UP Partnership

UP COLLEGE OF LAW AGENCY & PARTNERSHIP BAR OPERATIONS COMMISSION

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Contract of Partnership DEFINITION By 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. [Article 1767] Article 1767 defines partnership from the viewpoint of a contract. From the contract arises the partnership relation. As a form of business organization,

partnership falls between two extremes – single proprietorship and corporation. [De Leon, Comments and Cases on Partnership, Agency and Trusts (2010), hereinafter referred to as "De Leon (2010)"] ELEMENTS There is a contract of partnership when: (1) There is a meeting of the minds; (2) To form a common fund; (3) With intention that profits and losses will be

divided among the contracting parties. ESSENTIAL FEATURES A partnership contract has the following essential features: (1) There must be a valid contract. (2) The parties must have legal capacity. (3) There must be a mutual contribution of money,

property, or industry to a common fund. (4) The object must be lawful. (5) The primary purpose must be to obtain profits

and to divide the same among the parties. (6) The partnership has a juridical personality

separate from individual partners [Article 1768]. As such, "Any immovable property or an interest therein may be acquired in the partnership name. Title so acquired can be conveyed only in the partnership name." [Article 1774]

EFFECT OF UNLAWFUL OBJECT If the partnership has an unlawful object or purpose: (1) The contract is void ab initio. [Article 1409(1)] (2) Once dissolved by judicial decree:

(a) The profits shall be confiscated by favor of the State; (b) The instruments or tools and proceeds of the crime shall also be forfeited in favor of the State. [Article 1770] (c) The contributions of partners shall not be confiscated unless they are instruments or tools of the crime. [De Leon (2010)]

Note: A partnership is dissolved by operation of law (even without judicial decree) when the business becomes unlawful. ASSOCIATIONS WITHOUT LEGAL PERSONALITY Associations and societies with the following characteristics has no legal personality and is governed by the provisions of co-ownership: (1) The articles are kept secret among the members;

and (2) Any one of the members may contract in his own

name with third persons. [Article 1775] It may, however, be sued by third persons under the

common name it uses. [Section 15, Rule 3, Rules of Court]

CHARACTERISTICS The contract of partnership is: (1) Consensual, because it is perfected by mere

consent. (2) Nominate, because it has a specific name. (3) Bilateral or multilateral, because it is entered into

between two or more persons. (4) Principal, because its existence does not depend

on another contract. (5) Onerous, because money, property or industry are

contributed by the parties. (6) Preparatory, because it is entered into to carry out

a business or specific venture. (7) Commutative, because the undertaking of each is

considered as equivalent of that of the others. PARTIES TO THE CONTRACT General rule: Any person capacitated to contract may enter into a contract of partnership. As such, the following persons cannot enter into a contract of partnership: (1) Those suffering from civil interdiction; (2) Minors; (3) Insane or demented persons; (4) Deaf-mutes who do not know how to write; (5) Incompetents who are under guardianship. Exceptions: The capacity of the following persons to enter into a contract of partnership, though capacitated to contract generally, are limited: (1) Those who are prohibited from giving each other

any donation or advantage cannot enter into a universal partnership. [Article 1782]

(2) A corporation cannot enter into a partnership in the absence of express authorization by statute or charter.

Ratio: Otherwise, as a result of the mutual agency between partners, a corporation would be bound by the acts of persons other than its duly appointed or authorized officers or agents. This is inconsistent


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with the policy of the law that a corporation should manage its own affairs. Also, the arrangement would allow corporate property to be subject to risks not contemplated by the stockholders when they originally invested. [Mendiola v. CA (2006)] Although a corporation cannot enter into a partnership contract, it may, however, engage in a joint venture with others [Auerbach vs. Sanitary Wares Manufacturing Corp. (1989)]. There is no prohibition against a partnership being a partner in another partnership. [De Leon (2010)] OBJECT OF THE CONTRACT OBJECT OF UNIVERSAL PARTNERSHIP A universal partnership may refer to: (1) All present property:

(a) The partners contribute all the property which belongs to them to a common fund, with the intention of dividing the same among themselves, as well as the profits they may acquire therewith. [Article 1778]

(b) The property contributed includes all those belonging to the partners at the time of the constitution of the partnership.

(c) A stipulation for the common enjoyment of any other profits may also be made. However, the property which the partners may acquire subsequently by inheritance, legacy or donation cannot be included in such stipulation, except the fruits thereof. [Article 1779]

(2) All the profits: (a) It comprises all that the partners may acquire

by their industry or work during the existence of the partnership.

(b) Only the usufruct over the property of the partners passes to the partnership. [Article 1780] When the articles of universal partnership does not specify its nature (all present property or all the profits), the partnership will be considered as one only of all the profits. [Article 1781]

OBJECT OF PARTICULAR PARTNERSHIP A particular partnership has for its object determinate things, their use or fruits, or a specific undertaking, or the exercise of a profession or vocation. [Article 1783] FORM OF THE CONTRACT General rule: The contract may be constituted in any form. [Article 1771]

Exceptions: (1) Where immovable property or real rights are contributed: (a) The contract must appear in a public instrument;

and (b) Attached to such instrument must be an

inventory, signed by the parties, of the property contributed. [Articles 1771 and 1773]

(2) Where the capital is at least P3,000, in money or property:

(a) The contract must appear in a public instrument; and

(b) It must be recorded in the SEC. Failure to comply with these requirements, however, does not affect the liability of the partnership and the partners to third persons. [Articles 1768 and 1772]

DURATION OF THE CONTRACT COMMENCEMENT A partnership begins from the moment of the execution of the contract, unless it is otherwise stipulated. [Article 1784] TERM As to period, a partnership may either be: (1) For a fixed term or particular undertaking; or (2) At will, the formation and dissolution of which

depend on the mutual desire and consent of the parties. Any one of the partners may, at his sole pleasure, dictate the dissolution of the partnership, even in bad faith, subject to liability for damages. [Ortega v. CA (1995)]

EXTENSION A partnership term may be extended by: (1) Express renewal of the agreement; or (2) Implied renewal, when the requisites concur:

(a) The partnership is for a fixed term or particular undertaking;

(b) It is continued after the termination of the fixed term or particular undertaking without any express agreement.

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. The effect of such continuation is that the right and duties of the partners remain the same as they were at such termination of the period, but this time, the partnership is considered to be at will. [Article 1785]


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RULES TO DETERMINE EXISTENCE When the intent of the parties is clear, it shall govern. When it does not clearly appear, the following rules apply: (1) Persons who are not partners to each other are

not partners as to third persons. Exception: A person not a partner may be considered

a partner by estoppel. (2) Co-ownership or co-possession does not of itself

establish a partnership, even when there is sharing of profits in the use of the property.

(3) Sharing of gross returns does not of itself establish a partnership, even when the parties have joint or common 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 a partner.

Exceptions: No such inference is drawn if the profits are received in payment: (a) As a debt by installments or otherwise; (b) As wages of an employee of 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 amount of

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

business or other property by installments or otherwise. [Article 1769]

RELATIONS CREATED (1) Among the partners themselves. (2) Between the partners and the partnership. (3) Between the partnership and third persons with

whom it contracts. (4) Between the partners and such third persons. KINDS OF PARTNERSHIP AS TO LEGALITY OF EXISTENCE (1) Partnership de jure is one which has complied with all the requisites for its lawful establishment. (2) Partnership de facto is one which failed to so comply. AS TO OBJECT (1) Universal partnership: (a) Of all present property; (b) Of profits; (2) Particular partnership. AS TO DURATION (1) For a fixed term or particular undertaking; (2) At will.

AS TO LIABILITY OF PARTNERS (1) General partnership, consisting of general partners

only, who are liable pro rata for partnership obligations with all their after exhaustion of partnership assets;

(2) Limited partnership, includes, aside from general partner/s, limited partners, who are not personally liable for partnership obligations.

AS TO PUBLICITY (1) Secret partnership, where the existence of certain

persons as partners is not made known by the partners;

(2) Open or notorious partnership, the existence of which is made known to the public by the partners.

AS TO PURPOSE (1) Commercial or trading partnership, for transaction

of business; (2) Professional or non-trading, for exercise of a

profession. A profession has been defined as "a group of men pursuing a learned art as a common calling in the

spirit of public service — no less a public service because it may incidentally be a means of livelihood." [In the Matter of the Petition for Authority to Continue Use of Firm name "Sycip, Salazar, etc."/"Ozaeta, Romulo, etc." (1979)] A professional partnership is a particular partnership. [Article 1783] KINDS OF PARTNERS (1) Capitalist, whose contribution is money or

property; (2) Industrial, whose contribution is only his industry; (3) General, whose liability to third persons extends

to his separate property; (4) Limited, whose liability to third persons is limited

to his capital contribution; (5) Managing, designated to manage the affairs or

business of the partnership; (6) Liquidating, takes charge of the winding up of

partnership affairs; (7) By estoppel, who is not really a partner but is

liable as such for the protection of innocent third persons;

(8) Continuing, who continues the business after dissolution of the partnership by admission of a new partner, or retirement, death or expulsion of existing partners.

(9) Surviving, who remains a partner after dissolution by death of any partner;

(10)Subpartner, who is not a member of the partnership but contracts with a partner with


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regard to the share of the latter in the partnership;

(11) Ostensible, who takes active part in the business of the partnership and is known by the public;

(12)Secret, who takes active part in the business, but is unknown to the third persons as a partner;

(13) Silent, who does not take active part in the business, but may be known to be a partner by third persons; (14)Dormant, who does not take active part in the

business and is not known or held out as a partner;

(15)Original, who has been a partner since the constitution of the partnership;

(16)Incoming, who is about to be taken as a member into an existing partnership;

(17) Retiring, who is withdrawing from the partnership.

Industrial Partner Capitalist Partner

Form of contribution

Industry Money or property

Share in profits

Just and equitable share According to agreement; if none, in proportion to contribution

Share in losses

Exempted as to losses as between partners, but liable to third persons, without prejudice to reimbursement from capitalist partners

According to agreement; if none, in proportion to agreed share in the profits; if none, in proportion to contribution

Engaging in business

Cannot engage in business for himself, unless the partnership expressly permits him to do so; should he do so without permission, the capitalist partners (as well as industrial partners [De Leon (2010)]) may (a) exclude him from the firm, or (b) avail themselves of the benefits obtained in violation of the prohibition, with right to damages in either case [Article 1789]

Cannot engage, for his own account, in the same kind of business as that of the partnership, unless there is a stipulation to the contrary; should he do so, he shall bring to the common fund any profits accruing to him from his transactions and shall personally bear all the losses [Article 1808]

DISTINGUISHED FROM OTHER CONTRACTS

Partnership Joint Venture

Operates with firm name and legal personality

Operates with no firm name and legal personality

Generally relates to a continuing business of various transactions of a certain king

Usually limited to a single transaction

Corporations may not enter into a partnership

Corporations may enter into joint ventures

It would seem therefore that under Philippine law, a joint venture is a form of partnership and should thus be governed by the laws of partnership. [Auerbach vs. Sanitary Wares Manufacturing Corp. (1989)]

Partnership Co-Ownership

Generally created by either express or implied contract

Generally created by law, and may exist even without a contract

Has a separate juridical personality

Has no separate juridical personality

Generally, the purpose is to obtain profits

The purpose is common enjoyment of a thing or right

Duration has no limitation An agreement to keep a thing undivided for more than 10 years is not allowed

There is mutual agency between partners

There is no mutual representation among co-owners

Death or incapacity of a partner dissolves the partnership

Death or incapacity of a co-owner does not dissolve the co-ownership

Partner cannot dispose of his interest so as to make the assignee a partner, without consent of others

Co-owner can dispose of his share without consent of others

Partnership Corporation

Has juridical personality separate and distinct from its individual members

Can only act through agents


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Partnership Corporation

Composed of an aggregate of individuals

Distributes its profits to those who contributed capital to the business

Can only be organized where there is a law authorizing its organization

Taxable as a corporation

Created by agreement Created by law (with SEC approval)

Involves at least 2 persons Except for a corporation sole, requires at least 5 incorporators

Personality commences from the moment of execution of the contract

Personality commences from the issuance of certificate of incorporation

Can exercise any power authorized by partners

Can exercise only powers granted by law or those incidental to its existence

When management is not agreed upon, every partner may act for the partnership

Management is vested in the board of directors of trustees

Partners are generally liable for partnership debts

Stockholders are liable only to the extent of their shares

Partner cannot dispose of his interest so as to make the assignee a partner, without consent of others

Stockholder has the right to transfer his shares without consent of others

Duration has no limitation The term is 50 years, but may be extended

May be dissolved at any time by one or all of the partners

May only be dissolved with the consent of the state

Partnership Conjugal

Partnership of Gains

Created by voluntary agreement of 2 or more partners of either sex

Arises in case the spouses, of opposite sex, agree before marriage

Governed by agreement Governed by law

Partnership Conjugal

Partnership of Gains

Has juridical personality Has no juridical personality

Commencement date may be stipulated

Commencement is on the date of the celebration of the marriage, and any stipulation to the contrary is void

Share in profits may be stipulated; otherwise, in proportion to contribution

Share in profits is equal

Management shared by all partners, unless otherwise agreed upon

Administration belongs to the spouses jointly, but decision of husband prevails in disagreement

Partner can dispose of Interest even without consent of others

Spouse cannot dispose of interest during marriage, even with consent

Partnership Voluntary Association

Has juridical personality Has no juridical personality

Organized for profit Not always organized for profit

Capital is contributed Capital is not contributed, although fees are collected from members

Partnership is primarily liable; the partners are liable only subsidiarily

The members are liable individually for debts which they authorized or ratified

Share in profits may be stipulated; otherwise, in proportion to contribution

Share in profits is equal

Management shared by all partners, unless otherwise agreed upon

Administration belongs to the spouses jointly, but decision of husband prevails in disagreement

Partner can dispose of Interest even without consent of others

Spouse cannot dispose of interest during marriage, even with consent


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Rights and obligations of the partnership RIGHT TO CONTRIBUTION, IN GENERAL The mutual contribution to a common fund is the essence of the contract of partnership [De Leon (2010)]. As such, the partnership has a right to the contribution (or partners are obliged to contribute). The money or property thus contributed, or their use or fruits, becomes a property of the partnership. To complement this right of the partnership and as an incident of its separate and distinct juridical personality, it is allowed by law to acquire any immovable property or an interest therein. Title so acquired can be conveyed only in the partnership name [Article 1774]. OBLIGATION OF PARTNERS TO THE PARTNERSHIP WITH RESPECT TO CONTRIBUTION OF MONEY OR PROPERTY With respect to contribution of property, a partner is obliged to: (1) To contribute, at the beginning of the partnership

or at the stipulated time, the money, property or industry which he undertook to contribute;

(2) In case a specific and determinate thing is to be contributed:

(a) To warrant against eviction in the same manner as a vendor; and

(b) To deliver to the partnership the fruits of the property promised to be contributed, from the time they should have been delivered, without need of demand [Article 1786];

(3) In case a sum of money is to be contributed, or in case he took any amount from the partnership coffers, to indemnify the partnership for:

(a) Interest; and (b) Damages, from the time he should have

complied with his obligation, or from the time he converted the amount to his own use, respectively [Article 1788].

Article 1788 is an exception to the general rule that in obligations consisting in the payment of a sum of money, the indemnity for damages consists only in the payment of interest [Article 2209]. AMOUNT OF CONTRIBUTION General rule: The partners are obliged to contribute equal shares to the capital of the partnership.

Exception: When there is an agreement to the contrary, the contribution shall follow such agreement [Article 1790]. DETERMINING VALUE OF CONTRIBUTION IN GOODS To determine the value when the contribution consists, in whole or in part, of goods, their appraisal must be made: (1) In the manner prescribed in the partnership contract; (2) In the absence thereof, by experts chosen by the partners and according to current prices. Subsequent changes in the price will be for the benefit or will be suffered by the partnership [Article 1787]. ADDITIONAL CAPITAL CONTRIBUTION In case of an 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 save the venture, shall be obliged to sell his interest to the other partners, unless there is an agreement to the contrary [Article 1791]. Requisites: (1) There is an imminent loss of the business of the partnership; (2) The majority of the capitalist partners are of the opinion that an additional contribution to the common fund would save the business; (3) The capitalist partner refuses deliberately (not because of financial inability) to contribute an additional share to the capital; and (4) There is no agreement that even in case of imminent loss of the business, the partners are not obliged to contribute. PROHIBITION AGAINST ENGAGING IN BUSINESS General rule: A capitalist partner cannot engage for his own account in any operation which is of the kind of business in which the partnership is engaged. Should he do so, he shall bring to the common fund any profit accruing to him from his transactions, while personally bearing all the losses. Exception: The rule does not apply when there is a stipulation to the contrary [Article 1808]. RISK OF LOSS OF THINGS CONTRIBUTED In case the contribution consists in the use and fruits of specific and determinate things, which are not fungible, the risk of loss shall be borne by the partner who owns them. The partnership bears the risk if the things: (1) Are fungible; (2) Cannot be kept without deterioration;


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(3) Were contributed to be sold; or (4) Were brought and appraised in the inventory. In the last case, the claim is limited to the

appraised value of the things [Article 1795]. REMEDY IN CASE OF NON-COMPLIANCE A partner is guilty of estafa if he misappropriates partnership money or property received by him for a specific purpose of the partnership [Liwanag v. CA (1997)]. However, mere failure on the part of an industrial partner to return to the capitalist partner the capital brought by him into the partnership is not an act constituting estafa. The action that may be brought to recover the money is a civil one [US v. Clarin (1910)]. OBLIGATION OF PARTNERS TO THE PARTNERSHIP WITH RESPECT TO CONTRIBUTION OF INDUSTRY With respect to contribution of industry, a partner is also obliged to contribute it at the stipulated time. PROHIBITION AGAINST ENGAGING IN BUSINESS General rule: An industrial partner cannot engage in business for himself. Should he do so, the capitalist partners, as well as industrial partners [De Leon (2010)], may either: (1) Exclude him from the firm; or (2) Avail themselves of the benefit which he may have obtained. Exception: He may engage in business for himself when the partnership expressly permits him to do so. [Article 1789] RIGHT TO APPLY PAYMENT TO PARTNERSHIP CREDIT General rule: A partner authorized to manage, who collects a demandable sum owed to him in his own name from a person who also owes the partnership a demandable sum, is obliged to apply the sum collected to both credits pro rata, even if he issued a receipt for his own credit only. Requisites: (1) There exist at least two debts, one where the

collecting partner is creditor, and the other, where the partnership is the creditor;

(2) Both debts are demandable; and (3) The partner who collects is authorized to manage

and actually manages the partnership.

Exceptions: (1) In case the receipt was issued for the account of

the partnership credit only, however, the sum shall be applied to the partnership credit alone.

(2) When the debtor declares, pursuant to Article 1252, at the time of making the payment, to which debt the sum must be applied, it shall be so applied [Article 1792].

The law, through this rule, safeguards the interests of the partnership by preventing the possibility of their being subordinated by the managing partner to his own interest, by intentionally failing to collect partnership credits to collect his own, to the prejudice of the other partners. This possibility does not exist in case the partner is not authorized to manage [De Leon (2010)]. RIGHT TO RETURN OF CREDIT RECEIVED A partner, who is authorized to manage or not, is obliged to bring to the partnership capital what he received when: (1) He has received, in whole or in part, his share of

the partnership credit; (2) The other partners have not collected their

shares; and (3) The partnership debtor has become insolvent. This obligation exists even when he issued a

receipt for his share only. [Article 1793] Ratio: In this case, the debt becomes a bad debt. It would be unfair for the partner who already collected not to share in the loss of the other partners. RIGHT TO INDEMNITY FOR DAMAGES Every partner is responsible to the partnership for damages suffered by it through his fault. COMPENSATION OF LIABILITY General rule: The liability for damages cannot be set-off or compensated by profits or benefits which the partner may have earned for the partnership by his industry. Ratio: The partner has the obligation to secure the benefits for the partnership. As such, the requirement for compensation, that the partner be both a creditor and a debtor of the partnership at the same time, is not complied with [Article 1278; De Leon (2010)]. Exception: The court may equitably lessen the liability if, through his extraordinary efforts in other activities of the partnership, unusual profits were realized [Article 1794]. Note, however, that there is still no compensation.


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SUIT FOR DAMAGES Before a partner may sue another for alleged fraudulent management and resultant damages, liquidation must first be effected to determine the extent of the damage. Without liquidation of partnership affairs, a partner cannot claim damages [Soncuya v. De Luna (1939)]. RESPONSIBILITY OF THE PARTNERSHIP TO PARTNERS In the absence of any stipulation to the contrary, every partner is an agent of the partnership for the purpose of its business. As such, it is responsible to every partner: (1) For amounts, and the corresponding interest

from the time the expenses were made, which he may have disbursed on behalf of the partnership;

(2) For obligations he may have contracted in good faith in the interest of the partnership business; and

(3) For risks in consequence of the management of the partnership. [Article 1796]

Rights and obligations of partners inter se RIGHT TO ASSOCIATE ANOTHER IN SHARE Every partner may associate another person with him in his share. The admission of the associate to the partnership, however, requires the consent of all the other partners, even if the partner having an associate is a managing partner [Article 1804]. SUBPARTNERSHIP The arrangement refers to a contract of subpartnership, which is a partnership within a partnership, distinct and separate from the main partnership [De Leon (2010)]. The associate is sometimes referred to as a subpartner. Since admission of the subpartner as a new partner in the main partnership amounts to a modification of the original contract, it requires the unanimous consent of the partners. RIGHT TO ACCESS PARTNERSHIP BOOKS The partnership books shall be kept at the place agreed upon by the partners.

Without such agreement, they shall be kept at the principal place of business of the partnership. Every partner shall, at any reasonable hour, have access to and may inspect and copy any of them. [Article 1805] BASIS OF RIGHT Since a partner is a co-owner of partnership properties, which include the books, and has a right to participate in the management of its affairs, the books should not be in the exclusive custody or control of any one partner [De Leon (2010)]. REASONABLE HOUR "Any reasonable hour" has been interpreted to mean reasonable hours on business days throughout the year, not merely during some arbitrary period of a few days chosen by the managing partner [Pardo v. Lumber Co., (1925)]. RIGHT TO A FORMAL ACCOUNT Any 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) If, without his consent, a partner has derived profits from any transaction connected with the formation, conduct, or liquidation of the partnership or from any use of partnership property;

(4) Whenever other circumstances render it just and reasonable [Article 1809].

ACCRUAL OF RIGHT General rule: The right to a formal account of partnership affairs accrues only when the partnership is dissolved. Ample protection is already provided. Exceptions: In special and unusual cases under Article 1809, formal accounting may be demanded even before dissolution. PERSON OBLIGED The obligation to account rests on the managing or active partner (or, after dissolution, in the liquidating or surviving partner). PRESCRIPTION OF ACTION The right, on the part of the other partners, to demand an accounting exists while the partnership exists. The prescriptive period begins to run only


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upon the dissolution when the final accounting is done [Fue Leung v. IAC (1989)]. NATURE OF ACTION The action for accounting is an action in personam, regardless of the incidental fact that some of the assets of the partnership are real property [Emnace v. CA (2001)]. PROPERTY RIGHTS OF PARTNERS IN GENERAL The property rights of a partner are: (1) Rights in specific partnership property; (2) Interest in the partnership; and (3) Right to participate in the management [Article 1810]. PARTNERSHIP PROPERTY AND PARTNERSHIP CAPITAL

Capital Property

With constant value Value varies with market conditions

Includes only actually contributed and promised capital

Includes the contributions and property acquired by the partnership

OWNERSHIP OF CERTAIN PROPERTY (1) The ownership of property used by the partnership

depends on the intention of the parties, which may be drawn from an express agreement or their conduct. (a) A partner may allow the property to be used

by the partnership without transfer of ownership, contributing only the use or enjoyment thereof.

(b) He may also hold title to partnership property, without acquiring ownership thereof [Article 1819].

(2) Property acquired by a partner with partnership funds is presumed to be partnership property.

(3) The same presumption also arises when the property is indicated in the partnership books as partnership asset.

(4) Other factors may be considered to determine ownership of the property.

RIGHTS IN SPECIFIC PROPERTY The partners are co-owners of specific partnership property. As such: (1) A partner has an equal right with his partners to

possess such property for partnership purposes. For other purposes, the consent of his partners is necessary. If the partner is excluded, he may ask for: (a) Formal accounting [Article 1809]; or

(b) Dissolution by judicial decree [Article 1831]. (2) A partner's right in such property is not

assignable, except when all the partners assign their rights in the same property.

(3) The right is not subject to attachment or execution, except on claim against the partnership. Also, in case of such attachment, the partners, or any of them, or the representatives of a deceased partner, cannot claim any right under the homestead or exemption laws;

(4) The right is also not subject to legal support under Article 291 [Article 1811].

A partner's right in specific property cannot be separately assigned, since it is impossible to determine the extent of his beneficial interest in the property until after the liquidation of partnership affairs. It is also not subject to support precisely because it is a property of the partnership and not of the individual partners. INTEREST IN THE PARTNERSHIP A partner's interest in the partnership is his share of the profits and surplus [Article 1812]. This interest is subject to support and may be assigned. RIGHTS OF ASSIGNEE Assignment by a partner of his whole interest in the partnership does not, of itself: (1) Dissolve the partnership; or (2) Entitle the assignee to:

(a) Interfere in the management or administration of the partnership business or affairs;

(b) Require information or account of partnership; or

(c) Inspect the partnership books. It merely entitles the assignee to: (1) Receive the profits to which the assigning partner was entitled; (2) In case of fraud in management, avail himself of the usual remedies; (3) In case of dissolution:

(a) Receive his assignor's interest; and (b) Require an accounting from the date only of

the last account agreed to by all the partners [Article 1813].

CHARGING OF PARTNERSHIP INTEREST BY PERSONAL CREDITOR OF PARTNERS Partnership creditors are preferred over the personal creditors of the partners as regards partnership property [Article 1827].


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However, on due application by any judgment creditor of a partner, a competent court may: (1) Charge the interest of the partner for the

satisfaction of the judgment debt; (2) Appoint a receiver of the share of the profits and

of any other money due or to fall due to the partner; and

(3) Make all other orders, directions, accounts and inquiries, which the debtor partner might have made, or which the circumstances may require.

The interest charged may be redeemed before foreclosure or, in case of sale directed by the court, may be purchased without causing dissolution: (1) With separate property, by one or more of the

partners; or (2) With partnership property, by one or more of the

partners, will consent of all, except the debtor partner.

The partner debtor is not deprived of his right under exemption laws. [Article 1814] CHARGING ORDER A charging order subjects the interest in the partnership of the debtor partner with the payment of an unsatisfied amount of a judgment debt against him, with the least interference with the partnership business and the rights of the partners. By virtue of the order, any amount or portion thereof which the partnership would otherwise pay to the debtor partner is instead given to the judgment creditor [De Leon (2010)]. RIGHT TO PROFITS AND OBLIGATION FOR LOSSES RULES FOR DISTRIBUTION OF PROFITS AND LOSSES The distribution of profits and losses shall be in accordance with the following rules (1) They shall be distributed in conformity with the

agreement. (2) If only the share in profits has been stipulated, the

share in the losses shall be in the same proportion.

(3) In the absence of any stipulation: (a) The share in the profits of the capitalist

partners shall be in proportion to their contributions.

(b) The losses shall be borne by the capitalist partners, also in proportion to the contributions;

(c) The share of the industrial partners in the profits is that share as may be just and equitable. If he also contributed capital, he will receive a share of the profits in proportion to his contribution; and

(d) The industrial partner, who did not contribute capital, is not liable for losses [Article 1797].

DESIGNATION OF SHARE BY THIRD PERSONS The designation of the share of each one in the profits and losses can be delegated to a third person, in which case, it cannot be impugned: (a) Unless it is manifestly inequitable; (b) The partner impugning it has begun to execute

the designation; or (c) The partner has not impugned it within 3 months

from the time he had knowledge thereof. The designation cannot be delegated to one of the partners [Article 1798]. EXCLUSION OF PARTNER FROM SHARE A stipulation excluding one or more partners from any share in the profits or losses is void [Article 1799]. With reference to the industrial partner, since the law itself excludes him from losses, a stipulation exempting him from the losses is naturally valid since if the partnership fails to realize profits, he can no longer withdraw his work or labor. He cannot but share in the loss. OBLIGATION TO RENDER INFORMATION Partners shall render on demand true and full information of all things affecting the partnership to any partner or the legal representative of any deceased partner or of any partner under legal disability [Article 1806]. BASIS OF OBLIGATION This obligation arises from the mutual trust and confidence among partners. Thus, there must be no concealment between them in all matters affecting the partnership [De Leon (2010]. OBLIGATION TO ACCOUNT AND ACT AS TRUSTEE Every partner must account to the partnership for any benefit, and hold as a 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 [Article 1807]. BASIS OF OBLIGATION This obligation also arises from the fiduciary nature of the partnership relation, and operates to prevent a partner from making a secret profit out of the partnership. Note that the obligation extends from the formation to the liquidation of the partnership.


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Operation of the Partnership

FIRM NAME Every 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 [Article 1815]. RIGHT TO CHOOSE FIRM NAME General rule: The partners may adopt any firm name desired. Exceptions: (1) They cannot use a name that is "identical or

deceptively or confusingly similar to an existing [partnership] or corporation or to any other name already protected by law or is patently deceptive, confusing or contrary to existing laws" [Section 18, Corporation Code].

(2) Use of names of deceased partner in law firms is "permissible provided that the firm indicates in all its communications that said partner is deceased" [Rule 3.02, Code of Professional Responsibility].

MANAGEMENT OF THE PARTNERSHIP Management of the partnership is primarily governed by the agreement of the partners in the articles of partnership. It may be managed by: (1) All the partners; or (2) A number of partners appointed as managers,

which may be appointed: (a) In the articles of partnership; or (b) After constitution of the partnership.

POWERS OF A MANAGING PARTNER General rule: The partner designated as manager in the articles may execute all acts of administration despite opposition by the other partners. Exception: He cannot do so when he acts in bad faith. REVOCATION OF POWER OF MANAGING PARTNER The powers of the managing partner may be revoked: (1) If appointed in the articles of partnership, when:

(a) There is just or lawful cause for revocation; and

(b) The partners representing the controlling interest revoke such power.

(2) If appointed after the constitution of the partnership, at any time and for any cause [Article 1800].

MANAGEMENT BY TWO OR MORE PARTNERS When there are two or more managing partners appointed, without specification of their duties or without a stipulation on how each one will act: (1) Each one may separately execute all acts of

administration. (2) If any of them opposes the acts of the others, the

decision of the majority prevails. (3) In case of a tie, the partners owning the

controlling interest will decide [Article 1801]. Requisites: (1) Two or more partners have been appointed as

managers; (2) There is no specification of their respective duties;

and (3) There is no stipulation that one of them shall not

act without the consent of all the others. STIPULATION ON UNANIMITY OF MANAGING PARTNERS In case there is a stipulation that none of the managing partners shall act without the consent of others, the concurrence of all is necessary for the validity of the acts. The absence or disability of one cannot be alleged, unless there is imminent danger of grave or irreparable injury to the partnership. [Article 1802] MANAGEMENT WHEN MANNER NOT AGREED UPON When there is no agreement as to the manner of management, the following rules apply: (1) All the partners are considered agents (mutual

agency). Whatever any one does alone binds the partnership, unless there is a timely opposition to the act, under Article 1801.

(2) Any important alteration in the immovable property of the partnership, even if useful to the partnership, requires unanimity. If the alteration is necessary for the preservation of the property, however, consent of the others is not required [De Leon (2010)].

If the refusal is manifestly prejudicial to the partnership, court intervention may be sought [Article 1803]. INSTANCES OF MUTUAL AGENCY (1) Partners can dispose of partnership property even

when in partnership name [Article 1819]. (2) An admission or representation made by any

partner concerning partnership affairs is evidence against the partnership [Article 1820].

(3) Notice to any partner of any matter relating to partnership affairs is notice to the partnership [Article 1821].


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(4) Wrongful act or omission of any partner acting for partnership affairs makes the partnership liable [Article 1822].

(5) Partnership is bound to make good losses for wrongful acts or misapplications of partners [Article 1823].

Obligations of partnership/ partners to third persons LIABILITY OF PARTNERS FOR PARTNERSHIP CONTRACTS The partnership is primarily liable for contracts entered into in its name and for its account, under its signature and by a person authorized to act for it. Upon exhaustion of its assets, all partners are liable pro rata with all their property. Any partner may enter into a separate obligation to perform a partnership contract [Article 1816]. NATURE OF INDIVIDUAL LIABILITY The pro-rating should be understood to mean equally or jointly, not proportionally [De Leon (2010), citing Article 1839(4); note, however, that this conclusion does not find textual support in Article 1816]. The fact that a partner has left the country and the payment of his share of the liability cannot be enforced [Co-Pitco v. Yulo (1907)] or his liability is condoned by the creditor [Island Sales v. United Pioneers (1975)] cannot increase the liability of the other partners. The liability is subsidiary or secondary. It only arises upon exhaustion of partnership assets. However, they may be joined as party defendants in the action against the partnership, subject to their right to prior exhaustion of partnership assets [Cia. Maritima v.

Muñoz (1907)]. General rule: The partners are liable pro-rata and subsidiarily, with all their property. Exceptions: (1) A third person who transacted with the

partnership can hold the partners solidarily liable for the whole obligation if the case falls under

Articles 1822 or 1823 [Muñasque v. CA (1985)].

(2) A person admitted as a partner into an existing partnership is liable for all the obligations of the partnership arising before his admission, except that his liability shall be satisfied only out of partnership property, unless there is a stipulation to the contrary.

LIABILITY OF INDUSTRIAL PARTNER An industrial partner, who is not liable for losses, is not exempt from this liability. However, he can recover the amount he has paid from the capitalist partners, unless there is a stipulation to the contrary.

[Cia. Maritima v. Muñoz (1907)]. STIPULATION AGAINST INDIVIDUAL LIABILITY Any stipulation against this liability is void and does not affect third persons. The stipulation, however, is valid only as among the partners [Article 1817]. LIABILITY OF PARTNERS FOR PARTNERSHIP CONTRACTS ACTS APPARENTLY FOR THE CARRYING ON OF USUAL BUSINESS General rule: Every partner is an agent of the partnership for the purpose of its business and any act of a partner which is apparently for the carrying on of the usual business of the partnership binds the latter, including the execution of any instrument in the partnership name [1st par., Article 1818]. Exception: The partnership is not bound when: (1) The partner has in fact no authority to act; AND (2) The person with whom he deals has knowledge of

such fact. ACTS NOT APPARENTLY FOR CARRYING ON OF THE USUAL BUSINESS General rule: Acts of a partner which is not apparently for carrying on of the usual business does not bind the partnership. Exception: The partnership is bound if the other partners authorized him to do the act. ACTS OF STRICT DOMINION General rule: One or some of the partners have no authority to do the following acts of strict dominion: (a) Assign the partnership property in trust for

creditors or on the assignee's promise to pay the debts of the partnership;

(b) Dispose of the goodwill of the business; (c) Do any other act which makes it impossible to

carry on the ordinary business of the partnership; (d) Confess a judgment; (e) Enter into a compromise concerning a

partnership claim or liability;


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(f) Submit a partnership claim or liability to arbitration;

(g) Renounce a claim of the partnership. Exception: They may do so if: (1) Authorized by all the partners; OR (2) The other partners have abandoned the business. ACTS IN CONTRAVENTION OF RESTRICTION Any act of a partner in contravention of a restriction on authority does not bind the partnership to persons having knowledge of the restriction [Article 1818]. CONVEYANCE OF REAL PROPERTY OF PARTNERSHIP TITLE IN THE PARTNERSHIP NAME Any partner may convey the property in the name of the partnership. The partnership can recover it, except when: (1) The act of the partner binds the partnership under 1st par., Article 1818 (i.e., for the carrying on of the usual business of the partnership); or (2) If not so authorized, the property has been conveyed by the grantee, or a person claiming under him, to a holder for value and without knowledge that the partner exceeded his authority. TITLE IN THE PARTNERSHIP NAME A partner, authorized to act under 1st par., Article 1818, may convey, in his own name, the equitable interest of the partnership. TITLE IN THE NAME OF ONE OR MORE (NOT ALL) OF THE PARTNERS AND THE RECORD DOES NOT DISCLOSE THE RIGHT OF THE PARTNERSHIP The partners having title may convey title. The partnership may recover it if the act does not bind it under 1st par., Article 1818, unless the purchaser or his assignee is: (1) A holder for value; AND (2) Without knowledge that the act exceeded

authority. TITLE IN THE NAME OF ONE OR MORE OR ALL THE PARTNERS, OR IN A THIRD PERSON IN TRUST FOR THE PARTNERSHIP A partner may convey equitable title in the partnership name or in his own name, when the act is authorized under 1st par., Article 1818. TITLE IN THE NAMES OF ALL THE PARTNERS The conveyance must be executed by all of them to pass all their rights in the property [Article 1819].

LIABILITY OF PARTNERSHIP FOR ADMISSION BY PARTNER An admission or representation by any partner concerning partnership affairs within the scope of his authority may be used as evidence against the partnership [Article 1820]. LIABILITY OF PARTNERSHIP FOR WRONGFUL ACTS OF PARTNER The partnership is solidarily liable with the partner who causes loss or injury, or incurs any penalty through any wrongful act or omission: (1) In the ordinary course of the business of the

partnership; or (2) Not in such ordinary course of business, but with

the authority of his co-partners [Article 1822]. LIABILITY OF THE PARTNERSHIP FOR MISAPPLICATION OF MONEY OR PROPERTY RECEIVED The partnership is liable for losses suffered by a third person whose money or property was: (1) Received by a partner, acting within the scope of

his apparent authority, who also misapplied it; or (2) Received by the partnership, in the course of its

business, but is misapplied by any partner while it is in the custody of the partnership [Article 1823].

LIABILITY OF OTHER PARTNERS FOR WRONGFUL ACTS OR MISAPPLICATION All partners are solidarily liable with the partnership for its liabilities under Articles 1822 and 1823 [Article 1824]. This is without prejudice to the guilty partner being liable to the other partners. However, as far as third persons are concerned, the partnership is answerable. LIABILITY IN CASE OF PARTNERSHIP BY ESTOPPEL PARTNER BY ESTOPPEL A person, not a partner, may become a partner by estoppel, and be liable as a partner, when, by words, spoken or written, or conduct, he: (1) Directly represents himself to anyone as a partner

in an existing or non-existing partnership; or (2) Indirectly represents himself by consenting to

another representing him as such partner. [Article 1825]

LIABILITY OF PARTNER BY ESTOPPEL A partner by estoppel is liable: (1) To any person who extended credit to the

partnership, actual or apparent, relying on his representation; and


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(2) In case the representation was made publicly, to any person, who extended such credit, whether or not the communication to said creditor was made with the knowledge of the partner.

NATURE OF LIABILITY He is liable in the following manner: (1) When there is an existing partnership and all the

partners consented to the representation, a partnership liability results, and the partner by estoppel is liable as though he were a partner;

(2) When there is an existing partnership and not all the partners consented, or when there is no existing partnership and all those represented as partners consented to the representation, he is liable jointly and pro rata with those who consented to the representation;

(3) When there is an existing partnership but none of the partners consented, or when there is no existing partnership and not all of those represented as partners consented to the representation, he is liable separately.

EFFECTS OF ACTS OF PARTNER BY ESTOPPEL The acts of a partner by estoppel have the following effects: (1) A person, thus representing himself as a partner

of other persons, becomes an agent of the latter, in the same manner as though he were a partner in fact, with respect to persons who rely upon the representation.

(2) When all the members of the existing partnership consent to the representation, a partnership act or obligation results.

(3) In all other cases, only a joint act or obligation results. [Article 1825]

No real partnership is created by estoppel. It is only with respect to third persons that partnership by estoppel is recognized. ESTABLISHING LIABILITY The basic elements in connection with establishment of liability as a partner if based on the doctrine of estoppel must encompass: (1) Proof by plaintiff that he was individually aware of

the defendant's representations as to his being a partner or that such representations were made by others and not denied or refuted by the defendant;

(2) Reliance on such representations by the plaintiff; and

(3) Lack of any denial or refutation of the statements by the defendant; such denial need not precede plaintiff's acting therein if the denial was forthcoming promptly upon hearing of the representations, and if, by prudence and diligence

the plaintiff might have learned of the truth or untruth of the representations.

Persons who knowingly assume to act as a corporation without authority to do so are liable as general partners for all debts, liabilities and damages incurred. [Section 21, Corporation Code] A partnership de facto is created. LIABILITY OF INCOMING PARTNER A person admitted as a partner is liable as the other partners for obligations subsequent to his admission. He is also liable for obligations incurred before his admission, but will be satisfied only out of the partnership property, unless otherwise stipulated. (Article 1826) Ratio: (1) The new partner partakes of the benefits of the

partnership property and an already established business.

(2) He has every means of obtaining full knowledge of the debts of the partnership and remedies that amply protect his interest [De Leon (2010)].

However, an incoming partner may fully assume the obligations of a retiring partner. NOTICE TO OR KNOWLEDGE OF THE PARTNERSHIP The following operate as notice to or knowledge of the partnership: (1) Notice to any partner of any matter relating to

partnership affairs; (2) Knowledge of the partner acting in the particular

matter acquired while a partner; (3) Knowledge of the partner acting in the particular

matter then present to his mind; and (4) Knowledge of any other partner who reasonably

could and should have communicated it to the acting partner.

These do not apply in case of fraud on the partnership committed by or with the consent of the partner [Article 1821]. PREFERENCE OF PARTNERSHIP CREDITORS Partnership creditors are preferred over personal creditors of the partners with respect to partnership property. However, personal creditors may ask the attachment and public sale of the share of the partner debtor in the partnership assets. [Article 1827]


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Ratio: The partnership, as a legal entity distinct from its members, should apply its property to the payment of its debts in preference to the claim of any partner or his individual creditors.

Dissolution and winding up CONCEPTS Dissolution is the change in the relation of the partners caused by any partner ceasing to be associated in the carrying on of the business. It is different from the winding-up of the business [Article 1828]. Winding up is the actual process of settling the partnership business or affairs after dissolution. It involves collection and distribution of partnership assets, payment of debts, and determination of the value of the interest of the partners in the partnership. Termination is the point in time when all partnership affairs are completely wound up and finally settled. It signifies the end of the partnership life. EFFECT OF DISSOLUTION ON EXISTENCE OF PARTNERSHIP Dissolution does not terminate the existence of the partnership, which continues until the winding up of partnership affairs is completed. [Article 1829]. The dissolution of a partnership must not be understood in the absolute and strict sense so that at the termination of the object for which it was created the partnership is extinguished, pending the winding up of some incidents and obligations of the partnership, but in such case, the partnership will be reputed as existing until the juridical relations arising out of the contract are dissolved [Testate Estate of Mota v. Serra (1926)]. CAUSES OF DISSOLUTION WITHOUT VIOLATION OF THE AGREEMENT Without violation of the partnership agreement between the partners: (1) By the termination of the definite term or

particular undertaking specified in the agreement;

(2) By the express will of any partner, who must act in good faith, when no definite term or particular is specified;

(3) By the express will of all the partners who have not assigned their interests or suffered them to be charged for their separate debts, either before

or after the termination of any specified term or particular undertaking;

(4) By the expulsion of any partner from the business bona fide in accordance with such a power conferred by the agreement between the partners.

If, after the expiration of the definite term or particular undertaking, the partners continue the partnership without making a new agreement, the firm becomes a partnership at will. [Article 1785] Verily, any one of the partners may, at his sole pleasure, dictate a dissolution of the partnership at will. He must, however, act in good faith, not that the attendance of bad faith can prevent the dissolution of the partnership but that it can result in a liability for damages. [Ortega v. CA (1995)] Bad faith, in the context here used, is no different from its normal concept of a conscious and intentional design to do a wrongful act for a dishonest purpose or moral obliquity. [Ortega v. CA (1995)] IN CONTRAVENTION OF THE AGREEMENT 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. [E]ven if there is a specified term, one partner can cause its dissolution by expressly withdrawing even before the expiration of the period, with or without justifiable cause. Of course, if the cause is not justified or no cause was given, the withdrawing partner is liable for damages but in no case can he be compelled to remain in the firm. With his withdrawal, the number of members is decreased, hence, the dissolution. [Rojas v. Maglana (1990)] BY OPERATION OF LAW (1) By any event which makes it unlawful for the

business of the partnership to be carried on or for the members to carry it on in partnership;

(2) 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 acquired the ownership thereof;

(3) By the death of any partner;


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(4) By the insolvency of any partner or of the partnership;

(5) By the civil interdiction of any partner; BY DECREE OF COURT (1) A partner may apply in court for dissolution when:

(a) A partner has been declared insane in any judicial proceeding or is shown to be of unsound mind;

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

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

(d) A partner willfully or persistently commits a 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;

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

(f) Other circumstances render a dissolution equitable.

(2) A person who acquires the interest of a partner may likewise apply: (a) After the termination of the specified term or

particular undertaking; (b) At any time if the partnership was a

partnership at will when the interest was assigned or when the charging order was issued. [Articles 1830 and 1831]

Judicial determination as to dissolution may be resorted to when the facts which may cause such dissolution are open to dispute. OTHER CAUSES (1) When a new partner is admitted into an existing

partnership; (2) When any partner retires; (3) When the other partners assign their rights to the

sole remaining partner; (4) When all the partners assign their rights in the

partnership property to third persons. [Article 1840]

The statutory enumeration of the causes of dissolution is exclusive. [De Leon (2010)] EFFECT OF DISSOLUTION ON AUTHORITY OF PARTNERS Upon dissolution, the authority of the partners to represent the partnership is confined only to acts necessary to wind up partnership affairs or to complete transactions begun but not then finished.

WITH RESPECT TO PARTNERS The authority of partners to act for the partnership is terminated, with respect to partners: (1) When the dissolution is not by the act, insolvency

or death of a partner; or (2) When the dissolution is by such act, insolvency or

death, when the partner acting for the partnership has knowledge or notice of the cause. Otherwise, each co-partner is still liable for his share in the liability created by the partner acting for the partnership, as if there was no dissolution. [Article 1832]

WITH RESPECT TO THIRD PERSONS With respect to persons not partners: (1) After dissolution, a partner can bind the

partnership by any act appropriate for winding up partnership affairs or completing transactions unfinished at dissolution.

(2) He can also bind it by any transaction which would bind the partnership as if 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 thereof; or

(b) Had not so extended credit, but had known of the partnership prior to dissolution, and, having no knowledge or notice of dissolution, the fact 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 business was regularly carried on.

Note the character of notice required. As to persons who extended credit to the partnership prior to dissolution, notice must be actual. As to persons who merely knew of the existence of the partnership, publication in a newspaper of general circulation in the place of business of the partnership is sufficient. LIABILITY OF PARTNERS IN TRANSACTIONS AFTER DISSOLUTION General rule: The liability of a partner, in general, is the same as in ordinary contracts (pro rata and subsidiary). Exceptions: In the following cases, however, the liability shall be satisfied out of the partnership assets alone: (1) When the partner had been, prior to the

dissolution, unknown as a partner to the person with whom the contract is made;

(2) When the partner had been, prior to the dissolution, so far unknown or inactive in partnership affairs that the business reputation of the partnership could not be said to have been in


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any degree due to his connection with it. [Article 1834]

CASES WHERE PARTNERSHIP IS NOT BOUND Any act of a partner after dissolution in no case binds the partnership in the following cases: (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;

(2) Where the partner has become insolvent; or (3) Where the partner has 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.

PARTNERSHIP BY ESTOPPEL AFTER DISSOLUTION Article 1834 does not 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 [Article 1834]. CONTRACTS AFTER DISSOLUTION BY SPECIFIC CAUSES General rule: A contract entered into by a partner acting for the partnership after dissolution by act, death or insolvency of a partner binds the other partners. Exceptions: (1) The dissolution being by act of any partner, the

partner acting for the partnership had knowledge of the dissolution; or

(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. [Article 1833]

The general rule assumes that the partner acting for the partnership has no knowledge or notice of the specific cause of dissolution. EFFECT OF DISSOLUTION ON EXISTING LIABILITY OF PARTNERS General rule: Dissolution does not of itself discharge the existing liability of any partner. Exception: A partner may be so relieved when there is an agreement to that effect between: (1) Himself; (2) The partnership creditor; and

(3) The person or partnership continuing the business.

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. In case of dissolution by death, the individual property of a deceased partner is liable for obligations of the partnership incurred while he was a partner, after payment of his separate debts. [Article 1835] WINDING UP PARTNERS WHO MAY WIND UP The following partners have the right to wind up the partnership affairs: (1) Those designated in an agreement; (2) Those who have not wrongfully dissolved the

partnership; or (3) The legal representative of the last surviving

partner, who was not insolvent. However, any partner or his legal representative or assignee may obtain winding up by the court, upon cause shown. [Article 1836] MANNER OF WINDING UP Thus, winding up of partnership affairs may be done: (1) Extrajudicially, by the partners themselves; or (2) Judicially, under the control and direction of the

proper court. NATURE OF JUDICIAL LIQUIDATION The action for liquidation of the partnership is personal. The fact that sale of assets, including real property, is involved does not change its character, such sale being merely a necessary incident of the liquidation of the partnership, which should precede and/or is part of its process of dissolution. [Claridades v. Mercader (1966)] POWERS OF WINDING UP PARTNER In general, the liquidating partner may perform acts appropriate for the winding up of partnership affairs. RIGHTS OF PARTNERS IN CASE OF DISSOLUTION DISSOLUTION WITHOUT VIOLATION OF THE AGREEMENT Unless otherwise agreed, when dissolution is caused in any way, except in contravention of the partnership agreement, each partner, as against his co-partners and all partners claiming through them in respect of their interests in the partnership, may have the partnership property applied to discharge the partnership liabilities, and the surplus applied in cash to the net amount owing to the respective


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partners [referred to as the right under 1st par., Article 1837]. In case of dissolution by bona fide expulsion of a partner, and the expelled partner is discharged from all partnership liabilities, either by payment or agreement to that effect (Article 1835), he shall receive only the net amount due him from the partnership. DISSOLUTION IN CONTRAVENTION OF THE AGREEMENT Rights of partner who has not caused the dissolution wrongfully: (a) To demand the right under 1st par., Article 1837; (b) To be indemnified for damages for breach of the

agreement against the partner who caused the dissolution wrongfully;

(c) To continue the business in the same name, by themselves or jointly with others, during the agreed term for the partnership and for that purpose may possess the partnership property provided they: (i) Secure the payment by bond approved by the

court; or (ii) Pay any partner who has caused the

dissolution wrongfully the value of his interest in the partnership, less any damages recoverable, and indemnity against all present or future partnership liabilities.

Rights of partner who has caused the dissolution wrongfully: (a) If the business is not continued, all the rights 1st

par., Article 1837, subject to liability for damages; (b) If the business is continued, the right, as against

his co-partners and all claiming through them, to: (i) Ascertainment, without considering the value

of the goodwill of the business, and payment to him in cash the value of his partnership interest, less any damage, or have the payment secured by a bond approved by the court; and

(ii) Be released from all existing liabilities of the partnership. [Article 1837]

The goodwill of a business may be defined to be the advantage which it has from its establishment or from the patronage of its customers, over and above the mere value of its property and capital. The goodwill (which includes the firm name) is part of the partnership assets and may be subject of sale. [De Leon (2010)] RIGHTS OF PARTNERS IN CASE OF RESCISSION A partner, induced by fraud or misrepresentation to become a partner, may rescind the contract.

Where a partnership contract is rescinded on such grounds, the party entitled to rescind, without prejudice to any other right, is entitled: (1) After satisfying partnership liabilities to third

persons, to a lien on, or right of retention of, to the surplus of the partnership property: (a) For any sum of money paid by him for the

purchase of an interest in the partnership; and (b) For any capital or advances contributed by

him. (2) After satisfying partnership liabilities to third

persons, to stand in the place of partnership creditors 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. [Article 1838]

SETTLING OF ACCOUNTS BETWEEN PARTNERS Subject to any agreement to the contrary, the following rules shall be observed in settling accounts between partners after dissolution. COMPOSITION OF PARTNERSHIP ASSETS The assets of the partnership are: (1) The partnership property; and (2) The contributions of the partners necessary for

the payment of all the liabilities. In accordance with the subsidiary liability of the partners, the partnership property shall be applied first to satisfy any liability of the partnership. AMOUNT OF CONTRIBUTION FOR LIABILITIES The rules on distribution of losses [Article 1979] shall determine the contributions of the partners. As such: (1) The contribution shall be in conformity with the

agreement. (2) If only the share in profits has been stipulated, the

contribution shall be in the same proportion. (3) In the absence of any stipulation, the contribution

shall be in proportion to the capital contribution. ENFORCEMENT OF CONTRIBUTION The following persons have the right to enforce the contributions: (1) An assignee for the benefit of creditors; (2) Any person appointed by the court; or (3) To the extent of the amount which he has paid in

excess of his share of the partnership liability, any partner or his legal representative.

The individual property of a deceased partner shall be liable for the contributions.


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ORDER OF APPLICATION OF ASSETS The partnership liabilities 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. DOCTRINE OF MARSHALING OF ASSETS When partnership property and the individual properties of the partners are in possession of a court for distribution: (1) Partnership creditors shall have priority on

partnership property; and (2) Separate creditors on individual property, saving

the rights of lien of secured creditors. (3) Anything left from either shall be applied to

satisfy the other. DISTRIBUTION OF PROPERTY OF INSOLVENT PARTNER Where a partner has become insolvent or his estate is insolvent, the claims against his separate property shall rank in the following order: (1) Those owing to separate creditors; (2) Those owing to partnership creditors; (3) Those owing to partners by way of contribution.

[Article 1839] RIGHTS OF CREDITORS OF DISSOLVED PARTNERSHIP CREDITORS OF DISSOLVED PARTNERSHIP AS CREDITORS OF NEW PARTNERSHIP In the following cases, creditors of the dissolved partnership are also creditors of the person or partnership continuing the business: (1) When the business is continued without

liquidation, and the cause of dissolution is: (a) Admission of a new partner into the existing

partnership; (b) Retirement or death of any partner, and his

rights to partnership property are assigned to: (i) Two or more of the partners; or (ii) One or more of the partners and one or

more third persons. (c) Retirement of all but one partner, and their

rights to partnership property are assigned to the remaining partner, who continues the business, either alone or with others;

(d) Wrongful dissolution by any partner, and the remaining partners continue the business, either alone or with others;

(e) Expulsion of a partner, and the remaining partners continue the business, either alone or with others.

(2) When the cause of dissolution is the retirement or death of any partner, and business is continued

with the consent of the retired partner or the representative of the deceased partner, without assignment of their rights to partnership property.

(3) When the cause of dissolution is the assignment by all the partners or their representatives of their rights in partnership property to one or more third persons who promise to pay the debts and who continue the business of the partnership.

LIABILITY OF A NEW PARTNER The liability to the creditors of the dissolved partnership of a new partner in the partnership continuing the business shall be satisfied out of the partnership property alone. However, he may, through agreement, assume individual liability. PRIORITY OF CREDITORS OF DISSOLVED PARTNERSHIP The creditors of dissolved partnership have prior right to any claim of the retired partner or the representative of the deceased partner against the person or partnership continuing the business. Nothing in this article shall be held to modify any right of creditors to set aside any assignment on the ground of fraud. EFFECT OF CONTINUING USE OF PARTNERSHIP NAME 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. [Article 1840] RETIRED OR REPRESENTATIVE OF DECEASED PARTNER Unless otherwise agreed upon, when any partner retires or dies, and the business is continued without any settlement of accounts as between him or his estate and the person or partnership continuing the business, he or his legal representative as against such person or partnership, subject to the prior rights of creditors of the dissolved partnership: (1) May have the value of his interest at the date of dissolution ascertained; and (2) Shall receive as an ordinary creditor: (a) An amount equal to the value of his interest in the dissolved partnership with interest; or (b) 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. [Article 1841] RIGHT TO AN ACCOUNT The right to an account of his interest shall accrue to any partner, or his legal representative, at the date of


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dissolution, in the absence of any agreement to the contrary, as against: (1) The winding up partners; (2) The surviving partners; or (3) The person or partnership continuing the

business [Article 1842]. EXISTENCE OF RIGHT [T]he right to demand an accounting exists as long as the partnership exists. Prescription begins to run only upon the dissolution of the partnership when the final accounting is done. [Fue Leung v. IAC (1989)] NEED FOR LIQUIDATION The profits of the business cannot be determined by taking into account the result of one particular transaction instead of all the transactions had. Hence, the need for a general liquidation before a member of a partnership may claim a specific sum as his share of the profits. [Sison v. McQuaid (1953)] However, no liquidation is necessary when there is already a settlement or an agreement as to what he shall receive [De Leon (2010)].

Limited partnership

DEFINITION A 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. [Article 1843] CHARACTERISTICS (1) A limited partnership is formed by compliance

with the statutory requirements [Article 1844]. (2) The business is controlled or managed by one or

more general partners, who are personally liable to creditors [Articles 1848 and 1850].

(3) One or more limited partners contribute to the capital and share in the profits but do not manage the business and are not personally liable for partnership obligations beyond their capital contributions [Articles 1845, 1848 and 1856].

(4) Obligations or debts are paid out of the partnership assets and the individual property of the general partners.

(5) The limited partners may have their contributions back subject to conditions prescribed by law [Articles 1844 and 1957].

ADVANTAGES OF LIMITED PARTNERSHIP (1) For general partners, to secure capital from

others while retaining control and supervision for the business;

(2) For limited partners, to have a share in the profits without risk of personal liability.

GENERAL AND LIMITED PARTNER DISTINGUISHED

General Partner Limited Partner

Extent of liability

Personally, but subsidiarily, liable for obligations of the partnership

Only to the extent of his capital contributions

Right to participate in management

Unless otherwise agreed upon, all general partners have an equal right to manage the partnership

No right to participate in management

Nature of contribution

Cash, property or industry Cash or property only, not industry

Property party in proceedings by or against partnership

Proper party Not proper party, unless: (1) He is also a general partner; or (2) Where the object of the proceedings is to enforce his right against or liability to the partnership

Name in firm name

Name may appear in the firm name

Name must not appear in the firm name

Prohibition to engage in other business

Prohibited (qualified) Not prohibited

Effect of retirement, death, insanity or insolvency

Dissolves partnership Does not dissolve; rights transferred to executor or administrator for selling his estate

Assignability of interest


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General Partner Limited Partner

Not assignable Assignable

GENERAL AND LIMITED PARTNERSHIP DISTINGUISHED

General Partnership Limited Partnership

Creation

May be constituted in any form, with exceptions

Partners must: (1) Sign and swear to a certificate in compliance with Article 1844; and (2) File the certificate for record in the SEC

Composition

Only general partners One or more general, and one or more limited partners

Firm name

Must contain the word "Company" (SEC Memo Circ No. 14-00), except for professional partnerships May or may not include the name of one or more of the partners

Must include the word "Limited" (SEC Memo Circ No. 14-00) Must not include name of limited partners, unless: (1) It is also the surname of a general partner; or (2) Prior to the time when the limited partner became such, the business has been carried on under a name in which his surname appeared.

Rules governing dissolution and winding up

Articles 1828-1842 Articles 1860-1863

FORMATION OF LIMITED PARTNERSHIP Two or more persons desiring to form a limited partnership shall: (1) Sign and swear to a certificate stating the items

in Article 1844; and (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 requirements. A partnership cannot become a limited partner. A general partnership may be changed into a limited one. A partner in the former general partnership may become a limited partner in the limited partnership formed [De Leon (2010)]. PURPOSE OF FILING The purpose of the requirement of filing the certificate is to give actual or constructive notice to potential creditors or persons dealing with the partnership to acquaint them with its essential features, including the limited liability of limited partners. NO SUBSTANTIAL COMPLIANCE When there is failure to substantially comply with the requirements: (1) In relation to third persons, the partnership is

general, unless they recognized that the firm as a limited partnership;

(2) As between the partners, the partnership remains limited, since they are bound by their agreement [De Leon (2010)].

FIRM NAME The surname of a limited partner shall not appear in the partnership name unless: (1) It is also the surname of a general partner; or (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 this prohibition is liable as a general partner to partnership creditors who extend credit without actual knowledge that he is not a general partner. FALSE STATEMENT IN THE CERTIFICATE If the certificate contains a false statement, one who suffers loss by reliance thereon may hold liable any party to the certificate who knew the statement to be false: (1) At the time he signed the certificate; or (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.

Requisites: (1) The partner knew the statement to be false at the

time he signed the certificate, or subsequently, but having sufficient time to cancel or amend it,


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or file a petition for its cancellation or amendment, and he failed to do so;

(2) The person seeking to enforce liability has relied upon the false statement in transacting business with the partnership; and

(3) The person suffered loss as a result of reliance upon such false statement.

ADMISSION OF ADDITIONAL LIMITED PARTNERS After the formation of a limited partnership, additional limited partners may be admitted upon filing an amendment to the original certificate. GENERAL AND LIMITED PARTNER AT THE SAME TIME A person may be a general and a limited partner in the same partnership at the same time, provided that this fact shall be stated in the certificate. 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. [Article 1853] MANAGEMENT OF LIMITED PARTNERSHIP A 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 [Article 1848]. MANAGEMENT BY GENERAL PARTNERS Only the general partners have the right to manage the partnership. The limited partners are not so entitled. LIABILITY OF LIMITED PARTNER FOR PARTICIPATING IN CONTROL A limited partner is liable as a general partner (i.e., subsidiarily liable) for the obligations of the partnership if he takes part in the control of the business. The control contemplated is active participation in the management of the business. It does not contemplate mere giving of advice to general partners which may be followed or not. The abstinence of the limited partner from participation in the transaction of the business of the firm is essential to his exemption from personal liability. [De Leon (2010)]. POWERS OF GENERAL PARTNER General rule: A general partner shall have the rights and powers and be subject to all restrictions and liabilities of a partner in a partnership without limited partners.

Thus, a general partner is vested with the entire control of the business. It is in consideration of his unlimited personal liability for the obligation of the partnership that he is granted the general authority to manage. Qualification: Written consent or ratification of the specific act by all the limited partners is necessary to authorize the general partners 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 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 so to do is given in the certificate. [Article 1851]

The acts enumerated are acts of strict dominion. OBLIGATIONS OF A LIMITED PARTNER OBLIGATIONS RELATED TO CONTRIBUTION The contributions of a limited partner may be cash or property, but not services [Article 1845]. A limited partner is liable for partnership obligations when he contributes services instead of only money or property to the partnership [De Leon (2010)]. A limited partner is liable to the partnership: (1) For the difference between his actual contribution

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 at the time and on the conditions stated in the certificate. [1st par., Article 1858]

He 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; and

(2) Money or other property wrongfully paid or conveyed to him on account of his contribution. [2nd par., Article 1858]

The liabilities under Article 1858 can be waived or compromised only by the consent of all members.


PAGE 258

Such waiver or compromise, however, shall not affect the right to enforce said liabilities of a creditor: (1) Who extended credit, or (2) Whose claim arose, after the filing or before a

cancellation or amendment of the certificate, to enforce such liabilities.

Even after a limited partner has rightfully received the return in whole or in part of his capital contribution, he is still liable to the partnership for any sum, not in excess of such return with interest, necessary to discharge its liabilities to all creditors: (1) Who extended credit, or (2) Whose claims arose, before such return. [Article

1858] A person who has contributed capital to a partnership, erroneously believing that he has become a limited partner, but his name appears in the certificate as a general partner or he is not designated as a limited partner, is not personally liable as a general partner by reason of his exercise of the rights of a limited partner, provided: (1) On ascertaining the mistake, he promptly

renounces his interest in the profits of the business or other compensation by way of income [Article 1852];

(2) He does not participate in the management of the business [Article 1848]; and

(3) His surname does not appear in the partnership name [Article 1846].

LIABILITY TO PARTNERSHIP CREDITORS General rule: A limited partner is not liable as a general partner. His liability is limited to the extent of his contributions. Exceptions: The limited partner is liable as a general partner when: (1) His surname appears in the partnership name,

with certain exceptions. (2) He takes part in the control of the business. LIABILITY TO SEPARATE CREDITORS On due application to a court of competent jurisdiction by any separate creditor of a limited partner, the court may: (1) Charge his interest with payment of the

unsatisfied amount of such claim; (2) Appoint a receiver; and (3) Make all other orders, directions and inquiries

which the circumstances of the case may require. The interest so charged may be redeemed with the separate property of any general partner, but may not be redeemed with partnership property. [Article 1862]

Note: In a general partnership, the interest may be redeemed with partnership property with the consent of all the partners whose interests are not charged [Article 1814].

RIGHTS OF A LIMITED PARTNER RIGHTS OF LIMITED PARTNER, IN GENERAL A limited partner shall have the same rights as a general partner to: (1) Require that the partnership books be kept at the

principal place of business of the partnership; (2) To inspect and copy any of them at a reasonable

hour; (3) To demand true and full information of all things

affecting the partnership; (4) To demand a formal account of partnership

affairs whenever circumstances render it just and reasonable; and

(5) To ask for dissolution and winding up by decree of court;

(6) To receive a share of the profits or other compensation by way of income; and

(7) To receive the return of his contribution provided the partnership assets are in excess of all its liabilities.

RIGHT TO TRANSACT BUSINESS WITH PARTNERSHIP A limited partner may: (1) Loan money to the partnership; (2) Transact other business with the partnership; and (3) Receive a pro rata share of the partnership assets

with general creditors if he is not also a general partner.

Limitations: A limited partner, with respect to his transactions with the partnership, cannot: (1) Receive or hold as collateral security any

partnership property; or (2) Receive any payment, conveyance, or release

from liability if it will prejudice the right of third persons.

Violation of the prohibition is considered a fraud on the creditors of the partnership. [Article 1854] RIGHT TO SHARE IN PROFITS A limited partner may receive from the partnership the share of the profits or the compensation by way of income stipulated for in the certificate. This right is subject to the condition that partnership assets will still be in excess of partnership liabilities after such payment. Ratio: Otherwise, he will receive a share to the prejudice of third-party creditors.


PAGE 259

In determining the partnership liabilities, the liabilities to the limited partners (for their contributions) and to general partners (whether for contributions or not) are not included. RIGHT TO RETURN OF CONTRIBUTION A limited partner may have his contributions withdrawn or reduced when: (1) All the 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 may be demanded as a matter of right; and

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

The return of his contributions may be demanded, as a matter of right (even when not all the other partners consent), the return of his contribution when (1) and (2) above are complied with: (1) On the dissolution of the partnership; (2) Upon the arrival of the date specified in the

certificate for the return; or (3) After the expiration of a 6-month notice in writing

given by him to the other partners, if no time is fixed in the certificate for: (a) the return of the contribution; or (b) the dissolution of the partnership.

General rule: A limited partner, irrespective of the nature of his contribution has only the right to demand and receive cash in return for his contribution. Exceptions: He may receive his contribution in a form other than cash when: (1) There is a statement in the certificate to the

contrary; or (2) All the members of the partnership consent. PREFERENCE OF LIMITED PARTNERS General rule: The limited partners stand on equal footing as to their: (1) Compensation by way of income; (2) Return of contribution; or (3) Any other matter. Exception: By an agreement of all the partners (general and limited) in the certificate, priority or preference may be given to some limited partners over others with respect to the matters enumerated. [Article 1855]

RIGHT TO ASSIGN INTEREST The interest of a limited partner is assignable. The assignee may become: (1) A substituted limited partner; or (2) A mere assignee. 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. He has all the rights and powers, and is subject to all the restrictions and liabilities of his assignor, except those liabilities which: (1) The assignee was ignorant of; and (2) Cannot be ascertained from the certificate. An assignee is only entitled to receive the share of the profits or other compensation by way of income, or the return of contribution, to which the assignor would otherwise be entitled. He has no right: (1) To require any information or account of the

partnership transactions; (2) To inspect the partnership books. An assignee has the right to become a substituted limited partner if: (1) All the partners consent thereto; (2) The assignor, being empowered to do so by the

certificate, gives him that right. An assignee becomes a substituted limited partner when the certificate is appropriately amended. [Article 1859] RIGHT TO ASK FOR DISSOLUTION A limited partner may have the partnership dissolved and its affairs wound up: (1) When his demand for the return of his

contribution is denied although he has a right to such return;

(2) When he has such right, but his contribution is not paid because the partnership property is insufficient to pay its liabilities. [Article 1857]

CAUSES OF DISSOLUTION OF LIMITED PARTNERSHIP A limited partnership is dissolved in much the same way and causes as an ordinary partnership [De Leon (2010)]. General rule: The retirement, death, insolvency, insanity or civil interdiction of a general partner dissolves the partnership. Exception: It is not so dissolved when the business is continued by the remaining general partners: (1) Under a right to do so stated in the certificate; or (2) With the consent of all members. [Article 1860]


PAGE 260

On the death of a limited partner, his executor or administrator shall have: (1) All the rights of a limited partner for the purpose

of settling his estate; and (2) The power to constitute an assignee as a

substituted limited partner, if the deceased was so empowered in the certificate.

The estate of a deceased limited partner shall be liable for all his liabilities as a limited partner. [Article 1861] SETTLEMENT OF ACCOUNTS ORDER OF PAYMENT In settling accounts after dissolution, the liabilities of the partnership shall be entitled to payment in the following order: (1) Those to creditors, including limited partners

except those on account of their contributions, in the order of priority as provided by law;

(2) Those to limited partners in respect to their share of the profits and other compensation by way of income in 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 capital. Note: In settling accounts of a general partnership, those owing to partners in respect to capital enjoy preference over those in respect to profits. SHARE IN THE PARTNERSHIP ASSETS The share of limited partners in respect to their claims for capital, profits, or for compensation by way of income, is in proportion of their contribution, unless: (1) There is a statement in the certificate as to their

share in the profits; or (2) There is a subsequent agreement fixing their

share. [Article 1863] AMENDMENT OR CANCELLATION OF CERTIFICATE WHEN CERTIFICATE IS CANCELLED The certificate shall be cancelled when: (1) The partnership is dissolved; or (2) All limited partners cease to be such. WHEN CERTIFICATE IS AMENDED 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;

(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; or

(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.

REQUIREMENTS FOR AMENDMENT OR CANCELLATION To amend or cancel a certificate: (1) The amendment or cancellation must be in

writing; (2) It must be signed and sworn to by all the

members including the new members, and the assigning limited partner in case of substitution or addition of a limited or general partner; and

(3) The writing to amend (with the certificate, as amended) or to cancel must be filed for record in the SEC.

From the moment the amended certificate/writing or a certified copy of a court order granting the petition for amendment has been filed, such amended certificate shall thereafter be the certificate of partnership. [Article 1865]

Contract of agency DEFINITION By the contract of agency, a person binds himself to render some service or to do something in representation or on behalf of another, with the consent or authority of the latter [Article 1868]. Agency may refer to both a contract, as defined in the provision, and the representative relation created. As a relation, agency is fiduciary (based on trust and confidence), which implies a power in an agent to contract with a third person on behalf of a principal.

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