’s

name but D immediately sells it to E. The land title was originally under the partnership’s name. Can the partnership recover the land?Title passes to D, then to E. The partnership cannot recover the land once it has transferred to E but if the land was still with D, they could have recovered it if the contract was not binding .

(2) What if A sells the property under his name?Only the equitable title passes to D.

(3) What if A sells the property and the land title is registered under his name?Title passes to D because land is registered under the partner’s names. This will hold true if A, B and C are co-owners of the land, even if only A sold it to D.

(4) Land title belongs to one or more or all of the partners or a 3rd person in trust for the partnership.Only the equitable title will pass to D if the seller had no authority to sell such to D.

(5) A, B and C ALL sell the land to D, with the land title belonging to ALL of them.Title passes to D because ALL partners sell to him.

Article 1820An admission or representation made by any

partner concerning the partnership affairs within the scope of his authority in accordance with this Title is evidence against the partnership. (n)

  Anything a partner says or admits, as long as it is concerning

the partnership affairs and it is within the scope of his authority, is sufficient evidence against the partnership.

This article is a rule of evidence In order that admission/representation made can be used as

evidence, the existence of the partnership must be established and proved first.

Example: (1) Partner A borrows money from the bank and declares

that the money borrowed is for the partnership. This statement, made by A, is enough evidence against the partnership and the bank may use this in case the partnership does not pay back the money borrowed.

(2) A, B, and C are partners. A told D, a 3rd person, that the debtor already paid his obligation to the partnership. Is this enough evidence against the partnership?YES, since it concerns partnership affairs and the partner has authority to say so.

Article 1821Notice to any partner of any matter relating to

partnership affairs, and the knowledge of the partner acting in the particular matter, acquired while a partner or then present to his mind, and the knowledge of any other partner who reasonably could and should have communicated it to the acting partner, operate his notice to or knowledge of the partnership, except in the case of a fraud on the partnership, committed by or with the consent of that partner. (n)

  IN SHORT, notice to ANY of the partners is notice to the

partnership. (You don't have to notify EVERY partner in relation to partnership affairs).

Knowledge of a partner acting in a particular manner (meaning the partner is a managing partner), or knowledge of any partner who SHOULD HAVE communicated it to the managing partner, is knowledge to the partnership.

This is so EVEN IF the non-managerial partner does not communicate the information he knows regarding partnership affairs. The partner SHOULD have communicated this. Non knowledge by other partners is not a reason to evade from obligations. 

If notice is delivered to a partner, that is an effective communication to the partnership, notwithstanding the failure of the partner to communicate such notice or knowledge to the other partners.

Example:(1) A, B, and C are partners where B is the managing

partner. D, a 3rd person, filed a case against the partners AND the partnership for some unknown reason. Does D need to notify all of them?If this is done, D just needs to notify either A, B, or C, but doesn't have to notify ALL OF THEM (imagine if there are 100 partners, it would be burdensome and costly to notify all 100). So if A is notified about the case, that is considered by D as notice to EVERYONE even if A is not a managerial partner (since A should communicate this to all partners). 

(2) Suppose D wants to sell a piece of land to the partnership and notifies B (the managing partner) about it, but warns him that the land is under litigation and there is a possibility of the land to be claimed by E. B

took the risk and purchased the land.  Later on, E still claimed the land. Can the partners reclaim this? Even though ALL partners were not informed about the litigation, the partnership cannot get the land anymore since B was informed about it. Notice to B, the acting partner, is already notice to the partnership.

(3) Suppose before B became a partner, D was able to talk to him about the piece of land under litigation. Later on, B became a managing partner and purchased the land D told him about a long time ago. E won the litigation and was able to claim the land. Can the partnership reclaim the land?The partnership cannot get it anymore. Even if D was not informed WHILE he was a partner, the information was still present in his mind. The issue here would be: If B can still recall the conversation he had with D before he became a managing partner.

(4) Suppose D informed C (who is not a managing partner) about the land under litigation. Later on, D sold the land to B, the managing partner, without informing him that the land was under litigation (take note: the information was given to C). Is notice to C, a notice to B? YES, because C should have communicated the information. 

In cases (2), (3) and (4), the partnership can't file action for damages against D since the "partnership had knowledge" about the litigation but the partners still took the risk of buying the land. 

Article 1822Where, by any wrongful act or omission of any

partner acting in the ordinary course of the business of the partnership or with the authority of his co-partner, loss or injury is caused to any person, not being a partner in the partnership, or any penalty is incurred, the partnership is liable therefore to the same extent as the partner so acting or omitting to act. (n)

Article 1823The partnership is bound to make good the loss:(1) Where one partner acting within the scope of his

apparent authority receives money or property of a third person and misapplies it; and

(2) Where the partnership in the course of its business receives money or property of a third person and the money or property so received is misapplied by any partner while it is in the custody of the partnership. (n)

Article 1824All partners are liable solidarily with the partnership

for everything chargeable to the partnership under Articles 1822 and 1823. (n)

In the following cases, obligation is not pro-rata or equal, but a solidary obligation. Any partner MAY pay for the obligation (Unlike in article 1816, each partner should only pay for their SHARE):(1) When by an unlawful act or omission, loss or injury is

caused to 3rd person.- Example:

(a) A, B, and C are partners. A made an act of omission with D as the victim. He caused P50,000 worth of injury to D. What can D do? D can go to A for the full amount of P50,000 OR FROM B OR C.

(b) Can D go to B for the whole e P50,000 since B is the richest among the partners?

This is allowable since the partners have a solidary obligation through A’s act of omission. B will be entitled for reimbursement from the one responsible, A.

- Any one of A, B, OR C, or all partners including the partnership can pay without prejudice to the rights of partners to get reimbursement from the one responsible for the crime

(2) A partner, within the scope of his authority, receives money or property from a third person and misapplies it.- Example:

A partnership is engaged in a pawnshop business. D, a 3rd person, pawned his watch to A and A sells it. Who is liable for the watch?All partners are solidarily liable to D since A misapplies the watch received from D.

(3) The partnership, in its ordinary course of business, receives money or property from a 3rd person and a partner misapplies it while in the custody of the partnership.- Example:

The partnership is engaged in a pawnshop business where it received a watch from D to be pawned. The watch is placed in the partnership VAULT. B, a partner, gets the watch from the vault and sells it. Who is liable for the watch?All partners are solidarily liable.

Article 1825When a person, by words spoken or written or by

conduct, represents himself, or consents to another representing him to anyone, as a partner in an existing partnership or with one or more persons not actual partners, he is liable to any such persons to whom such representation has been made, who has, on the faith of such representation, given credit to the actual or apparent partnership, and if he has made such representation or consented to its being made in a public manner he is liable to such person, whether the representation has or has not been made or communicated to such person so giving credit by or with the knowledge of the apparent partner making the representation or consent to its being made:

(1) When a partnership liability results, he is liable as though he were an actual member of the partnership;

(2) When no partnership liability results, he is liable pro rata with the other persons, if any, so consenting to the contract or representation as to incur liability, otherwise separately.

When a person has been thus represented to be a partner in an existing partnership, or with one or more persons not actual partners, he is an agent of the persons consenting to such representation to bind them to the same extent and in the same manner as though he were a partner in fact, with respect to persons who rely upon the representation. When all the members of the existing partnership consent to the representation, a partnership act or obligation results; but in all other cases it is the joint act or obligation of the person acting and the persons consenting to the representation. (n)

  2 things being mentioned:

(1) PARTNERSHIP by estoppels - There is an existing partnership, and partners

misrepresent themselves together with a 3rd person.

- EXAMPLE:

(a) Suppose there is a partnership, X, with partners A, B, and C. D told E that he is a partner of A, B, and C. E verified from the actual partners of X partnership if D is really a partner, A, B, and C consented. E entered in a contract with D, believing he was a partner. This is partnership by estoppels since A, B, and C verified D as a partner. In this case, E can go after A, B, and C.

(b) Suppose only A and B consented, is there a partnership by estoppels?There will be no partnership by estoppels since only A and B, not all partners, consented to D’s misrepresentation.

(2) PARTNERS by estoppels- 2 or more persons pretend to be partners in the

eyes of 3rd persons.- Example:

A, B, AND C said they were partners to D and entered in a contract with the “partners”. When it was time for them to pay D for their obligation, they cannot for the reason that they are not partners. What is their obligation to D?Their obligation to D will be pro rata, as if they were partners (since they are partners by estoppels)

Article 1826A person admitted as a partner into an existing

partnership is liable for all the obligation of the partnership arising before his admission as though he had been a partner when such obligation were incurred, except that this liability shall be satisfied only out of partnership property, unless there is a stipulation to the contrary. (n)

            A new partner admitted to an existing partnership is also

liable to the obligations existing before he was admitted, but his liability only extends to his contribution to the partnership UNLESS stipulated.

A new partner is liable to his separate property when the obligation was incurred when he was already a partner.

ExampleA, B, and C are the original partners of the partnership X with contributions of P10,000.00 each.  X partnership owes D P40,000.00. Later on, E entered the partnership and contributed P4,000.00. How shall the debt be paid?P34,000.00 will be paid to D out of the partnership assets, and the P6,000 will be paid through A, B, and C’s personal assets. The P6,000.00 will be divided among the 3 original partners pro rata.

Article 1827The creditors of the partnership shall be preferred

to those of each partner as regards the partnership property. Without prejudice to this right, the private creditors of each partner may ask for the attachment and public sale of the share of the latter in the partnership assets. (n)

Partnership creditors have BETTER RIGHTS to partner obligation WITH REGARD TO PARTNERSHIP PROPERTY.

Personal creditors of partners have BETTER RIGHT than a partnership creditor with regards to PERSONAL PROPERTY of the partner.

EXAMPLE: (1) A, B, and C are partners. A OWES E P6,000.00. The

PARTNERSHIP OWES D P28,000.00. The total partnership assets amount to P40,000.00. Who has better right to the partnership property?

In this case, D, the partnership creditor, has a better right to the partnership property. When obligation to D is paid, what will be left for the partners to share is P4,000.00. If E, the personal creditor of A, demands to be paid out of partnership property, he will only get P4,000.00 from it since the priority is the partnership creditor. The P2,000.00 will be paid out from A’s personal property.

(2) If total partnership assets is only P28,000.00, and the liability of the partnership is P40,000,, how shall the debt be paid?A, B, and C will have to pay E P6,000.00 each.

(3) If A only had P6,000.00 of personal property, who will have the better right to this?A’s priority is his personal creditor, E. So D cannot collect A’s share of P4,000.00. D cannot, also, increase the obligation of the other partners to be able to collect their debt.

Chapter 3 – Dissolution and Winding Up

Article 1828The dissolution of a partnership is the change in the

relation of partners caused by any partner ceasing to be associated in the carrying on as distinguished from the winding up of business. (n)

Article 1829On dissolution, the partnership is not terminated,

but continues until the winding up of partnership affairs is completed. (n)

Article 1830Dissolution is caused:(1) Without violation of the agreement between the

partners:(2) In contravention of the agreement between the

partners, where the circumstances do not permit a dissolution under any other provision of this article, by the express will of any partner at any time;

(3) By any event which makes it unlawful for the business of the partnership to be carried on or the members to carry it on in partnership;

(4) When a specific thing, which a partner had promised to contribute to the partnership, perishes before the delivery; in any case by the loss of the thing, when the partner who contributed it having reserved the ownership thereof, has only transferred to the partnership the use or enjoyment of the same; but the partnership shall not be dissolved by the loss of the thing when it occurs after the partnership has acquire the ownership thereof;

(5) By the death of any partner;(6) By the insolvency of any partner or of the

partnership(7) By the civil interdiction of any partner;(8) By degree of court under the following article.

(1700a and 1701a)

Dissolution is usually caused by change a change of relation between partners.

If there is dissolution, no new partnership business may be undertaken

Upon dissolution, partnership continues until winding up and liquidation is completed.

CAUSES OF DISSOLUTION:(1) WITHOUT VIOLATION OF AGREEMENT

(a) Termination/expiration of term or specific undertaking

(b) Upon express will of any partner if there is no term or specific undertaking AS LONG AS PARTERS ACT IN GOOD FAITH.

(c) Upon the will of the partners whose interest is not assigned or charged. - Example:

A sold his interest to E, and B’s interest is charged to F because he borrowed P50,000 from him. C and D are the only ones who can ask for dissolution since their interest is not assigned or charged.

(d) Expulsion bona fide of a partner (a partner is expelled in good faith in accordance with agreement.

(e) Expulsion has the effect of decreasing the # of partners.

(2) IN VIOLATION OF THE AGREEMENT- Example:

A, B, and C agreed that the term of their partnership is only until Dec. 31, 2011. A goes to premature resignation (resigns early from partnership). No one can prevent A from resigning, but the partners can ask for damages for not staying with the agreement.

(3) When it becomes unlawful for a partnership to carry on the business or partner to carry on his role

(4) When specific thing is contributed, and before deliver, it is lost.- If it is lost after delivery, partnership is not

dissolved.- If use is contributed, it is lost before or after delivery

(it doesn’t matter when it was lost), partnership is dissolved.

- If what is to be contributed is generic, and it is lost, there is no dissolution.

Article 1831On application by or for a partner, the court shall

decree dissolution whenever:(1) A partner has been declared insane in any

judicial proceeding or is shown to be of unsound mind;

(2) A partner becomes in any other way incapable of performing his part of the partnership contract;

(3) A partner has been guilty of such conduct as tends to affect prejudicially the carrying on of the business;

(4) A partner willfully or persistently commits breach of the partnership agreement, or otherwise so conducts himself in matters relating to the partnership business that it is not reasonably practicable to carry on the business in partnership with him;

(5) The business of the partnership can only be carried on at a loss

(6) Other circumstances that will render dissolution equitable

On the application of the purchaser of a partner’s interest under Article 1813 or 1814:

(1) After the termination of the specific term or particular undertaking

(2) At any time the partnership was a partnership at will when the interest was assigned or when the charging order was issued. (n)

When can a partnership be dissolved judicially?(1) When a partner is DECLARED insane

(2) When he becomes incapable of performing his part in the partnership

(3) Misconduct of a partner prejudicially to the business(4) Persistent breach of partnership agreement(5) The business can only be carried out on a loss(6) Other circumstances:

(a) Abandonment of the business(b) Fraud(c) Refusal to render an accounting

(7) On application of 3rd parties’ (who purchased or have charged a partner’s interest) right as per Articles 1813 and 1814

Article 1832Except so far as may be necessary to wind up

partnership affairs or to complete transactions begun but not then finished, dissolution terminates all authority of any partner to act of the partnership:

(1) With respect to the partners(a) When the dissolution is not by the act,

insolvency or death of a partner(b) When the dissolution is by such act,

insolvency or death of a partner, in cases where Article 1833 so requires

(2) With respect to persons not partners, as declared in Article 1834

General Rule:When partnerships are dissolved, partners cannot engage in new business transactions because their authority to do so terminates upon the occurrence of dissolution.

2 Cases with are Contrary to the General Rule:(1) During the WINDING UP of Business

- Transactions relating to the winding up of business such as the liquidation of partnership assets can be entered into because the partners’ authorities to do so shall continue.

(2) To complete unfinished transactions during dissolution- Example:

A and B are in a partnership where they have contracted with C to deliver goods in two installments. B resigns after the first delivery is made, thus dissolving the partnership. Can A and B cease to continue with their obligation?NO. A and B must continue on with their obligation to complete unfinished transactions.

If dissolution is not by an act, insolvency or death, the authority of partners as among themselves is terminated.- Example:

A partnership was dissolved due to the expiration of the term. If C transacts with D after this and he defaults, he will be the only one liable AS TO THE PARTNERS. If A & B are to pay D, C shall reimburse them.

Article 1833Where the dissolution is caused by the act, death or

insolvency of a partner, each partner is liable to his co-partners for his share of any liability created by any partner acting for the partnership as if the partnership had not been dissolved unless:

(1) The dissolution being by act of any partner, the partner acting for the partnership had knowledge of the dissolution

(2) The dissolution being by death or insolvency of a partner, the partner acting for the partnership had knowledge or notice of the death or insolvency

If dissolution is caused by an act, insolvency or death, then each partner shall share in the liability of the partnership due to the actions of a partner, unless he had knowledge of an act, insolvency or death, or notice of the insolvency or death.

Example:(1) B told A that he is resigning TODAY. The partnership is

thus dissolved. Should A enter into a contract with D, who shall be liable?As among themselves, only A because he had knowledge of B’s resignation, thus knowing that they are no longer in a partnership.

(2) If B texts his resignation to A because A is in Mindanao and A contracts with D, was his authority terminated when the text arrived?No, A’s authority was not terminated as he has only received a NOTICE. Mere notice cannot terminate the authority of partners because the grounds are BY AN ACT, and because of this it should be PERSONALLY KNOWN by the acting partner.

(3) If C texts A that B had died, does their authority terminate once A gets the text message?Their authority is terminated because in this case, the cause of dissolution is death. Mere notice is sufficient to terminate authority if the grounds are due to the insolvency or to the death of a partner.

Article 1834After dissolution, a partner can bind the

partnership, except as provided in the third paragraph of this article:

(1) By an act appropriate for winding up partnership affairs or completing transactions unfinished at dissolution

(2) By any transaction which would bind the partnership is dissolution had not taken place, provided the other party to the transaction:(a) Had extended credit to the partnership prior

to dissolution and had no knowledge or notice of the dissolution; or

(b) Though he had not so extended credit, had nevertheless known of the partnership prior to dissolution, and, having no knowledge or notice of dissolution, the fact of dissolution had not been advertised in a newspaper of general circulation in the place (or in each place if more than one) at which the partnership was regularly carried on.

The liability of a partner under the first paragraph, No. 2, shall be satisfied out of partnership assets alone when such partner had been prior to dissolution:

(1) Unknown as a partner to the person with whom the contract is made; and

(2) So far unknown and inactive in partnership affairs that the business reputation of the partnership could not be said to have been in any degree due to his connection with it

The partnership is in no case bound by any act of a partner after dissolution:

(1) Where the partnership is dissolved because it is unlawful to carry on the business, unless the act is appropriate for winding up partnership affairs; or

(2) Where the partner has become insolvent; or(3) Where the partner had no authority to wind up

partnership affairs; except by a transaction with one who – (a) Had extended credit to the partnership prior

to dissolution and had no knowledge or notice of his want of authority; or

(b) Had not extended credit to the partnership prior to dissolution, and, having no knowledge or notice of his want of authority, the fact of his want of authority has not been advertised in the manner provided for advertising the fact of dissolution in the first paragraph, No. 2 (b).

Nothing in this article shall affect the liability under article 1825 of any person who after dissolution represents himself or consents to another representing him as a partner in a partnership engaged in carrying on business (n)

Partners may still bind the partnership to transactions even after dissolution if the transactions are with respect to the winding up or the completion of unfinished transactions.

The transaction will be binding if:(1) Credit was extended without knowledge of the

dissolution before the dissolution(2) No credit was extended but there was knowledge of the

partnership’s existence and none of the dissolution The partnership is required to have the dissolution be

announced in general circulation newspapers of the place of operations. As long as they do this, then it is sufficient notice to all third persons. (If you don’t read broadsheets, that’s your fault, not the partnership’s)

Liabilities shall be satisfied out of partnership assets alone if the partner being dealt with is a DORMANT partner.

Upon dissolution, the partnership is no longer bound by transactions :(1) When it becomes unlawful to carry on the business(2) Insolvency of a partner(3) Unauthorized winding up, except when

(a) Credit was extended and there was no knowledge of the lack of authority

(b) No credit was extended and there was no knowledge of the dissolution because there was no advertisement of such

In the case wherein “A” still represents himself as a partner even if the partnership has already been dissolved, then he is a PARTNER BY ESTOPPEL.

Article 1835The dissolution of the partnership does not of itself

discharge the existing liability of any partner.A partner is discharged from any existing liability

upon dissolution of the partnership by an agreement to that effect between himself, the partnership creditor and the person or partnership continuing the business; and such agreement may be inferred from the course of dealing between the creditor having knowledge of the dissolution and the person or partnership continuing the business.

The individual property of a deceased partner shall be liable for all obligations of the partnership incurred while he was a partner, but subject to the prior payment of his separate debts. (n)

Dissolution does not discharge the partnership and/or the partners from existing liabilities

EXAMPLE:Suppose A, B and C are in a partnership (X & Co.) and owe D a sum of P 26,000.00. Total partnership assets equate to a sum of P 20,000.00.(1) What if C dies and his total assets are worth P2,000.00?

The law says that C’s individual property shall be used to clear his liabilities when he was still alive. In all cases, the PERSONAL CREDITOR has priority.

(2) What if A resigns? Can he ask to be discharged from his obligation to pay D?A can only be discharged from his obligation to pay D the sum of P2,000.00 if it was agreed upon by all concerned parties. Agreement can be EXPRESSED or IMPLIED, based on our interpretation of the law.

Article 1836Unless otherwise agreed, the partners who have not

wrongfully dissolved the partnership or the legal representative of the last surviving partner, not insolvent, has the right to wind up the partnership affairs, provided, however, that any partner, his legal representative or his assignee, upon cause shown, may obtain winding up by the court. (n)

Who can wind up partnership affairs?(1) Whoever is so assigned by the agreement(2) Partners who did not wrongfully cause the dissolution(3) Legal representatives of the last surviving partner (who

is not insolvent)(4) The court in a judicial winding up of partnership affairs.

Article 1837When dissolution is caused in any way, except in

contravention of the partnership agreement, each partner, as against his co-partners and all persons claiming through them in respect of their interests in the partnership, unless otherwise agreed, may have the partnership property applied to discharge its liabilities, and the surplus applied to pay in cash the net amount owing to the respective partners. But if dissolution is caused by expulsion of a partner, bona fide under the partnership agreement and if the expelled partner is discharged from all partnership liabilities, either by payment or agreement under the second paragraph of Article 1835, He shall receive in cash only the net amount due him from the partnership.

When dissolution is caused in contravention of the partnership agreement the rights of the partners shall be as follows:

(1) Each partner who has not caused dissolution wrongfully shall have:(a) All the rights specified in the first

paragraph of this article, and(b) The right, as against each partner who

caused the dissolution wrongfully to damages for breach of the agreement

(2) The partners who have not caused the dissolution wrongfully, if they all desire to continue the business in the same name either by themselves or jointly with others, may do so, during the agreed term for the partnership and for that purpose may possess the partnership property, provided they secure the payment by bond approved by the court, or pay to any partner who has caused the dissolution wrongfully, the value of his interest in the partnership at the dissolution, less any damages recoverable under the second paragraph, No. 1 (b) of this article, and in like manner indemnify him against all present or future partnership liabilities.

(3) A partner who has caused the dissolution wrongfully shall have:(a) If the business is not continued under the

provisions of the second paragraph, No. 2, all the rights of a partner under the first paragraph, subject to liability for damages

in the second paragraph, No. 1 (b), of this article.

(b) If the business is continued under the second paragraph, No. 2, of this article, the right as against his co-partners and all claiming through them in respect of their interests in the partnership, to have the value of his interest in the partnership, less any damage caused to his co-partners by the dissolution ascertained and paid to him in cash, or the payment secured by a bond approved by the court, and to be released from all existing liabilities of the partnership; but in ascertaining the value of the partner’s interest the value of the goodwill of the business shall not be considered. (n)

Suppose there is a situation wherein A, B and C are in a partnership, X & Co., with total assets of P 26,000.00 and liabilities to D amounting to P 20,000.00. If the partnership is dissolved WITHOUT VIOLATION OF ANY AGREEMENTS, naturally, the liability will be cleared because the partnership assets are more than enough, and the surplus will be given to each of the partners in proportion to their interest in the partnership or as per their agreement.

What if the partnership was dissolved due to EXPULSION?Suppose that A was the one expelled from the partnership, then he can only get a share in the NET PROCEEDS of the surplus that would have originally been his.

What if the partnership was dissolved due to VIOLATION OF AGREEMENTS?Determine the rights of the INNOCENT and GUILTY parties. Suppose that in this situation, A was the one guilty of violating an agreement. Then B and C will be allowed the following rights:(1) Apply partnership assets to partnership liabilities and

distribute the cash surplus amongst themselves.(2) To be indemnified for the damages that A has caused.(3) To continue the business up to the agreed term.(4) To possess partnership property.While A will have the following rights:(1) Partners decide not to continue the business

(a) Right to claim his share in the cash surplus, but only the net proceeds of such meaning, the cash surplus less damages.

(2) Continue the business(a) Ascertain his interest in the business.(b) Freedom from existing and future liabilities of the

partnership.

Article 1838Where a partnership contract is rescinded on the

ground of the fraud or misrepresentation of one of the parties thereto, the party entitled to rescind is, without prejudice to any other right, entitled:

(1) To a lien on, or right of retention of, the surplus of the partnership property after satisfying the partnership liabilities to third persons for any sum of money paid by him for the purchase of an interest in the partnership and for any capital or advances contributed by him;

(2) To stand, after all liabilities to third persons have been satisfied, in the place of the creditors of the partnership for any payments made by him in respect of the partnership liabilities; and

(3) To be indemnified by the person guilty of the fraud or making the representation against all debts and liabilities of the partnership. (n)

Considers a case wherein a partner was induced to join the partnership by means of fraud or misrepresentation

The victim can ask for the recision or restitution of the contract of partnership (return of all his contributions)

He has the right to the surplus for certain purposes He has the rights of a 3rd person or a subrogated creditor

after the liabilities have already been paid to recollect what he paid when he entered into the partnership.

He is entitled to be indemnified for all debts and liabilities that he paid for during his time in the partnership.

Article 1839In settling accounts between the partners after

dissolution, the following rules shall be observed, subject to any agreement to the contrary:

(1) The assets of the partnership are:(a) The partnership property(b) The contributions of the partners necessary

for the payment of all the liabilities specified in No. 2

(2) The liabilities of the partnership shall rank in order of payment, as follows:(a) Those owing to creditors other than

partners(b) Those owing to partners other than for

capital and profits(c) Those owing to partners in respect of

capital(d) Those owing to partners in respect of

profits(3) The assets shall be applied in the order of their

declaration in No. 1 of this article to the satisfaction of the liabilities

(4) The partners shall contribute, as provided by Article 1797, the amount necessary to satisfy the liabilities

(5) An assignee for the benefit of the cr4editor or any person appointed by the court shall have the right to enforce the contributions specified in the preceding number.

(6) Any partner or his legal representative shall have the right to enforce the contributions specified in No. 4, to the extent of the amount which he has paid in excess of his share of the liability.

(7) The individual property of a deceased partner shall be liable for the contributions specified in No. 4

(8) When partnership property and the individual properties of the partners are in possession of a court for distribution, partnership creditors shall have priority on partnership property and separate creditors on individual property, saving the rights of lien or secured creditors

(9) Where a partner has become insolvent or his estate is insolvent, the claims against his separate property shall rank in the following order:(a) Those owing to separate creditors(b) Those owing to partnership creditors(c) Those owing to partners by way of

contribution (n)

Considers the case of liquidation and the distribution of partnership assets

Liquidation is when all the assets of the partnership is converted to cash.

Total assets will include GOODWILL as well as the original CONTRIBUTIONS of the partners.

Order of payment during liquidation:(1) 3rd persons/outside creditors(2) Partner creditors (partners who have claims)(3) Normal partners (all partners)

(a) In accordance with the agreement(b) In proportion to their contribution

Article 1840In the following cases, creditors of the dissolved

partnership are also creditors of the person or partnership continuing the business:

(1) When any new partner is admitted into an existing partnership, or when any partner retires and assigns (or the representative of the deceased partner assigns) his rights in partnership property to two or more of the partners, or to one or more of the partners and one or more third persons, if the business is continued without liquidation of the partnership affairs;

(2) When all but one partner retire and assign (or the representative of a deceased partner assigns) their rights in partnership property to the remaining partner, who continues the business without liquidation of partnership affairs, either alone or with others;

(3) When any partner retires or dies and the business of the dissolved partnership is continued as set forth in Nos. 1 and 2 of this article, with the consent of the retired partner or the representative of the deceased partner, but without any assignment of his right in partnership property;

(4) When all the partners or their representatives assign their rights in partnership property to one or more third persons who promise to pay the debts and who continue the business of the dissolved partnership;

(5) When any partner wrongfully causes a dissolution and the remaining partners continue the business under the provisions of Article 1837, second paragraph, No. 2, either alone or with others, and without liquidation of the partnership affairs;

(6) When a partner is expelled and the remaining partners continue the business either alone or with others without liquidation of the partnership affairs.

The liability of a third person becoming a partner in the partnership continuing the business, under this article, to the creditors of the dissolved partnership shall be satisfied out of the partnership property only, unless there is a stipulation to the contrary.

When the business of a partnership after dissolution is continued under any conditions set forth in this article, the creditors of the dissolved partnership, as against the separate creditors of the retiring or deceased partner or the representative of the deceased partner, have a prior right to any claim of the retired partner or the representative of the deceased partner against the person or partnership continuing the business, on account of the retired or deceased partner’s interest in the dissolved partnership or on account of any consideration promised for such interest or for his right in partnership property.

Nothing in this article shall be held to modify any right of creditors to set aside any assignment on the ground of fraud.

The use by the person or partnership continuing the business of the partnership name, or the name of a deceased partner as part thereof, shall not of itself make the individual property of the deceased partner liable for any debts contracted by such person or partnership. (n)

Explains the rights of the creditor in case of partnership dissolution because of membership changes and the business is continued without liquidation.

The membership changes include RETIREMENT, EXPULSION, DEATH or ADDITION.

Note that the creditor of the OLD partnership will still be the creditor of the NEW partnership if there is still an old partner/original partner with the NEW partnership. (debt will not be cleared or discharged)

The creditor will continue to be the creditor of the remaining/new partnership in all cases except when:(1) Rights are assigned to other people (no old partners)(2) Unless there is a promise to pay debt from the new

partners or if the creditor can set aside the right of the new partners on the ground of fraud.

Article 1841When any partner retires or dies, and the business

is continued under any of the conditions set forth in the preceding article, or in Article 1837, second paragraph, No. 2, without any settlement of accounts as between him or his estate and the person or partnership continuing the business, unless otherwise agreed, he or his legal representative as against such person or partnership may have the value of his interest at the date of dissolution ascertained, and shall receive as an ordinary creditor an amount equal to the value of his interest in the dissolved partnership with interest, or, at his option or at the option of his legal representative, in lieu of interest, the profits attributable to the use of his right in the property of the dissolved partnership; provided that the creditors of the dissolved partnership as against the separate creditors, or the representative of the retired or deceased partner, shall have priority on any claim arising under this article, providing by Article 1840, third paragraph. (n)

Suppose that A retires but B and C continue the business without liquidation. What are the rights of A?The rights of A are as follows:(1) That his interest be ascertained as of dissolution date(2) Collect his interest in the partnership plus interest or

profits by the use of his right to these as a creditorIf A dies, and the same situation occurs (he did not retire), then his legal representatives have the same rights as mentioned above.

Article 1842The right to an account of his interest shall accrue

to any partner, or his legal representative as against the winding up partners or the surviving partners or the person or partnership continuing the business, at the date of dissolution, in the absence of any agreement to the contrary. (n)

Who can demand to know how much his interest is in the partnership and from whom?All involved parties can demand to know how much his interest is. He can demand to know these from the SURVIVING, CONTINUING and WINDING UP partners.

CHAPTER 4 – LIMITED PARTNERSHIP

Article 1843A limited partnership is one formed by two or more

persons under the provisions of the following article, having as members one or more general partners and one or more limited partners. The limited partners as such shall not be bound by the obligations of the partnership.

Defines what a limited partnership is. It is sufficient that there is 1 general and 1 limited partner in

a limited partnership. The reason for the existence of a limited partnership is to

address the needs of all those who wish to join a partnership without the risk of losing any personal property.

Characteristics:(1) Comply with the statutory requirements of Article 1824(2) General partners control the partnership and are

personally liable for partnership debts.(3) Limited partners contribute capital and are not liable

personally for partnership debts.

Article 1844Two or more persons desiring to form a limited

partnership shall:(1) Sign and swear to a certificate, which shall state

(a) The name of the partnership, adding thereto the word “Limited”

(b) The character of the business(c) The location of the principal place of

business(d) The name and place of residence of each

member, general and limited partners being respectively designated

(e) The term for which the partnership is to exist

(f) The amount of cash and a description of and the agreed value of the other property contributed by each limited partner

(g) The additional contributions, if any, to be made by each limited partner and the times at which or events on the happening of which they shall be made

(h) The time, if agreed upon, when the contribution of each limited partner is to be returned

(i) The share of the profits or the other compensation by way of income which each limited partner shall receive by reason of his contribution

(j) The right, if give, of a limited partner to substitute an assignee as contributor in his place, and the terms and conditions of the substitution

(k) The right, if given, of the partners to admit additional limited partners

(l) The right, if given, of one or more of the limited partners to priority over other limited partners, as to contributions or as to compensation b way of income, and the nature of such priority

(m) The right, if given, of the remaining general partner or partners to continue the business on the death, retirement, civil interdiction, insanity or insolvency of a general partner

(n) The right, if given, of a limited partner to demand and receive property other than cash in return for his contribution

(2) File for record the certificate in the Office of the Securities and Exchange Commission.

A limited partnership is formed if there has been substantial compliance in good faith with the foregoing requirements.

Two requirements in a limited partnership:(1) Sign and swear to a certificate containing the data

mentioned in the article (a) to (n)(2) Have the certificate recorded with the SEC

Can a limited partnership be formed orally?No. A limited partnership contract is not perfected by mere agreement as it requires formal proceedings.

Partnership must SUBSTANTIALLY comply with the requirements.

What if the partnership does not comply with the requirements? Will it be void?No, it will only become a GENERAL PARTNERSHIP.

Why is it that the certificate must be registered?Registration is the notice, to all 3rd persons who will be dealing with or are dealing with the partnership, that there are partners with limited liability.

The presumption is that when a partnership deals with a 3rd

person, the partnership is a GENERAL partnership.

Article 1845The contributions of a limited partner may be cash

or other property, but not services.

Limited partners can only contribute cash or other property, not services because if he does so, then he shall become a GENERAL INDUSTRIAL PARTNER.

Contribution must be given immediately. If he has promised additional contribution, then it should be given on the date promised or agreed upon.

Article 1846The surname of a limited partner shall not appear in

the partnership name unless:(1) It is also the surname of a general partner(2) Prior to the time when the limited partner

became such, the business had been carried on under a name in which his surname appeared

A limited partner whose surname appears in a partnership name contrary to the provisions of the first paragraph is liable as a general partner to partnership creditors who extend credit to the partnership without actual knowledge that he is not a general partner.

The surname of the limited partner should not appear except if it is also the surname of a general partner or if at the time of his admission, it was already being used.

If the limited partner allows that his surname be used, then he shall be held liable as a general partner as to 3 rd persons who extended credit not knowing he was a limited partner.

If the creditor has knowledge of his being a limited partner, then this rule shall not apply.

Article 1847If the certificate contains a false statement, one who

suffers loss by reliance on such statement may hold liable any party to the certificate who knew the statement to be false:

(1) At the time he signed the certificate(2) Subsequently, but within a sufficient time

before the statement was relied upon to enable

him to cancel or amend the certificate, or to file a petition for its cancellation or amendment as provided in Article 1865.

If there are false statements in the certification and 3 rd

persons should suffer loss due to these, then he can hold liable all those who had knowledge of the false statement at the time certification was signed.

The same shall apply if the partners concerned had sufficient time to have the certificate cancelled but did not do so.

Article 1848A limited partner shall not become liable as a

general partner unless, in addition to the exercise of his rights and powers as a limited partner, he takes part in the control of the business.

The limited partner who, aside from his powers, participates in the management of the partnership becomes liable as a general partner.

Article 1849After the formation of a limited partnership,

additional limited partners may be admitted upon filing an amendment to the original certificate in accordance with the requirements of Article 1865.

Suppose that in a limited partnership, there are only 2 general partners and 1 limited partner. Can you add another limited partner?Yes, amend the certificate under Article 1865 and do so.

Article 1850A general partner shall have all the rights and

powers and be subject to all the restrictions and liabilities of a partner in a partnership without limited partners. However, without the written consent or ratification of the specific act by all the limited partners, a general partner or all of the general partners have no authority to:

(1) Do any act in contravention of the certificate(2) Do any act which would make it impossible to

carry on the ordinary business of the partnership

(3) Confess a judgment against the partnership(4) Possess partnership property, or assign their

rights in specific partnership property, for other than a partnership purpose

(5) Admit a person as a general partner(6) Admit a person as a limited partner, unless the

right to do so is given in the certificate(7) Continue the business with partnership

property on the death, retirement, insanity, civil interdiction or insolvency of a general partner, unless the right to do so is given in the certificate

Refers to the power, liabilities and limitations of general partners in a limited partnership.

A general partner has the same rights, powers and limitations in a limited partnership as when he would have been in a general partnership.

A general partner, without written consent from ALL limited partners, cannot:(1) Do any act in contravention of the certificate(2) Do any act which would make it impossible to carry on

the ordinary business of the partnership(3) Confess a judgment against the partnership

(4) Possess partnership property, or assign their rights in specific partnership property

(5) Admit a person as a general partner(6) Admit a person as a limited partner, unless the right to

do so is given in the certificate(7) Continue the business with partnership property on the

death, retirement, insanity, civil interdiction or insolvency of a general partner, unless the right to do so is given in the certificate

If there are 100 general partners and 1 dies, the partnership will be dissolved. However, this rule will not apply in the case of limited partners. If there are 5 limited partners and 1 dies, then the partnership will still continue.

A limited partnership will continue (not dissolve) even in cases of the death of a limited partner as long as there is still ONE surviving limited partner in the partnership.

Article 1851A limited partner shall have the same rights as a

general partner to:(1) Have the partnership books kept at the principal

place of business of the partnership, and at a reasonable hour to inspect and copy any of them

(2) Have on demand true and full information of all things affecting the partnership, and a formal account of partnership affairs whenever circumstances render it just and reasonable

(3) Have dissolution and winding up by decree of court

A limited partner shall have the right to receive a share of the profits or other compensation by way of income and to the return of his contribution as provided in Articles 1856 and 1857.

This Article is important as far as the limited partner is concerned as it shows them what rights they have.

A limited partner is given the same rights as the general partner, that is:(1) They can require that the partnership books be kept at

the principal place of business.(2) Inspect and copy partnership books.(3) Demand true and full information regarding all matters

concerning the partnership.(4) Demand for legal winding up or dissolution(5) Share in profits, other compensation by way of income

and the return of contributions.

Article 1852Without prejudice to the provisions of Article 1848,

a person who has contributed to the capital of a business conducted by a person or partnership erroneously believing that he has become a limited partner in a limited partnership, is not, by reason of his exercise of the rights of a limited partner, a general partner with the person or in the partnership carrying on the business, or bound by the obligations of such person or partnership, provided that on ascertaining the mistake he promptly renounces his interest in the profits of the business, or other compensation by way of income.

Refers to a failure to create a limited partnership. Suppose A, B and C form a limited partnership, with C being

the limited partner with a contribution of P20,000.00. The certificate that they sign says that C is a general partner. What, then, if C, believing himself to be a limited partner, begins to exercise his rights as such?

C cannot be held liable, as a general partner, if upon his realization of the error, he promptly renounces his involvement with the partnership, except:(1) If he participates in the management of the partnership(2) If his surname is used in the partnership name

Consider the situation above, but this time, C’s name is not mentioned at all. What happens then?If that is the case, then there is no limited partnership because there is no limited partner mentioned .

The law anticipates a situation where in the person is a limited partner but his name is not mentioned as such or not mentioned at all in the certificate.

Article 1853A person may be a general partner and a limited

partner in the same partnership at the same time, provided that this fact shall be stated in the certificate provided for in Article 1844.

A person who is a general, and also at the same time a limited partner, shall have all the rights and powers and be subject to all the restrictions of a general partner; except that, in respect to his contribution, he shall have the rights against the other members which he would have had if he were not also a general partner.

A partner can be a limited and general partner at the same time provided that this fact is STATED IN THE CERTIFICATE that he signs.

Who are they to 3rd persons then?They are general partners as to 3rd persons but as amongst the partners themselves, they are seen as limited partners with regards to their contribution.

Article 1854A limited partner also may loan money to and

transact with other businesses with the partnership, and, unless he is also a general partner, receive on account of resulting claims against the partnership, with general creditors, a pro rata share of the assets. No limited partner shall in respect to any such claim:

(1) Receive or hold as collateral security any partnership property

(2) Receive from a general partner or the partnership any payment, conveyance, or release from liability, if at the time the assets of the partnership are not sufficient to discharge partnership liabilities to persons not claiming as general or limited partners.

The receiving of collateral security, or a payment, conveyance or release in violation of the foregoing provisions is a fraud on the creditors of the partnership.

Provides that a limited partner can extend credit or transact with partnerships that he is part of.

He is also entitled to partnership assets pro rata to creditors but it cannot be used as collateral from the partnership.

Suppose X & Co. owes D a sum of P20,000.00 and C, a limited partner, P20,000.00. The total assets of the partnership is P50,000.00. How shall these be settled?Both C and D can simultaneously collect from the partnership as partnership assets are sufficient to cover BOTH. However, if partnership assets are only P20,000.00, C cannot share in it because it would prejudice D’s claim.

Article 1855Where there are several limited partners the

members may agree that one or more of the limited partners shall have a priority over other limited partners as to the return of their contributions, as to their

compensation by way of income, or as to any other matter. If such an agreement is made, it shall be stated in the certificate, and in the absence of such a statement, all the limited partners shall stand upon equal footing.

Suppose that there are three limited partners. These partners can agree (because there are more than 1) that one of them can have priority over the others provided that such SHOULD BE STATED IN THE CERTIFICATE.

Article 1856A limited partner may receive from the partnership

the share of the profits or the compensation by way of income stipulated for in the certificate; provided, that after such payment is made, whether from the property of the partnership or that of a general partner, the partnership assets are in excess of all liabilities of the partnership except liabilities to limited partners on account of their contributions and to general partners.

The limited partner is entitled to share in payment by share in profits or other compensation by way of income provided that the partnership assets are sufficient to meet such.

To determine total liability, do not deduct contributed capital. Liabilities owed to general partners are not considered part

of the partnership’s total liabilities. The ability of the limited partner to share is based on the

total liability, which must be known. Suppose that A, B and C are in partnership wherein C is the

limited partner and total assets are P50,000.00. They owe D a sum of P10,000.00, C P15,000.00 and A P50,000.00, is C still entitled to share in the surplus after clearing liabilities?Yes, because total liabilities in this case is only P25,000.00 and the assets are still sufficient to pay out the surplus.

Article 1857A limited partner shall not receive from a general

partner or out of partnership property any part of his contribution until:

(1) All liabilities of the partnership, except liabilities to general partners and to limited partners on account of their contributions, have been paid or there remains property of the partnership sufficient to pay them

(2) The consent of all members is had, unless the return of the contribution may be rightfully demanded under the provisions of the second paragraph

(3) The certificate is cancelled or so amended as to set forth the withdrawal or reduction

Subject to the provisions of the first paragraph, a limited partner may rightfully demand the return of his contribution:

(1) On the dissolution of a partnership(2) When the date specified in the certificate for its

return has arrived(3) After he has given six months’ notice in writing

to all other members, if no time is specified in the certificate, either for the return of the contribution or for the dissolution of the partnership.

In the absence of any statement in the certificate to the contrary or the consent of all members, a limited partner, irrespective of the nature of his contribution, has only the right to demand and receive cash in return for his contribution.

A limited partner may have the partnership dissolved and its affairs wound up when:

(1) He rightfully but unsuccessfully demands the return of his contribution

(2) The other liabilities of the partnership have not been paid, or the partnership property is insufficient for their payment as required by the first paragraph, No. 1, and the limited partner would otherwise be entitled to the return of his contribution.

What are the requisites for the limited partner to be entitled to the return of his contribution?(1) When, after deducting partnership liabilities, partnership

assets are sufficient to do so.(2) If he has the consent of all partners unless the right can

be demanded.(3) The certificate must be amended to reflect the return of

his contribution. When may a limited partner rightfully demand the return of

his contribution?(1) During dissolution(2) Upon arrival of the date of return of his contribution(3) After he has given 6 months’ notice, WRITTEN, and

there was no date of return nor dissolution The limited partner is only entitled to the return of his

contribution, IN CASH, except:(1) If it was agreed upon(2) He has the consent of all the partners

When can a limited partner ask for dissolution?(1) He rightfully but unsuccessfully demanded the return(2) If he was entitled to receive his contribution and the

certificate was already amended but partnership assets are not sufficient to pay off partnership creditors.

Article 1858A limited partner is liable to the partnership:(1) For the difference between his contribution as

actually made and that stated in the certificate as having been made

(2) For any unpaid contribution which he agreed in the certificate to make in the future of the time and on the conditions stated in the certificate

A limited partner holds as trustee for the partnership:

(1) Specific property stated in the certificate as contributed by him, but which was not contributed or which has been wrongfully returned

(2) Money or other property wrongfully paid or conveyed to him on account of his contribution

The liabilities of a limited partner as set forth in this article can be waived or compromised only by the consent of all members; but a waiver or compromise shall not affect the right of a creditor of a partnership who extended credit or whose claim arose after the filing and before a cancellation or amendment of the certificate, to enforce such liabilities.

When a contributor has rightfully received the return in whole or in part of the capital of his contribution, he is nevertheless liable to the partnership for any sum, not in excess of such return with interest, necessary to discharge its liabilities to all creditors who extended credit or whose claims arose before such return.

Suppose A promises to contribute P20,000.00 but only pays P15,000.00. What is his obligation to the partnership?Then A must pay the P5,000.00 difference NOW.

Suppose C, the limited partner, promises to contribute P20,000.00 more. What should be done?

It should be paid on the date he promised to pay it. When can a limited partner be held as trustee?

(1) When he promises specific things but does not follow through with the promise of delivery

(2) In circumstances of wrongful returns(3) In cases of money and/or property that is wrongfully

conveyed Can the partnership waive the difference of contributions?

(EX: the first situation)Yes, as long as it will not affect creditors who had extended credit before the waiver of such.

Can the partnership reclaim the returns if it is needed? (EX: C’s contribution was already returned but the partnership needs it to finish paying off D, a creditor)Yes, as long as the claim came into existence before the return of contribution.

Article 1859A limited partner’s interest is assignable.A substituted limited partner is a person admitted to

all the rights of a limited partner who has died or has assigned his interest in a partnership.

An assignee, who does not become a substituted limited partner, has no right to require any information or account of the partnership transactions or to inspect the partnership books; he is only entitled to receive the share of the profits or other compensation by way of income, or return of his contribution, to which his assignor would otherwise be entitled.

An assignee shall have the right to become a substituted limited partner if all the members consent thereto or if the assignor, being thereunto empowered by the certificate, gives the assignee that right.

An assignee becomes a substituted limited partner when the certificate is appropriately amended in accordance with Article 1865.

The substituted limited partner has all the rights and powers, and is subject to all the restrictions and liabilities of his assignor, except those liabilities of which he was ignorant at the time he became a limited partner and which could not be ascertained from the certificate.

The substitution of the assignee as a limited partner does not release the assignor from liability to the partnership under Articles 1847 and 1858.

The interest of a limited partner can be assigned. His interest is his share in profits, other compensation by way of income or his return.

A substituted limited partner is the person admitted and has all the rights of a limited partner who dies or has assigned his interest.

What if the person is not qualified to be a substituted limited partner?Then he shall remain an assignee with the following rights and limitations:(1) Receive share in profits, other compensation by way of

income or return of contribution(2) Cannot demand information on partnership activities nor

inspect partnership books. When will the assignee become a substituted limited

partner?(1) If consent from all other partners was given(2) If the limited partner is empowered by the certificate to

constitute a substituted limited partner, and the certificate is amended under Article 1865

What are the rights of a substituted limited partner?He has all the powers, limitations and liabilities as his assignor except those which he was ignorant of at the time

he became a limited partner and those that could not be ascertained from the certificate.

What about the assignor?The assignor is still liable for false statements and claims before the admittance of a substitute limited partner, as in Articles 1847 and 1858.

Article 1860The retirement, death, insolvency, insanity or civil

interdiction of a general partner dissolves the partnership, unless the business is continued by the remaining general partners:

(1) Under a right so to do stated in the certificate(2) With the consent of all the members

Again, this does not apply to limited partners because as long as there is ONE limited partner still living, then the partnership is continued.

General partners can only continue the business if:(1) The right was stated in the certificate(2) All partners consent to such.

Article 1861On the death of a limited partner, his executor or

administrator shall have the rights of a limited partner for the purpose of settling his estate, and such power as the deceased had to constitute his assignee a substituted limited partner.

The estate of a deceased limited partner shall be liable for all his liabilities as a limited partner.

The executor/administrator has the power to settle the dead partner’s estate and those to constitute his assignee as a substituted limited partner, if the limited partner originally had the power to do so, or was allowed such.

The estate of a limited partner will pay for all his liabilities as a limited partner.

Article 1862On due application to a court of competent,

jurisdiction by any creditor of a limited partner, the court may charge the interest of the indebted limited partner with payment of the unsatisfied amount of such claim, and may appoint a receiver, and make all other orders, directions, and inquiries which the circumstances of the case may require.

The interest may be redeemed with the separate property of any general partner, but may not be redeemed with partnership property.

The remedies conferred by the first paragraph shall not be deemed exclusive of others which may exist.

Nothing in this Chapter shall be held to deprive a limited partner of his statutory exemption.

Similar to Article 1814 for general partnerships. If a 3rd person files a case against the limited partners for

non-payment or non-compliance with their contract, he can ask for the partners’ interests to be attached.

The attached interest may be redeemed using separate general partners’ property but not partnership property UNLESS all partners have consented to such.

Article 1863In settling accounts after dissolution, the liabilities

of the partnership shall be entitled to payment in the following order:

(1) Those to creditors, in the order of priority as provided by the law, except those to limited

partners on account of their contributions, and to general partners

(2) Those to limited partners in respect to their share of the profits and other compensation by way of income on their contributions

(3) Those to limited partners in respect to the capital of their contributions

(4) Those to general partners other than for capital and profits

(5) Those to general partners in respect to profits(6) Those to general partners in respect to capitalSubject to any statement in the certificate or to

subsequent agreement, limited partners share in the partnership assets in respect to their claims for capital, and in respect to their claims for profits or for compensation by way of income on their contribution respectively, in proportion to the respective amounts of such claims.

Who has priority over distribution of assets in a limited partnership?(1) Creditors, including limited partners who have a claim

against the partnership.(2) Limited partners’ share in profits(3) Limited partners’ return of capital contribution(4) General partners who have claims against the

partnership(5) General partners’ share in profits(6) General partners’ return of capital contribution

The difference of this with general partnerships is that in a general partnership, capital contributions are returned BEFORE profits from surplus are shared.

Article 1864The certificate shall be cancelled when the

partnership is dissolved or all limited partners cease to be such.

A certificate shall be amended when:(1) There is a change in the name of the

partnership or in the amount or character of the contribution of any limited partner

(2) A person is substituted as a limited partner(3) An additional limited partner is admitted(4) A person is admitted as a general partner(5) A general partner retires, dies, becomes

insolvent or insane, or is sentenced to civil interdiction and the business is continued under Article 1860

(6) There is a change in the character of the business of the partnership

(7) There is a false or erroneous statement in the certificate

(8) There is a change in the time as stated in the certificate for the dissolution of the partnership or for the return of a contribution

(9) A time is fixed for the dissolution of the partnership, or the return of a contribution, no time having been specified in the certificate

(10) The members desire to make a change in any other statement in the certificate in order that it shall accurately represent the agreement among them.

When should a certificate be cancelled?(1) Upon DISSOLUTION(2) When ALL limited partners cease to be such

When should the certificate be amended?In all cases other than those that will cause the certificate to be cancelled.

Article 1865The writing to amend a certificate shall:(1) Conform to the requirements of Article 1844 as

far as necessary to set forth clearly the change in the certificate which it is desired to make

(2) Be signed and sworn to by all members, and an amendment substitution a limited partner or adding a limited or general partner shall be signed also by the member to be substituted or added, and when a limited partner is to be substituted, the amendment shall also be signed by the assigning limited partner.

The writing to cancel a certificate shall be signed by all members.

A person desiring the cancellation or amendment of a certificate, if any person designated in the first and second paragraphs as a person who must execute the writing refuses to do so, may petition the court to order a cancellation or amendment thereof.

If the court finds that the petitioner has a right to have the writing executed by a person who refuses to do so, it shall order the Office of the Securities and Exchange Commission where the certificate is recorded, to record the cancellation or amendment of the certificate; and when the certificate is to be amended, the court shall also cause to be filed for record in the said office a certified copy of its decree setting forth the amendment.

A certificate is amended or cancelled when there is filed for record in the Office of the Securities and Exchange Commission where the certificate is recorded:

(1) A writing in accordance with the provisions of the first or second paragraph

(2) A certified copy of the order of court in accordance with the provisions of the fourth paragraph

(3) After the certificate is duly amended in accordance with this article, the amended certificate shall thereafter be for all purposes the certificate provided for in this Chapter.

What are the requisites for certificates to be amended or cancelled?(1) It must be in writing(2) It must be signed AND sworn by ALL concerned parties(3) It must be registered with the SEC

Article 1866A contributor, unless he is a general partner, is not

a proper party to proceedings by or against a partnership, except where the object is to enforce a limited partner’s right against or liability to the partnership.

A limited partner is a mere contributor, meaning, he is practically a stranger. This is because he has no participation in management and control and is only liable to the partnership, not to 3rd persons and if he is filed against as a general partner, he can file a counterclaim for wrongful inclusion.

2 exceptions to this rule:(1) To enforce his right against the partnership(2) If he refuses to restore his contribution when the

partnership assets are not sufficient to pay creditors

Article 1867A 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.