AGENCY TRUST

AND PARTNERSHIP

1 ST SEMESTER A/Y 2021-2022

THE LAW ON
PARTNERSHIP
Article 1767. 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. (1665a)
 Natural/juridical

1. MONEY
TWO OR MORE 2. PROPERTY COMMON
PERSONS 3. INDUSTRY FUND

DIVIDE PROFITS
AMONG
THEMSELVES

Requisites for Existence of Partnership

• BUSINESS 1. intention to create a partnership;

2. common fund obtained from
• EXERCISE OF A contributions;
PROFESSION 3. join interest in the profits;
What is the difference between a vocation and a profession

A vocation (from Latin vocatio, meaning ‘a call, summons’) is an occupation to which a

person is specially drawn or for which they are suited, trained, or qualified. Though
now often used in non-religious contexts, the meanings of the term originated in
Christianity.

A profession is a vocation founded upon specialized educational training, the

purpose of which is to supply disinterested objective counsel and service to others,
for a direct and definite compensation, wholly apart from expectation of other
business gain.
Xxx, our law on partnership does not exclude partnerships for the practice of law from
its coverage. Article 1767 of the Civil Code provides that "[t]wo or more persons may
also form a partnership for the exercise of a profession." Article 1783, on the other
hand, states that "[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."
Since the law uses the word "profession" in the general sense, and does not distinguish
which professional partnerships are covered by its provisions and which are not, then
no valid distinction may be made. (Saludo vs. PNB G.R. No. 193138 August 20, 2018)
Under Article 1767 of the Civil Code, there are two essential elements in a contract
of partnership: (a) an agreement to contribute money, property or industry to a common
fund; and (b) intent to divide the profits among the contracting parties. (Pascual v. The
Commissioner of Internal Revenue G.R. No. 78133 October 18, 1988; Jarantilla vs. Jarantilla
G. R. No. 154486 December 1, 2010)

Where circumstances taken singly they may be inadequate to prove the intent to form a
partnership, nevertheless, the collective effect of these circumstances is such as to
support a finding of the existence of the parties’ intent (Read: Evangelista, et. al. v.
Collector of Internal Revenue, et. al., 102 Phil. 141, 146 (1957); Heirs of Tan Eng Kee vs CA
GR No 126881 October 3, 2000)
Applying the legal provision to the facts of this case, the following circumstances tend to prove
that Elfledo was himself the partner of Jimmy and Norberto: 1) Cresencia testified that Jose
gave Elfledo ₱50,000.00, as share in the partnership, on a date that coincided with the
payment of the initial capital in the partnership; (2) Elfledo ran the affairs of the partnership,
wielding absolute control, power and authority, without any intervention or opposition
whatsoever from any of petitioners herein; (3) all of the properties, particularly the nine trucks
of the partnership, were registered in the name of Elfledo; (4) Jimmy testified that Elfledo did
not receive wages or salaries from the partnership, indicating that what he
actually received were shares of the profits of the business; and (5) none of the petitioners,
as heirs of Jose, the alleged partner, demanded periodic accounting from Elfledo during his
lifetime. As repeatedly stressed in Heirs of Tan Eng Kee, a demand for periodic accounting is
evidence of a partnership. (Heirs of Jose Lim vs. Juliet Villa Lim G.R. No. 172690 March 3, 2010)
The business venture operated under Geminesse Enterprise did not result in an employer-
employee relationship between petitioners and private Respondent. While it is true that the
receipt of a percentage of net profits constitutes only prima facie evidence that the recipient
is a partner in the business, the evidence in the case at bar controverts an employer-employee
relationship between the parties. In the first place, private respondent had a voice
in the management of the affairs of the cookware distributorship, including selection of
people who would constitute the administrative staff and the sales force. Secondly,
petitioner Tocao’s admissions militate against an employer-employee relationship. She
admitted that, like her who owned Geminesse Enterprise, private respondent received only
commissions and transportation and representation allowances and not a fixed salary.
(Tacao vs. G.R. No. 127405 October 4, 2000)
From the factual findings of both lower courts, it is clear that Chua, Yao and Lim had decided
to engage in a fishing business, which they started by buying boats worth P3.35 million,
financed by a loan secured from Jesus Lim who was petitioner’s brother. In their Compromise
Agreement, they subsequently revealed their intention to pay the loan with the proceeds of the
sale of the boats, and to divide equally among them the excess or loss. These boats, the
purchase and the repair of which were financed with borrowed money, fell under the term
"common fund" under Article 1767. The contribution to such fund need not be cash or fixed
assets; it could be an intangible like credit or industry. That the parties agreed that any loss or
profit from the sale and operation of the boats would be divided equally among them also
shows that they had indeed formed a partnership.
Moreover, it is clear that the partnership extended not only to the purchase of the boat, but
also to that of the nets and the floats. The fishing nets and the floats, both essential to fishing,
were obviously acquired in furtherance of their business. It would have been inconceivable for
Lim to involve himself so much in buying the boat but not in the acquisition of the aforesaid
equipment, without which the business could not have proceeded.

Given the preceding facts, it is clear that there was, among petitioner, Chua and Yao, a
partnership engaged in the fishing business. They purchased the boats, which constituted the
main assets of the partnership, and they agreed that the proceeds from the sales and
operations thereof would be divided among them. (LIM TONG LIM vs. PHILIPPINE FISHING
GEAR INDUSTRIES, INC G.R. No. 136448 November 3, 1999)
Under the above-quoted Agreement, petitioners would contribute property to the partnership in the form of
land which was to be developed into a subdivision; while respondent would give, in addition to his
industry, the amount needed for general expenses and other costs. Furthermore, the income from the said
project would be divided according to the stipulated percentage. Clearly, the contract manifested the
intention of the parties to form a partnership.

It should be stressed that the parties implemented the contract. Thus, petitioners transferred the title to the
land to facilitate its use in the name of the respondent. On the other hand, respondent caused the subject
land to be mortgaged, the proceeds of which were used for the survey and the subdivision of the land. As
noted earlier, he developed the roads, the curbs and the gutters of the subdivision and entered into a
contract to construct low-cost housing units on the property.

Respondent’s actions clearly belie petitioners’ contention that he made no contribution to the partnership.
Under Article 1767 of the Civil Code, a partner may contribute not only money or property, but also
industry. (Torres vs. CA G.R. No. 134559 December 9, 1999)
Under the above-quoted Agreement, petitioners would contribute property to the partnership in the
form of land which was to be developed into a subdivision; while respondent would give, in addition to
his industry, the amount needed for general expenses and other costs. Furthermore, the income from the
said project would be divided according to the stipulated percentage. Clearly, the contract manifested
the intention of the parties to form a partnership.

It should be stressed that the parties implemented the contract. Thus, petitioners transferred the title to
the land to facilitate its use in the name of the respondent. On the other hand, respondent caused the
subject land to be mortgaged, the proceeds of which were used for the survey and the subdivision of the
land. As noted earlier, he developed the roads, the curbs and the gutters of the subdivision and entered
into a contract to construct low-cost housing units on the property.

Respondent’s actions clearly belie petitioners’ contention that he made no contribution to the
partnership. Under Article 1767 of the Civil Code, a partner may contribute not only money or property,
but also industry. (Torres vs. CA G.R. No. 134559 December 9, 1999)
Article 1768. The partnership has a juridical
personality separate and distinct from that of each
of the partners, even in case of failure to comply
with the requirements of article 1772, first
paragraph. (n)
• it presupposes that the partnership has been validly constituted;

• the requirements of Article 1772, 1st paragraph is only for regulatory purposes;
thus, non-compliance therewith will not prevent the partnership from acquiring
a separate and distinct personality
Although a partnership is based on delectus personae or mutual agency, whereby any
partner can generally represent the partnership in its business affairs, it is non
sequitur that a suit against the partnership is necessarily a suit impleading each and every
partner. It must be remembered that a partnership is a juridical entity that has a distinct
and separate personality from the persons composing it. (Guy vs. Gacott G.R. No. 206147
January 13, 2016)
Having settled that SAFA Law Office is a partnership, we hold that it acquired
juridical personality by operation of law. The perfection and validity of a contract
of partnership brings about the creation of a juridical person separate and distinct
from the individuals comprising the partnership. (Saludo vs. PNB G.R. No. 193138
August 20, 2018)
Article 1769. In determining whether a partnership exists, these rules
shall apply:

(1) Except as provided by article 1825, persons who are not partners as to
each other are not partners as to third persons;

(2) Co-ownership or co-possession does not of itself establish a

partnership, whether such-co-owners or co-possessors do or do not share
any profits made by the use of the property;

(3) The sharing of gross returns does not of itself establish a partnership,
whether or not the persons sharing them have a joint or common right or
interest in any property from which the returns are derived;
(4) The receipt by a person of a share of the profits of a business is prima facie
evidence that he is a partner in the business, but no such inference shall be
drawn if such profits were received in payment:

(a) As a debt by installments or otherwise;

(b) As wages of an employee or rent to a landlord;

(c) As an annuity to a widow or representative of a deceased partner;

(d) As interest on a loan, though the 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. (n)
The strongest indication that petitioner was a partner in the Sto Niño mine is the fact that it
would receive 50% of the net profits as "compensation" under paragraph 12 of the
agreement. The entirety of the parties’ contractual stipulations simply leads to no other
conclusion than that petitioner’s "compensation" is actually its share in the income of the
joint venture.

Article 1769 (4) of the Civil Code explicitly provides that the "receipt by a person of a share in
the profits of a business is prima facie evidence that he is a partner in the business."
Petitioner asserts, however, that no such inference can be drawn against it since its share in
the profits of the Sto Niño project was in the nature of compensation or "wages of an
employee", under the exception provided in Article 1769 (4) (b).
On this score, the tax court correctly noted that petitioner was not an employee of Baguio
Gold who will be paid "wages" pursuant to an employer-employee relationship. To begin
with, petitioner was the manager of the project and had put substantial sums into the venture
in order to ensure its viability and profitability. By pegging its compensation to profits,
petitioner also stood not to be remunerated in case the mine had no income. It is hard to
believe that petitioner would take the risk of not being paid at all for its services, if it were
truly just an ordinary employee.
Consequently, we find that petitioner’s "compensation" under paragraph 12 of the agreement
actually constitutes its share in the net profits of the partnership. Indeed, petitioner would
not be entitled to an equal share in the income of the mine if it were just an employee of
Baguio Gold. It is not surprising that petitioner was to receive a 50% share in the net profits,
considering that the "Power of Attorney" also provided for an almost equal contribution of
the parties to the St. Nino mine. The "compensation" agreed upon only serves to reinforce
the notion that the parties’ relations were indeed of partners and not employer-employee.
(PHILEX MINING CORPORATOIN vs COMMIISSIONER OF INTERNAL REVENUE G.R. No. 148187
April 16, 2008)
 In November 2000, petitioner Merian B. Santiago (Merian) was enticed by respondent Edna L.
Garcia (Edna) to invest money in the latter's lending business with a promise of a high return in terms of
monthly interest ranging from 5% to 8%. The parties agreed that monthly interest shall be remitted by
Edna to Merian and that the principal amount invested shall be returned to Merian upon demand.
Neither of the parties, however, presented evidence to show that such agreement was reduced in writing.

Xxx

The Court cannot subscribe to the view that Merian and Edna formed a partnership. 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. Partnership is essentially a
result of an agreement or a contract, either express or implied, oral or in writing, between two or more
persons. Here, there was neither allegation nor proof that Merian and Edna agreed to enter into a
partnership for purposes of carrying out the lending business.
There was likewise no agreement for the sharing of profits, only that Merian expects to receive
remittance of monthly interest from the amount she invested. At any rate, the receipt by a person of a
share of the profits, or of a payment of a contingent amount in case of profits earned, is not a conclusive
evidence of partnership. Article (Art.) 1769(3) of the Civil Code provides that "the sharing of gross
returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or
common right or interest in any property from which the returns are derived". There must be an
unmistakable intention to form a partnership which is lacking in this case. Most importantly, the facts do
not disclose that there is mutual agency between Merian and Edna, that is, neither party alleged that she
can bind by her acts the other, and can be bound by the acts of the other in the ordinary course of
business. (Santiago vs. Spouses Garcia G.R. No. 228356 March 9, 2020)
Petitioners borrowed a sum of money from their father which together with their own
personal funds they used in buying several real properties. They appointed their brother to
manage their properties with full power to lease, collect, rent, issue receipts, etc. They had
the real properties rented or leased to various tenants for several years and they gained net
profits from the rental income. Thus, the Collector of Internal Revenue demanded the
payment of income tax on a corporation, among other, from them.

Xxx. Upon consideration of all the facts and circumstances surrounding the case, we are fully
satisfied that their purpose was to engage in real estate transactions for monetary gain and
then divide the same among themselves, xxx. (Evangelista v. Collector, G.R. No. 9996, Oct.
15, 1957, 102 Phil. 140)
On June 22, 1965, petitioners bought two (2) parcels of land from Santiago Bernardino, Et. Al.
and on May 28, 1966, they bought another three (3) parcels of land from Juan Roque. The first
two parcels of land were sold by petitioners in 1968 to Marenir Development Corporation,
while the three parcels of land were sold by petitioners to Erlinda Reyes and Maria Samson on
March 19, 1970. Petitioners realized a net profit in the sale made in 1968 in the amount of
P165,224.70, while they realized a net profit of P60,000.00 in the sale made in 1970. The
corresponding capital gains taxes were paid by petitioners in 1973 and 1974 by availing of the
tax amnesties granted in the said years.

However, in a letter dated March 31, 1979 of then Acting BIR Commissioner Efren I. Plana,
petitioners were assessed and required to pay a total amount of P107,101.70 as alleged
deficiency corporate income taxes for the years 1968 and 1970.
Xxx, there is no evidence that petitioners entered into an agreement to contribute money,
property or industry to a common fund, and that they intended to divide the profits among
themselves. Respondent commissioner and/or his representative just assumed these
conditions to be present on the basis of the fact that petitioners purchased certain parcels of
land and became co-owners thereof. (Pascual vs CIR G.R. No. 78133 October 18, 1988)

(Also read: OBILLOS vs. CIR G.R. No. L-68118 October 29, 1985)
 EVANGELISTA CASE
there was a series of transactions where petitioners
purchased twenty-four (24) lots showing that the purpose
was not limited to the conservation or preservaion of the
common fund or even the properties acquired by them. The
character or habituality peculiar to business transactions
engaged in for the purpose of gain was present.
the properties were leased out to tenants for several years;
the business was under the management of one of the
partners; such condition existed for over fifteen (15) years.
PASCUAL CASE
petitioners bought two (2) parcels of land in 1965; they did not sell the
same nor make any improvements thereon; in 1966, they bought
another three (3) parcels of land from one seller; it was only 1968 when
they sold the two (2) parcels of land after which they did not make any
additional or new purchase; the remaining three (3) parcels were sold
by them in 1970; the transactions were isolated. the character of
habituality peculiar to business transaction for the purpose of gain was
not present.
there is clear evidence of co-ownership between the petitioners; there is
no adequate basis to support the proposition that they thereby formed an
unregistered partnership.; the two isolated transaction whereby
they purchased properties and sold the same a few years thereafter did
not thereby make them partners; they shared in the gross profits as co-
owners and paid their capital gains taxes on their net profits and availed
of the tax amnesty thereby; under the circumstances, they cannot be
considered to have formed an unregistered partnership which is thereby
liable for corporate income tax, as the respondent commissioner
proposes.
Article 1770. A partnership must have a lawful object or
purpose, and must be established for the common
benefit or interest of the partners.

When an unlawful partnership is dissolved by a judicial

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

Relate this Article with Article 1411 and 1412 of the Civil Code and Article 45 of the
Revised Penal Code
When the nullity proceeds from the illegality of the cause or object of the contract, and the act constitutes a
criminal offense, both parties being in pari delicto, they shall have no action against each other, and both shall be
prosecuted. Moreover, the provisions of the Penal Code relative to the disposal of effects or instruments of a crime
shall be applicable to the things or the price of the contract.

This rule shall be applicable when only one of the parties is guilty; but the innocent one may claim what he has given,
and shall not be bound to comply with his promise. (Article 1411, NCC)

If the act in which the unlawful or forbidden cause consists does not constitute a criminal offense, the following
rules shall be observed:

(1) When the fault is on the part of both contracting parties, neither may recover what he has given by virtue of the
contract, or demand the performance of the other's undertaking;

(2) When only one of the contracting parties is at fault, he cannot recover what he has given by reason of the contract,
or ask for the fulfillment of what has been promised him. The other, who is not at fault, may demand the return of
what he has given without any obligation to comply his promise. (Article 1412, NCC)
Confiscation and Forfeiture of the Proceeds or Instruments of the Crime. — Every penalty
imposed for the commission of a felony shall carry with it the forfeiture of the proceeds of the
crime and the instruments or tools with which it was committed.

Such proceeds and instruments or tools shall be confiscated and forfeited in favor of the
Government, unless they be property of a third person not liable for the offense, but those
articles which are not subject of lawful commerce shall be destroyed. (Article 45, Revised Penal
Code)
Article 1771. A partnership may be constituted in any
form, except where immovable property or real
rights are contributed thereto, in which case a public
instrument shall be necessary. (1667a)
Article 1773. A contract of partnership is void, whenever
immovable property is contributed thereto, if an inventory
of said property is not made, signed by the parties, and
attached to the public instrument. (1668a)
Considering that the allegations in the complaint showed that [petitioner] contributed
immovable properties to the alleged partnership, the "Memorandum" (Annex "A" of the
complaint) which purports to establish the said "partnership/joint venture" is NOT a public
instrument and there was NO inventory of the immovable property duly signed by the
parties. As such, the said "Memorandum" … is null and void for purposes of establishing the
existence of a valid contract of partnership. Indeed, because of the failure to comply with the
essential formalities of a valid contract, the purported "partnership/joint venture" is legally
inexistent and it produces no effect whatsoever. Necessarily, a void or legally inexistent
contract cannot be the source of any contractual or legal right. (Litonjua vs. Litonjua G.R. No.
166209-300 December 13, 2005)
Petitioners argue that the Joint Venture Agreement is void under Article 1773 of the Civil
Code, xxx

They contend that since the parties did not make, sign or attach to the public instrument an
inventory of the real property contributed, the partnership is void.

We clarify. First, Article 1773 was intended primarily to protect third persons. Thus, the
eminent Arturo M. Tolentino states that under the aforecited provision which is a
complement of Article 1771, "The execution of a public instrument would be useless if there is
no inventory of the property contributed, because without its designation and description,
they cannot be subject to inscription in the Registry of Property, and their contribution
cannot prejudice third persons. This will result in fraud to those who contract with the
partnership in the belief [in] the efficacy of the guaranty in which the immovables may
consist. Thus, the contract is declared void by the law when no such inventory is made." The
case at bar does not involve third parties who may be prejudiced.
Second, petitioners themselves invoke the allegedly void contract as basis for their claim that
respondent should pay them 60 percent of the value of the property. They cannot in one
breath deny the contract and in another recognize it, depending on what momentarily suits
their purpose. Parties cannot adopt inconsistent positions in regard to a contract and courts
will not tolerate, much less approve, such practice.

In short, the alleged nullity of the partnership will not prevent courts from considering the
Joint Venture Agreement an ordinary contract from which the parties’ rights and
obligations to each other may be inferred and enforced. (Torres vs. CA G.R. No. 134559
December 9, 1999)
Article 1772. Every contract of partnership having a
capital of three thousand pesos or more, in money or
property, shall appear in a public instrument, which must
be recorded in the Office of the Securities and Exchange
Commission.

Failure to comply with the requirements of the preceding

paragraph shall not affect the liability of the partnership
and the members thereof to third persons. (n)
 REQUIREMENTS OF A PUBLIC INSTRUMENT

IN ARTICLE 1771 IN ARTICLE 1772

For the validity of contract
Regardless of the value of the
immovable or real rights
Non-compliance will prevent
the acquisition of juridical
personality by the partnership
For the registration in the office of
the SEC
Capital of P3, 000 and above
Non-compliance will affect the
acquisition of juridical personality
by the partnership
The Angeles spouses’ position that there is no partnership because of the lack of a public
instrument indicating the same and a lack of registration with the Securities and Exchange
Commission ("SEC") holds no water. First, the Angeles spouses contributed money to the
partnership and not immovable property. Second, mere failure to register the contract of
partnership with the SEC does not invalidate a contract that has the essential requisites of a
partnership. The purpose of registration of the contract of partnership is to give notice to
third parties. Failure to register the contract of partnership does not affect the liability of
the partnership and of the partners to third persons. Neither does such failure to register
affect the partnership’s juridical personality. A partnership may exist even if the partners
do not use the words "partner" or "partnership."(Angeles vs. Sec of Justice G.R. No. 142612 July
29, 2005)
Article 1774. 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. (n)
• Applicable to immovable as well as personalty because the partnership is a juridical entity
capable of owning and possessing property
• Subject to the limitations under Article XII of the 1987 constitution

ₒ Private corporations or associations may not hold such alienable lands of the public
domain except by lease, for a period not exceeding twenty-five years, renewable for not
more than twenty-five years, and not to exceed one thousand hectares in area. (Section 3)
ₒ Save in cases of hereditary succession, no private lands shall be transferred or conveyed
except to individuals, corporations, or associations qualified to acquire or hold lands of
the public domain. (Section 7)

 transfer of the land to the partnership must be duly recorded in the

Registration of Property to make the transfer effective insofar as third
persons are concerned
Two important rules:

1. Any immovable property or an interest therein may be acquired in the

partnership name.
2. Title so acquired can be conveyed only in the partnership name.

Are these rules absolute?

Article 1775. 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)
If articles are kept secret
ₒ 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 not
in the name of the firm;
ₒ 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;
ₒ however, it cannot sue as such, because it has no legal personality and therefore, cannot
ordinarily be a party to a civil action;
ₒ 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 third persons are
prejudiced, only the rules on co-ownership must apply. Some rule applies in the case of a
partnership by estoppel
THAT’S ALL FOR
TODAY
THAT’S ALL FOR
TODAY
 AGENCY TRUST
AND PARTNERSHIP

1 ST SEMESTER A/Y 2021-2022

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

As regards the liability of the partners, a

partnership may be general or limited. (1671a)
 CLASSIFICATION OF PARTNERSHIPS
Universal With all present property
As to object With all profits
Particular
As regards liability of partners General
Limited
As to manner of creation Orally constituted

In writing In a private instrument

In a public instrument
According to legality Lawful or legal
Unlawful or illegal
With a term

Until accomplishment of the purpose or undertaking

According to duration At will No period is specified
Period has expired or purpose or undertaking is accomplished but
partnership is continued without liquidation
Article 1777. A universal partnership may refer
to all the present property or to all the profits.
(1672)
Article 1778. A partnership of all present property
is that in which the partners contribute all the
property which actually belongs to them to a
common fund, with the intention of dividing the
same among themselves, as well as all the profits
which they may acquire therewith. (1673)

PARTNERSHIP
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
UNIVERSAL PARTNERSHIP OF ALL
PRESENT PROPERTY
A partnership of all present property is that
in which the partners contribute all the
property which actually belongs to them to
a common fund, with the intention of
dividing the same among themselves, as
well as all the profits which they may
acquire therewith.

“1. How would you reconcile the apparent conflict between Article 1767 and 1778,
in so far as the intention of the partners in forming a partnership is concerned?”
Article 1779. In a universal partnership of all present property,
the property which belonged to each of the partners at the time
of the constitution of the partnership, becomes the common
property of all the partners, as well as all the profits which they
may acquire therewith.

A stipulation for the common enjoyment of any other profits

may also be made; but the property which the partners may
acquire subsequently by inheritance, legacy, or donation cannot
be included in such stipulation, except the fruits thereof. (1674a)
 PROPERTIES THAT BECOME THE COMMON PROPERTY OF THE
PARTNERS IN A UNIVERSAL PARTNERSHIP OF ALL PRESENT
PROPERTY

WITHOUT STIPULATION BY STIPULATION

• Property which belongs to a • After-acquired property, except that

partner at the time of the by inheritance, legacy or donation
constitution of the partnership

• Profits acquired therewith • Fruits of subsequent acquired

property, including that by
inheritance, legacy or donation
Article 1780. A universal partnership of profits
comprises all that the partners may acquire by their
industry or work during the existence of the
partnership.

Movable or immovable property which each of the

partners may possess at the time of the celebration of
the contract shall continue to pertain exclusively to
each,
only the usufruct passing to the partnership. (1675)
 ALL PRESENT PROPERTY ALL PROFITS

Presently owned property Contributed and become common Only the usufruct become common
property property
Subsequently acquired
property (excluding May be included by stipulation Usufruct may be included by
those acquired by stipulation
inheritance, legacy, or
donation)

those acquired with the use of common Those acquired by work or industry of
Profits property become part of the common the partners become common
fund; other profits may be included by property, exclusion may be allowed by
stipulation stipulation
Article 1781. Articles of universal partnership,
entered into without specification of its nature,
only constitute a universal partnership of profits.
(1676)
Article 1782. Persons who are prohibited from
giving each other any donation or advantage
cannot enter into universal partnership. (1677)
PERSONS WHO CANNOT ENTER INTO A UNIVERSAL PARTNERSHIP

• Husband and wife (are common-law spouses covered by the

prohibition?)
• Persons who are guilty of adultery or concubinage (must there be a
prior conviction?)
• Those guilty of the same criminal offense if the partnership was
entered into in consideration of the same (must they have the same
degree of participation? must there be a proper conviction?
The petitioner-appellant has evidently failed to observe the fact that William J. Suter
"Morcoin" Co., Ltd. was not a universal partnership, but a particular one. As appears
from Articles 1674 and 1675 of the Spanish Civil Code, of 1889 (which was the law in force
when the subject firm was organized in 1947), a universal partnership requires either that
the object of the association be all the present property of the partners, as contributed by
them to the common fund, or else "all that the partners may acquire by their industry or
work during the existence of the partnership". William J. Suter "Morcoin" Co., Ltd.
was not such a universal partnership, since the contributions of the partners were fixed sums
of money, P20,000.00 by William Suter and P18,000.00 by Julia Spirig and neither one
of them was an industrial partner. It follows that William J. Suter "Morcoin" Co., Ltd.
was not a partnership that spouses were forbidden to enter by Article 1677 of the Civil
Code of 1889. (COMMISSIONER OF INTERNAL REVENUE vs. WILLIAM J. SUTER and THE
COURT OF TAX APPEALS G.R. No. L-25532 February 28, 2969)
“2. Is the ruling in the case of COMMISSIONER OF INTERNAL
REVENUE vs. WILLIAM J. SUTER and THE COURT OF TAX
APPEALS (G.R. No. L-25532 February 28, 1969)- that the
marriage between the partners did not result in the dissolution
of the particular partnership- still applicable at the present in the
light of the Family Code provision on what comprises the
exclusive property of each spouse under the different property
regimes?”
Article 1783. 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. (1678)
May persons who practice different professions be members
of the same partnership?
Article 1784. A partnership begins from the
moment of the execution of the contract,
unless it is otherwise stipulated. (1679)
Time when partnership begins to exist -
• As stipulated in the contract
• In the absence of stipulation, from the moment of execution of a contract

When is the contract considered to have been executed -

• If immovable or real right is contributed?
• If neither immovable nor right is contributed?
• If the capital is P3,000 or more?
Article 1785. When a partnership for a fixed term or particular
undertaking is continued after the termination of such term or
particular undertaking without any express agreement, the rights
and duties of the partners remain the same as they were at such
termination, so far as is consistent with a partnership at will.

A continuation of the business by the partners or such of them as

habitually acted therein during the term, without any settlement
or liquidation of the partnership affairs, is prima facie evidence
of a continuation of the partnership. (n)
• A partnership whose business is continued after the expiration of its term or
completion of the undertaking for which it was organized becomes a partnership at
will; the rights and obligations of the partners remain the same so far as they are
consistent with a partnership at will.

• Conduct of the business that the partnership habitually engages in, without any
liquidation or settlement, is a prima facie evidence of the continuation of the
business.
Article 1786. Every partner is a debtor of the partnership for
whatever he may have promised to contribute thereto.

He shall also be bound for warranty in case of eviction with

regard to specific and determinate things which he may have
contributed to the partnership, in the same cases and in the
same manner as the vendor is bound with respect to the vendee.
He shall also be liable for the fruits thereof from the time they
should have been delivered, without the need of any demand.
(1681a)
Article 1788. A partner who has undertaken to contribute a sum of
money and fails to do so becomes a debtor for the interest and
damages from the time he should have complied with his
obligation.

The same rule applies to any amount he may have taken from
the partnership coffers, and his liability shall begin from the
time he converted the amount to his own use. (1682)
• What is the implication of the statement, “Every partner is a debtor of the
partnership for whatever he may have promised to contribute thereto”?

• When is the promised contribution due?

• Is demand necessary to put a partner in delay?

• What are the effects of the failure to deliver the promised contribution?

There are four instances when demand is not necessary to constitute the
N debtor in default: (1) when there is an express stipulation to that effect; (2)
O where the law so provides; (3) when the period is the controlling motive or
T the principal inducement for the creation of the obligation; and (4) where
E demand would be useless.
 MONEY PROPERTY INDUSTRY
Time of delivery At the time the partnership is entered into, unless a different period is
agreed upon, demand is not necessary to put a partner in delay
Liability due to Payment of interest Delivery of the fruits that Denial of the share in
failure to deliver on and damages accrued from the time it the profit
time should have been delivered

Obligation after Warrant against eviction

delivery
Effect of loss before None Partnership is dissolved if Partnership is
delivery of promised property is determinate dissolved if delivery
contribution becomes impossible
Article 1787. When the capital or a part thereof which a
partner is bound to contribute consists of goods, their
appraisal must be made in the manner prescribed in the
contract of partnership, and in the absence of stipulation,
it shall be made by experts chosen by the partners, and
according to current prices, the subsequent changes
thereof being for account of the partnership. (n)
Goods includes all chattels personal but not things in action or money of legal tender in
the Philippines. The term includes growing fruits or crops. (Article 1636, NCC)

How is appraisal made:

a. in the manner prescribed in the contract of partnership
b. by experts chosen by partners, according to current prices, in the
absence of stipulation

After appraisal, subsequent changes in price of the contributed goods

shall be for the account of the partnership
Article 1789. An industrial partner cannot engage in business for
himself, unless the partnership expressly permits him to do so;
and if he should do so, the capitalist partners may either
exclude him from the firm or avail themselves of the benefits
which he may have obtained in violation of this provision, with
a right to damages in either case. (n)
Article 1808. The capitalist partners cannot engage for their own
account in any operation which is of the kind of business in
which the partnership is engaged, unless there is a stipulation to
the contrary.

Any capitalist partner violating this prohibition shall bring to

the common funds any profits accruing to him from his
transactions, and shall personally bear all the losses. (n)
 INDUSTRIAL PARTNER
Prohibition Engage in business for himself without
permission from the partnership
Capitalist partners may:
• Exclude him/her from the firm or
Penalty for • Avail of the benefits he/she may
violation have obtained
Damages may be recovered by the
capitalist partners in either case
“3. Why is the law ‘strict’ on the industrial partner but ‘lenient’ on the capitalist
partner?’
CAPITAL PARTNER
Engage for their own account in any operation
which is of the kind of business in which the
partnership is engaged unless permitted by
stipulation
• Bring to the common funds any profits
accruing to him/her from his transactions
• Personally bear all the losses
Article 1790. Unless there is a stipulation to the contrary,
the partners shall contribute equal shares to the
capital of the partnership. (n)

The article applies to capitalist partners only

GENERAL RULE: EQUAL SHARE
UNEQUAL SHARE MAY BE AGREED UPON
Article 1791. If there is no agreement to the contrary, 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 he obliged to sell his interest to the other partners. (n)
Contemplated situation:
• There is an imminent loss of the business of the partnership
• There is a need to infuse additional capital to save the venture
• A capitalist partner refuses to contribute
• The refusal is unjustified

General rule:
• The capitalist partner who refuses to contribute shall be
obliged to sell his interest* to the other partner
Exception:
• If there is agreement to the contrary “A partner’s interest in the
partnership is his share of the profits
and surplus. (Art. 1812, NCC)
Article 1792. If a partner authorized to manage collects a demandable sum which
was owed to him in his own name, from a person who owed the partnership
another sum also demandable, the sum thus collected shall be applied to the
two credits in proportion to their amounts, even though he may have given a
receipt for his own credit only; but should he have given it for the account of
the partnership credit, the amount shall be fully applied to the latter.

The provisions of this article are understood to be without prejudice to the

right granted to the other debtor by article 1252, but only if the personal credit
of the partner should be more onerous to him. (1684)
Contemplated situation:
• A partner authorized to manage* collects from a debtor
• The debtor is indebted to the partnership and the partner
• Both debts are due and demandable
• The payment is not sufficient to cover both debts. *see Articles 1800-1803

Rules on the crediting of payment:

• If receipt was issued in the name of the partnership, full credit shall be given to the
indebtedness to the partnership.
• If receipt was issued in the name of the partner, payment shall be applied to the two credits in
proportion to their amounts.
• Debtor may invoke Article 1252 of the New Civil Code )application of payment) only if the
personal credit of the partner is more onerous.
THAT’S ALL FOR
TODAY
 AGENCY TRUST
AND PARTNERSHIP

1 ST SEMESTER A/Y 2021-2022

Article 1793. A partner who 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. (1685a)
Contemplated situation:
• The partnership is a going concern (not dissolved)
• Partnership credit was distributed to all partners
• The debtor becomes insolvent before all partners could • Why was there a distribution of
collect their share partnership credit when the
partnership is still a going concern?
Consequence
• A partner who was able to collect his/her share shall • Why would it be necessary for the
bring to the partnership capital what he/she has received partner who was able to collect
his/her share to bring to the
partnership capital what he/she
has received?
Article 1794. Every partner is responsible to the partnership for
damages suffered by it through his fault, and he cannot
compensate them with the profits and benefits which he may
have earned for the partnership by his industry. However, the
courts may equitably lessen this responsibility if through the
partner's extraordinary efforts in other activities of the
partnership, unusual profits have been realized. (1686a)
• Duties imposed upon a partner
• Not to be at fault
• To bring profits and benefits to the partnership
• Consequently -
• Liability for damages due to a partner’s fault cannot be compensated with the benefits and
profits that he/she may have earned for the partnership.
• Courts may mitigate his/her liability if through his/her extraordinary efforts in other
partnership activities, unusual profits were realized.

“In the context of the partnership’s business operation, what is

meant by ‘extraordinary efforts’ and ‘unusual profits’?”
Article 1795. The risk of specific and determinate things, which are not
fungible, contributed to the partnership so that only their use and fruits
may be for the common benefit, shall be borne by the partner who owns
them.

If the things contribute are fungible, or cannot be kept without

deteriorating, or if they were contributed to be sold, the risk shall be
borne by the partnership. In the absence of stipulation, the risk of the
things brought and appraised in the inventory, shall also be borne by the
partnership, and in such case the claim shall be limited to the value at
which they were appraised. (1687)
The provision answers the question, “who bears the risk of loss of the things that are contributed to
the partnership?’

It applies the rule that “the owner bears the risk of loss”.

“Fungible goods” means goods of which any unit is, from its nature by mercantile custom, treated
as the equivalent of any other unit. (Sec. 58, Warehouse Receipts Law)

The quality of being fungible depends upon the possibility of the property, because of its nature or
the will of the parties, being substituted by others of the same kind not having a distinct
individuality. (Tolention, Civil Code of the Philippines Commentaries and Jurisprudence, Vol. II
1983, p. 26)
Who bears the risk of loss for contributed property?

PARTNERSHIP PARTNER-CONTRIBUTOR
Specific and determinate thing,
non-fungible Specific and determinate thing, non-
Fungible or deteriorable things fungible, If only usufruct is contributed
Things contributed to be sold
Things contributed under appraisal
Article 1796. The partnership shall be responsible to every
partner for the amounts he may have disbursed on behalf of
the partnership and for the corresponding interest, from the
time the expense are made; it shall also answer to each partner
for the obligations he may have contracted in good faith in the
interest of the partnership business, and for risks in
consequence of its management. (1688a)
Obligation of the partnership:
• Reimburse the partner for what he may have disbursed in behalf of the
partnership
• Pay interest thereon
• Answer for all obligations that a partner may have contracted in good
faith in behalf of the partnership
• Assume all risks in consequence of its management

• These obligations subsist regardless of the outcome of the

transaction as long as the partner concerned acted in good
faith.
Article 1797. The losses and profits shall be distributed in conformity with the
agreement. If only the share of each partner in the profits has been agreed
upon, the share of each in the losses shall be in the same proportion.

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

If agreement is as to Profits According to agreement According to agreement

profits only Losses Apply agreement as to profits Exempt

Profits In proportion to what he/she Just and equitable share

No agreement
may have contributed
Losses Exempt

Assuming the promised contribution is not the same as the actual contributed, to
which of the two does the phrase, “which he may have contributed” refer?

“Is an industrial partner really exempt from loss?”

Article 1798. If the partners have agreed to intrust to a third person the
designation of the share of each one in the profits and losses, such
designation may be impugned only when it is manifestly inequitable. In
no case may a partner who has begun to execute the decision of the third
person, or who has not impugned the same within a period of three
months from the time he had knowledge thereof, complain of such
decision.

The designation of losses and profits cannot be intrusted to one of the

partners. (1690)
Designation of share in the profits and losses made by a third person can
only be impugned if it is MANIFESTLY INEQUITABLE

Even if it is manifestly inequitable, it can no longer be impugned if:

1. Aggrieved party has already begun to execute the decision (basis: ESTOPPEL)
2. If he/she has not impugned the decision within three (3) months from the time
he/she had knowledge thereof (basis: PRESCRIPTION)

In case a partner is given a manifestly inequitable share, may he/she accept it under
protest or with reservation in order to preserve his/her right to impugn such
determination?
Article 1799. A stipulation which excludes one or
more partners from any share in the profits or
losses is void. (1691)

Excerpt in the case of an industrial partner, as regards

exclusion from losses
Article 1800. The partner who has been appointed manager in the
articles of partnership may execute all acts of administration
despite the opposition of his partners, unless he should act in
bad faith; and his power is irrevocable without just or lawful
cause. The vote of the partners representing the controlling
interest shall be necessary for such revocation of power.

A power granted after the partnership has been constituted may

be revoked at any time. (1692a)
TO SUMMARIZE:
How applied In the article or partnership
Execute all acts of
Extent of power administration despite the
opposition of partners
Requires the affirmative vote
With just cause of partners representing the
controlling interest
Removal as such Requires the affirmative vote
Without just cause of ALL partners
In another document or oral
Execute all acts of administration
unless opposed by the other
partners
Requires the affirmative vote of
partners representing the
controlling interest
Requires the affirmative vote of
partners representing the
controlling interest
Article 1801. If two or more partners have been intrusted with the
management of the partnership without specification of their
respective duties, or without a stipulation that one of them
shall not act without the consent of all the others, each one may
separately execute all acts of administration, but if any of them
should oppose the acts of the others, the decision of the
majority shall prevail. In case of a tie, the matter shall be
decided by the partners owning the controlling interest.
(1693a)
Contemplated situation:
• Two or more partners have been appointed manager
• There is no specification as to their respective duties

Consequence:
• Each of them may execute acts of administration without the concurrence of the others
• If any one of them opposes the act, the decision of the majority shall prevail
• In case of a tie, the matter shall be decided by the partners owning the controlling interest
(provided, they are also managers)

?
If a managing partner has an objection/opposition, when should it be raised?
Why can’t non-managers participate in breaking the tie?
How can the matter be resolved id neither of the opposing sides own the controlling
interest?
Article 1802. In case it should have been stipulated that none
of the managing partners shall act without the consent of the
others, the concurrence of all shall be necessary for the
validity of the acts, and the absence or disability of any one of
them cannot be alleged, unless there is imminent danger of
grave or irreparable injury to the partnership. (1694)
Contemplated situation:
• Two or more partners have been appointed manager
• There is a stipulation that none of the managers shall act without the consent of the others

Consequence:
• The concurrence of all managers is necessary for the validity of any act.
• The absence or disability of any one of them, resulting in his/her failure to give his/her
concurrence, can only be alleged in case of imminent danger of grave or irreparable loss
to the partnership.
Article 1803. When the manner of management has not been agreed
upon, the following rules shall be observed:

(1) All the partners shall be considered agents and whatever any one of
them may do alone shall bind the partnership, without prejudice to the
provisions of article 1801.

(2) None of the partners may, without the consent of the others, make
any important alteration in the immovable property of the partnership,
even if it may be useful to the partnership. But if the refusal of consent
by the other partners is manifestly prejudicial to the interest of the
partnership, the court's intervention may be sought. (1695a)
Management not agreed upon:
• All partners are considered managing partners
• Rule under Article 1801 shall be applied in so far as their authority to act is concerned.
• Neither of them may make important alteration on the immovable property of the partnership**
• If withholding of consent is manifestly prejudicial to the interest of the partnership, court
intervention may be sought

**This restriction actually pertains to the execution of acts of strict dominion; hence, consent
of the other partners is required whether the subject property is movable or immovable.

It is settled that alteration include any act of strict dominion or ownership and any encumbrance or
disposition has been held implicitly to be an act of alteration. (Cruz v. Catapang, G.R. No. 164110, 12
February 2008, 544 SCRA 512, 519, citing Gala v. Rodriguez, 70 Phil. 124 (1940)
Article 1804. Every partner may associate another person with
him in his share, but the associate shall not be admitted into
the partnership without the consent of all the other partners,
even if the partner having an associate should be a manager.
(1696)
• A partner is the absolute owner of his interest in the partnership
• As the owner he/she may convey in whole or in part said interest without the consent of his/her
partners
• The transferee of a partner’s interest remains a stranger unless he/she is admitted as a new
partner upon the consent of all the partners
• The transferee of a partner’s interest who is not admitted as a partner becomes a mere associate
of the said partner in his interest in the partnership. (This holds true even if the one who has an
associate is the managing partner.)
Article 1805. The partnership books shall be kept, subject to
any agreement between the partners, at the principal place
of business of the partnership, and every partner shall at
any reasonable hour have access to and may inspect and
copy any of them. (n)
• What books must partnership keep?
• Who shall keep them?
• Where should they be kept?
• What time of the day would constitute “reasonable hours”?

It will be noted that our statute declares that the right of inspection can be exercised “at reasonable
hours. “This means at reasonable hours on business days throughout the year, and not merely during
some arbitrary period of a few days chosen by the directors*. (ANTONIO PARDO vs. THE HERCULES
LUMBER CO. INC., and IGNACIO FERRER G.R. No. L-22442 August 1, 1924)

*managers, in the case of partnerships

Article 1806. 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. (n)
• A partner owes utmost fidelity to his co-partners
• He is required to disclose even without demand all information on all matters affecting the
partnership that comes to his/her knowledge.
• The disclosure should be made-
• to any partner or The law reiterates that duty when it
• to the legal representative- provided that the partner shall RENDER
ON DEMAND...
• of a domestic partner or
• a partner under legal disability.

How may the other partners (or their legal representative) know their co-
partner conceals from them information that needs to be disclosed?
Article 1807. Every partner must account to the partnership
for any benefit, and hold as trustee for it any profits derived
by him without the consent of the other partners from any
transaction connected with the formation, conduct, or
liquidation of the partnership or from any use by him of its
property. (n)
Duties imposed by the provision:
• Render an account to the partnership for any benefit derived by him without the consent of the other
partners-
• from any transaction connected with the
• formation )
• conduct or ) of the partnership or
• liquidation)
• from any use by him of partnership property
• Hold as trustee for the partnership any profits derived by him without the consent of the other partners-
• from any transaction connected with the
• formation )
• conduct or ) of the partnership or
• liquidation)
• from any use by of partnership property
Article 1809. 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) As provided by article 1807;

(4) Whenever other circumstances render it just and reasonable.

(n)
Article 1810. The property rights of a partner are:
(1) His rights in specific partnership property;
(2) His interest in the partnership; and
(3) His right to participate in the management (n)

Article 1812. A partner's interest in the partnership

is his share of the profits and surplus. (n)
Article 1811. A partner is co-owner with his partners of specific partnership property.

The incidents of this co-ownership are such that:

(1) A partner, subject to the provisions of this Title and to any agreement between the partners, has an equal
right with his partners to possess specific partnership property for partnership purposes; but he has no right to
possess such property for any other purpose without the consent of his partners;

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

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

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

*now Article 195, Family Code

• While the law says the partners are co-owners with respect to specific partnership properties, the rules on co-
ownership do not necessarily apply (the partners cannot be said to be absolute owners of their undivided
share, their title is, at most, inchoate
• As co-owners, the partners-
• have equal rights to possess partnership property but only for partnership purposes (if used for personal
purpose, a partner must account for and hold as trustee any benefit that he/she may have derived
therefrom (Article 1806, NCC)
• cannot assign their right thereon, unless all the partners do so with respect to the same property
• Their creditors cannot attach their interest in specific partnership property.
• Their dependents cannot avail of the partnership property as source of legal support.
Article 1813. A conveyance by a partner of his whole interest in the partnership does not of itself
dissolve the partnership, or, as against the other partners in the absence of agreement, entitle
the assignee, during the continuance of the partnership, to interfere in the management or
administration of the partnership business or affairs, or to require any information or
account of partnership transactions, or to inspect the partnership books; but it merely entitles
the assignee to receive in accordance with his contract the profits to which the assigning
partner would otherwise be entitled. However, in case of fraud in the management of the
partnership, the assignee may avail himself of the usual remedies.

In case of a dissolution of the partnership, the assignee is entitled to receive his assignor's
interest and may require an account from the date only of the last account agreed to by all the
partners. (n)
• a partner’s interest in specific partnership property should not be confused with his/her interest in the
partnership; in the former, ownership is, at most, inchoate, in the latter, it is absolute
• a partner may convey his/her interest in the partnership without the consent of the other partners
• such conveyance does not result in the dissolution of the partnership; the partner-conveyor remains a
partner even if he/she has already conveyed 100% of his/her interest to a 3rd party
• the transferee of the partner’s interest only becomes an associate of the partner-conveyor (article 1804, ncc)
unless the other partners consent to his/her admission as a partner
• During the continuance of the partnership and in th e absence of stipulation, the trasnsferee only acquires the
right to receive, in accordance with his/her contract, the share in the profits to which the partner-transferor
would otherwise be entitled: he/she -
• cannot interfere in the management of the business
• require information or account, or
• inspect partnership books
• the admission of the transferee of the partner’s interest as a partner results in the dissolution of the
partnership; a new one is, however created
• the transferee who is not admitted as a partner may sue for dissolution -
• after termination of the specified term or particular undertaking or
• anytime after the conveyance in the case of partnership at will
READ: Realubit vs. Jaso G.R.
• upon dissolution of the partnership the transferee is entitled - No. 178782 September 21, 2011
• to receive the partner-transferor’s interest and
• may require an account
• for the purpose of ascertaining the value of the partner-transferor’s interest
• which shall only be from the date of the last account agreed to by all partners
Article 1814. Without prejudice to the preferred rights of 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 later appoint a receiver of his share of the profits, and of any other money due or to fall due to
him in respect of the partnership, and make all other orders, directions, accounts and inquiries which the debtor partner
might have made, or which the circumstances of the case may require.

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

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

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

Nothing in this Title shall be held to deprive a partner of his right, if any, under the exemption laws, as regards his
interest in the partnership. (n)
• The provision emphasizes the preferential right of partnership creditor with regard to partnership assets.
• What may be charged, upon application of the judgment creditor, to satisfy a judgment debt of a partner is
his/her interest in the partnership.
• Upon application by the judgment creditor, the court that issued the judgment or any other court may -
• issue a charging order,
• appoint a receiver and
• make other orders, directions, accounts and inquiries which the debtor-partner might have made or
which the circumstances of the case may require.
• The issuance of a charging order does not have the effect of placing the partnership under receivership.
• A receiver, if appointed by the court, shall only be for the share of the partner-debtor in the profits and other
monies that may be due him/her in respect of the partnership.
• A charging order is a court authorized lien imposed by a creditor on distributions made from a business
entity, such as a partnership. The debtor, in such a case, will be a member or partner
• The charging order is usually limited to the amount of the judgment and is similar to garnishment of
wages or income. It does not give the creditor management rights in the business entity. Nor can the
creditor interfere in the management of the business to which the debtor is a partner or member.

Redemption of the interest so charged may be made any time before foreclosure
With separate property
Purchase of the By any one or
interest so charged at more of the With partnership property with the Shall not dissolve the
a sale directed by the partners consent of all the partners whose partnership
court interest was not so charged or sold

Why is the consent of the partner whose interest was charged/sold not required if partnership property will
be used?
Article 1815. 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. (n)
READ: SEC Memorandum Circular No.13 Series of 2019 (Amended Guidelines and Procedures
on the Use of Corporate and Partmership Names)

• The partnership name shall bear the word “Company” or “Co” and if it is a limited partnership, the word
“Limited” or “Ltd”
• A professional partnership name may bear the word “Company” “Associates,” or “Partners,” or other similar
descriptions
• The practice of a profession regulated by a special law which, among others, provides for the permissible use of
the profession’s name in a firm, partnership or association shall govern the use of the name, e.g. “Engineer” or
“Engineering” (R.A. 1582), “Architect” (R.A. 9266), or “Geodetic Engineer” (R.A. 8560).
• The name of a corporation or partnership that has been dissolved or whose registration has been revoked shall
not be used by another corporation or partnership within five (5) years from the approval of dissolution or five
(5) years from the date of revocation, unless its use has been allowed at the time of the dissolution or revocation
by the stockholders, members or partners who represent a majority of the outstanding capital stock or
membership of the dissolved corporation or partnership, as the case may be.
THAT’S ALL FOR
TODAY
 AGENCY TRUST
AND PARTNERSHIP

1 ST SEMESTER A/Y 2021-2022

Article 1816. All partners, including industrial ones, shall be liable pro rata with
all their property and after all the partnership assets have been exhausted, for
the contracts which may be entered into in the name and for the account of the
partnership, under its signature and by a person authorized to act for the
partnership. However, any partner may enter into a separate obligation to
perform a partnership contract. (n)

Article 1817. Any stipulation against the liability laid down in the preceding
article shall be void, except as among the partners. (n)
• All partners are liable to the partnership creditors in case of insufficiency of the partnership’s assets.
• The obligation must be valid, meaning, it should have been entered inito-
• in the name of the partnership;
• for the account of the partnership;
• under its signature; and,
• by a person authorized to act for the partnership.
• A partner’s liability is joint and subsidiary.
• Pro rata should not be interpreted as proportionate to the partner’s interest; otherwise, industrial partner would not
have any share in the liability.
• However, if there is no industrial partner, the pro rata share of the partners can be directly computed based on their
loss sharing agreement or on their interest, as case may be, because the unpaid obligation actually represents loss
that will be eventually shared among the partners in accordance with the provisions Article 1797.
• A partner is not precluded from assuming full responsibility for a partnership obligation, with the consent o the
concerned creditor.
Since the unsettled obligation/s after exhaustion of partnership assets represent loss, a partner who has paid
more than his/her share shall be entitled to reimbursement from those who have paid less.

Illustration:

A B C D
Interest in the partnership 50% 30% 20% 0%
Assuming after the exhaustion of partnership assets, there remain unpaid obligations amounting to
P150,000.00, how will these be shared among the partners?

Partners’ pro rata share of the liability pursuant to Article 37,500.00 37,500.00 37,500.00 37,500.00
1816
Partner’s distributive share of the loss pursuant to Article 75,000.00 45,000.00 30,000.00 0.00
1797 (assuming there is no agreement as to sharing of profits
and losses)

Reimbursement to (from) the partner (37,500.00) (7,500.00) 7,500.00 37,500.00

This provision clearly states that, first, the partner’s obligation with respect to the partnership liabilities is
subsidiary in nature. It provides that the partners shall only be liable with their property after all the partnership
assets have been exhausted. To say that one’s liability is subsidiary means that it merely becomes secondary and
only arises if the one primary liable fails to sufficiently satisfy the obligation. Resort to the properties of a
partner may be made only after efforts in exhausting partnerhip assets have failed or that such partnership
assets are insufficient to cover the entire obligation. The subsidiary nature of the partners’ liability with the
partnership is one of the valid defenses against a premature execution of judgment diverted to a partner.

Xxx

Second, Article 1816 provides that the partners’ obligation to third persons with respect to the partnership liability
is pro rata or joint. Liability is joint when a debtor is liable only for the payment of only a proportionate part of
the debt. In contrast, a solidary liability makes a debtor liable for a payment of entire debt. In the same vein,
Article 1207 does not presume solidary liability unless: 1) the obligation expressly so states; or 2) the law or
nature requires solidarity. With regard to partnerships, ordinarily, the liability of the partners is not
solidarity. The joint liability of the partners is a defense that can be raised by a partner impleaded in a complaint
against the partnership. (Guy vs. Gacott G.R. No. 206147 January 13, 2016)
Article 1818. Every partner is an agent of the partnership for the purpose of its business, and the act of
every partner, including the execution in the partnership name of any instrument, for apparently
carrying on in the usual way the business of the partnership of which he is a member binds the
partnership, unless the partner so acting has in fact no authority to act for the partnership in the
cbnnnnnnl...,kkkmj mkj, mmmmmmnhhn mj0o9-o-particular matter, and the person with whom he is
dealing has knowledge of the fact that he has no such authority.

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

Except when authorized by the other partners or unless they have abandoned the business, one or more
but less than all the partners have no authority to:
 (1) Assign the partnership property in trust for creditors or on the assignee's promise to pay the
debts of the partnership;

(2) Dispose of the good-will of the business;

(3) Do any other act which would make it impossible to carry on the ordinary business of a
partnership;

(4) Confess a judgment;

(5) Enter into a compromise concerning a partnership claim or liability;

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

(7) Renounce a claim of the partnership.

No act of a partner in contravention of a restriction on authority shall bind the partnership to persons
having knowledge of the restriction. (n)
• The 1st paragraph speaks about the application of the doctrine of mutual agency- there is the presumption that the
partner is authorized to act for the partnership, which includes the execution of instruments, as long as the
transaction is “for apparently carrying on in the usual way the business of the partnership’.
• These are the transactions that are germane to the business of the partnership which involve mere acts of
administration. (It should be recalled that the authority of a managing partner is only limited to performance of acts
of administration unless he/she is also given the authority to perform acts of strict dominion.)
• Take note also that the law uses the term. “for apparently”, meaning the transaction need not really be for the
carrying on in the usual way the business of the partnership” as long as it appears to be so”.
• The presumption that the partner is authorized to execute transactions which are for “apparently carrying on xxx”
does not apply if -
• The partner acting has in fact no authority and
• The 3rd person with whom he/she deals has knowledge of such want of authority
• For transactions that are not “for apparently carrying on xxxx”, a partner must have authority from the other partners
in order to bind the partnership.
• For the seven acts that are enumerated under the 3rd paragraph, one or some of the partners may not perform
any of them if the other partners have not given him/her or them the authority to do so unless the business had
already been abandoned. (In the latter case, it presupposes that the one doing the act is the one in charge of the
abandoned business.)

• Reason: THESE ACTS ARE CONSIDERED ACTS OF STRICT DOMINION WHICH REQUIRE A SPECIAL
POWER OF ATTORNEY IF THE SAME WILL BE PERFORMED THROUGH AN AGENT.

Although a partnership is based on delectus personae or mutual agency, whereby any partner can
generally represent the partnership in its business affairs, it is non sequitur that a suit against the
partnership is necessarily a suit impleading each and every partner. It must be remembered that a
partnership is a juridical entity that has a distinct and separate personality from the persons composing it.
(Guy vs. Gacott G.R. No. 206147 January 13, 2016)
Article 1819. Where title to real property is in the partnership name, any partner may convey
title to such property by a conveyance executed in the partnership name; but the
partnership may recover such property unless the partner's act binds the partnership under
the provisions of the first paragraph of article 1818, or unless such property has been
conveyed by the grantee or a person claiming through such grantee to a holder for value
without knowledge that the partner, in making the conveyance, has exceeded his authority.

Where title to real property is in the name of the partnership, a conveyance executed by a
partner, in his own name, passes the equitable interest of the partnership, provided the act
is one within the authority of the partner under the provisions of the first paragraph of
article 1818.
Where title to real property is in the name of one or more but not all the partners, and the
record does not disclose the right of the partnership, the partners in whose name the title
stands may convey title to such property, but the partnership may recover such property if
the partners' act does not bind the partnership under the provisions of the first paragraph
of article 1818, unless the purchaser or his assignee, is a holder for value, without knowledge.

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

Where the title to real property is in the name of all the partners a conveyance executed by
all the partners passes all their rights in such property. (n
This provision tackles the effects of conveyance of real property of the partnership under different scenarios

Scenario No. 1
• Real property is owned by the partnership;
• The title thereto is in the partnership name; and,
• A partner conveys the property in the partnership name.

Effect
• The grantee acquires title to the property but the partnership may recover the same
• However, recovery is no longer possible in the following instances:
1. The act of conveying the property is for apparently carrying on in the usual way the business of the
partnership and the grantee has no knowledge that the partner, in making the conveyance, has no
authority or has exceeded his/her authority, if such was the fact.
2. The property has been conveyed by the grantee or a person claiming through such grantee to a holder for
value without knowledge that the partner, in making the conveyance, has exceeded his/her authority.
Scenario No. 2
• Real property is owned by the partnership;
• The title thereto is in the partnership name; and
• A partner conveys the property in his/her own name

Effect
• The grantee acquires equitable interest in the property provided the conveyance is for apparently carrying
on in the usual way the business of the partnership and the grantee has no knowledge that the partner has
no authority or has exceeded his/her authority, if such was the fact; otherwise, the grantee does not acquire
any interest in the property.
Scenario No. 3
• Real property is owned by the partnership
• Title thereto is on the name of one or more but not all the partners and the record does not disclose the right of
the partnership; and
• The partner/s in whose name the title stand convey/s the property.

Effect
• The grantee acquires title to the property but the partnership may recover the same.
• However, recovery is no longer possible in the following instances:
1. The act of conveying the property is for apparently carrying on in the usual way the business of the
partnership and the grantee has no knowledge that the partner/s, in making the conveyance, has/have no
authority or has have/exceeded his/her authority, if such was the fact.
2. The purchaser or his assignee is a purchaser for value, without knowledge
Scenario No. 4
• Real property is owned by the partnership;
• Title thereto is in the name of one or more or all the partners, or in a third person in trust for the partnership;
and
• A partner conveys the property either in his/her own name in the partnership name.

Effect
• The grantee acquires equitable interest in the property provided the conveyance is for apparently carrying on
in the usual way the business of the partnership and the grantee has no knowledge that the partner, in
making the conveyance, has no authority or has exceeded his/her authority, if such was the fact; otherwise
the grantee does not acquire any interest.
Scenario No. 5
• Real property is owned by the partnership; Effect’
• Title thereto is in the name of all partners; and • The grantee acquires full title
• All partners execute a deed of conveyance covering the property. to the property.

Jurisprudence has defined an innocent purchaser for value as one who buys property of
N another, without notice that some other person has a right to or interest therein, and who then
pays a full and fair price for it, at the time of such purchase, or before receiving a notice of the
O claim or interest of some other persons in the property. Buyers in good faith buy a property with
T the belief that the person from whom he receives the thing is the owner who can convey title to
the property. A purchaser can not close his eyes to facts which should put a reasonable person
E on guard and still claim that they are acting in good faith. (Yared v. Tiangco, G.R. No. 161360, 19
October 2011, 659 SCRA 545, 555)
Equally or even more preclusive of the respondent partnership's claim to the mortgaged property is the last
paragraph of Article 1819 of the Civil Code, which contemplates a situation duplicating the circumstances that
attended the execution of the mortgage in favor of Syjuco and therefore applies foursquare thereto:

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.

The term "conveyance" used in said provision, which is taken from Section 10 of the American Uniform
Partnership Act, includes a mortgage.

Interpreting Sec. 10 of the Uniform Partnership Act, it has been held that the right to mortgage
is included in the right to convey. This is different from the rule in agency that a special power to sell
excludes the power to mortgage (Art. 1879).

- (SANTIAGO SYJUCO, INC vs. HON. JOSE P. CASTRO, et al G.R. No. 70403 July 7, 1989)
Article 1820. An admission or representation made by any
partner concerning partnership affairs within the scope of his
authority in accordance with this Title is evidence against the
partnership. (n)
THIS IS A RULE ON ADMISSIBILITY OF EVIDENCE
• To be admissible in evidence against the partnership, an admission or representation made by
any partner must -
1. concern partnership affairs
2. be within the scope of his/her authority
3. be of his/her personal knowledge
• An admission or representation made by former partner at a time that he/she is no longer a
partner is not admissible as evidence against the partnership.
Article 1821. Notice to any partner of any matter relating to
partnership affairs, and the knowledge of the partner acting in
the particular matter, acquired while a partner or then present
to his mind, and the knowledge of any other partner who
reasonably could and should have communicated it to the acting
partner, operate as notice to or knowledge of the partnership,
except in the case of fraud on the partnership, committed by or
with the consent of that partner. (n)
 INSTANCES WHERE THERE IS IMPUTED NOTICE TO/KNOWLEDGE NO IMPUTED
OF THE PARTNERSHIP NOTICE/KNOWLEGE

Notice to any partner of any matter Operate as notice to the

relating to partnership affairs partnership

Knowledge of the partner acting in the Except in the case of fraud on the
particular matter, acquired while already partnership, committed by of with
a partner or then present to his mind Operate as knowledge of the the consent of that partner
partnership

Knowledge of any other partner who

reasonably could and should have
communicated it to the acting partner

The application of this doctrine is anchored on the partners’ duty to render true and full information on all matters
affecting the partnership under Article 1806.
Further, Article 1821 of the Civil Code does not state that there is no need to implead a partner in order to be
bound by the partnership liability. It provides that:

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

[Emphases and Underscoring Supplied]

A careful reading of the provision shows that notice to any partner, under certain circumstances, operates as notice to
or knowledge to the partnership only. Evidently, it does not provide for the reverse situation, or that notice to the
partnership is notice to the partners. Unless there is an unequivocal law which states that a partner is automatically
charged in a complaint against the partnership, the constitutional right to due process takes precedence and a partner
must first be impleaded before he can be considered as a judgment debtor. To rule otherwise would be a dangerous
precedent, harping in favor of the deprivation of property without ample notice and hearing, which the Court certainly
cannot countenance. (Guy vs. Gacott G.R. No. 206147 January 13, 2016)
Article 1822. Where, by any wrongful act or omission of any partner acting in the ordinary course of
the business of the partnership or with the authority of his co-partners, loss or injury is caused to
any person, not being a partner in the partnership, or any penalty is incurred, the partnership is
liable therefor to the same extent as the partner so acting or omitting to act. (n)

Article 1823. The partnership is bound to make good the loss:

(1) Where one partner acting within the scope of his apparent authority receives money or
property of a third person and misapplies it; and

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

Article 1824. All partners are liable solidarily with the partnership for everything chargeable to
the partnership under articles 1822 and 1823. (n)
 INSTANCES WHEN SOLIDARY LIABILITY IS IMPOSED BY LAW UPON THE PARTNERS
AND THE PARTNERSHIP

1. Where,by any wrongful act or omission of any partner acting in the ordinary course of
the business of the partnership or with the authority of co-partners, loss or injury is
caused to any person, not being a partner in the partnership, or any penalty is incurred

2. Where one partner acting within the scope of his apparent authority receives money or
property of a third person and misapplies it
3. Where the partnership in the course of its business receives money or property of a
third person and the money or property so received is misapplied by any partner while it
is in the custody of the partnership

**The partnership and the innocent partner/s are entitled to reimbursement from the guilty partner.
 REQUISITES THAT MUST BE PRESENT IN ORDER FOR SOLIDARY LIABILITY TO ARISE
Article 1822 Article 1823 (1) Article 1823 (2)
There must be a wrongful act or omission
by a partner; While acting within the scope of his In the course of its business, the
Such wrongful act or omission occurred apparent authority, a partner partnership receives money or
while the partner is acting in the receives money or property of a third property of a third person.
ordinary course of the business of the person;
partnership or with authority of his co-
partners;
As a result of the wrongful act or
omission, loss or injury is caused to any
person, not being a partner, or a penalty The money or property so received
is incurred; The partner who receives the money is misapplied by ANY partner
The partner responsible for the wrongful or property misapplies it while it is in the custody of the
act or omission is held liable. partnership
In essence, these provisions articulate that it is the act of a partner which caused loss or injury to a
third person that makes all other partners solidarily liable with the partnership because of the
words "any wrongful act or omission of any partner acting in the ordinary course of the business,"
"one partner acting within the scope of his apparent authority" and "misapplied by any
partner while it is in the custody of the partnership." The obligation is solidary because the law
protects the third person, who in good faith relied upon the authority of a partner, whether such
authority is real or apparent. (Munasque v. Court of Appeals, 224 Phil. 79, 90 (1985) cited in Guy vs.
Gacott G.R. No. 206147 January 13, 2016)

1. Will there be solidary liability among the partnership and the partners if the injured
party is an employee of the partnership?
2. What will be the extent of liability of the partnership and the partners if the one who
misapplies the money or property of the third person is an employee of the
partnership?
Article 1825. When a person, by words spoken or written or by conduct, represents himself, or
consents to another representing him to anyone, as a partner in an existing partnership or
with one or more persons not actual partners, he is liable to any such persons to whom such
representation has been made, who has, on the faith of such representation, given credit to
the actual or apparent partnership, and if he has made such representation or consented to
its being made in a public manner he is liable to such person, whether the representation has
or has not been made or communicated to such person so giving credit by or with the
knowledge of the apparent partner making the representation or consenting to its being
made:

(1) When a partnership liability results, he is liable as though he were an actual member
of the partnership;
(2) When no partnership liability results, he is liable pro rata with the other persons, if
any, so consenting to the contract or representation as to incur liability, otherwise
separately.
When a person has been thus represented to be a partner in an existing partnership, or with
one or more persons not actual partners, he is an agent of the persons consenting to such
representation to bind them to the same extent and in the same manner as though he were a
partner in fact, with respect to persons who rely upon the representation. When all the
members of the existing partnership consent to the representation, a partnership act or
obligation results; but in all other cases it is the joint act or obligation of the person acting
and the persons consenting to the representation. (n)
A person becomes a partner by estoppel in any of the following manners:
1. He/she represents himself’/herself as a partner in an existing partnership or with one or more persons who are not
actual partners; or
2. He/she consents to another person representing him/her as a partner in an existing partnership or with one or more
persons who are not actual partners.

Representation could be done either -

1. By words, spoken or written, or
2. By conduct.

Liability -
a) to the person to whom the representation was made or
b) to any person, whether the representation was or was not communicated to him/her by or with the knowledge of
the apparent partner making the representation or consenting to its being made, if the representation or the
consent to be represented was made in a public manner
shall only arise if the aggrieved party, either or (a) or (b) above, extended credit to the actual or apparent
partnership on the faith of the such representation.
Extent of liability of a partner by estoppel:

1. When partnership liability results, he/she is liable as though he/she were an actual member of the
partnership. (His/her liability shall be pro rata (joint) and subsidiary, in accordance pursuant to Article
1816).

2. When no partnership liability, he/she is liable pro rata with the person who consented to the contract, if
any; otherwise separately. (His/her liability shall be pro rata (joint) and primary.)

Mutual agency applies to partners by estoppel and they can bind each other as though they were partners
in fact with respect to person who rely upon the representation.

Partnership obligation results when a person represents himself/herself or consents to be represented as a

partner in an existing partnership and all members thereof consent to the representation.

In all other cases, a joint obligation results among the person acting and the person/s consenting to the
representation.
Article 1826. A person admitted as a partner into an existing partnership is liable for all the
obligations of the partnership arising before his admission as though he had been a partner when
such obligations were incurred, except that this liability shall be satisfied only out of partnership
property, unless there is a stipulation to the contrary. (n)

Article 1840. In the following cases creditors of the dissolved partnership are also creditors of the
person or partnership continuing the business:

(1) When any new partner is admitted into an existing partnership, xxx

Xxx

The liability of a third person becoming a partner in the partnership continuing the business,
under this article, to the creditors of the dissolved partnership shall be satisfied out of the
partnership property only, unless there is a stipulation to the contrary
• When a new partner is admitted in an existing partnership the old one is dissolved.
• Technically, it may be argued that the creditors of the dissolved partnership are not creditors of the new
partnership.
• To preclude such an argument, Article 1840 categorically states that the creditors of the old partnership are
also creditors of the new partnership.
• Because the creditors of the dissolved partnership are also creditors of the new partnership, the newly
admitted partner is liable to them even though the corresponding obligations were incurred prior to his/her
admission according to Article 1826, said liability is, however, joint and subsidiary pursuant to Article 1816.
• Article 126 and Article 1840 further clarifies that, as a rule, the liability of the newly admitted partner does
not extend to his/her separate properties.
• However, it can be validly stipulated that the subsidiary liability of the newly admitted partner shall extend
even to his/her separate properties.
Article 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. (n)
• The provision is an expression of the doctrine of marshalling of assets.

• The equitable doctrine of marshalling assets of a partnership is that when the partnership property
and the individual properties of the partners are before the court for distribution, the firm’s creditors
have priority on firm’s assets, and individual partners’ creditors have priority on individual partner’s
assets.

• While the law adheres to the doctrine of marshalling of assets, it still allows the private creditors of
the partners to ask for the attachment and public sale of the share of the latter in the partnership
assets; after all any remaining assets after the satisfaction of the claim of partnership creditors are
distributable to the partners in proportion to their respective interest.
Article 1828. The dissolution of a partnership is the change in the
relation of the partners caused by any partner ceasing to be
associated in the carrying on as distinguished from the winding
up of the business. (n)

Article 1829. On dissolution the partnership is not terminated, but

continues until the winding up of partnership affairs
is completed. (n)
• The law allows the dissolution of partnership for any reason provided such dissolution does not
amount to a breach of contract or is prejudicial to third parties.
• The death of a partner or the admission of a new one results in the dissolution thereof.
• In other words, any change in the composition of the partnership, unless so allowed, will result in
the dissolution thereof.
• The remaining partners, if they so desire, may form a new partnership with less or more partners.
• If the business is continued after dissolution, winding up is not necessary
• If there is complete cessation of business after dissolution, winding up must be undertaken without
unnecessary delay.
• The law does not fix the period during which the wining up must be completed.
Under the Civil Code, the three final stages of a partnership are (1) dissolution; (2) winding-up; and (3)
termination. These stages are distinguished, to wit:

1. 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 of time the time the partners
cease to carry on the business together.

2. Winding up is the process of settling business affairs of dissolution. (NOTE: Examples of winding
up: the paying of previous obligations; the collecting of assets previously demandable; even new
business if needed to wind up, as the contracting with a demolition company for the demolition of
the garage used in a “used car” partnership.)

3. Termination is the point in time after all the partnership affairs have been wound up.

(Paras, Civil Code of the Philippines, Vol. V. 7th., p. 516.)

THAT’S ALL FOR
TODAY
 AGENCY TRUST
AND PARTNERSHIP

1 ST SEMESTER A/Y 2021-2022

Article 1830. Dissolution is caused:

(1) Without violation of the agreement between the partners:

(a) By the termination of the definite term or particular undertaking specified in the agreement;

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

(c) By the express will of all the partners who have not assigned their interests or suffered them to be
cha rged for their separate debts, either before or after the termination of any specified term or
particular undertaking;

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

(2) In contravention of the agreement between the partners, where the circumstances do not permit a
dissolution under any other provision of this article, by the express will of any partner at any time;
(3) By any event which makes it unlawful for the business of the partnership to be carried on or for the
members to carry it on in partnership;

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

(5) By the death of any partner;

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

(7) By the civil interdiction of any partner;

(8) By decree of court under the following article. (1700a and 1701a)
Some points to consider:
• Dissolution is either-
• extrajudicial which automatically occurs upon the happening of the particular event which, by provision of
law, is a ground for dissolution, or
• judicial which occurs upon order of the court based on any of the grounds provided for by law.

• The happening of any of the following events will result in the dissolution of the partnership:
1. Expiration of the term or accomplishment of the undertaking for which the partnership was formed.
2. Express will of any partner when no definite term of particular undertaking is specified in the contract;
provided, he/she acts in good faith
3. 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. Bona fide expulsion of any partner.
5. Express will of any partner contravention of the partnership agreement.
6. Any event which makes it unlawful-
• for the partnership to carry on ts business or
• for the partners to carry it on in partnership.
7. Loss before delivery of the determinate thing which a partner has promised to contribute or loss at any time
if only the usufruct was transferred to the partnership.
8. Death of any partner.
9. Insolvency-
• of any partner or
• of the partnership.
10. Civil interdiction of any partner.
FYI: Under Section 35 (h) of the Revised
Corporation Code (RA No. 11232), a
corporation is expressly allowed to enter into
partnerships with natural and juridical
persons,
The partnership exists until dissolved under the law. Since the partnership created by petitioners and private
respondent has no fixed term and is therefore a partnership at will predicated on their mutual desire and
consent, it may be dissolved by the will of a partner. Thus:

"x x x. The right to choose with whom a person wishes to associate himself is the very foundation and essence of
that partnership. Its continued existence is, in turn, dependent on the constancy of that mutual resolve, along
with each partner’s capability to give it, and the absence of cause for dissolution provided by the law itself.
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."

An unjustified dissolution by a partner can subject him to action for damages because by the mutual agency
that arises in a partnership, the doctrine of delectus personae allows the partners to have the power, although
not necessarily the right to dissolve the partnership. (MARJORIE TOCAO and WIILLIIAM T. BELO vs COURT
OF APPEALS and MENIITA A. ANAY G.R. No. 127403 October 4, 2000)
A partnership may be constituted in any form, except where immovable property of real rights are
contributed thereto, in which case a public instrument shall necessary. Hence, based on the intention of the
parties, as gathered from the facts and ascertained from their language and conduct, a verbal contract of
partnership may arise. The essential profits that must be proven to that a partnership was agreed upon are (1)
mutual contribution to a common stock, and (2) a joint interest in the profits. Understandably so, in view
of the absence of the written contract of partnership between respondent and Jacinto, respondent resorted to
the introduction of documentary and testimonial evidence to prove said partnership. The crucial issue to settle
then is to whether or not the "Dead Man's Statute" applies to this case so as to render inadmissible respondent's
testimony and that of his witness, Josephine. (Sunga-Chan vs. Chua G.R. No. 143340 August 15, 2001)

It was held that the “Dead Man’s Statute” was not applicable in this case. Read the full text of the case to
know the circumstances that led to this conclusion.
Article 1831. On application by or for a partner the court shall decree a dissolution whenever:
(1) A partner has been declared insane in any judicial proceeding or is shown to be of unsound mind;
(2) A partner becomes in any other way incapable of performing his part of the partnership contract;
(3) A partner has been guilty of such conduct as tends to affect prejudicially the carrying on of the
business;
(4) A partner wilfully 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;
(5) The business of the partnership can only be carried on at a loss;
(6) Other circumstances render a dissolution equitable.
On the application of the purchaser of a partner's interest under article 1813 or 1814:
(1) After the termination of the specified term or particular undertaking;
(2) At any time if the partnership was a partnership at will when the interest was assigned or when the
charging order was issued. (n)
Grounds that a partner may invoke (at any time):
1. Insanity or unsoundness of mind of a partner
2. Incapability of a partner to perform his/her part in the partnership contract
3. Conduct of a partner that tends to affect prejudicially the carrying on of the partnership
4. Willful or persistent breach of partnership agreement or conduct that makes it unreasonably practicable to
carry on the business in partnership with him/her
5.The business can only be carried on at a loss
6. Other circumstances that render dissolution equitable

• Will the judicial declaration of insanity of the partner in another proceeding be conclusive upon the court
where the petition for dissolution of the partnership is pending?
• The willful or persistent breach of partnership agreement does not warrant the expulsion of the guilty
partner; otherwise, it would not be necessary to file an action in court.
From the foregoing provision, it is evident that "(t)he transfer by a partner of his partnership interest does not
make the assignee of such interest a partner of the firm, nor entitle the assignee to interfere in the management
of the partnership business or to receive anything except the assignee’s profits. The assignment does not
purport to transfer an interest in the partnership, but only a future contingent right to a portion of the ultimate
residue as the assignor may become entitled to receive by virtue of his proportionate interest in the capital."
Since a partner’s interest in the partnership includes his share in the profits, we find that the CA
committed no reversible error in ruling that the Spouses Jaso are entitled to Biondo’s share in the profits,
despite Juanita’s lack of consent to the assignment of said Frenchman’s interest in the joint venture. Although
Eden did not, moreover, become a partner as a consequence of the assignment and/or acquire the right to
require an accounting of the partnership business, the CA correctly granted her prayer for dissolution of the
joint venture conformably with the right granted to the purchaser of a partner’s interest under Article 1831 of
the Civil Code. (Realubit vs. Jaso G.R. No. 178782 September 21, 2011)

*reffering to is Article 1813 of the New Civil Code

The birth and life of a partnership at will is predicated on the mutual desire and consent of the partners. The
right to choose with whom a person wishes to associate himself is the very foundation and essence of that
partnership. Its continued existence is, in turn, dependent on the constancy of that mutual resolve, along with
each partner's capability to give it, and the absence of a cause for dissolution provided by the law itself.
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
partnership4 but that it can result in a liability for damages. (Ortega, et al vs. CA G.R. No. 109248 July 3,
1995

NOTE: Resort to judicial dissolution would only be necessary if the partners are unwilling to
voluntarily dissolve their partnership.
Article 1832. Except so far as may be necessary to wind up partnership affairs or to
complete transactions begun but not then finished, dissolution terminates all
authority of any partner to act for the partnership:
(1) With respect to the partners,
(a) When the dissolution is not by the act, insolvency or death of a partner; or
(b) When the dissolution is by such act, insolvency or death of a partner, in
cases where article 1833 so requires;
(2) With respect to persons not partners, as declared in article 1834. (n)
Article 1833. Where the dissolution is caused by the act, death or insolvency of a
partner, each partner is liable to his co-partners for his share of any liability
created by any partner acting for the partnership as if the partnership had not
been dissolved unless:
(1) The dissolution being by act of any partner, the partner acting for the
partnership had knowledge of the dissolution; or
(2) The dissolution being by the death or insolvency of a partner, the partner
acting for the partnership had knowledge or notice of the death or insolvency.
Article 1834. After dissolution, a partner can bind the partnership, except as provided in the third paragraph of
this article:
(1) By any act appropriate for winding up partnership affairs or completing transactions unfinished at
dissolution;
(2) By any transaction which would bind the partnership 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 of
the dissolution; or
(b) Though he had not so extended credit, had nevertheless known of the partnership prior to
dissolution, and, having no knowledge or notice of dissolution, the fact of dissolution had not been
advertised in a newspaper of general circulation in the place (or in each place if more than one) at
which the partnership business was regularly carried on.
The liability of a partner under the first paragraph, No. 2, shall be satisfied out of partnership assets alone
when such partner had been prior to dissolution:
(1) Unknown as a partner to the person with whom the contract is made; and
(2) So far unknown and inactive in partnership affairs that the business reputation of the partnership
could not be said to have been in any degree due to his connection with it.

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

(1) Where the partnership is dissolved because it is unlawful to carry on the business, unless the act is
appropriate for winding up partnership affairs; or
(2) Where the partner has become insolvent; or
(3) Where the partner 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 in the
manner provided for advertising the fact of dissolution in the first paragraph, No. 2 (b).

Nothing in this article shall affect the liability under article 1825 of any person who after dissolution
represents himself or consents to another representing him as a partner in a partnership engaged in
carrying on business. (n)
GENERAL RULE:
• Dissolution terminates all authority of any partner to act for the partnership.
EXCEPTION:
• As regards the partners (i.e., each partner is liable to his co-partners for his share of any liability created by any
partner acting for the partnership as if the partnership had not been dissolved)-
• When the partner acting for the partnership had no knowledge of the dissolution, the dissolution being by act of
any partner.
• When the partner acting for the partnership had neither knowledge nor notice of the death or insolvency, the
dissolution being by the death or insolvency of a partner.
• As regards the partnership (i.e., a partner can bind the partnership after dissolution)-
• By any act appropriate for (1) winding up partnership affairs or (2) completing transactions unfinished at
dissolution
• By any transaction, which would bind the partnership if dissolution had not taken place, entered into with an
innocent third party.
An innocent third party (with respect to transaction which would otherwise bind the partnership had there been
no dissolution) is either-
• One who
• had extended credit to the partnership prior to dissolution and
• had neither knowledge nor notice of the dissolution, or
• One who-
• had not so extended credit
• had nevertheless known of the partnership prior to dissolution, and
• had neither knowledge nor notice of dissolution, the fact of dissolution had not been advertised in a
newspaper of general circulation in the place (on in each place if more than one) at which the partnership
business was regularly carried on
 The liability for transaction with an innocent third party of a partner who, prior to the dissolution, is unknown to
the innocent third party who extended credit to the dissolved partnership and is inactive in partnership affairs
that the business reputation could not have been in any degree due to his connection with it SHALL BE
SATISFIED OUT OF PARTNERSHIP ASSETS ALONE.

After dissolution, a partner cannot bind the partnership in the following instances:
• Where the partnership is dissolved because it is unlawful to carry on the business, unless the act is
appropriate for winding up partnership affairs (in case there no one designated winding up partner)
• Where the partner has no authority to wind up partnership affairs (as when there is a designated winding up
partner or one is appointed by the court to undertake the winding up); except by a transaction with an
innocent third party
• Where the partner has become insolvent (the insolvency occurs after dissolution)
An innocent third party (with respect to winding up transaction ) is either-
• One who
• had extended credit to the partnership prior to dissolution and
• had neither knowledge nor notice of the want of authority of the partner, or
• One who-
• had not so extended credit to the partnership prior to dissolution, and
• had neither knowledge nor notice of the partner’s want of authority, the fact of his/her want of authority
had not been advertised in a newspaper of general circulation in the place (on in each place if more than
one) at which the partnership business was regularly carried on
If partnership is bound by the transaction but the dissolution -
• is not due to the act, death or insolvency of the partner or
• is not due to the act of a partner but the partner acting for the partnership had knowledge of the
dissolution or
• is due to the death or insolvency of a partner but the partner acting for the partnership had knowledge
or notice of the death or insolvency
the other partners can seek reimbursement from the partner acting for their share in the
resulting obligation
Article 1835. The dissolution of the partnership does not of itself discharge the existing liability
of any partner.

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

The individual property of a deceased partner shall be liable for all obligations of the
partnership incurred while he was a partner, but subject to the prior payment of his separate
debts. (n)
• Neither the dissolution of the partnership nor the death of the partner shall discharge him/her from the
subsidiary and pro rata liability to the partnership creditors.
• In case the business of the dissolved partnership is continued, a partner shall be discharged from liability by an
agreement to that effect between himself/herself, the partnership creditor and the person or partnership
continuing the business.
• Ideally, the contract should be in writing; however, the law seems to imply that the agreement would be valid
even if not in writing.
• The existence of an oral contract can be inferred from the course of the dealing between the creditor and the
person or partnership continuing the business.
• In case of dissolution due to the death of a partner where such partner is not discharged from his/her
subsidiary liability, the claim of the creditor may be file as a claim against the estate, in which case the
doctrine of marshalling of assets shall apply..
Article 1836. Unless otherwise agreed, the partners who have not
wrongfully dissolved the partnership or the legal representative of
the last surviving partner, not insolvent, has the right to wind up
the partnership affairs, provided, however, that any partner, his
legal representative or his assignee, upon cause shown, may obtain
winding up by the court. (n)
 Winding up means the administration of the assets of the partnership for the purpose of terminating the
business and discharging the obligations of the partnership. (Primebook Properties and Development Corporation, et
al vs. Ma. Clarita T. Lazatin-Magat, et al G.R. No. 167379, June 27, 2006)

• Winding up could either be extrajudicial or judicial

• Extrajudicial winding up shall be undertaken - • Either of the following may seek
• by the one who was designated in the partnership agreement or judicial winding up -
• subsequently agreed upon by the partners. • A partner
• In the absence of agreement, winding up shall be undertaken - • His/her legal representative
• by the partners who have not wrongfully dissolved the partnership, or • His/her assignee
• by the legal representative of the last surviving partner who is not insolvent.

The partners A, B and C, who are multi-millionaire, were passengers of an airplane that exploded in midair.
None of them was recovered in one piece, Whose legal representative would have the right to wind up the affairs
of their partnership?
Article 1837. When dissolution is caused in any way, except in contravention of the partnership agreement, each
partner, as against his co-partners and all persons claiming through them in respect of their interests in the
partnership, unless otherwise agreed, may have the partnership property applied to discharge its liabilities,
and the surplus applied to pay in cash the net amount owing to the respective partners. But if dissolution is
caused by expulsion of a partner, bona fide under the partnership agreement and if the expelled partner is
discharged from all partnership liabilities, either by payment or agreement under the second paragraph of
Article 1835, he shall receive in cash only the net amount due him from the partnership.
When dissolution is caused in contravention of the partnership agreement the rights of the partners shall be as
follows:
(1) Each partner who has not caused dissolution wrongfully shall have:
(a) All the rights specified in the first paragraph of this article, and
(b) The right, as against each partner who has caused the dissolution wrongfully, to damages
breach of the agreement.
(2) The partners who have not caused the dissolution wrongfully, if they all desire to continue the business
in the same name either by themselves or jointly with others, may do so, during the agreed term for the
partnership and for that purpose may possess the partnership property, provided they secure the payment
by bond approved by the court, or pay any partner who has caused the dissolution wrongfully, the value of
his interest in the partnership at the dissolution, less any damages recoverable under the second
paragraph, No. 1 (b) of this article, and in like manner indemnify him against all present or future
partnership liabilities.
(3) A partner who has caused the dissolution wrongfully shall have:
(a) If the business is not continued under the provisions of the second paragraph, No. 2, all the rights of
a partner under the first paragraph, subject to liability for damages in the second paragraph, No. 1
(b), of this article.
(b) If the business is continued under the second paragraph, No. 2, of this article, the right as against
his co-partners and all claiming through them in respect of their interests in the partnership, to have
the value of his interest in the partnership, less any damage caused to his co-partners by the
dissolution, ascertained and paid to him in cash, or the payment secured by a bond approved by the
court, and to be released from all existing liabilities of the partnership; but in ascertaining the value
of the partner's interest the value of the good-will of the business shall not be considered. (n)
RIGHTS AND OBLIGATION OF THE PARTNERS UPON DISSOLUTION OF THE PARTNERSHIP
Dissolution is caused in any way, except in contravention of the partnership agreement:
• have the partnership property applied to discharge its liabilities, and the surplus applied to pay in cash the net
amount owing to the respective partners
(a partner who is expelled bona fide in accordance with the partnership agreement but is discharged from liability
is also entitled to receive in cash the net amount due him/her)
• In the absence of agremeent, a partner is
Dissolution is caused in contravention of the partnership agreement:
only entitled to receive cash as payment for
A. Partners who have not wrongfully caused the dissolution the value of his/her interest

Rights -
• have the partnership property applied to discharge its liabilities, and the surplus applied to pay in cash the net
amount owing to the respective partners, or
• if they all desire, continue the business in the same name either by themselves or jointly with others during the
agreed term for the partnership and possess partnership properties for this purpose
• in either case, recover damages from the partner/s who has caused the dissolution wrongfully
 Obligation (in case they decide to continue the business)
• secure the payment by bond approved by the court, or pay any partner who has caused the dissolution
wrongfully, the value of his/her interest in the partnership at the dissolution, less any damages
• indemnify him/her against all present or future partnership liabilities
B. Partner who has wrongfully caused the dissolution
If business is not continued-
• have the partnership property applied to discharge its liabilities, and receive in cash the net amount owing to
him/her (net of damages)
If business is continued-
• have the value of his interest in the partnership, less any damage caused to his/her co-partners by the
dissolution, ascertained and paid to him/her in cash, or the payment secured by a bond approved by the court,
• be released from all existing liabilities of the partnership and be indemnified against future liabilities

NOTE: THE GUILTY PARTNER IS NOT ENTIITLED TO A SHARE IN THE GOODWILL OF THE BUSINESS
The liquidation of the assets of the partnership following its dissolution is governed by various
provisions of the Civil Code; however, an agreement of the partners, like any other contract, is
binding among them and normally takes precedence to the extent applicable over the Code's
general provisions. (Ortega, et. al vs. CA, et al G.R. No. 109248 July 3, 1995)
Since it is the partnership, as a separate and distinct entity, that must refund the shares of the partners, the amount to
be refunded is necessarily limited to its total resources. In other words, it can only pay out what it has in its coffers,
which consists of all its assets. However, before the partners can be paid their shares, the creditors of the partnership
must first be compensated. After all the creditors have been paid, whatever is left of the partnership assets becomes
available for the payment of the partners' shares.
Xxx
Because of the above-mentioned transactions, the partnership capital was actually reduced. When petitioners and
respondents ventured into business together, they should have prepared for the fact that their investment would either
grow or shrink. In the present case, the investment of respondents substantially dwindled. The original amount of
P250,000 which they had invested could no longer be returned to them, because one third of the partnership properties
at the time of dissolution did not amount to that much.
It is a long established doctrine that the law does not relieve parties from the effects of unwise, foolish or disastrous
contracts they have entered into with all the required formalities and with full awareness of what they were doing.
Courts have no power to relieve them from obligations they have voluntarily assumed, simply because their contracts
turn out to be disastrous deals or unwise investments. (Villareal, et al vs. Ramirez, et al G.R. No. 144214 July 14, 2003)
Article 1838. Where a partnership contract is rescinded on the ground of the fraud or
misrepresentation of one of the parties thereto, the party entitled to rescind is, without prejudice to
any other right, entitled:
(1) To a lien on, or right of retention of, the surplus of the partnership property after
satisfying the partnership liabilities to third persons for any sum of money paid by him for
the purchase of an interest in the partnership and for any capital or advances contributed by
him;
(2) To stand, after all liabilities to third persons have been satisfied, in the place of the
creditors of the partnership for any payments made by him in respect of the partnership
liabilities; and
(3) To be indemnified by the person guilty of the fraud or making the representation against
all debts and liabilities of the partnership. (n)
Rights of the aggrieved party in case of rescission due to fraud or misrepresentation:
• Lien or retention of the surplus- for any sum of money paid by him/her for the purchase of
interest in the partnership or for any capital or advances contributed by him/her
• Subrogation - to stand in place of the creditors of the partnership for any payments made by
him/her in respect of partnership liabilities
• Indemnification- from the person guilty of fraud or misrepresentation against all debts and
liabilities of the partnership
Article 1839. In settling accounts between the partners after dissolution, the following rules shall be observed,
subject to any agreement to the contrary:
(1) The assets of the partnership are:
(a) The partnership property,
(b) The contributions of the partners necessary for the payment of all the liabilities specified in No. 2.
(2) The liabilities of the partnership shall rank in order of payment, as follows:
(a) Those owing to creditors other than partners,
(b) Those owing to partners other than for capital and profits,
(c) Those owing to partners in respect of capital,
(d) Those owing to partners in respect of profits.
(3) The assets shall be applied in the order of their declaration in No. 1 of this article to the satisfaction of
the liabilities.
(4) The partners shall contribute, as provided by article 1797, the amount necessary to satisfy the
liabilities.
(5) An assignee for the benefit of creditors or any person appointed by the court shall have the right to
enforce the contributions specified in the preceding number.
(6) Any partner or his legal representative shall have the right to enforce the contributions specified in
No. 4, to the extent of the amount which he has paid in excess of his share of the liability.
(7) The individual property of a deceased partner shall be liable for the contributions specified in No. 4.
(8) When partnership property and the individual properties of the partners are in possession of a court
for distribution, partnership creditors shall have priority on partnership property and separate creditors
on individual property, saving the rights of lien or secured creditors.
(9) Where a partner has become insolvent or his estate is insolvent, the claims against his separate
property shall rank in the following order:
(a) Those owing to separate creditors;
(b) Those owing to partnership creditors;
(c) Those owing to partners by way of contribution. (n)
• For purposes of settling partnership obligations, both the remaining properties of the partnership at the time of
dissolution and the additional contribution that the partners make in case of insolvency of the partnership are
considered partnership assets.
• It should be noted that all claims against the partnership are treated as its liabilities.
• Settlement of these liabilities shall be made in the given order.
• Additional contribution from the partners is only required for the settlement of the claims of partnership
creditors.
• The amount that each partner shall contribute shall be determined in accordance with Article 1797.
• Enforcement of the additional contribution can be made by -
• An assignee for the benefit of creditors or any person appointed by the court (up to the full amount)
• Any partner or his/her legal representative (to the extent of the amount which he has paid in expess of his
share of the liability)
• The additional contribution of a deceased partner shall be filed as claim against his/her estate.
• The doctrine of marshalling of assets shall be applied if both the properties of the partnership and the partner/s
are in the custody of the court for distribution; however, the lien of preferred creditors shall be respected.
• Claims against an insolvent partner (or insolvent estate of a deceased partner) are ranked in the following order:
• Those owing to separate creditors
• Those owing to partnership creditors
• Those owing to partners by way of contribution (it presupposes that the share of the insolvent partner in the
unpaid obligation of the partnership is less than the amount that he/she is required to contribute pursuant
to Rule No.4)
Article 1840. In the following cases creditors of the dissolved partnership are also creditors of the person or
partnership continuing the business:
(1) When any new partner is admitted into an existing partnership, or when any partner retires and
assigns (or the representative of the deceased partner assigns) his rights in partnership property to two or
more of the partners, or to one or more of the partners and one or more third persons, if the business is
continued without liquidation of the partnership affairs;
(2) When all but one partner retire and assign (or the representative of a deceased partner assigns) their
rights in partnership property to the remaining partner, who continues the business without liquidation of
partnership affairs, either alone or with others;
(3) When any partner retires or dies and the business of the dissolved partnership is continued as set forth
in Nos. 1 and 2 of this article, with the consent of the retired partners or the representative of the deceased
partner, but without any assignment of his right in partnership property;
 (4) When all the partners or their representatives assign their rights in partnership property to one or
more third persons who promise to pay the debts and who continue the business of the dissolved
partnership;

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

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

The liability of a third person becoming a partner in the partnership continuing the business, under this
article, to the creditors of the dissolved partnership shall be satisfied out of the partnership property only,
unless there is a stipulation to the contrary.
When the business of a partnership after dissolution is continued under any conditions set forth in this article
the creditors of the dissolved partnership, as against the separate creditors of the retiring or deceased partner
or the representative of the deceased partner, have a prior right to any claim of the retired partner or the
representative of the deceased partner against the person or partnership continuing the business, on account
of the retired or deceased partner's interest in the dissolved partnership or on account of any consideration
promised for such interest or for his right in partnership property.

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

The use by the person or partnership continuing the business of the partnership name, or the name of a
deceased partner as part thereof, shall not of itself make the individual property of the deceased partner liable
for any debts contracted by such person or partnership. (n)
• The provision deals with the effects if the continuation of the business of the dissolved partnership without undergoing
liquidation.
• The effects are:
• In the six (6) given situations, the creditors of the dissolved partnership automatically become creditors of the person or
partnership continuing the business.
• The liability of a third person becoming a partner in the partnership continuing the business to the creditors of the
dissolved partnership shall be satisfied out of the partnership property only, unless there is a stipulation to the contrary.
• As against the separate creditors of the retiring or deceased partner or the representative of the deceased partner, the
creditors of the dissolved partnership shall have a prior right to any claim of the retired partner or the representative of
the deceased partner against the person or partnership continuing the business, on account of the retired or deceased
partner’s interest in the dissolved partnership or on account of any consideration promised for such interest or for his
right in partnership property.
• 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 itself make the individual property of the deceased partner liable for any debts
contracted by such person or partnership.

• Would it mean that the use by the person or partnership continuing the business of the
partnership name, or the name of a living former partner as part thereof, shall make the former
partner liable for any debts contracted by such person or partnership?
The situation covered by Article 1840

1. Admission of a new partner in an existing partnership or assignment by a third partner (or by representative of a
deceased partner) of his/her rights in partnership property to two or more partners, or to one ore of the partners and
one or more third persons.
2. Retirement of all but one partner and assignment of their rights (or the representative of a deceased partner assigns) in
partnership property to the remaining partner.
3. Retirement or death of a partner and continuation of the business with the consent of the retired partners or the
representative of the deceased partner.
4. Assignment by all partners or their representatives of their rights in partnership property to one or more third persons
who promise to pay the debts who continued the business of the dissolved partnership
5. Continuation of the business by the remaining partners after a partner had wrongfully dissolved the partnership.
6. Expulsion of a partner and continuation of the business by the remaining partners.

**In all these instances,the dissolved partnership did not undergo liquidation
Under Article 1840 above, creditors of the old Jade Mountain are also creditors of the new Jade Mountain which
continued the business of the old one without liquidation of the partnership affairs. Indeed, a creditor of the
old Jade Mountain, like petitioner Benjamin Yu in respect of his claim for unpaid wages, is entitled to priority
vis-a-vis any claim of any retired or previous partner insofar as such retired partner's interest in the dissolved
partnership is concerned. It is not necessary for the Court to determine under which one or mare of the above
six (6) paragraphs, the case at bar would fall, if only because the facts on record are not detailed with
sufficient precision to permit such determination. It is, however, clear to the Court that under Article 1840
above, Benjamin Yu is entitled to enforce his claim for unpaid salaries, as well as other claims relating to his
employment with the previous partnership, against the new Jade Mountain. (Yu vs. NLRC G.R. No. 97212 June
30, 1993)
xxx. In regards to the last paragraph of Article 1840 of the Civil Code cited by petitioners, supra, the first factor to consider is that it is within
Chapter 3 of Title IX of the Code entitled "Dissolution and Winding Up." The Article primarily deals with the exemption from liability in cases of a
dissolved partnership, of the individual property of the deceased partner for debts contracted by the person or partnership which continues
the business using the partnership name or the name of the deceased partner as part thereof. What the law contemplates therein is a hold-over
situation preparatory to formal reorganization.

Secondly, Article 1840 treats more of a commercial partnership with a good will to protect rather than of a professional partnership, with no
saleable good will but whose reputation depends on the personal qualifications of its individual members. Thus, it has been held that a saleable
goodwill can exist only in a commercial partnership and cannot arise in a professional partnership consisting of lawyers.

"As a general rule, upon the dissolution of a commercial partnership the succeeding partners or parties have the right to carry on the business
under the old name, in the absence of a stipulation forbidding it, (s)ince the name of a commercial partnership is a partnership asset
inseparable from the good will of the firm . . .." (60 Am Jur 2d, s 204, p. 115) (Emphasis supplied)

On the other hand,

"a professional partnership the reputation of which depends on the individual skill of the members, such as partnerships of attorneys or
physicians, has no good will to be distributed us a firm asset on its dissolution, however intrinsically valuable such skill and reputation may
be, especially where there is no provision in the partnership agreement relating to good will as an asset. . . ." (ibid, s 203, p. 115) (Emphasis
supplied).
(PETITION FOR AUTHORITY TO CONTINUE USE OF THE FIRM NAME “SYCIP, SALAZAR, FELICIANO, HERNANDEZ & CASTILLO.” July 30, 1979)
Article 1841. When any partner retires or dies, and the business is continued under any of the
conditions set forth in the preceding article, or in article 1837, second paragraph, No. 2, without
any settlement of accounts as between him or his estate and the person or partnership continuing
the business, unless otherwise agreed, he or his legal representative as against such person or
partnership may have the value of his interest at the date of dissolution ascertained, and shall
receive as an ordinary creditor an amount equal to the value of his interest in the dissolved
partnership with interest, or, at his option or at the option of his legal representative, in lieu of
interest, the profits attributable to the use of his right in the property of the dissolved partnership;
provided that the creditors of the dissolved partnership as against the separate creditors, or the
representative of the retired or deceased partner, shall have priority on any claim arising under
this article, as provided article 1840, third paragraph. (n)
Rights of a retired partner or the representative of a deceased partner if the business is continued under the
conditions set forth in Article 1840 or in the 2nd paragraph no.2 of Article 1837:
• have the value of his/her interest at the date of dissolution ascertained, and
• received as an ordinary creditor an amount equal to the value of his interest in the dissolved partnership
• with interest, or,
• at his/her option or at the option of his/her legal representative, in lieu of interest, the profits attributable to
the use of his/her right in the property of the dissolved partnership

N As against the separate creditors of the retired or deceased partner or the representative of the deceased
partner, the creditors of the dissolved partnership shall have a prior right to any claim of the retired
O
partner or the representative of the deceased partner against the person or partnership continuing the
T business, on account of the retired or deceased partner’s interest in the dissolved partnership or on
E account of any consideration promised for such interest or for his right in partnership property.
Article 1842. The right to an account of his interest shall accrue to any partner, or his legal
representative as against the winding up partners or the surviving partners or the person or
partnership continuing the business, at the date of dissolution, in the absence of any agreement to
the contrary. (n)
• After dissolution the right to an account of a partner’s interest is enforceable against -
• the winding up partner/s,
• the surviving partner/s, or
• the person or partnership continuing the business.
• It can be enforced by the partner or by his/her legal representative.
• The right accrues at the date of dissolution, in the absence of any agreement to the
contrary.
THAT’S ALL FOR
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Article 1843. 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.
Q. What does the statement, “the limited partners as such shall not be bound by the obligations of the
partnership”, mean?

A. It simply means that after the limited partner had delivered their promised
contributions, no additional contribution can be demanded from them in case of
insolvency of the partnership.
Article 1844. Two or more persons desiring to form a limited partnership shall:
(1) Sign and swear to a certificate, which shall state -
(a) The name of the partnership, adding thereto the word "Limited";
(b) The character of the business;
(c) The location of the principal place of business;
(d) The name and place of residence of each member, general and limited partners being respectively
designated;
(e) The term for which the partnership is to exist;
( f ) The amount of cash and a description of and the agreed value of the other property contributed by
each limited partner;
(g) The additional contributions, if any, to be made by each limited partner and the times at which or
events on the happening of which they shall be made;
(h) The time, if agreed upon, when the contribution of each limited partner is to be returned;
(i) The share of the profits or the other compensation by way of income which each limited partner
shall receive by reason of his contribution;
( j) The right, if given, of a limited partner to substitute an assignee as contributor in his place, and the
terms and conditions of the substitution;
(k) The right, if given, of the partners to admit additional limited partners;
(l) The right, if given, of one or more of the limited partners to priority over other limited partners, as
to contributions or as to compensation by way of income, and the nature of such priority;
(m) The right, if given, of the remaining general partner or partners to continue the business on the
death, retirement, civil interdiction, insanity or insolvency of a general partner; and
(n) The right, if given, of a limited partner to demand and receive property other than cash in return
for his contribution.
(2) File for record the certificate in the Office of the Securities and Exchange Commission.
A limited partnership is formed if there has been substantial compliance in good faith with the foregoing
requirements.
Requirements to be complied with by person desiring to form a limited partnership:
1. Sign and swear to a certificate containing the matters set forth in Article 1844
2. File for record the certificate in the office of the SEC

• Matters to be set forth in the certificate are either mandatory or optional

• Optional matters are those that only need to be set forth if agreed upon by the parties
• Substantial compliance in good faith with the requirements of Article 1844 pertains to the
inclusion in the certificate of all mandatory matters

Q. May the partners validly establish a limited partnership at will (i.e., on without a
fixed term)?

Q. May the partners exercise any of the rights mentioned in letters (j) to (n) if the
said rights are not specifically stated in the certificate?
Article 1845. The contributions of a limited partner may be cash or property, but not services.

Article 1846. 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 has been
carried on under a name in which his surname appeared.
A limited partner whose surname appears in a partnership name contrary to the provisions
of the first paragraph is liable as a general partner to partnership creditors who extend
credit to the partnership without actual knowledge that he is not a general partner.
TAKE NOTE: Limited partners must always be industrial partners.

GENERAL RULE:
A limited partner who allows his/her surname to be included in the partnership name shall be liable as a
general partner to a partnership creditor who extends credit to the partnership without actual knowledge
that he/she is not a general partner.

EXCEPTION:
A limited partner’s surname may appear in the partnership name without the risk on the part of the
concerned limited partner of becoming liable as a general partner in the following instances:
• The surname of that limited partner is also the surname of a general partner
• The business has been carried on under a name where the limited partner’s name appears prior to
the time when he/she became a limited partner.
“Prior to the time when the limited partner became such, the business has been carried on
under a name in which his surname appeared”

Q. What could he/she in relation to the partnership prior to his/her becoming a

limited partner? Could it be that at the time, he/she was already connected
with the partnership or was he/she a still complete stranger to the firm. [the
implication of both situations should be considered in resolving the issue]
Article 1847. If the certificate contains a false statement, one who suffers loss
by reliance on such statement may hold liable any party to the certificate
who knew the statement to be false:
(1) At the time he signed the certificate, 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 as provided in article 1865.
A false statement is a statement that is not true. Although the word fallacy is sometimes used as a synonym
for false statement, that is not how the word is used in philosophy, mathematics, logic and most formal
contexts.
A false statement need not be a lie. A lie is a statement that is known to be untrue and is used to mislead. A
false statement is a statement that is untrue but not necessarily told to mislead, as a statement given by
someone who does not know it is untrue. (en-wikipedia.org)

Aggrieved party- one who suffers loss due to his/her reliance on a false statement in the certificate.

He/she must be able to prove the following:

1. A statement in the certificate is false;
2. He/she relied on that statement;
3. He/she thereby suffers loss.
Who can be held liable by the aggrieved party on account of such false statement:
1. A party to the certificate who knew the statement to be false at the time he/she signed the certificate.
2. A party to the certificate who knew the statement to be false after he/she signed the certificate but within
sufficient time to enable him/her to amend or cancel the certificate, or to file a petition for its cancellation
or amendment before the statement was relied upon. (this presupposes that the false statement remained
in the certificate even after the lapse of that “sufficient time”)
Article 1848. 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.
Among the property rights of a partner is the right to participate in the management of the business. However,
the right is not given to a limited partner. In lieu thereof, he/she is given other rights that are not given to the
general partners, like the right to receive a share of the profit or other compensation by way of income on
account of his/her contribution and the right to return of his/her contribution before the expiration of the
term of the partnership. Thus, if a limited partner take part in the management (control) of the business,
he/she becomes liable as a general partner.

Q. When is a limited partner considered to have taken part in the control of the business?

A. When he/she performs any of the functions of management. [planning, organizing,

staffing, directing, and controlling]. Anything done by a limited partner which does not
amount to any of the preceding (e.g., giving non-binding suggestions, advices, or
recommendation to the managing partner/s during meetings) shall not be considered as
taking part in the control of the business.
Article 1849. After the formation of a lifted partnership,
additional limited partners may be admitted upon filing an
amendment to the original certificate in accordance with the
requirements of article 1865.
• The admission of additional limited partners does not result in the dissolution of the existing
partnership whose term has not yet expired.
• Appropriate amendment in the pertinent statements in the certificate should be made to effect
the admission of an additional limited partner.
• Q. May an additional limited partner be validly admitted if no statement to that effect, as required
under Article 1844 (1)(k), is included in the certificate which they executed and filed with the
Office of the SEC?
• A. Yes, but the consent of all partners will be required. (see Article 1850)
Article 1850. A general partner shall have all the rights and powers and be subject to all the restrictions and
liabilities of a partner in a partnership without limited partners. However, without the written consent or
ratification of the specific act by all the limited partners, a general partner or all of the general partners have
no authority to:
(1) Do any act in contravention of the certificate;
(2) Do any act which would make it impossible to carry on the ordinary business of the partnership;
(3) Confess a judgment against the partnership;
(4) Possess partnership property, or assign their rights in specific partnership property, for other than a
partnership purpose;
(5) Admit a person as a general partner;
(6) Admit a person as a limited partner, unless the right so to do 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.
• As far as the general partner’s capacity to act in behalf of the partnership is concerned, the rules are the
same for both general and limited partnerships.
• Article 1850 emphasizes that with respect to the execution of the seven (7) acts enumerated therein,
which, by their nature, are acts of strict dominion, the consent of ALL partners is required. Thus, the
law provides that the written consent or ratification of the limited partners is necessary.
• Q. As regards act no.1 (do any act in contravention of the certificate) does it mean that as long as there
is consent from all partners, a general partner can already contravene what is expressly stated in the
certificate?
A. Technically, if an act is consented to by all partner, it can not be considered as having been done in
contravention of the certificate. By giving their consent, the partners merely expressed their later will
which effectively superseded what is stated in the certificate. Of course, if a 3rd party is prejudiced, the
partnership and consequently the partners can be held liable.
Article 1851. A limited partner shall have the same rights as a general partner to:
(1) Have the partnership books kept at the principal place of business of the
partnership, and at a reasonable hour to inspect and copy any of them;
(2) Have on demand true and full information of all things affecting the
partnership, and a formal account of partnership affairs whenever
circumstances render it just and reasonable; and
(3) Have dissolution and winding up by decree of court.
A limited partner shall have the right to receive a share of the profits or other
compensation by way of income, and to the return of his contribution as provided
in Articles 1856 and 1857.
Rights of a limited partner:
1. Have the partnership books and other records kept at the partnership’s principal place of business
and inspect and copy them during reasonable hours on a business day.
2. Demand true and full information of all things effecting the partnership
3. Have a formal account of the partnership affairs in instances allowed under the agreement or by
law
4. Have the partnership dissolved and its affairs settled by judicial decree
5. Receive a share in the profits or other compensation by way of income as provided in Article 1856
6. Have his/her contribution returned as provided in Article 1857
Article 1852. Without prejudice to the provisions of article 1848, a person who
has contributed to the capital of a business conducted by a person or
partnership erroneously believing that he has become a limited partner in
a limited partnership, is not, by reason of his exercise of the rights of a
limited partner, a general partner with the person or in the partnership
carrying on the business, or bound by the obligations of such person or
partnership, provided that on ascertaining the mistake he promptly
renounces his interest in the profits of the business, or other compensation
by way of income.
• The provision applies to a situation where one contributed to the capital of the partnership on the mistakes
belief that he/she is doing so as a limited partner.
• Technically a contributor who does not become a limited partner would be considered a general partner.
• However, one who is in that situation due to a mistaken belief is not considered a general partner of the
person or with the partnership carrying on the business and is therefore not bound by the obligations of that
person or partnership (meaning, he/she does not incur the liability of a partner under Article 1816): provided
the following conditions are meet:
• He/she does not take part in the control of the business and
• He/she promptly renounces his/her interest in the profits of the business, or other compensation by way
of income upon ascertaining the mistake.

Q. What could be the reason/s why the contributor did not become a limited partner?
Article 1853. A person may be a general partner and a limited partner in the same
partnership at the same time, provided that this fact shall be stated in the
certificate provided for in article 1844.

A person who is a general, and also at the same time a limited partner, shall
have all the rights and powers and be subject to all the restrictions of a general
partner; except that, in respect to his contribution, he shall have the rights
against the other members which he would have had if he were not also a
general partner.
• Please take note that the certificate must expressly state the fact that a partner is a general partner
and limited partner at the same time.
• As regards his/her rights and liabilities, the partner is treated as if he/she is a purely general
partner; thus, he/she has the right to participate in the management of the business and is liable to
the partnership creditors up to the extent of is/her separate properties.
• As regards his/her contribution, partner is treated as if he/she is a purely limited partner; thus
he/she can demand for the return of his/her contribution under the conditions and upon
compliance with the requirements set forth in Article 1857.
Article 1854. A limited partner also may loan money to and transact other business
with the partnership, and, unless he is also a general partner, receive on account of
resulting claims against the partnership, with general creditors, a pro rata share of
the assets. No limited partner shall in respect to any such claim:

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

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

The receiving of collateral security, or payment, conveyance, or release in violation

of the foregoing provisions is a fraud on the creditors of the partnership.
This provision gives a limited partner the following privileges:

Purely General-
PRIVILEGE Limited Limited
Partner Partner

Loan money and transact other business with the partnership

where he/she is a partner YES YES

Receive on account of resulting claims against the partnership,

with general creditors, a pro-rata share of the assets YES NO

For the purpose of ranking of claims against the partnership, the claim of the purely limited partner is
grouped with external creditors while a general-limited partner’s claim is grouped with that of the other
general partners.
This provision imposes the following prohibition:

ABSOLUTE PROHIBITION RELATIVE PROHIBITION

Receive or hold as collateral security and **Receive from a general partner or the partnership
partnership property any payment, conveyance, or release from liability

**This prohibition only applies if at he time of receipt of any payment, conveyance, or

release from liability, the assets of the partnership are not sufficient to discharge
partnership liabilities to persons and claiming as general or limited partners

Effect of violation of the prohibitions:

• The transactions shall be considered to have been undertaken in fraud of the partnership creditors (the
subject transaction can be rescinded)
Q. What is this liability of the limited partner which the law prohibits to be compensated
with his/her claim on account of his/her transaction/s with the partnership if at the time of
the compensation, the assets of the partnership are not sufficient to discharge partnership
liabilities to persons not claiming as general or limited partners? [See Article 1858]
Article 1855. Where there are several limited partners the members may
agree that one or more of the limited partners shall have a
priority over other limited partners as to the return of their
contributions, as to their compensation by way of income, or as
to any other matter. If such an agreement is made it shall be
stated in the certificate, and in the absence of such a statement
all the limited partners shall stand upon equal footing.
• The certificate may provide for an order of priority among limited partner. In the absence of any such
provision, all limited partners shall stand on equal footing.
• The priority could pertain to -
• Return of contribution [of contribution]
• Payment of the share in the profits or other compensation by way of income
• Any other matter, like return of contribution other than by cash
• The order of priority shall only be applicable in case several limited partners have due and
demandable claims against the partnership with respect to a matter where priority is provided for in
the certificate and these claims cannot be paid at the same time to valid reasons.
THAT’S ALL FOR
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1 ST SEMESTER A/Y 2021-2022

Article 1856. 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; provided, that after such payment
is made, whether from property of the partnership or that of a
general partner, the partnership assets are in excess of all
liabilities of the partnership except liabilities to limited partners
on account of their contributions and to general partners.
Conditions that must be meet before a limited partner could validly receive the share of the profits or other
compensation by way of income:

1. Entitlement thereto must be stipulated in the certificate (executed in accordance with Article 1844)
2. After the payment, the partnership assets must be in excess of all partnership liabilities.

Q. HOW MUCH SHOULD BE THE EXCESS OF ASSETS OVER THE LIABILITIES?

Source of payment:

1. Properties of the partnership, or

2. Properties of a general partner

In computing the partnership liabilities, the following are excluded:

1. Claims of limited partners on account of their contribution

2. All claims of general partners
Article 1857. A limited partner shall not receive from a general partner or out of partnership property any
part of his contributions until:

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

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

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

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

(1) On the dissolution of a partnership; or

(2) When the date specified in the certificate for its return has arrived, or
(3) After he has six months' notice in writing to all other members, if no time is specified in the
certificate, either for the return of the contribution or for the dissolution of the partnership.
In the absence of any statement in the certificate to the contrary or the consent of all members, a limited
partner, irrespective of the nature of his contribution, has only the right to demand and receive cash in
return for his contribution.

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

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

(2) The other liabilities of the partnership have not been paid, or the partnership property is
insufficient for their payment as required by the first paragraph, No. 1, and the limited partner
would otherwise be entitled to the return of his contribution.
Conditions that must be complied with before a limited contribution or a part of it could validly returned:

1. All liabilities have been paid or there remains sufficient properties to pay them
2. The consent of all partners is obtained (Note: consent of the other parties is not required if return of the contributions may be rightfully
demanded.)
3. The certificate of cancelled or amended, as the case may be, to set forth the withdrawal or reduction of the contribution.

Return of a limited partner’s contribution may be rightfully demanded in any of the following instances:

1. On dissolution of the partnership, or

2. When the date specified in the certificate for its return has arrived, or
3. After he/she has given six month’s notice in writing to all other partners. (Note: the 6-month notice is required: a) if the certificate does
not specify 1) the date of dissolution of the partnership or 2) the return of the limited partner’s contribution, and b) the other partners
do not give their consent to an earlier return of the limited partner’s contribution.)

Payment to the limited partner may come from:

1. A general partner
2. Partnership property
NOTE: As a rule, a limited partner shall only receive cash as return of his/her contribution, except:
1. When there is a stipulation in the certificate stating otherwise, or
2. When the other partners give their consent to the payment in kind (in the absence of stipulation in the
certificate allowing such payment in kind).
In the following instances, a limited partner may sue for dissolution of partnership and winding up of its affairs:

1. When he/she has rightfully but unsuccessfully demanded the return of his/her contribution (e.g. the partnership has sufficient assets to cover its
liabilities and the amount of contribution to be returned but the other partners refuse to pay him/her without any valid reason/s)
2. When the properties of the partnership are not sufficient to cover its liabilities and the amount of contribution to be returned but the other
conditions that would make the return of the limited partner’s contribution are meet.

In computing the partnership liabilities, the following are excluded:

1. Claims of limited partners on account of their contribution
2. All claims of general partners

NOTE: however, that even when a limited partner has rightfully received the return in whole or in part of the capital of his/her contribution,
he/she is nevertheless liable to the partnership for any sum, not in excess of such return with interest, necessary to discharge its liabilities to
all creditors who extended credit or whose claims arose before such return. (See Article 1858 last paragraph)
Article 1858. A limited partner is liable to the partnership:

(1) For the difference between his contribution as actually made and that stated in the certificate as having been
made, and
(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.

A limited partner holds as trustee for the partnership:

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

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

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

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

1. Undelivered contribution (Under Article 1786 a partner is considered as a debtor for what he/she has promised to
contribute to the partnership)
2. Additional contribution as stipulated in the certificate that has become due and demandable (i.e., the date has
arrived or the condition has happened)

Properties that a limited partner only holds as trustee:

1. Specific property that he/she ought to have contributed per certificate but which remains in his/her possession or
which was wrongfully returned to him/her. (It should be noted that in the absence of stipulation, a limited partner
is only entitled to receive cash as return of his/her contribution; thus if despite the absence of stipulation, property
other than cash is given to the limited partner, such is considered wrongful return.)
2. Money or other property wrongfully paid or conveyed to him/her on account of his/her contribution. (The money
or other property is not owing to the limited partner.)
• The liabilities of the limited partner can be compensated with his/her claim on account his/her loan to or other
transaction with the partnership. However, compensation is prohibited if at that time, the assets of the partnership
are not sufficient to cover its liabilities to persons not claiming as partners. Violation of the prohibition shall be
considered as fraud on the creditors. (see Article 1854, NCC)

• Said liabilities can also be waived or compromised.However, despite such waiver or compromise, a
creditor can still enforce the liabilities if his/her claim arose or if he/she has extended credit to the
partnership before the certificate was cancelled or amended to reflect the change in the amount of the
contribution of the limited partner as a result of the waiver or compromise. (a creditor can only enforce
the liabilities despite the waiver or compromise if as a result thereof, the partnership is unable to pay
his/her claim. If the creditor is not prejudiced, then the waiver or compromise stands.)

• The compensation, waiver or compromise requires the consent of all partners.

Q. Is it just and fair to hold a limited partner liable to the partnership for such sum,
not in excess of the amount returned to him/her plus interest, necessary to
discharge its liabilities to creditors whose claim arose or who extended credit to the
partnership before such return, despite said partner’s having rightfully received the
return of his/her contribution (meaning, at that time the contribution was
returned, there remains sufficient assets to cover the liabilities [see Article 1857])?
Article 1859. A limited partner's interest is assignable.

A substituted limited partner is a person admitted to all the rights of a limited partner who has died or has assigned his
interest in a partnership.

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

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

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

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

The substitution of the assignee as a limited partner does not release the assignor from liability to the partnership
under articles 1847 and 1858.
 COMPARISON BETWEEN THE INTEREST OF A GENERAL PARTNER AND A LIMITED PARTNER
GENERAL PARTNER LIMITED PARTNER
Interest is assignable Interest is assignable
Assignee does not become a partner unless Assignee may be constituted into a substituted limited
consented to by all partners partner
Admission of the assignee as new partner results in Substitution of the limited partner upon consent of all
the dissolution of the old partnership and the partners or upon exercise of the assignee of the power
creation of a new one granted upon him/her in the certificate does not result in
the dissolution of the partnership; the substitution takes
effect upon amendment of the certificate.

• The substituted limited partner acquires all the rights and powers and is subject to all liabilities and restriction of
his/her assignor; however, with respect to the liabilities, the same should be known to the substituted limited partner at
the time he/she became such or their existence could be ascertained from the certificate.

• The assignee of the interest of a limited partner who does not become a substituted limited partner only acquires the
right to receive the share of the profits or other compensation by way of income, or the return of the contribution, to
which the assignor would otherwise be entitled. He/she has no right to require any information or account of the
partnership transactions or to inspect the partnership books.
Article 1860. The retirement, death, insolvency, insanity or civil
interdiction of a general partner dissolves the partnership,
unless the business is continued by the remaining general
partners:
(1) Under a right so to do stated in the certificate, or
(2) With the consent of all members.
• As a rule, the occurrence of any of these events - retirement, death, insanity, insolvency, or civil
interdiction - involving a general partner automatically dissolves a general partnership (see Article
1830); however, in the case of a limited partnership, the occurrence of any of the said events involving a
member who is a general partner will not result in the dissolution of the partnership if there
remains at least one general partner with full capacity to act and the business is continued
pursuant to a stipulation in the certificate, or in the absence of stipulation, with the consent
of all remaining partners.
Article 1861. On the death of a limited partner his executor or
administrator shall have all the rights of a limited partner for
the purpose of setting his estate, and such power as the
deceased had to constitute his assignee a substituted limited
partner.
The estate of a deceased limited partner shall be liable for all
his liabilities as a limited partner.
The provision emphasizes the following matters:
1. the executor or administrator of a deceased limited partner has full power to ensure a
smooth settlement of the estate of the decedent and to protect the latter’s interest in the
partnership; (it should be noted that pending the settlement of the estate of the deceased
limited partner, the authority to act in his/her behalf lies with the executor or administrator
and not with this/her heirs)
2. the estate of the deceased limited partner has the obligation to settle all his/her liabilities to
the partnership.
Article 1862. On due application to a court of competent jurisdiction by any creditor of a limited
partner, the court may charge the interest of the indebted limited partner with payment of
the unsatisfied amount of such claim, and may appoint a receiver, and make all other
orders, directions and inquiries which the circumstances of the case may require.

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

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

Nothing in this Chapter shall be held to deprive a limited partner of his statutory exemption.
 COMPARISON BETWEEN A CHARGING ORDER ISSUED ON THE INTEREST OF A GENERAL PARTNER AND ONE ISSUED ON
THE INTEREST OF A LIMITED PARTNER
General Partner Limited Partner
Who may issue A court of competent jurisdiction
At whose instance Judgment creditor of the partner-debtor
For what purpose To satisfy a judgment debt
Appoint a receiver of his share of the profits, and
of any other money due or to fall due to him in Appoint a receiver, and make all other orders,
Other orders that the court may issue respect of the partnership, and make all other directions and inquiries which
orders, directions, accounts and inquiries which the circumstances of the case may require
the debtor partner might have made, or which the
circumstances of the case may require
Property that can be used to redeem the Separate property of a general partner or Separate property of a general partner
interest so charged partnership property
Invocation of statutory exemption/s by Allowed
the partner-debtor
Availment of other remedies by the Allowed
judgment creditor
Article 1863. In settling accounts after dissolution the liabilities of the partnership shall be entitled to payment in the
following order:
(1) Those to creditors, in the order of priority as provided by law, except those to limited partners on account
of their contributions, and to general partners;
(2) Those to limited partners in respect to their share of the profits and other compensation by way of income
on their contributions;
(3) Those to limited partners in respect to the capital of their contributions;
(4) Those to general partners other than for capital and profits;
(5) Those to general partners in respect to profits;
(6) Those to general partners in respect to capital.
Subject to any statement in the certificate or to subsequent agreement, limited partners share in the partnership
assets in respect to their claims for capital, and in respect to their claims for profits or for compensation by way of
income on their contribution respectively, in proportion to the respective amounts of such claims.
• On matters not covered by Article 1863, the rules provided for under Article 1839 shall be
applied.
• It must be noted that only general partners are required to contribute in case of insufficiency
of the partnership assets to cover the claims of the creditors.
Article 1864. The certificate shall be cancelled when the partnership is dissolved or all limited partners cease
to be such.
A certificate shall be amended when:
(1) There is a change in the name of the partnership or in the amount or character of the contribution
of any limited partner;
(2) A person is substituted as a limited partner;
(3) An additional limited partner is admitted;
(4) A person is admitted as a general partner;
(5) A general partner retires, dies, becomes insolvent or insane, or is sentenced to civil interdiction and
the business is continued under article 1860;
(6) There is a change in the character of the business of the partnership;
(7) There is a false or erroneous statement in the certificate;
(8) There is a change in the time as stated in the certificate for the dissolution of the partnership or for
the return of a contribution;
(9) A time is fixed for the dissolution of the partnership, or the return of a contribution, no time having
been specified in the certificate, 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.
• In general, amendment of the certificate is effected -
• To rectify an error or falsity in a statement;
• To supply an omission in a statement;
• To ensure that a statement remains truthful

• The certificate is cancelled when the limited

partnership ceases to be such.
Article 1865. The writing to amend a certificate shall:
(1) Conform to the requirements of article 1844 as far as necessary to set forth clearly the change in the
certificate which it is desired to make; and
(2) Be signed and sworn to by all members, and an amendment substituting a limited partner or adding
a limited or general partner shall be signed also by the member to be substituted or added, and when a
limited partner is to be substituted, the amendment shall also be signed by the assigning limited partner.
The writing to cancel a certificate shall be signed by all members.
A person desiring the cancellation or amendment of a certificate, if any person designated in the first and second
paragraphs as a person who must execute the writing refuses to do so, may petition the court to order a
cancellation or amendment thereof.
If the court finds that the petitioner has a right to have the writing executed by a person who refuses to do so, it
shall order the Office of the Securities and Exchange Commission where the certificate is recorded, to record the
cancellation or amendment of the certificate; and when the certificate is to be amended, the court shall also
cause to be filed for record in said office a certified copy of its decree setting forth the amendment.
A certificate is amended or cancelled when there is filed for record in the Office of the Securities and
Exchange Commission, where the certificate is recorded:
(1) A writing in accordance with the provisions of the first or second paragraph, or
(2) A certified copy of the order of the court in accordance with the provisions of the fourth paragraph;
(3) After the certificate is duly amended in accordance with this article, the amended certified shall
thereafter be for all purposes the certificate provided for in this Chapter.
 Amendment of certificate Cancellation of certificate

Formal requirement Conform to the requirements of Article 1844

All members, including the assigning limited partner and the

member to be substituted (the assignee) (substitution of a
limited partner)

All members and the member/s to be admitted (admission of new

partner) All members
Signatories
All members (other amendments)

A person required to sign The person desiring the amendment may petition the court to order The person desiring the cancellation may petition
refuses to do so the amendment the court to order the cancellation
Court finds that the Court shall 1) order the SEC office where the certificate is recorded Court shall order the SEC office where the
petitioner has a right to to record the amendment of the certificate, cause to be filed for certificate is recorded to record the cancellation of
have the act executed record in said office a certified copy of the decree setting forth the the certificate
amendment
• The filing for record in the office of the SEC where the certificate to be
amended or cancelled is recorded of the duly executed instrument or a
certified copy of the order of the court renders the amendment or
cancelling effective.
Article 1866. A contributor, unless he is a general partner, is not a
proper party to proceedings by or against a partnership, except
where the object is to enforce a limited partner's right against
or liability to the partnership.
• As a rule, actions initiated by or against the limited partnership may only involve the
general partner as parties
• Limited parties shall only become proper parties if the action seeks to enforce said
partner’s right or liabilities (e.g., a limited partner institutes an action to dissolve the
partnership after he/she rightfully but unsuccessfully demands the return of his/her
contribution or a creditor files an action to enforce a limited partner’s undelivered
contribution which was waived by the partnership.)
Article 1867. A limited partnership formed under the law prior to the effectivity of this
Code, may become a limited partnership under this Chapter by complying with the
provisions of article 1844, provided the certificate sets forth:
(1) The amount of the original contribution of each limited partner, and the time
when the contribution was made; and
(2) That the property of the partnership exceeds the amount sufficient to
discharge its liabilities to persons not claiming as general or limited partners by
an amount greater than the sum of the contributions of its limited partners.
A limited partnership formed under the law prior to the effectivity of this Code, until
or unless it becomes a limited partnership under this Chapter, shall continue to be
governed by the provisions of the old law.
• This provision provides the rule on the conversion of a limited partnership
formed under the old law into one that conforms to the provisions of the new
civil code.
• It also clarifies that conversion is not mandatory and a partnership that is not
converted to conform to the provisions of the New Civil Code shall continue to
be governed by the old law.
THAT’S THE END