Law on Partnerships

A REVIEW

What is a Partnership?
Partnership is a contract whereby
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. (Art.
1767.) Two or more persons may
also form a partnership for the
exercise of a profession. (Ibid.)

Characteristics
Partnership is a consensual, nominate,
bilateral, onerous, commutative, principal,
and preparatory contract. (see III. Contracts.) Strictly speaking, the practice
of a profession is not a business or an
enterprise.
However, the law allows the pursuit thereof
by two or more persons. Such a
partnership is called "general professional
partnership.

Nature of Partnership
Partnership is fiduciary in nature,
meaning that the partners must
have and confidence in each other.
Personae delectae Partnership is
based on the fiduciary relation ship
among the partners, a person has
right to select other persons whom
he has trust and confidence to
become his partners.

A partnership is a juridical
person
As an association of persons, a partnership duly
formed under the law has a juridical
personality separate and district form that of
each of the partners. Thus, in the partnership
X & Co., in which A and B are the partners,
there are three (3) district persons namely: (1)
X & Co., (2) A, and (3) B. As a consequence of
its distinct legal personality, a partnership
may acquire the possess property, incur
obligations, and bring civil or criminal actions
in its own name. (Art. 46.)
Note: There is no prohibition against a
partnership being a partner in another
partnership.

Essential Features of a
1. Partnership
There must be a valid contract;

2. The parties must have legal capacity to enter

into the contract;
3. There must be a mutual contribution to a
common fund of money (i.e., currency which is
legal tender in the Philippines), property (which
may be real or personal, tangible or intangible
such as credit, share of stock), or industry (which
may be personal manual efforts or intellectual;
4. The Object must be lawful (Art. 1770.); and
5. The purpose or primary purpose must be to
obtain profits and to divide the same or among
the partners. (Art. 1767, 1770.)

The definition of partnership under

Article 1767 refers to "profits" only and
is silent as to "losses." The reason is
that the object of a partnership is
primarily the sharing of profits, while the
distribution of losses is but a
"consequence of the same." (Espiritu &
Sibal, Phil. Law on Partnership [1937.]
p.2, citing 11 Manresa 263.)
(2) It is required that the article of
partnership must not be secret among
its members. (Art. 1775.)
(1)

Effects if articles are kept secret under

Article 1775:
The association here is certainly not a
partnership and therefore not a legal
person because anyone of the
members may contract in his own
name with third persons and name in
the name of the firm.
Although, not a juridical entity, it may
be sued by third persons under the
common name, it uses, otherwise said
innocent third parties may be
prejudiced.

 However, it cannot sue as such, because it has

no legal personality, and therefore, cannot

ordinarily be a party to a civil action. Moreover
the fact that it has no legal personality as a
partnership cannot be invoked by the partners
for the purpose of evading compliance with
obligations contracted by them because they
who caused the nullity of a contract are
prohibited from availing of its benefits.
Therefore, insofar as innocent third parties are
concerned, the partners can be considered as
members of a partnership; but as between
themselves, or insofar as 3rd persons are
prejudiced, only the rules on ownership must
apply. The same rule applies in the case of
partnership by estoppel.

Advantages of Partnership as a
Business Organization

. It is easy and inexpensive to organize as

it is formed by a simple contract
between two or more persons;
2. The unlimited liability of the partners
makes it reliable from the point of view
of the creditor;
3. The combined personal credit of the
partners offers better opportunity for
obtaining additional capital than does
the sole proprietorship;

4.The participation in the business by

more than one person makes possible
a closer supervision of all its
activities;
5. The direct gain to the partners is an
incentive to close attention to the
business;
6. The personal element in the
characters of the partners is retained;
and
7. It is generally free from government
control.

Disadvantages as an Business
Organization
1. The personal liability for firm debts

deters many from investing capital in it;

2. A partner may be subject to personal
liability for the wrongful acts or omissions
of his associates;
3. It also lacks stability due to the ease by
which it may be dissolved;
4. There is divided authority; and
5. There is constant likelihood of dissension
and disagreement when each of the
partners has the same authority in the
,management of the concern.

Rules in determining whether

partnership exist
Test of determining whether
partnership exists depends upon
the contract itself, express or
implied and the intention to create
partnership and in addition:
1)The existence of the common fund
2)Joint interest in the profits
3)Mutual benefit or advantage of
partners

HENCE, persons who are not partners as to

each other are not partners as to third
persons.
However, when a person represents
himself, or consents to another
representing to anyone, as a partner in
an existing partnership or with one or
more persons not actually partners, he is
liable to any such persons to who such
representation has been made, who has,
on the faith of such representation ,
given credit to the actual or apparent
partnership. (Art. 1825)

Legal effect of the receipt by a

person of a share of the profits of a
business

Such receipt is prima facie evidence that he is

a partner in the business. No such inference,
however, shall be drawn if such profits were
received in payment:
As a debt by installments or otherwise;
As wages of an employee or rent to a landlord;
As annuity to a window or representative of a

deceased partner;

Legal effect of the receipt by

a person of a share of the

As interest
loan though the
profits
of on
a abusiness

amount of payment may vary with the

profits of the business; and
As the consideration for the sale of
goodwill of a business or other property
by installment or otherwise. (Art. 1769.)
In all the above cases, the profits in the
business are not shared as profits of a
partner but in some other respects.

Co-ownership versus
Partnership
There is co-ownership whenever the
ownership of an undivided thing or right
belongs to different persons. (Art. 484.)
Although every partnership is founded on a
community of interest, every community of
interest does not necessarily constitute a
partnership (e.g., The heirs who inherited
an apartment which is leased to third
persons are not partners but merely coowners although they share in the profits
from the lease of the property).

Associations and societies, whose articles

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

Does sharing of gross returns by

persons who have a joint or
common interest in the property
from which the returns are derived
of itself establish a partnership?
No, since in a partnership, the partners
share profits after satisfying all of the
partnership's liabilities. (Arts. 1769,
1812, 1839.)

Effects of unlawful
partnership

(1) The contract is void ab initio and the

partnership never existed in the eyes of
the law (Art. 1409.);
(2) The profits shall be confiscated in favor
of the government; and
(3) The instrument of tools and proceeds
of the crime shall be forfeited in favor of
the government. (Art. 1770.)

Formalities required for the

creation of a partnership
As a general rule, a partnership may be
constituted in any form (Art. 1771.)
except in the following cases:
Where personal property is contributed
and the capital is P 3, 000 or more.
The contract must appear in a public
instrument; and
It must be registered with the
Securities and Exchange Commission.
(Art. 1772.)

Formalities required for

the creation of a
Note:
However, failure to comply
partnership

with the above requirements does

not prevent the establishment of
the partnership as a distinct
personality (Art. 1768.) or affect its
liability and that of the partners to
third persons (Art. 1772.) because
they are merely for administrative
and licensing purposes.

Formalities required for the

creation of a partnership
Where immovable property or real
rights thereto are contributed,
regardless of value.
The contract must appear in a
public instrument (Art. 1771.); and
An inventory of the property,
signed by the partners, must be
attached to the public instrument
(Art. 1773.)

Formalities required for

the creation of a
Note:
If the above requirements are
partnership

not observed the contract of

partnership is void. (Ibid.) They do
not apply where the immovable
property is acquired (not
contributed by the partners) by the
partnership. (Agad vs. Mabato. L24173, June 28, 1968.)

Formalities required for the

creation of a partnership
In case of limited partnership.
The partners must sign and swear to a
certificate or articles of limited partnership
which states the matters prescribed by law;
and
(b) They must file such certificate with the
Securities and Exchange Commission. (Art.
1844.)
Note: If there is no substantial compliance
with the above legal requirements, the
partnership becomes a general partnership.

When contribution consists of goods:

(Art. 1787)
Appraisal of value is needed to
determine how much has been
contributed.
How appraisal is made:
Firstly, as prescribed by the contract.
Secondly, in default of the first, by
experts chosen by the partners and at
current prices.
After goods are contributed to the
partnership, the latter bears the risks.

Classification of
Partnerships

According to manner of creation

orally constituted
constituted in a private instrument
constituted in public instrument
registered in the Office of the
Securities and Exchange
Commission

Classes of Partnerships
As to its object:
1.Universal Partnership
2.Particular Partnership

A) Universal partnership of all present

property. - one in which the partners
contribute all the properties which
actually belong to each of them at the
time of the constitution of the partnership
to a common fund, with the intention of
dividing the same among themselves as
well as the profits which they may
acquire therewith (Art. 1778.); and

B) Universal partnership of all profits.

- one which comprises all that the

partners may acquire by their
industry or work during the existence
of the partnership and the usufruct of
movable or immovable property
which each of the partners may
possess at the time of the celebration
of the contract. (Art. 1780.)

Articles of universal

partnership entered into

without specification of its
nature only constitute a
universal partnership of profits
(Art. 1781.)

ALL PROFITS

ALL PRESENT
PROPERTY

a)Only the usufruct a)All the property

of the properties actually belonging
of the partners to the partners are
contributed and
becomes
said
properties
COMMON
become common
PROPERTY
property
(owned
(owned by them
by all partners and
and
the
by
the
partnership);
partnership).
NAKED
b)As a rule, aside
OWNERSHIP
is from
the
retained by each contributed

Note: Persons who are

prohibited from giving each
other any donation or
advantage cannot enter into
universal partnership of profits.
(Art. 1782.)

Classes of Partnerships
Particular partnership. - one which has
for its object determinate things, their
use or fruits, or a specific undertaking,
e.g., acquisition of a real property for
the purpose of reselling it at a profit,
or practice of a profession or vocation.
(Art. 1783.) So, the carrying on a
business of a continuing nature is not
essential to constitute a partnership.

Classes of Partnerships
As to liability of the partners:
(a) General partnership. - one consisting of
general partners who are liable pro rata and
subsidiary (Art. 1816.) and sometimes
solidarily (Arts. 1822-1824.) with their
separate property for partnership debts; or
(b) Limited partnership. - one formed by
two or more persons having as members
one or more general partners and one or
more limited partners, who as such are not
bound by the obligation of the partnership.
(Art. 1843.)

Classes of Partnerships
As to duration:
(a)Partnership at will. - one which no time is
specified and is not formed for a particular
undertaking or venture and which may be
terminated any time by mutual agreement of the
partners or by the will of one alone (40 Am. Jur.
139.); or
(b) Partnership with a fixed term. - one in
which the term of period for which the partner is
to exist is agreed upon or one formed for a
particular undertaking, and upon the expiration
of that term or completion of the particular
enterprise, the partnership is dissolved, unless
continued by the partners. (Art. 1785.)

Classes of Partnerships
As to representation to others:
(a) Ordinary partnership. - one which
actually exists among the partners and
also as to third persons; or
(b) Partnership by estoppel. - one which
in reality is not a partnership, but is
considered a partnership only in relation
to those who, by their conduct or
admission, are precluded to deny or
disprove its existence. (Art. 1825.)

Partnership by Estoppel
It is created in two ways:
1.When a 3rd person represents himself to
another person as a partner in an existing
partnership and the true partners did not
object to his representation, then a
Partnership by Estoppel is created among
themselves.
2. The other way is when the true partners of
an existing partnership represent a third
person did not object to their representation,
then a partnership by estoppel is created
among themselves.

Classes of Partnerships

As to legality of its existence:

(a) De jure partnership. - one which has
complied with all the requirements for its
establishment (see Arts. 1772, par. 2; 1773.); or
(b) De facto partnership. - one which has failed to
comply with all the legal requirements for its
establishment. (Ibid.)
As to publicity:
(a) Secret partnerships. - one wherein the
existence of certain persons as partners are not
made known to the public by any of the partners;
or
(b) Open or notorious. - one whose existence is
made known to the public by the members of the
firm.

Classes of partners

As to contributions:
(a) Capital partner. - one who contributes capital. I.e.,
money or property, to the common fund (Art. 1767.);
or
(b) Industrial partner. - one who contributes industry or
labor. (Art. 1789, 1767.)
As to Liability
(a)General Partner one whose liability to third person
extends to his separate property. He may be either a
capitalist or industrial partner or both
(b)Limited Partner one whose liability is limited to his
capital contribution. Also known as a special partner.
He does not participate in the management of the
partnership.

Classes of partners

As to management
(a) Liquidation partner. - one who takes
charge of the winding up of partnership affairs
upon dissolution (Art. 1836.)
(b) Nominal partner or partner by estoppel. one who is not really a partner, not being a
party to the partnership agreement, but is
made liable as a partner for the protection of
innocent third persons (Art. 1825.);
(c) Real partner. - one who is actually
connected with the business as a partner (Art.
1767.)

Classes of partners
(d)

Ostensible partner. - one who is actually

connected with the business as a partner
in the business (Art. 1834, par. 2.);
(e) Dormant partner. - one who does not
take active part in the business and is not
known to the public as a partner; he is
both a silent and secret partner (Ibid.); and
(f) Subpartner. - one who contracts with a
partner with reference to the latter's share
in the partnership. (Art. 1804) He is not
really a partner.

Obligations of the partners

among themselves
There are at least four distinct juridical
relations, namely:
Relations among partners themselves;
Relations of the partners with the
partnership;
Relations of the partnership with third
persons with third persons with whom
it contracts; and
Relations of the partners with such
third persons.

Obligations of the partners

among themselves
When does a partnership begin?
Since partnership is a consensual
contract, it begins from the moment of
the execution of the contract. The
partners, however, may stipulate some
other date for the commencement of
the partnership (Art. 1784). Hence,
there can be a future partnership,
which at the moment has no juridical
existence yet.

Obligations of the partners

among themselves
Obligations of the partner among
themselves and to the partnership with
respect to contribution of money or
property:
To contribute at the beginning of the
partnership or at the stipulated time the
money, property which he promised to
contribute;
It is permissible to contribute unequal
shares, if there is a stipulation to this
effect. In the absence of proof, the shares
are presumed EQUAL.

Obligations of the
partners among
To answer for eviction (as a vendor) in
themselves
case the partnership is deprived of
the determinate property contributed;
To answer to the partnership for the
fruits of the property the contribution
of which he delayed, from the date
they should have been contributed up
to the time of actual delivery without
the need of any demand (Art. 1786);

Obligations of the partners

among themselves
Obligations of the partner among
themselves and to the partnership with
respect to contribution of money or
property:
To preserve said property with the diligence of a
good father of a family pending a delivery to the
partnership (Art. 1163);
To indemnify the partnership for nay damage
(and also the legal interest of the promised
contribution in money) caused to it by retention
of the same or by the delay in its contribution
(Arts. 1788, 1170)

Obligations of the partners

Obligations
of themselves
an Industrial Partner:
among

To contribute at the beginning of the partnership or

at the stipulated time the industry which he

promised to contribute (Art. 1786);
Not to engage in any other business for himself
(prohibition is absolute) unless the partnership
expressly permits him to do so; otherwiseThe capitalist partners may exclude him from the
firm; or they may avail themselves of the benefits
which the industrial partner may have obtained from
other businesses, with a right to damages in either
case. (Art. 1789)
Reason for the prohibition: The industrial partner
is a debtor of the partnership for his work or
services. He must therefore devote his full time to
the interest of the partnership.

Obligations of the partners

among themselves
Rule on capitalist partner investment in other
business:
As a rule, he cannot engage for his own account, in any
operation, which is of the same kind of business in which
the partnership is engaged otherwise He shall be liable to the partnership for any profits he
obtained from his transactions; and
He shall personally bear all his losses (Art. 1808)
Reason for the prohibition: The capitalist partner is
likely to prejudice the partnership by the competition he
will offer.
Exceptions are (a) when the business is not the same or
similar to that engaged in by the partnership; or (b)
although it is of the same kind, if there is a stipulation to
the contrary.

Obligations of the partners

among themselves
Rules in case managing partner collects a
demandable debt from a person who also
owes the partnership a demandable debt:
The sum collected shall be applied to the two
credits in proportion to their amounts;
It shall be fully applied to the partnership credit, if
the receipt given is for the account of the same;
and
The debtor however has the right to have the
payment applied to his debt to the partner if it
should be more onerous to him. (Arts. 1792, 1252)
Reason: To prevent the furtherance of a managing
partner's interest to the prejudice of the firm. Note
that the law speaks only of a managing partner.

Obligations of the partners

among
A partner
whothemselves
has received, in whole or in part,

his share of a partnership credit, when the other

partners have not collected theirs, shall be
obliged, if the debtor should thereafter become
insolvent, to bring to the partnership capital
what he received even though he may have
given receipt for his share only. (Art. 1793)
Example
X owes a firm P 1,000. P, a partner was given his
share of P 500, there being only two partners.
Later X becomes insolvent. P must share the P
500 with the other partner even if P had given a
receipt for his share.
This applies whether the partner has received HIS
SHARE wholly or in part.

Obligations of the partners

among themselves
Obligations of a Partner:
Money converted to personal use. - To pay to the
partnership interest and damages for any sum of
money which he may have taken from the
partnership coffers; said liability to begin from the
time of conversion (not demand) of the amount to
his own use (Art. 1788)
Additional share to capital. - To contribute an
additional share to the capital in case of imminent
loss of the business of the partnership to save the
venture; otherwise, he (Except an industrial partner
because having contributed his entire industry there
is nothing more he can do) shall be obliged to sell his
interest to the other partners. (Art. 1791) Reason
for the sanction: The refusing partner reflects his
lack of interest in the continuance of the partnership;

Obligations of the partners

amongof themselves
Obligations
a Partner:
Indemnity for damages to partnership. - To

indemnify the partnership for damages suffered by it

through his fault and he cannot compensate them with
the profits or benefits he may have earned for the
partnership. (Art. 1794) Reason: A partner has an
obligation to secure benefits for the partnership. Hence,
the profits he may have earned pertains as matter of
right to the partnership;
Information affecting partnership. - To render on
demand true and full information of all things affecting
the partnership to any partner or his legal
representative. (Art. 1806) Reason: The relations
between the partners involve trust and confidence; and
Share in loss. - To share in the loss of the partnership
except in the case of the industrial partner. (Art. 1797)

Obligations of the partners

Rights enjoyed by a partner:
among themselves
To receive his share of the profits of the

partnership (Arts. 1797, 1799);

To participate in the management of the firm, in
the absence of an agreement to the contrary
(Arts. 1803, 1810)
To associate another person (sub-partner) with
him in his share (Art. 1804) consent of the
other partners is not required. But to make an
associate a partner, all must consent. Reason
MUTUAL TRUST IN THE PARTNERSHIP.
To have access to, inspect and copy, at any
reasonable hour, any of the partnership books
(Art. 1805);

To demand a formal account (even before

dissolution) of the partnership affairs:
If he is wrongfully excluded from the partnership
business or possession of its property;
If he has such right under the terms of any
agreement;
If a partner receives any benefit or profit which
should pertain to the partnership (see Art.
1807) and
Whenever other circumstances render it just
and reasonable (Art. 1809);
To ask for the dissolution and winding up of the
partnership by decree of the court (Art. 1831,
infra.); and

To ask for the return of his contribution,

provided that the partnership assets are

in excess of all its liabilities. (Art. 1839,
Infra.)
Note: As a rule, a partner is not entitled
to a formal account. Reasons: His rights
to know partnership affairs are amply
protected (Art. 1805, 1806, supra.) and
furthermore, a formal account requires
considerable time and effort

Rules of failure to contribute and for

conversion (Art. 1788)
Cases covered:
when money promised is not given on
time
when partnership money is converted
to the personal use of the partner.
Coverage of Liability covers also
INTEREST AND DAMAGES
Interest at the agreed rate: if none at
the legal rate of 12% per annum
Damages that may be suffered by the
partnership

Note: No need for Demand to put partner in

default.
Reason: in case of the contribution, because
time is of the essence: a partnership is formed
precisely to make use of the contributions and
this use should start from its formation, unless
a different period has been set, otherwise the
firm is necessarily deprived of the benefits
thereof. Thus the injury is constant.
In case of conversion, because the firm is
deprived of benefits of the money, from the
very moment of conversion.

PRESUMPTION AS TO THE AMOUNT OF

CONTRIBUTION
Unless there is a stipulation to the contrary,
the partners shall contribute equal shares
to the capital of the partnership. (Art. 1790)

Rules for the distribution of profits and losses

among partners.
Distribution of profits:
The partners share the profits according to their
agreement subject to Article 1799 (see question
No. 11, infra.);
If there is no such agreement:
The share of each capitalist partner shall be in
proportion to his capital contribution. This rule is
based on the presumed will of the partners;
The industrial partner shall receive such share,
which must be satisfied first before the capitalist
partners shall divide the profits, as may be just
and equitable under the circumstances;
The capitalist-industrial partner shall get a share in
the profits, which must also be satisfied first, as
an industrial partner, and an additional share, in
proportion to his contribution from the balance.
(Art. 1797.)

Obligations of the
partners among
Distribution of losses:
themselves
The losses shall be distributed according to their

agreement subject to Article 1799 (see question

No.11. infra.);
If there is no such agreement, but the contract
provides for the share of the partners in the
profits, the share of each in the losses shall be in
accordance with the profits-sharing ratio; but the
industrial partner shall not be liable for losses.
The term "losses" implies that there are no
profits.

Obligations of the
partners among
May
a partner be excluded
themselves

from any share in the

profits or losses?
No. Any such stipulation is void.
(Art. 1700.) Reason: The
partnership must exist for the
common benefit and interest of
the partners. (Art. 1770.)

But a stipulation exempting the industrial

partner from the losses is naturally valid
since the law itself excludes him from
losses. (Art. 1797.) Reasons.
Unlike a capitalist partner who can
withdraw his capital, an industrial partner
cannot withdraw the work already done
by him; and
Furthermore, in the event of loss, then
an industrial partner has labored in vain
and in a real sense, he has already
contributed his share in the loss.

EXAMPLE: A, B, and C formed a partnership, whereby each

of them contributed P 20,000.00. They agreed that
should the partnership realize profits, the same shall be
distributed in the following proportions:
A as managing partner 40%
B .. 30%
C .. 30%
In this case, the partners shall share the profits in
conformity with their agreement. If there is no
agreement with respect to the share of each partner,
then, they shall share the profits equally.
Suppose, the contributions of the partners are as follows:
A .. P 30,000.00
B ..
20,000.00
C .
10,000.00
Total
P 60,000.00

In the absence of stipulation the share of each of the partners shall

be in proportion to his contribution, that is:
A .. P 3/6
B .
2/6
C .
1/6
If D is an industrial partner he shall receive such share as may be
just and equitable under the circumstances. Assuming that the
partnership makes a profit of P 17,000.00, the partners may
determine considering all the circumstances, that D, as industrial
partner, is entitled to P 2,000.00. The balance of P 15,000.00
will be divided among A, B, and C in proportion to their
respective capital contributions: P 7,500.00, P 5,000.00, and P
2,500.00 respectively.
Now, if D, aside from his services, contributed P 12, 000.00, then,
he will also have a share in the balance of P 15,000.00 in
proportion to his contribution, which is 3/15 (P 12,000.00 P
6,000.00) or P 3,000.00, while A, B, and C will share P 6,000.00,
P 4,000.00, and P 2,000.00, respectively.

Distribution of losses:
The losses shall be distributed according to their agreement
subject to Article 1799 (see question No.11. infra.);
If there is no such agreement, but the contract provides for
the share of the partners in the profits, the share of each in
the losses shall be in accordance with the profits-sharing
ratio; but the industrial partner shall not be liable for losses.
The term "losses" implies that there are no profits.
EXAMPLE: In the same example, the partners will share in the
losses in conformity with their agreement. If they failed to
agree as to the sharing of losses, the share of each partner
in the losses shall be in the same proportion stipulated with
regards to the share of each in the profits, to wit:
A .. 40%
B .. 30%
C . 30%

If there is also no profit-sharing ratio

stipulated, then the losses shall be divided

in proportion to their capital contributions.
D, however, being an industrial partner,
shall not be liable for losses but the same
shall be borne by A, B, and C, the capitalist
partner, then he shall share in the losses in
proportion to his contribution.

The designation of profit and loss sharing may be

entrusted to a third person. The designation made
by the third person is binding upon the partners
unless such is MANIFESTLY INEQUITABLE. If,
however the designation by third person is annulled,
the share of the partners in the profits and losses
shall be in proportion to their capital contribution.
The designation made by third person although
inequitable could no longer be impugned or
cancelled:
a)If the partner has begun to execute the decision of
the third person.
b)If he does not impugn or cancel such designation
within three months from the time he had knowledge
thereof. (Art. 1798)

Obligations of the partners

among themselves
Rules Governing Management of
Partnership: Obligations of the
partners among themselves
Where the manager is appointed in the
articles of partnership:
Extent of Power. - He may execute acts

of administration (not ownership)

despite the opposition of his partners
unless he acts in bad faith;

Obligations of the
partners
among
Therefore:
themselves
a)To
remove him for JUST cause, the controlling
partners
( controlling financial interest)
should vote to OUST HIM (See Art. 1800, par 1);
b)To remove him WITHOUT CAUSE or FOR AN
UNJUST CAUSE, there must be UNANIMITY
(including his own vote)
Reason: Revocation will amount to change in the
terms of the contract of partnership. For just or
lawful cause, the vote of the controlling
partners (controlling financial interest) is
necessary to oust him.

Obligations of the
partners among
Extent
of
Power:
themselves

a)If he acts in GOOD faith, he may do all

acts of Administration (not ownership)

despite the opposition of his partners.
b) If in BAD faith, he cannot ( however,
he is presumed to be acting in good
faith; moreover if he is really is in bad
faith the controlling interest should
remove him.)

Obligations of the partners among

themselves
Where manager is appointed orally or in an
instrument other than the articles of
partnership:
Extent of Power. - The partner appointed as
manager after constitution of the
partnership may also perform acts of
administration;
Revocation of Power. - The power may be
revoked at anytime with or without just
cause. Removal should be done by
controlling interest.
Reason: The appointment is mere
delegation of power.

Where there are two or more managing

partners whose respective duties are not
specified.
Extent of Power.- Each one may separately
perform acts of administration;
In case of opposition by any of the managers.
- The decision of the majority of the
managers (per head) shall prevail. In case
of tie, the matter shall be decided by the
managing partners owning the controlling
interest (more than 50% of the investment)
(Art. 1801);

Where two or more managing partners

with stipulation that none of them
shall act without the consent of the
others.
Extent of Power. - The concurrence of
all is necessary for the validity of their
acts; and the absence or incapacity of
any manager cannot be alleged as an
excuse to dispense with this
requirement.
Exception. - When there is imminent
danger of grave or irreparable injury
to the partnership (Art. 1802);
Revocation of Power. - Same as letter
(a) and (b) as the case may be.

Where the manner of management has not

been agreed upon:
Extent of Power. - All the parties shall be
considered as agents of the partnership
whose acts shall bind the partnership;
None of the partners may make alterations
in the immovable property of the
partnership even if it may be useful to the
firm. In case of dispute, the partners may
seek the intervention of the court.
In case of Opposition by a partner. - The
decision of the majority of the partners
shall prevail. In case of tie, the partners
representing the controlling interest shall
decide the matter. (Art. 1801)

Obligations of the partners

The
obligations
of the partnership to the
among
themselves

partners?
To refund amounts disbursed by a partner in
behalf of the partnership plus the corresponding
interest from the time the expenses are made;
To answer for the obligations he may have
contracted in good faith in the interest of the
partnership business; and
To answer for risks in consequence of its
management. (Art. 1796.)
Note: A partner is a mere agent of the
partnership for the purpose of the business in
the absence of any stipulation to the contrary.
(Art. 1818.) Hence, he is not personally liable.

PROPERTY RIGHTS OF A
His rights
in specific
PARTNER
partnership property;
His interest in the
partnership; and
His right to participate
in the management.
(Art. 1810.)

PROPERTY RIGHTS OF A
PARTNER

Nature of a partner's right in specific

partnership property?
A partner is a co-owner with his partners
of specific partnership property. The
incidents of this rule are:
A partner, subject to legal provision on
partnership and to any agreement
between the partners, has an equal right
to possess specific partnership property,
but for partnership purposes only;

His right in specific partnership property is not

assignable. Reason: The extent of his

beneficial interest in the property cannot be
determined until after liquidation of
partnership affairs. However, the rights of all
the partners to the same property may be
assigned by them;
His right in said property is not subject to
attachment or execution except on a claim
against the partnership and not to the
partner; and
The property is not subject to legal support
due from a partner. (Art. 1811.)

PROPERTY RIGHTS OF A
Partnership property from partnership capital.
PARTNER

The distinctions are:

Partnership property is variable - its value may vary
from day to day with changes in the market value of
the partnership assets, while partnership capital is
constant - it remains unchanged as the amount
fixed by agreement of the partners, and is not
affected by fluctuations in the value of partnership
property; and
Partnership property includes not only the original
capital contributions of the partners, but all property
subsequently acquired on account of the
partnership or with partnership funds, while
partnership capital represents the aggregate of the
individual contributions made by the partners.
(Babb & Martin, Business Law, p.240.)

PROPERTY RIGHTS OF A
What
does the partner's interest in the
PARTNER

partnership consist of?

It consists of his share in the profits while the
partnership is on going and in the surplus after its
dissolution. (Art. 1812.)
Is the partner's interest in the partnership
assignable?
This interest may be assigned. Such assignment,
however, does not make the assignee or transferee
a partner. Reason: No one can become a partner
without the consent of the other partners. The
right of the assignee (among others) is to receive
the profits accruing to the assigning partner.

Property Rights of the

Effects of Conveyance by Partner of His Whole
Partner
Interest
in the Partnership (Art. 1813)
a. If a partner conveys ( assigns, sells, donates) his

WHOLE interest in the partnership ( his share in

the profits and surplus), either two things may
happen:
1. the partnership may still remain
2. The partnership is dissolved.
However, such conveyance DOES NOT itself
dissolve the firm, therefore the general
partnership remains.
b. The assignee does not necessarily become a
partner. The assignor is still the partner, with a
right to demand accounting and settlement.

The assignee cannot interfere in the management or

administration of the partnership business or affairs.
The assignee cannot demand
1. Information
2. Accounting
3. Inspection of the partnerships book
RIGHTS OF THE ASSIGNEE
a. To get whatever profits the assignor-partner would
have obtained.
b. To avail himself of the usual remedies in case of fraud
in the management.
c. To ask for annulment of the contract of assignment if
he was induced to enter into it thru vices of consent.
d. To demand accounting but only if the partnership is
dissolved, but even then, the account cover the period
only from the date of the last accounting which had
been agreed by the partners (Art. 1813 2 nd par.

PROPERTY RIGHTS OF A
PARTNER

With respect to the partner's interest in

the partnership, who enjoy preference his creditors or the partnership creditors?

The interest in the surplus is available for

the satisfaction of the separate debts of the
partners (Art. 1814.) subject to the
preferred rights of the partnership creditors
as regards partnership property. (Art. 1824.)
This means that they have to be paid first
from partnership property before the
separate or private creditors of each
partners of each partner.

PROPERTY RIGHTS OF A
Without
prejudice to the preferred rights of
PARTNER

partnership creditors under Article 1827, on

due application to a competent court by any
judgment creditor of a partner, the court which
entered the judgment, or any other court, may
charge the interest of the debtor partner with
payment of the unsatisfied amount of such
judgment debt with interest thereon, and may
then or latter appoint a receiver of his share of
the profits, and of any other money due or to
fall due to him in respect of the partnership,
and make all other orders, directions, accounts
and inquiries which the debtor partner might
have made, or which the circumstances of the
case may require.

The interest charged of a general

partner may be redeemed at
anytime before foreclosure by the
separate property by one or more
partners or by the partnership
property by one or more partners
with the consent of all the partners
whose interest are not charged.

PROPERTY RIGHTS OF A
Example :
A, B and C are partners A personally
PARTNER
owes X a sum of money. X sues A, and obtains a
final judgment in this favor. But A has no money.
What can X do?
He can charge the interest of partner A by
asking the same court ( or any other court
possessed of jurisdiction. Charged means to
attach or levy upon his interest in the
partnership for payment of his unpaid liabilities.
Note: while a partners interest in the
partnership ( his share in the profits or surplus)
may be charged or levied upon but his interest
in specific partnership property as a rule cannot
be attached.

PROPERTY RIGHTS OF A
PARTNER
When charging
order is applied for and granted, the
court MAY at the same time or later appoint a receiver
of the partners share in the PROFITS or other MONEY
due him. The receiver appointed is entitled to any
relied necessary to conserve the partnership purpose.
Thus, he may nullify all efforts to assign specific
partnership property.
REDEMPTION OF THE CHARGE INTEREST +
1.The charge may be redeemed or bought at any time
BEFORE FORECLOSURE
2. AFTER FORECLOSURE, it may still be bought with the

separate property ( one or more of the

partners) or with the partnerships
property with consent of all partners.

Note that if it is the limited

partners interest that is subject
to charging order of his creditor,
it may be redeemed by the
separate property of the
general partner but not of
the PARTNERSHIPS
PROPERTY
( Article 1862)

OBLIGATIONS OF THE PARTNERS

WITH REGARDS TO THIRD
PERSONS
the effects of the inclusion in the
Give
firm name of the name of a person
who is not a partner.
They are:
Such person does not acquire the rights of
a partner (Art. 1767.); and
He shall be subject to the liability of a
partner (Art. 1815.) in so far as third
persons without notice are concerned.

What is the nature of the liability of partners

to third persons for partnership contracts?
The liability of all the partners, including industrial
ones, is:
Pro rata. - This must be understood to mean
equally or jointly and not proportionately because
the pro-rating is based on the number of partners
and not in the amount of their contribution
subject to adjustment among them (see question
No. 13 [3], Chap.3.); and
Subsidiary. - The partners become personally
liable only after all the partnership assets have
been exhausted. (Art. 1816.)
Any stipulation against the liability laid down
above is enforceable only as among the partners
but is void as to third persons. (Art. 1817.)

Note: The exemption of the

industrial partner to pay
losses relates exclusively to
the settlement of partnership
affairs among themselves.
(Compania Maritima vs.
Muoz, 9 Phil. 326.)

Article 1818:
When a partner can bind or cannot bind the firm:
a)The fact that the partner is an agent;
b)The instances when he can bind the partnership
c) The instances when he cannot bind the partnership;
d)The instances when he cannot bind the partnership
( in which case should he enter into the contract, he
alone, and not the firm nor the partner) would be
liable.
Agency of a Partner
It has been truthfully aid that a partnership is a
contract of MUTUAL AGENCY, each partner acting as
a principal on his own behalf, and as an agent for
his co-partners or the firm.

WHEN CAN A PARTNER BIND THE PARTNERSHIP

a)When he is expressly authorized or impliedly
authorized:
b)When he acts in behalf and in the name of
the partnership.
Instances of Implied Authorization:
1.When the other partners do not object,
although they have knowledge of the act;
2.When the act is for apparently carrying on in
the usual way of the business of the
partnership. ( THIS IS BINDING TO THE FIRM
EVEN IF THE PARTNER WAS NOT REALLY
AUTHORIZED, PROVIDED THAT THE THIRD
PARTY IS IN GOOD FAITH)

What acts of a partner will be binding on a

partnership with respect to third persons?

(1) Acts for apparently carrying on in the usual

way the business of the partnership. - Unless
the partner has in fact no authority and the
third person has knowledge of that fact;
(2) Acts not apparently for carrying on in the
usual way the business of the partnership. When authorized by the other partners;
(3) Acts of strict dominion or ownership.
when authorized by the other partners;
when the other partners have abandoned the
business; or
when effect by all of them; and

4) Acts in contravention of a restriction

on authority. - Unless the third person
has knowledge of such restriction,
whether or not the acts are
apparently carrying on in the usual
way the business of the partnership.
(Art. 1818.)
Note: "Usual way" means usual for the
particular partnership or usual for
similar partnerships. (Crane, Law on
Partnership, p. 190.)

Example:
A, and B are partners in buying and selling
automobiles. A, by partners agreement was
authorized to BUY automobiles on a cash basis ,
never on an INSTALLMENT PLAN. One day , A
bought on credit or on the installment plan a car
from X, a client. X did not know of As lack of
authority. As purchase was made on behalf and
in the name of partnership. In the given
example, partnership is bound because although
A was not really authorized, still for apparently
carrying on in the usual way the business of the
partnership. A impliedly authorized and X was
in good faith. Had X known of As actual lack of
authority , the answer would not be bound.

instances of acts of strict dominion or

ownership.
.
Assignment of partnership property in trust for
creditors or on the assignee's promise to pay the
debts of the partnership;
Disposal of the goodwill of the business;
Any act which would make it impossible to carry
the ordinary business of the partnership;
Confession of judgement;
Compromise concerning a partnership claim or
liability;
Submission or partnership claim or liability to
arbitration; and
Renunciation of a claim of the partnership. (Ibid.)

CONVEYANCE AND REGISTRATION OF REAL

PROPERTY OF PARTNERSHIP ( Art. 1819)
A.If title is in the name of the partnership
I. If the partner is authorized to sell the
real property and the sale is made in the
name of the partnership, the buyer gets a
valid title.
II. If the partner is without authority and
he sells the property in the name of the
partnership, the partnership may recover
the land from the buyer.

Exceptions ( meaning the partnership can no

longer recover the property from the buyer)

1.When the partners acts in the usual way of
business and the buyer does not know of the
partners lack of authority, or
2.When the property has already been validly
conveyed to a third party in good and for value.
a. If the partner sells the property in his own name
and in the usual way of business and with
authority, the buyer does not get valid title, but
only the equitable interest.
What is equitable interest? It is not a legal title but a
fair, just and right title to the property based on
the principle of equity

b. If the partnerships property is in the name of

one or more but not all the partners, and the

record does not disclose the right of the
partnership, if sold by sold by the partner in
his name, title is conveyed to the buyer, but
the partnership has the right to recover the
property.
Exception:
(1) If the sellers act does not bind the
partnership as when the partners act in the
usual way of business and the buyer does not
know of the partners lack of authority. no
recovery
(2) When the buyer is in good faith and for
value, without knowledge of partners lack of
authority.- no recovery

c. If the property is registered in

the name of a third person in
trust of the partnership:
- If the registered trustee sells
the partnership property, the
buyer gets only the equitable
interest

Example:
Par. 1
A, B , C and D are partners of firm Edimus. A
parcel of land registered under name Edimus was
sold by A on behalf and in the name of the firm
Edimus but without express authority. The
purchaser is X Does he become the owner?
Answer: Ordinarily YES but the firm may get back the
land unless:
a. The firm is engaged in the buying and selling of land
( consequently, the act of A is usual;
b. X had in turn sold the same land to Y for value and Y
did not know of As actual lack of authority. (This is
the case even when the selling of the land was not
for apparently carrying on the business in the usual
ways) Thus in the case presented, the firm cannot
get back the land. Reason: Because the property
has in turn been conveyed by the grantee X. To a
holder for value (Y) without the knowledge that the
partner, in making the conveyance, has exceeded his
authority.

2. Example : Paragraph 2
A, B , C and D are partners of firm Edimus. engaged in
the buying and selling of land.
A parcel of land
registered under name Edimus was sold by A on in his
own name. Does the buyer become the owner of the
land? If not what right does the buyer have?
Ans: the buyer does not become the owner of the land.
However, he gets the equitable interest of the firm
insofar as the land is concerned, because after all the
selling of the land was in the usual course of business.
Of course, the
buyer may later on ask for the
reformation of the contract, so that now, the sellers
name would appear to be that of Edimus, provided of
course that the other partners would not object. ( they
would object of course if indeed A did not have actual
authority to sell, unless the buyer did not know of such
lack of authority.) If the contract be thus reformed, it is
clear that the buyer has also been given title. Note: If
the partnership had not been engaged in the purchase
and sale of land, the buyer would not even be entitled to
the equitable interest.

Example o Par. No. 3

A, B , C and D are partners in the real estate firm
Edimus. Although a certain parcel of land really
belonged to the firm, it was registered in the name of A
and B. A and B sold, in their name, the land to X. May the
firm get back the land?
Ans: Since the firm is engaged in the real estate business
the act of selling the land was for carrying in in the usual
way the firms business. So, the firm cannot get back the
land, for title thereto has been conveyed to X.
Question: Suppose in the preceding problem A and B had
not been expressly disauthorized by the firm to sell land,
would your answers remain the same?
Ans: It depends:
a. If X had been in good faith, that is, he head no knowledge
of the lack of authority, the answer would be the same
( 1st par. Art. 18181)
b. If X had been in Bad Faith, the firm can get back the land
unless X in turn had sold the property to Y who is in good
faith. (Here the assignee Y of the purchaser X is a holder
for value without knowledge.)

Example of Par. 4
A, B , C and D are partners in the real estate
firm Edimus. A certain parcel of land was in
the name of A in trust for the firm Edimus.
a)If A sells the land to X in the name of Edimus,
will X become owner?
Ans: No, what X gets will only be the equitable
interest of the firm.
b) If A sell the land to X in his (As) own name,
will X become the owner?
Ans.: No what X gets will also be only the
equitable interest of the firm.
Reason: It is clear in both instances that under
the registry records A is only the trustee.

Example of Par. 5
A, B , C and D are partners in the real estate
firm Edimus. A certain parcel of land was
registed not in the name of the firm but in the
name of A, B, C and D. If A, B, C and D will sell
the land to X, will X become the owner, or will
he have only the equitable interest?
Ans: X will get the title. Consequently, he
becomes the owner, for the law says that
where the title to real property is in the names
of all the partners, a conveyance executed by
all the partners passes all their rights in such
property ( Art. 1819, par. 5). The phrase all
their rights includes ownership because under
Art. 1811 A partner is co-owner with his
partners of specific partnership property.

Admission or Representation Made By a Partner (Art. 1820)

generally, an admission by a partner is an admission
against the partnership under the conditions given:
a) The admission must concern partnership affairs
b) Within the scope of authority
c) Admission must be made during the existence of the
partnership.
d) Proof of the existence of the partnership.
Restriction on the Rule:
a) Admissions made before dissolution are binding only
when the partner has authority to act on the particular
matter.
b) Admissions made after dissolution are binding only if the
admissions were necessary to wind up the business.
Reason: If the admission is not the act of the partnership
( thru the partner), it should not be evidence against it.
The words within the scope of authority produce this
result..

Needless to say an admission made by a

former partner, made after he has retired
from the partnership is NOT evidence
against the firm.
When is previous admission ( not present
court testimony) of a partner admissible
against the partnership?
When it was made WITHIN the scope of
the partnership and DURING its existence,
provided of course that the existence of
the partnership is first proved by other
evidence than such act or declaration.

Cases where notice to or knowledge of a

partner constitutes notice to or knowledge of
the partnership.
Notice to any partner of any matter relating to
partnership affairs;
Knowledge of the partner acting in the
particular matter acquired while a partner;
Knowledge of the partner acting in the
particular matter then present to his mind;
and
Knowledge
of any other partner who
reasonably
could
and
should
have
communicated it to the acting partner. (Art.
1821.)
But there is no notice to or knowledge of the
partnership in the case of fraud on the
partnership committed by or with the consent
of the partner. (Ibid.)

Effect of Notice to a Partner

In general, notice to a partner is notice to the
partnership, that is, a partnership cannot claim
ignorance if a partner knew. But this rule has
restrictions and qualifications.
Notice to a partner, given while already a partner is
a notice to the partnership provided it relates to
partnership affairs.
Effect of knowledge although No Notice is given
It may be that no notice has been given, but
knowledge has been somehow acquired. (Thus,
while, nobody made any notification still the
partner perhaps because of analysis or deduction
came to know of something.) Is this knowledge of
a partner also considered knowledge o the
partnership?

Knowledge of the partner is also knowledge of the firm

provided:
a) The knowledge was acquired by a partner who is acting
in the particular matter involved. (NOTE: The knowledge
may have been acquired while already a partner, or even
PRIOR TO THAT TIME, provided he still remembers the
same, that is, present to his mind.)
b) Or the knowledge may have been acquired by a partner
not acting in the particular matter involved. But here it is
essential that the partner having knowledge had reason
to believe that the fact related to a matter which had
some possibility of being the subject of the partnership
business, and then only if he was so situated that he
could communicate it to the partner acting in the
particular matte before such partner gives binding effect
to his act. The words who reasonably could and should
have communicated it to the acting partners
accomplishment this result.

Problem:
P acquired some knowledge about Ss credit before
P became a partner. Later P became a partner,
and one day S had a transaction with the firm. P
never conveyed the information he knew t o the
firm although he could have done so. Another
partner R was the person who dealt with Ss
transaction. Nobody else in the firm knew what P
already knew. Question: Is Ps knowledge also
the knowledge of the partnership?
Ans: No because P was not the partner acting in
the particular matter involved. He had acquired
he knowledge BEFORE he became a partner, not
afterwards. The words present in his mind
(remembered) do not apply, for they apply only to
the person ACTING in the particular matter. Where
the knowledge or notice has been received by the
partner before he became a partner acting in the
particular matter, there is no doubt that there
has been neither knowledge of nor notice to the
partnership.

What is the nature of the liability to third

persons of the partners for noncontractual debts arising from their
individual acts?
All the partners are solidarily liable with the
partnership for everything chargeable to the
partnership in the following cases:
Where (a) by any wrongful act or omission of
any partner (b) acting in the ordinary course of
business or with the authority of his co-partners,
loss of injury is caused to any person, not being
a partner in the partnership, or penalty is
incurred (Art. 1822; e.g., negligent operation of
a vehicle by a partner which result in a traffic
accident);
Reference to torts or quasi-delicts

Where (a) one partner acting within the

scope of his apparent authority receives

money or property of a third person, and (b)
misapplies it; and
Where (a) the partnership in the course of its
business (b) receives money or property is
misapplied by any partner (d) while it is the
custody of the partnership. (Art. 1823.)
Reference; Liability of Partnership for
Misappropriation.
Under Art. 1824, all partners are liable
solidarily with the partnership for everything
chargeable under Articles 1822 to Art. 1823.

When Firm and the Other partners are not

liable:
a. If the wrongful act or omission was not done
within the scope of the partnership business
and for its benefit.
b.If the act or omission was not wrongful (See
Art. 1822 which uses the term wrongful)
c. If the act or omission, although wrongful, did
not make the partner concerned liable
himself.
d.If the wrongful act or omission was
committed after the firm had been dissolved
( stopped its business) and the same was not
in connection with the process of winding up.

What is the nature of the liability to third

persons of the partners for noncontractual debts arising from their
individual acts.
All the partners are solidarily liable with the
partnership for everything chargeable to the
partnership in the following cases:
Where (a) by any wrongful act or omission of
any partner (b) acting in the ordinary course
of business or with the authority of his copartners, loss of injury is caused to any
person, not being a partner in the
partnership, or penalty is incurred (Art. 1822;
e.g., negligent operation of a vehicle by a
partner which result in a traffic accident);

Where (a) one partner acting within

the scope of his apparent authority

receives money or property of a third
person, and (b) misapplies it; and
Where (a) the partnership in the
course of its business (b) receives
money or property is misapplied by
any partner (d) while it is the custody
of the partnership. (Art. 1823.)

How may a person become a partner by

estoppel?
(1) By representing himself as a partner in
an existing partnership or in a non-existing
partnership (i.e., with one or more persons,
not actual partners); or

(2) By consenting to another making such

representation. (Art. 1825.)

Who will be liable to third persons who

acted in good faith when a person is
falsely represented as a partner in an
actual or apparent partnership?
They are:

The partner by estoppel;

Those who consented to such representation;
and
The partnership itself if all the actual partners
consented to the representation. (Ibid.) This is a
case of partnership by estoppel.
Note: Estoppel does not create a partnership as
between the alleged partners. A contract is
essential to the formation of a partnership. (Art.
1767.)

Rule on the liability of the partners for partnership

obligations where a person is admitted as a partner in
an existing partnership.
When a person is admitted as a partner into an

existing partnership, he is liable for all

obligations existing at the time of his admission
as though he was already a partner when such
obligations were incurred. Such obligations
shall be satisfied only out of the partnership
property, unless there is a stipulation to the
contrary. (Art. 1826.)

Those who were already partners at the time

when the obligations were incurred are liable
with their separate property. (Art. 1816.) For all
the obligations accruing subsequent to the
admission of the new partner, all the partners
are liable with their separate properties.

What is the extent of the liability of a person

admitted as a partner into an existing
partnership?

(1) As to partnership debts contracted before

his admission. - He is liable only up to the
amount of his contribution or his share in the
partnership property unless there is a
stipulation to the contrary; and

(2) As to partnership debts contracted after

his admission. - He is liable with his separate
property if partnership assets are not
sufficient. (Art. 1826.)

Art. 1827. The creditors of the partnership shall be

preferred to those of each partner as regards the
partnership property. Without prejudice to this
right, the private creditors of each partner may
ask the attachment and public sale of the share
of the latter in the partnership assets.
Reason for the Preference of Partnership Creditors
After all the partnership is a juridical person with
whom the creditors have contracted. Moreover
the assets of the partnership must be first
exhausted.
Reasons why individual creditors may still attach
the partners share: After all the remainder
( after paying partnership obligations) really
belongs to the partner. Note the purchaser at
the public sale does not necessarily become a
partner.

Sale by a Partner of His Share to a Third

Party
If a partner sells his share to a third
party, but the firm itself still remains
solvent, creditors of the partnership
cannot assail the validity of the sale
by alleging that it is made in fraud of
them, since they have not rally been
prejudiced.

DISSOLUTION AND
WINDING UP

DISSOLUTION AND
WINDING UP

Define dissolution.
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. (Art.
1828.) It is that point in time when the partners
cease to carry on business together.
Is the partnership terminated on dissolution?
No, it continues until the winding up to partnership
affairs is completed. (Art. 1829.) The principal
significance of dissolution is that thereafter no new
partnership business should be undertaken, but
affairs should be liquidated and distribution made to
those entitled to the partner's interest. (Crane, Law
on Partnership, p.223.)

DISSOLUTION AND
WINDING UP
(1)Winding up is the process of settling the

business or affairs of the partnership after

dissolution (Ibid., p.320.) after which the
existence of the partnership is terminated.
(2)) Termination is that point in time when
all the partnership affairs are wound up or
completed, and the partnership ceases to
exist for all purposes.

DISSOLUTION AND
WINDING UP

What are the causes for the dissolution

of a partnership?
They are:
Without violation of partnership agreement:
a. Termination of the agreed term of the
particular undertaking;
b. By the express will of any partner who must
act in good faith (otherwise, the partner will
be liable for damages), when no definite
term or particular undertaking is specified;

DISSOLUTION AND
WINDING UP

What are the causes for the dissolution of a

partnership?
c. By the express will of all partners except those:
who have assigned their interest; or
suffered them to be charged for their separation
debts, and
d. By expulsion of any partner. Reason: It has the
effect of decreasing the number of partners. The
partner expelled in bad faith can claim damages;

DISSOLUTION AND
WINDING UP

2. In violation of partnership agreement:

(a) By the express will of any partner at any time (with
or without justifiable cause). Reasons: A partner
cannot be compelled to remain in the firm against his
will;
3. By any event making it unlawful for the partnership
or members thereof to continue the business
4. By loss of specific thing which a partner had
promised to contribute before delivery. Reasons:
There is no contribution. If only the use of enjoyment
of the thing is contributed, the partner having
reserved the ownership thereof, the loss of the same
before or after delivery dissolves the partnership.
Reason: The partner bears the loss and, thereof, he
is considered in default with respect to his
contribution;

DISSOLUTION AND
WINDING UP

5. By the death of any partner. Reason: It causes a

decrease in the number of partners;
6. By the insolvency of any partner or the partnership.
Reason: The business of a partnership requires ability
to meet financial obligation to creditors;
7. By the civil interdiction of any partner. Reason: It
results in his incapacity to enter into dispositions of
property inter vivos (i.e., during his lifetime); and
8. By judicial decree in cases provided by law. (Art.
1830.)
Note: Civil interdiction deprives the offender during
the time of his sentence or imprisonment of the right
to manage his property and to dispose of the same by
any act to take effect during his lifetime. (see Art. 34,
Revised Penal Code.)

cases when the court may decree a

dissolution
of the partnership.
In the following instances:
On the application by or for a partnership:
In case of a partner's insanity;
When a partner becomes incapable of
performing his part of the partnership contract;
When a partner is guilty of conduct tending to
effect prejudicially the business;
In case a partner willfully or persistently
commit a breach of the partnership agreement
or such misconduct which makes it no longer
practicable to carry on the business with him.
When the business can only be carried on at a
loss; and
Other circumstances making dissolution
equitable (like fraud in the render accounting or
to allow inspection of partnership's books, etc.)

cases when the court may decree a

dissolution of the partnership.
On the application by a purchaser of a
partner's interest (under Arts. 1813, 1814,
supra.)
After the termination of the specified term
or particular undertaking; or
At any time if the firm was a partnership at
will when the interest was assigned or the
charging order was issued. (Art. 1831.)

DISSOLUTION AND
WINDING UP

eEfect of dissolution on the authority of

partners to act for the partnership?
General rule. - Dissolution terminates all
authority of any partner to act for the
partnership.
Exceptions:
When necessary to wind up partnership affair;
and
When necessary to complete transactions
begun but not then finished. (Art. 1832.)

DISSOLUTION AND
The
effects in case UP
new contracts are entered
WINDING
into by a partner with third persons after
dissolution.

(1) As among the partners themselves. - The other

partners are not bound (although they may be liable
to third persons when the dissolution is not by the act, insolvency, or
death of a partner (e.g., expiration of the term);
when the dissolution is by the act of any partner
(e.g., resignation) and the partner acting for the
partnership had knowledge of the dissolution; and
when the dissolution is by the death or insolvency of
a partner and the partner acting for the partnership
had knowledge or notice of the death or dissolution.
(see Art. 1833.)

What acts or transactions will bind a partnership

even after dissolution?
Acts appropriate for winding up;
Acts appropriate for completing unfinished at
dissolution; and
Transactions which would bind the partnership if
dissolution had not taken place provided the third
personHad extended credit to the partnership prior to
dissolution;
Had not extended credit but had known of the
partnership prior to dissolution and having no
knowledge or notice of dissolution, the fact of
dissolution had not been advertised in the newspaper
of general circulation in the place at which the
partnership was regularly carried on. (Art. 1834)

Cases is a partnership not bound by any

act of a partner after dissolution?
In the following cases:
When the partnership is dissolved because it
is unlawful to carry on the business unless
the act is appropriate for winding up
partnership affairs;
Where the partners has become insolvent; or
Where the partner has no authority to wind
up partnership affairs except as otherwise
provided by law.

DISSOLUTION AND
WINDING UP

two ways of winding up a dissolved

partnership?
Judicially - under the control and direction
of the proper court upon cause shown by
any partner, his legal representative or his
assignee; or
Extra judicially - by the partner themselves
without intervention of the court. (Art.
1836)

No partner can perform new acts which will the

partnership during the dissolution stage
EXCEPT:
a)Acts necessary for the winding up purposes;
b)Acts necessary for complete unfinished
business of the Partnership.
However, if the dissolution is due to the act,
insolvency or death (AID) of a partner, the other
partner can still bind the partnership with
contracts entered after the dissolution of the
partnership provided the partner so acting has
no knowledge of the AID or dissolution of the
contract by reason of any of the AID at the time
of the perfection of the contract. (Art. 1833)

DISSOLUTION AND
WINDING UP

What are the rights of each partner in

case of dissolution without violation of
partnership agreement?
Unless otherwise agreed =
To have the partnership properties applied
to discharge the liabilities of partnership;
and
To have the surplus, if any, applied, to pay
in cash the net amount owing to the
respective partners, (Art. 1837)

What are the rights of the innocent partners in

case of dissolution in violation of partnership
agreement?
They are:
to have partnership property applied for the payment
of its liabilities;
To receive in cash their share of the surplus;
To be indemnified for damages caused by the partner
guilty of wrongful dissolution;
To continue the business in the same name during the
agreed term of the partnership by themselves or
jointly with others; and
To possess partnership property should they decide to
continue the business.

What are the rights of the partner who

wrongfully caused the dissolution?
They are:
If the business is not continued by the other
partners. To have partnership property applied to
discharge its liabilities; and
To receive in cash his share of the surplus
less damages caused by his wrongful
dissolution.

What are the rights of the partner who

wrongfully caused the dissolution?
If the business is continued. -
To have the value of his interest in the
partnership (but the value of the goodwill of
the business is not considered) at the time of
dissolution ascertained and paid in cash or
secured by bond approved by the court; and
To be released from the existing and future
liabilities of the partnership.

What are the rights of the injured partner

where the partnership is rescinded on the
ground of fraud?
Right of a lien or retention of the surplus of
partnership property after satisfying partnership
liabilities for any sum of money contributed or
paid by him;
Right to subrogation in the place of partnership
creditors after payment of partnership liabilities;
Right of indemnification by the guilty partner
against all debts and liabilities of the
partnership; and
Such other rights to which he is entitled under
other provisions of law. (Art. 1838)

Distribution of
partnership assets after
Assets
of the partnership. - They are:
dissolution

Partnership property (including

goodwill); and
Contribution of the partners
necessary for the payment of all
liabilities in accordance with Article
1797

Distribution of
partnership assets after
Order of application of the assets. - The
dissolution
partnership asset shall be applied to the
satisfaction of the liabilities of the partnership in
the following order:
First, those owing to the partnership's creditors;
Second, those owing to partners other than for
capital and profits such as loans given by the
partners or advances for business expenses;
Third, those owing for the return of the capital
contributed by the partners; and
Lastly, the share of the profits, if any, due to each
partner.

Distribution of
partnership assets after
Right of a partner where assets are insufficient. - If
dissolution
the assets enumerated in No. 1, any partner of his
legal representative (to the extent of the amount
which he has paid in excess of his share of the
liability), or any assignee for the benefit of creditors
or any person appointed by the court, shall have
the right to enforce the contributions of the partners
provided in Article 1797.
Liability of deceased partner's individual property. The individual property of a deceased partner shall
be liable for his share of the contribution necessary
to satisfy the liabilities of the partnership incurred
while he was a partner. ( Arts. 1816, 1835, par. 3)

Distribution of
partnership assets after
Priority of payment of partnership creditors/partner's
dissolution
creditors.- When partnership property and the

individual properties of the partners are in possession

of the court for distribution, partnership creditors
from the individual properties of the partners.
Distribution of property of insolvent partner. - If a
partner is insolvent, his individual property shall be
distributed as follows:
First, to those owing to separate creditors; and
Then to those owing to partnership creditors; and
Lastly, to those owing to partners by way of
contribution. (Art. 1839)

LIMITED PARTNERSHIP
Define a Limited Partnership:

A limited partnership is one formed by two or

more persons in accordance with the
provisions of the law, having as members
one or more general partners and one or
more limited partners. (Art. 1843)

LIMITED PARTNERSHIP
Give the characteristics of a limited partnership:
A limited partnership is formed by compliance with the
statutory requirements;
One or more general partners control the business and
are personally liable to creditors;
One or more limited partners contribute to the capital
and share in the profits but do not participate in the
management of the business and are not personally
liable for partnership obligations; and
The partnership debts are paid out of the common
fund and the individual properties of the general
partners.
Note: The liability of a limited partner is an exception to
the general rule that all partners including industrial
partner are liable pro-rata with all their property for
partnership debts. (Art. 1816)

What is the purpose of the law in authorizing the

formation of limited partnership.
The purpose is to bring into trade and commerce funds
of those not inclined to engage in that business, who
are disposed to furnish capital upon such limited
liability with a view to the share of profits which
might be expected to result to them from its use.
State the essential requirements for the
formation of a limited partnership.
The certificate or articles of limited partnership which
states the matters enumerated in Article 1844 must
be signed and sworn to; and
Such certificate must be filed for record in the
Securities and Exchange Commission (Art. 1844)

Note: A strict compliance with the legal requirements

is not necessary. It is sufficient that there is
substantial compliance in good faith. If there is no
substantial compliance, the partnership becomes
general partnership.

What must be contributed by a limited partner?

The contribution of a limited partner may be cash or
property but not services (Art. 1845); otherwise, he
shall be considered an industrial partner, in which
case, he shall not be exempted from personal
liability.
In general, what are the rights, powers and
liabilities of a general partner in a limited
partnership?
A general partner has all the rights and powers and is
subject to all restrictions of a partner in a partnership
without limited partners. However, acts of strict
dominion or ownership (e.g., admitting a new
partner; continuing the business on death, etc. of a
general partner; acts in contravention of the
certificate, etc.) are beyond the scope of the
authority without the written consent or at least
ratification of all the limited partners. (Art. 1850)

Enumerate the rights of a limited partner.

To require that the partnership books be kept at the
principal place of business of the partnership (Art.
1805);
To inspect and copy at a reasonable hour partnership
books or any of them;
To demand true and full information of all things
affecting the partnership (Art. 1806);
To demand a formal account of partnership affairs
whenever circumstances render it just reasonable (Art.
1809);
To ask for dissolution and winding up by decree of court
(Art. 1857)
To receive a share of the profits or other compensation
by way of income (Art. 1856) and
To receive the return of his contribution provided the
partnership assets are in excess of all its liabilities (Art.
1857)

Note: The rights of a limited partners are necessarily

lesser than those of a general partner.

State the liabilities that a partner may incur in

favor of the partnership.

He is liable for any unpaid contribution:

The difference between the contribution as actually

made and that stated in the certificate as having
been made; and
The amount he agreed to make at a future time
stated in the certificate.

He holds as trustee:

Specific property stated in the certificate as

contributed by him but which he had not contributed
or had been wrongfully returned; and
Money or other property wrongfully paid or conveyed
to him on account of his contribution. (Art. 1858)

May the above liabilities of a limited partner be

waived or comrpomised?
Yes provided that the waiver or compromise is made with the consent of all the parties; and
does not prejudice the partnership creditors who
extended credit or whose claims arise before the
cancellation or amendment of the certificate.
10. May a person be both a general and a limited
partner in the same partnership?
Yes, provided that the fact is stated in the certificate
signed and sworn to and recorded in the SEC.
He shall have all the rights, powers and liabilities of a
general partner; hence he liable with his separate
property to third person;
With respect to his contribution, he would have the
right of a limited partner in so far as the other partners
are concerned (Art. 1853)

LIMITED PARTNERSHIP
Give the requisites for the return of
contribution of a limited partner
All liabilities of the partnership have been paid, or
if they have not yet been paid, the assets of the
partnership are sufficient to pay such liabilities to
limited partners on account of their contribution
and to the general partners are not considered;
The consent of all the members has been
obtained except when the return may be
rightfully demanded; and
The certificate is cancelled or so amended as to
set forth the withdrawal or reduction of the
contributions. (Art. 1857)

LIMITED PARTNERSHIP
When is a return of contribution of a limited

partner a matter of right?

The requisites in No. 13 (1) & (2) have been duly
complied with

On the dissolution of the partnership;

Upon the arrival of the date specified in the
certificate for the return; or
After the expiration of the 6 months' notice in
writing given by him to the other partners if no time
is fixed in the certificate for the return of the
contribution or for the dissolution of the partnership.

LIMITED PARTNERSHIP
Who is preferred limited partner?
A preferred limited partner is one given
preference over other limited partners as
to -
Return of contribution;
Compensation by way of income;
Any other matter by an agreement stated
in the certificate of limited partnership
(Art. 1855)

LIMITED PARTNERSHIP
What is a substituted limited partner?
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 (Art. 1859).
Give the requisites in order that the assignee
may become a substituted limited partner?
All the members must consent to the assignee
becoming a substituted limited partner or the limited
partner, being empowered by the certificate must give
the assignee the right to become a limited partner;
The certificate must be amended in accordance with
Article 1865;
The certificate as amended must be registered in the
SEC.

 Instances that will show that a limited partner is

a mere contributor or practically a stranger in

the limited partnership;
The surname of the limited partner shall not appear in
the partnership name unless it is also a surname of a
general partner or prior to the time when the limited
partner became such, the business had been carried
on under a name in which his surname appeared (Art.
1846);
A limited partner cannot participate in the
management of the partnership business (Art. 1848);
He may grant loans to and transact other business
with the partnership (Art. 1854);
He can demand under certain conditions, the return of
his contribution (Art. 1857);
He is not (unless he is also a general partner) a proper
party to a suit by or against the limited partnership
unless the suit is to enforce a limited partner's right
against or liability to the partnership (Art. 1866); and
The retirement, death, insolvency, insanity or civil
interdiction of a limited partnership as long as there
remains a limited partner (Art. 1860)

After the dissolution, how shall the liabilities of a

limited partnership be settled:
In the following order:
Those due to creditors, including limited partners,
except those on account of their contributions in the
order of priority as provided by law (Arts. 1854, 1856,
1857 (1))
Those due to limited partners in respect to their share
of the profits and other compensation by way of
income on their contribution;
Those due to limited partners for the return of the
capital contribution;
Those due to general partners in respect to profits; and
Those due to general partners for the return of the
capital contributed. (Art. 1863)
Note: In the absence of any statement in the certificate
as to the share of the profits which each partner shall
receive by reason of his contribution (Art. 1844, par. 1
(I) ) and subject to any subsequent agreement, limited
partners share in the partnership assets in respect to
their claims for capital and profits in proportion to the
respective amounts of such claims. (Art. 1863)

When shall the certificate of limited

partnership be cancelled or amended?
The certificate shall be cancelled:
When the partnership is dissolved; or
All the limited partners cease to be such (Art.
1846)
Reason: A limited partnership cannot exist
without any limited partner.
In all other cases (e.g., change in name of
partnership, addition or substitution of a
limited partner, etc.) , only an amendment of
the certificate is required.

State the requirements for the amendment

or cancellation of a certificate.
The amendment must be in writing;
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
The certificate, as amended must be filed for
record in the SEC (Art. 1865)
The cancellation of the certificate has been
duly amended, the amended certificate shall
thereafter be for all purposes the certificate of
the partnership. (Art. 1844)

THE

END