DBA 010

LEGAL ASPECTS OF BUSINESS

1. 20 points

X writes B offering to sell a piece of land for P100,000, and at the same time receives from B a

letter offering to buy the same land for P100,000. Is there a perfected contract? Explain.

Answer

Yes. There is a perfect contract of sale between X and B.

The Civil Code provides that the contract of sale is perfected at the moment the following

elements must be present. First, there is consent or a meeting of the minds upon thing which

is the object of the contract and upon the price or consideration. In this case, it is

manifested that X and B consented on the following terms, the object of the contract, which

is the land, and the price or consideration of the land in the amount of P100,000.

While the law provides that a contract of sale involving an immovable property, such as land,

to be in public instrument, non-compliance therewith does not adversely affect the validity

of the contract nor the contractual rights and obligations of the parties thereunder. Thus,

the contract of sale entered into between X and B is perfected.

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2. 20 points

A, B, and C are partners in X Partnership. The partnership is dissolved by A’s death. B

thereafter transacts business with D, a third person. The transaction does not refer to winding

up of partnership affairs nor is it designed to completed transactions begun but not finished

at dissolution. May the partnership be found? Explain.

Answer

Yes. The partnership may be found. It exists as to D.

The New Civil Code on partnership provides that when 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 the dissolution being by act of any partner, the partner acting for the

partnership had knowledge of the dissolution and/or the dissolution by death or insolvency

of a partner acting from the partnership had knowledge or notice of the death or insolvency.

While the death of the partner dissolves the partnership, the law states that the transaction

entered into between a partner, in the name of the partnership and a third party in good faith

and without the knowledge of A’s death create a valid contract as to the partnership. Thus, as

to D, the partnership exists.

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3. 20 points

What is Partnership by Estoppel?

Answer

A partnership by estoppel is one wherein two or more persons bind themselves together in order to

form a partnership but fails to comply with the legal personalities required to form its juridical

existence are deemed liable as partners in so far as its favorable to the third persons transacting in

good faith.

a. What are the two(2) ways wherein a Partnership by estoppel is created?

Answer

The two ways wherein a Partnership by estoppel is created are:

1. One who directly represents himself to anyone as a partner in an existing partnership or in a non-

existing partnership, or

2. One who indirectly represents himself by consenting to another representing him as a partner in

an existing partnership or in a non-existing partnership.

b. Cite a situational example for each way.

Answer

In relation to question number 3a, the following are the examples of Partnership by estoppel.

1. X, having no personality in ABC partnership, succeeded to enter into a contract to Y after having

represented himself as a partner in ABC partnership.

2. X, being a bona fide partner in ABC partnership, consented Z as his representative in an ABC

partnership where in truth and in fact he is not and has succeeded to contract with Y.

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c. What are the eight (8) criteria in distinguishing a partnership from a corporation?

Discuss how these criteria apply for each of them (partnership vis-a-vis corporation.

1. Composition: Partnership is generally composed of 2 or more persons while the

corporation may generally be incorporated by at least one person as in the case

of One Person Corporation (OPC) or at least 5 persons in Corporation.

2. Liability: the liability of the partnership, particularly the general partnership is

not limited to his capital. It extended up to his personal property while the liability

of the corporation is limited as to the corporate assets or capital.

3. Personality: The partnership has no personality separate and distinct from the

partnership. Corporation has juridical personality.

4. Manner of Creation: Partnership is created by mere agreement (in oral or in

writing) while the existence of a corporation commences only from the issuance

of Certificate of Incorporation.

5. Succession: There is no right of succession in partnership as death of general

partner dissolves the partnership. Corporation has right of succession, death of

stockholder does not dissolve the corporation.

6. Transfer of Interest: Corporate shares are freely transferable without the

consent of the other stockholders while interest in the partnership cannot be

transferred without the consent of the partners.

7. As to Powers: A corporation is more restricted in its powers because of its limited

personality while partnership is subject only to what may be agreed upon by the

partners.

8. Payment of Taxes: payment of taxes is made by the partner while payment of

taxes is levied upon the corporation.

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4. 20 points

In what ways or by what means can the existence of a corporation come to an end?

Answer

Corporations’ existence can be ended voluntarily or involuntarily.

The corporation may voluntarily cease to exist based on the following:

1. Shortening the corporate term through the amendment of the articles of incorporation.

2. If no creditors are affected, a corporation may be dissolved by filing an application for

issuance of certificate of dissolution with the Securities and Exchange Commission (SEC).

If creditors will be affected by the dissolution, a formal petition for dissolution must be

filed with the SEC, with due notice and hearing.

In addition to these, the corporation may also be dissolved involuntarily based on the following:

1. Failure to organize and commence business within 2 years from incorporation

2. Corporation may be held delinquent for continuously inoperative for 5 years and its

corporate existence may be terminated upon failure to explain in SEC for its non-

operation within 2 years.

3. A corporation may also be involuntarily dissolved by the SEC upon filing of a verified

complaint and after proper notice and hearing on grounds provided by existing laws,

rules and regulations.

4. Failure to file by laws within 30 days from the issue of certificate of incorporation

5. Fraud in procuring certificate of registration from Securities and Exchange

Commission (SEC) or government institutions that requires permits to submit in

relation to business registration.

6. Serious misrepresentation

7. Failure to file required reports to Securities and Exchange Commission (SEC) or

government institutions that reports are required to submit

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8. Continuance of the business not feasible as found by Management Committee or

Rehabilitation Receiver

9. Merger or consolidation. When a corporation merges or consolidates with another

corporation, it will dissolved and there will be a new corporation.

5. 20 points

Case Analysis – The X-Partnership becomes insolvent due to mismanagement and cannot pay

its liability to Y-Corp. Y-Corp proposes to manage the partnership business, with the

agreement that 50 percent of the net profits will be applied to the payment of X-Partnership’s

debt to Y-Corp. X-Partnership agrees to the management contract.

a. Can the Y-Corp. validly enter into the above management contract?

Answer

No. Y-Corp cannot validly enter into a management contract. The Civil Code prohibits the

juridical person or an artificial body to enter into a partnership. It is provided that the

management affair is an act of a partner. Since the corporation, being a juridical person,

cannot enter into a partnership and is therefore not entitled to enter into a management

contract.

Furthermore, the corporation being fiduciary in nature, cannot simply enter into a contract

that would prejudice its stockholders without the majority votes of the board of director and

written assent of the 2/3 votes of the outstanding capital stocks.

Being imbued with trust and confidence, the corporation must ensure that the rights and

interest of its stockholders are protected. In the management contract entered between Y-

Corp and X-Partnership, it is presumed that the corporation is at a disadvantage having

provided its resources to save and manage the partnership which profit shall only be

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appropriated in payment of its debt against the corporation. The terms and conditions

provided in the management contract is untenable.

b. Is the Y-Corp. considered a partner of the X-Partnership by the mere fact that it is

receiving a share of the net profits?

Answer

No. Y-Corp is not a partner of X-Partnership.

The law provides that there is a partnership, when two or more persons bind themselves to

contribute money, property or industry to a common fund with the understanding and

purpose of distributing the profits among themselves. While Y-Corp has agreed to contribute

its industry in the management of the affairs the same has not agreed to the sharing of profits

in the contemplation of the law. The sharing in the profits of Y Corp which is in the form of

the application of payment for debt is not the distribution contemplated by the law. The

sharing in the profit is made out of the contractual obligation of X-Partnership to Y-Corp.

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