AEC 65 Business Laws and Regulations

Partnership Chapter 1 General Provisions

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 and losses among
themselves. Partnership may also be formed for the exercise of a profession. Profession is a
group of men pursuing a learned art as a common calling in the spirit of public service.

• ESSENTIAL REQUISITES
1. There must be a valid contract;
2. There must be a contribution of money, property, or industry to a common fund;
3. The partnership must be organized for gain or profit; and
4. The partnership should have a lawful object or purpose, and must be established for
the common benefit or interest of the partners.
• TWO TESTS TO DETERMINE EXISTENCE
1. Determine whether or not there is an agreement to contribute money, property or
industry to a common fund.
2. Determine whether or not there is an intent of the contracting parties to divide the
profits among themselves.
• REQUISITES TO BE CONSIDERED A JURIDICAL PERSONALITY
1. Two or more persons bind themselves to contribute money, property or industry to
a common fund; and
2. Intention on the part of the partners to divide the profits among themselves.
• CHARACTERISTICS
1. Consensual – contract perfected by mere consent.
2. Commutative – contribution of each partner is considered as equivalent of the
contribution of the other partners.
3. Principal – contract does not depend on another contract to exist.
4. Bilateral – contract entered into by two or more persons.
5. Onerous – Each partner must contribute. Accordingly, a partner can contribute one, some,
or all of these.
6. Nominate – contract which has a name in law – partnership.
7. Preparatory – contract in preparation for another contract/s.
Note: Money is the medium of exchange authorized or adopted by a government as part of its
currency. Property is any external thing over which rights of possession, use, and enjoyment are
exercised. Industry is the diligence in the performance of a task, or a particular form or branch of
productive labor.

• DOCTRINE OF DELECTUS PERSONAE/PERSONARUM

The right to choose with whom a person wishes to associate himself is the very
foundation and essence of partnership. This doctrine allows the partners to have the power,
not necessarily the right, to dissolve the partnership. Unjustified dissolution can subject him to a
possible action for damages.

• PARTNERSHIP AT WILL

A partnership that does not fix its term is a partnership at will.

Note: Contributions to the common fund need not be cash or fixed assets, it may be in the form
of credit or industry.

ARTICLE 1768

A partnership has a juridical personality separate and distinct from that of each of
the partners. Therefore, partners cannot be held liable for the obligations of the partnership
UNLESS it is shown that the legal fiction of a different juridical personality is being used for
fraudulent, unfair, or illegal purposes. Even in case of failure to comply with Art. 1772, par. 1,
which states that “every contract of partnership having a capital of 3,000 pesos or more, in money
or property, shall appear in a public instrument…” shall not affect the liability of the partnership.

ARTICLE 1769

In determining whether a partnership exists, these rules shall apply:

• Rule 1: Persons who are not partners as to each other are not partners as to third
persons

Partnership in Estoppel is considered where a partnership not duly organized has been
recognized as such in its dealings with certain persons.
 • Rule 2: Co-ownership or co-possession does not of itself establish partnership

Partnership Co-ownership
Creation
Created by contract Created by contract and law
Juridical Personality
It has legal or juridical personality It has no juridical personality
Purpose
For profit Common enjoyment or use of a thing or right
Profit
May be stipulated upon Profits must always depend on proportionate
shares. Stipulation to the contrary is VOID.
Dissolution
It is dissolved by death or incapacity of a Not dissolved by death or incapacity of co-
partner owner
Form
May appear in any form except when real No public instrument is needed even if the
property is contributed object of the co-ownership is real property

• Rule 3: The sharing of gross returns does not of itself establish a partnership

It is worth noting that there is disputable presumption of establishing partnership if what the
partners are sharing are net profit. However, there is no presumption of establishing a partnership
if what is shared are gross profit.

• Rule 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

Prima facie – sufficient to establish a fact or raise a presumption UNLESS disproved or rebutted;
based on what seems to be true on first examination through it may be later proved to be untrue.

1. EXCEPTIONS
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 person
d. As an interest on a loan
 e. As the consideration for the sale of a goodwill of a business or other property

ARTICLE 1770

• LAWFUL OBJECT OR PURPOSE

The object or purpose of a partnership must be within the commerce of man, not
impossible, and it must not be contrary to law, morals, good customs, public order or
public policy.

• EFFECTS OF AN UNLAWFUL PARTNERSHIP

1. Contract is void ab initio;
2. Profits shall be confiscated in favor of the government;
3. Instruments or tools and proceeds of the crime shall be forfeited in favor of the
government; and
4. Contributions of the partners shall not be confiscated unless they fall under no. 3.

ARTICLE 1771 (FORM)

GENERAL RULE: No form is required. It may be oral or written.

EXCEPTION: If real properties or real rights are contributed regardless of the value, a public
instrument is needed; otherwise, contract is void.

Real Rights – A right that is connected with a thing rather than a person. Examples are
ownership, use, habitation, usufruct, predial servitude, pledge, and real mortgage.

Public Instrument – A document prepared by a notary public in the presence of the parties
who sign it before witnesses.

ARTICLE 1772

• Partnership having a capital of P3,000 or more (personal property)

Contract must appear in a public instrument and must be recorded with the SEC. Validity is
not affected with non-compliance.

• Partnership having a capital of below P3,000 (personal property)

No form is required.
 • Purpose of registration

To set “a condition for the issuance of licenses to engage in business or trade.”

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.

A partnership may be constituted in any form, say when immovable property or real rights
are contributed thereto or when the partnership has a capital of at least P3,000, in which case a
public instrument shall be necessary. And inventory to be signed by the parties and attached to
the public instrument is also indispensable to the validity of the partnership whenever immovable
property is contributed to it.

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. Because a partnership has
juridical personality, immovable property to be acquired must be in the name of the partnership
and if conveyed must also be in the partnership name.

ARTICLE 1775

Associations and societies, whose articles are kept secret among members, and wherein
any one may contract in his own name with third persons, shall have no juridical personality.

Partnership Association
Juridical Personality
It has legal or juridical personality It has no juridical personality
Purpose
For profit It may not be for profit
Contribution of Members
There is contribution of money, property, or There is no contribution of capital but
industry or a combination of these payment of fees for maintenance
Liability
Partnership is the one liable Members are individually liable for the debts
of the association
 ARTICLE 1776 (Classifications)

1. ACCORDING TO OBJECT
a. Universal (Art. 1777)
i. Of all present property – 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. (Art. 1778)
ii. Of all profits – It comprises all that the partners may acquire by their
industry or work during the existence of the partnership.
b. Particular (Art. 1783) – Has for its object determinate things, their use or fruits, or
specific undertaking, or the exercise of a profession or vocation.
2. ACCORDING TO LIABILITY
a. General partnership – one where all the partners are general partners in which
all are liable up to the extent of their separate properties after the assets of the
partnership have been exhausted.
b. Limited partnership – one where there is at least one general partner and one
limited partner. A general partner is liable beyond his contributions but a limited
partner is only to the extent of their contribution.
3. ACCORDING TO DURATION
a. Partnership at will – one where there is no fixed term or it is not formed for a
particular undertaking, or one for a fixed term or particular undertaking which is
continued after the termination of such without any express agreement.
b. Partnership with a fixed term – one where the life or period of existence of the
partnership has been agreed upon by the partners.
c. Partnership for a particular undertaking - one where it will exist until the purpose
is accomplished.
4. ACCORDING TO REPRESENTATION TO OTHERS
a. Ordinary partnership – one where 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
b. Partnership by estoppel – one where persons, by words spoken or written or by
conduct, represent themselves, or consent to another representing them to
anyone, as partners in an existing partnership or with one or more persons not
actual partners.
 5. ACCORDING TO THE LEGALITY OF ITS EXISTENCE
a. De jure partnership – one which has complied with all the legal requirements for
its creation.
b. De facto partnership – one which has not complied with all the legal
requirements for its creation.

ARTICLE 1779

In a universal partnership, property which belongs to each one 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.

• Future properties cannot be included because:

1. As a rule, contracts regarding successional rights cannot be made;
2. A partnership demands that the contributed things be determinate, known, and certain;
3. A universal partnership of all present properties really implies a donation, and it is well-
known that generally, future property cannot be donated.

ARTICLE 1780

A universal partnership of all 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.

Universal Partnership of all present Universal Partnership of profits (During

Property (At the time of constitution of the the existence of the partnership)
partnership)
All the present property actually belonging to Only the usufruct of the properties of the
the partners are contributed to the partnership partners becomes common property of all the
which become common property of all the partners and the partnership
partners and the partnership
 General Rule: Only the profits of said All profits acquired through the industry or
contributed property become common work of the partners become common
property but not profits arising from other property
property of the partners.
Exception: If stipulated, the profits from
other property of the partners may become
common.

ARTICLE 1781

Articles of universal partnership, entered into without specification of its nature, only
constitute a universal partnership of all profits. Presumption is in favor of universal partnership
of profits because it imposes less obligation due to their real and personal properties
retained by them in naked ownership.

ARTICLE 1782

Persons who are prohibited from giving each other any donation or advantage
cannot enter into universal partnership. The rationale is that a universal partnership is
virtually a donation to help each other of the partner’s properties. Therefore, if persons are
prohibited to donate to each other, they should not be allowed to do indirectly what the law forbids
directly.

• EFFECT OF VIOLATION
Partnership is null and void; nullity may be raised anytime.
• EXAMPLES OF PERSONS WHO CANNOT ENTER A UNIVERSAL PARTNERSHIP
1. Legally married spouses;
2. Persons living together as husband and wife without valid marriage;
3. Persons who were guilty of adultery and concubinage at time of donation;
4. Persons found guilty of the same criminal offense, in consideration thereof;
5. A person and a public officer or his wife, descendants and ascendants, by reason
of his office.
AEC 65 Business Laws and Regulations

Partnership Chapter 2 Obligations of the Partners

KINDS OF PARTNERS

1. As to contribution
a. CAPITALIST – contribute money/property or both to the common fund
b. INDUSTRIAL – contribute only their industry or labor to the common fund
c. CAPITALIST-INDUSTRIAL – both money/property and industry
2. As to liability
a. GENERAL – liable to third persons beyond the extent of their separate property
b. LIMITED/SPECIAL – cannot be held liable for partnership obligations
3. As to management
a. MANAGING/GENERAL/REAL – manage actively the business or affairs
b. SILENT – do not take active part though they share in profits/losses
c. LIQUIDATING – who take charge of the winding up or liquidation after dissolution
4. As to third persons
a. OSTENSIBLE – are active and known to the public as a partner
b. SECRET – connection to the partnership is not known to the public
c. DORMANT – both secret and silent
5. As to membership
a. REAL PARTNERS – partners in existing legal partnership
b. BY ESTOPPEL – not really partners but represent or consent to others as
partners
6. As to continuation of the business affairs after dissolution
a. CONTINUING – continue the partnership after dissolution
b. DISCONTINUING – do not continue after dissolution
7. As to nature of membership
a. ORIGINAL – members from the time of constitution
b. INCOMING – members after establishment
c. RETIRING – withdrew from the partnership
8. As to state of survivorship
a. SURVIVING – continue partnership after dissolution due to death of partner
b. DECEASED – dead partner
 9. As to the effect of expulsion
a. EXPELLED – expelled for a valid cause
b. EXPELLING – caused the expulsion for a valid cause
10. As to value of the contribution
a. MAJORITY – whose contribution represents majority or controlling interest
b. NOMINAL – whose contribution represents minority interest

SECTION 1. OBLIGATIONS OF THE PARTNERS AMONG THEMSELVES

• LEGAL RELATIONS CREATED BY A CONTRACT OF PARTNERSHIP

o Between partners
o Partners and the partnership
o Partners and third persons
o Partnership and third persons

Obligations of partners Rights of partners

1. To give their promised contribution.
2. Not to convert partnership money to their
own use.
3. To account and hold as trustee for any
profits derived without consent from partners.
4. Not to engage in business which is the
same kind.
5. Obligation of managing partners to credit
to the partnership payment made by a debtor
who owes them and the partnership.
6. Obligation to share with the other partners
the share of the partnership credit which they
have received from an insolvent partnership
debtor.
7. Pay for damages suffered by the
partnership through their fault.
1. Right to associate with another person in
their share
2. Right to access to and inspect and copy
partnership books
3. Right to demand a formal account
4. Right to ask for the dissolution of the
partnership at the proper time
5. Property rights of partners
a. Rights in specific partnership property
b. Interest in the partnership
c. Right to participate in the management

ARTICLE 1784

GENERAL RULE: A partnership begins from the moment of the execution of the contract,
UNLESS otherwise stipulated.
 ARTICLE 1785

When a partnership for a fixed term or particular undertaking is continued after the
termination of the 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.

ARTICLE 1786

OBLIGATION OF EVERY PARTNER

1. The obligation to contribute what had been promised

a. Failure to contribute makes partner a debtor even if there is no demand – an
exception to the general rule that there is no delay when there is no demand.
b. REMEDY is specific performance with interest and damages, not rescission.
2. The obligation to deliver the fruits thereof
a. If partner in bad faith, he is liable not only for fruits produced but also for those
that could have been produced.
3. The obligation to warrant
a. Warranty in case of eviction refers only to specific or determinate things which
has been contributed.

ARTICLE 1787

When capital contribution consists of goods, their appraisal must be made in the
manner of:

1. By stipulation; or
2. In absence of stipulation, by experts chosen by the partners according to current prices.

ARTICLE 1788

CASES COVERED OF THE LIABILTIY FOR DAMAGES AND INTEREST

a. Money promised by a partner is not given on time; and

b. Money of the partnership is converted to partners’ own use.
DEMAND NOT NECESSARY

a. Time is of the essence.

ARTICLE 1789

CAPITALIST PARTNER VS. INDUSTRIAL PARTNER

Capitalist Industrial
Contribution
Money or property His industry
Prohibition to engage in other business
Cannot engage in the same kind of business Cannot engage in business for himself,
in which the partnership is engaged, UNLESS the partnership expressly permits
UNLESS there is authorized stipulation him to do so
Profits
Share according to agreement; in absence, in Share according to agreement; in absence,
proportion to his contribution he shall receive such share as may be just
and equitable under the circumstances
Losses
General rule: agreement as to losses; if any. General rule: agreement as to losses; if any.
If there is no agreement, then agreement to
profits.
Exception: in absence of agreement as to Exception: in absence of agreement, he
profits and losses, in proportion to shall not be liable for losses.
contribution.

Remedies of capitalist partners against an industrial partner who engaged in business

for himself

1. They may exclude the industrial partner from the partnership plus damages; or
2. They may avail themselves of the benefits which the industrial partner may have
obtained plus damages.

ARTICLE 1790

UNLESS there is a stipulation to the contrary, the partners shall contribute equal
shares to the capital of the partnership.

ARTICLE 1791

GENERAL RULE: Capitalist partners are not bound to contribute additional capital.

EXCEPTION

1. Stipulation; and
 2. In case of imminent loss of the business of the partnership to save the venture, if the
capitalist partners refuse to contribute additional capital, they shall be obliged to
sell their interest to the other capitalist partners who are willing to contribute
additional capital.

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 that is also demandable,
the sum thus collected shall be applied to the two credits in proportion to their amounts,
even though he may have given a receipt for his own credit only; but should he have given
it for the account of the partnership credit, the amount shall be fully applied to the latter.

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

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.

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.

ARTICLE 1795

RISK OF LOSS

1. Specific and determinate things which are not fungible – owner bears the risk of
loss
2. Fungible things – partnership bears the risk of loss
3. Things contributed to be sold – partnership bears the risk of loss
 4. Things brought and appraised in the inventory – partnership bears the risk of loss

ARTICLE 1796

OBLIGATION OF THE PARTNERSHIP TO EVERY PARTNER

1. To refund the amounts a partner may have disbursed on behalf of the partnership
plus the interest from the time the expenses were made.
2. To answer to each partner for obligations, he may have contracted into in good
faith in the interest of the partnership, and for the risks in consequence of its
management.

ARTICLE 1797 (Share of Profits and Losses)

RULES FOR DISTRIBUTION OF PROFITS AND LOSSES OF A PARTNERSHIP

1. Distribution of Profits
a. According to agreement
b. If there is no agreement:
i. CAPITALIST – in proportion to what he may have contributed to the
common fund.
ii. INDUSTRIAL – that which is just and equitable under the circumstances.
2. Distribution of Losses
a. According to agreement
b. If there is no agreement:
i. CAPITALIST – in proportion to what they may have contributed to the
common fund.
ii. INDUSTRIAL – not liable for losses

ARTICLE 1798

THIRD PERSON DESIGNATING THE SHARE OF PARTNERS IN PROFITS AND LOSSES

GENERAL RULE: It is valid.

EXCEPTION: It is not valid and it may be questioned if it is manifestly inequitable; UNLESS:

1. A partner began to execute the decision of the third person; or

2. A partner has not questioned the said decision of the third person within a period of
3 months from the time he had knowledge thereof.
 ARTICLE 1799

GENERAL RULE: A stipulation excluding one or more partners from any share in the profits
and losses is void. Stipulation is only void, not the contract of partnership.

EXCEPTION: An industrial partner is not liable for losses UNLESS he waived this right.

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 of power. A power granted after the partnership has
been constituted may be revoked at any time.

TWO MODES OF APPOINTMENT

1. Appointment as manager in the articles of partnership; or

GENERAL RULE: Power is irrevocable without just or lawful cause.

EXCEPTION

a. To remove him for just cause, vote of partners having controlling interest is necessary;
b. To remove him without just cause, there must be unanimity including his own vote.

Extent of power

a. If acted in good faith, he may do all acts of administration despite opposition of partners.
b. If acted in bad faith, he cannot do any act of administration.

2. Appointment as manager made in an instrument other than the articles of

partnership

GENERAL RULE: The power to act may be revoked at any time, with or without just cause by
the partners owning the controlling interest.

REASON: Such appointment is a mere delegation of power; revocable at any time.

EXTENT: The manager can do all acts of administration.

 ARTICLE 1801

When Two or More Managing Partners have been Entrusted with the Management

REQUISITES

1. Two or more partners are managers;

2. There is no specification of respective duties; and
3. There is no stipulation requiring unanimity, that is, that one of them shall not act
without the consent of all the others.

GENERAL RULE: Each one may separately execute all acts of administration.

EXCEPTIONS: If any of the managers should oppose:

1. The decision of the majority of the managing partners shall prevail.

2. In case of tie, the decision of the managing partners owning the controlling interest
shall prevail.

ART. 1802 (not applicable to third person)

Stipulation Requiring Unanimity of Action

GENERAL RULE: Unanimous consent of all the managing partners (even if one of the
managers is absent or incapacitated) shall be necessary for the validity of the acts and
absence or disability of any managing partner cannot be alleged.

EXCEPTION: When there is an imminent danger of grave or irreparable injury to the

partnership.

ARTICLE 1803

RULES WHEN MANNER OF MANAGEMENT NOT AGREED UPON

1. All the partners shall be considered as managers. Consequently, all partners can do
all acts of administration. If the acts of a partner are opposed by the other partners, the
majority shall prevail. In case of tie, vote of partners representing controlling interest shall
prevail.
2. For important alterations in immovable property, unanimity is required. But if the
refusal of consent by other partners is manifestly prejudicial to the interest of the
partnership, the court’s intervention may be sought.
 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. Art. 1804 refers to Contract of
Sub-partnership in which the consent of other partners is not required.

Why sub-partner cannot be admitted without the consent of all the other partners?

a. Mutual trust is the basis of partnership; and

b. A change in membership is a modification or novation of the contract.

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. Reasonable hour should be on business
days throughout the year, and not merely during some arbitrary period of a few days chosen by
the managers.

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. Violation of this article is called concealment.

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.

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.
EFFECT OF VIOLATION

1. The capitalist partner shall bring to the common fund any profits accruing to him;
and
2. The capitalist partner shall personally bear all the losses.

ARTICLE 1809

GENERAL RULE: No formal accounting is demandable until after the partnership

dissolution.

EXCEPTIONS:

1. If a partner is wrongfully excluded from the partnership business or possession of

its property by his co-partners;
2. If the right to demand for accounting exists under the terms of any agreement;
3. As provided by Art. 1807; and
4. Whenever other circumstances render it just and reasonable.

SECTION 2. PROPERTY RIGHTS OF A PARTNER

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.

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 has an equal right with his partners to possess specific partnership
property for partnership purposes.
2. A partner’s right in specific partnership property is not assignable.
3. A partner’s right in specific partnership property is not subject to attachment or
execution.
4. A partner’s right in specific partnership property is not subject to legal support.
 ARTICLE 1812

A partner’s interest in the partnership is his share of the profits and surplus. As a rule,
partner’s interest can be assigned, attached, and be subject to legal support.

Profit - The excess of revenues over expenditures in a business transaction.

Surplus - The excess of receipts over disbursements. Funds that remain after a partnership
has been dissolved and all its debts paid.

ARTICLE 1813

Conveyance - The voluntary transfer of a right or of property.

EFFECTS OF CONVEYANCE BY PARTNER OF HIS WHOLE INTEREST IN THE

PARTNERSHIP

1. If a partner conveys his whole interest in the partnership, it may still subsist or it may
be dissolved.
2. The assignee:
a. Cannot interfere in the management of the partnership business;
b. Cannot require information or accounting of partnership transactions; and
c. Cannot inspect partnership books.

RIGHTS OF THE ASSIGNEE

1. To receive the profits to which the assigning partner would otherwise be entitled;
2. In case of fraud in the management, the assignee may avail himself of the usual
remedies provided by law;
3. In case of dissolution, to receive the assignor’s interest; and
4. In case of dissolution, the assignee may require an account from the date only of
the last account agreed to by all the partners.

ARTICLE 1814

What is meant by a “charging order” upon a partner’s interest in the partnership?

A charging order upon a partner’s interest in the partnership refers to the remedy available
to a judgment creditor of a debtor-partner to charge the interest of the latter in the partnership by
means of a court order for the purpose of satisfying the amount of the judgment. A receiver if the
debtor-partners’ share of the profits may even be appointed. This charging order, however, is
always subject to the preferred rights or partnership creditors.

REDEMPTION OF INTEREST CHARGED

1. Before foreclosure
a. Interest charged may be redeemed at any time before foreclosure
2. After foreclosure
a. It may still be purchased without thereby causing a dissolution:
i. With separate property of a partner; or
ii. With partnership property with the consent of all the partners whose
interests are not so charged or sold.

Redemption - The extinguishment of the charge or attachment on the partner’s interest in the
profits.

RIGHT OF A PARTNER UNDER EXEMPTION LAWS

A partner shall not be deprived of his right under the exemption laws, as regards his
interest in the partnership. However, a partner cannot avail himself of the exemption laws insofar
as his right in specific partnership property is concerned.

SECTION 3. OBLIGATIONS OF THE PARTNERS WITH REGARD TO THIRD PERSONS

ARTICLE 1815

GENERAL RULE: Partners may use any firm name desired and this will be the name of that
juridical person.

EXCEPTION: The partnership cannot use an identical or deceptively confusingly similar

to that of any existing partnership or corporation or to any other name already protected
by law or is patently deceptive or contrary to existing laws.

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.
Pro-rata - Means equally or joint.

Subsidiary - Partners’ separate property may be held liable only after the partnership creditors
exhausted the assets of the partnership.

ARTICLE 1817

A stipulation against liability of all partners for the contracts entered into in the name of
the partnership is void as to third persons. However, it is valid as among the partners.

ARTICLE 1818

PARTNER AS AGENT OF THE PARTNERSHIP

a. Acts apparently for carrying on in the usual way the business of the partnership
a. It binds the partnership UNLESS:
i. The partner so acting has in fact no authority to act; and
ii. The person with whom he is dealing has knowledge of the fact that
he has no such authority.
b. Acts not apparently for the carrying on in the usual way the business
a. It does not bind the partnership, UNLESS authorized by the other partners.
c. Acts of ownership
d. Acts in contravention of a restriction on authority
a. Act is not binding to the partnership as to persons having knowledge of such
restriction.

ARTICLE 1819

Title - Legal evidence of a person’s ownership rights in property

Equitable Interest - Interest held by virtue of an equitable title or claimed on equitable grounds.

REAL PROPERTY MAY BE REGISTERED OR OWNED IN THE NAME OF:

1. The partnership;
2. One or more or all the partners;
3. One or more or all the partners; or in a third person in the trust for the
partnership; and
4. All the partners.

ART. 1820
Admission - A statement in which someone admits that something is true or that he or she
has done something wrong.

An admission by any partner is evidence against the partnership if:

1. Admission must concern partnership affairs; and

2. Admission must be within the scope of his authority.

ARTICLE 1821

Instances where knowledge of a partner is considered knowledge of the partnership:

1. Knowledge of the partner acting in the particular matter acquired while a partner;
2. Knowledge of the partner acting in the particular matter then present to his mind; and
3. Knowledge of any other partner who reasonably could and should have communicated it
to the acting partner.

EXCEPTION: In the case of fraud on the partnership, committed by or with consent of that
partner.

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 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.

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.

ARTICLE 1824

All partners are solidary liable with the partnership for everything chargeable to the
partnership under Articles 1822 and 1823. A third person who transacted with said partnership
can hold the partners solidary liable for the whole obligation if the case of the third person falls
under Arts. 1822 and 1823.

ARTICLE 1825

When a person represents himself, or consents to another to represent him, as a partner

in an existing partnership with persons not actual partners, he is liable to any persons to whom
such representation has been made who has given credit to the actual or apparent
partnership:

1. When a partnership liability results, he is liable as though he were an actual partner;

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.

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 stipulated otherwise.

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.
AEC 65 Business Laws and Regulations

Partnership Chapter 3 Dissolution and Winding Up

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 with 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.

ARTICLE 1828

DISSOLUTION

• The change in the relation of the parties caused by any partner ceasing to be
associated in the carrying on of the business
• Upon the dissolution of the business, the partnership continues and its legal
personality is retained until the complete winding up of its business culminating in
its termination

Notes

• The dissolution of the partnership did not mean that the juridical entity was immediately
terminated and that the distribution of the assets to its partners should perfunctorily follow.
• On the contrary, the dissolution simply effected a change in the relationship among the
partners. The partnership, although dissolved, continues to exist until its termination, at
which time the winding up of its affairs should have been completed and the net
partnership assets are partitioned and distributed to the partners.

3 FINAL STAGES OF A PARTNERSHIP

1. Dissolution - the point of time wherein the partners cease to carry on the business
together.
2. Winding Up - the process of settling business affairs after dissolution.
3. Termination - the point in time after all the partnership affairs have been wound up.
IS THE AGREEMENT OF THE PARTNERS AFFECTING LIQUIDATION VALID?

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 provision.

Retirement - The dissociation by a partner, inclusive of resignation or withdrawal, from the

partnership that thereby dissolves it.

Notes

• In the ordinary course of events, the legal personality of the expiring partnership persists
for the limited purpose of winding up and closing of the affairs of the partnership.
• The new partnership simply took over the business enterprise owned by the preceding
partnership, and continued using the old name, without winding up the business affairs of
the old partnership.
• Not only the retiring partners but also the new partnership itself which continued the
business of the old are liable for the debts of the preceding partnership.
• A withdrawing partner remains liable to a third party creditor of the old partnership.

ARTICLE 1829

On dissolution the partnership is not terminated, but continues until the winding up
of partnership affairs is completed.

Notes

• After dissolution, all the transactions of the partnership should only pertain to liquidation
or winding up which will happen over a period of time.
• 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.

ARTICLE 1830

DISSOLUTION IS CAUSED:

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

a. By the termination of the definite term or particular undertaking specified in the
agreement;
 i. Partnership with a fixed term
ii. Partnership for a particular undertaking
b. By the express will of any partner, who must act in good faith, when no definite
term or particular is specified;
i. Partnership at will
c. By the express will of all the partners who have not assigned their interests or
suffered them to be charged for their separate debts, either before or after the
termination of any specified term or particular undertaking;
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;
i. Expulsion must be in good faith
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 (EXTRAJUDICIAL);
a. Even if there is a specified term, one partner can cause its dissolution by expressly
withdrawing even before the expiration of the period with or without justifiable
cause
b. If the cause is not justified or no cause was given, the withdrawing partner is
liable for damages but in no case can he be compelled to remain in the firm. With
his withdrawal, the number of members is decreased, hence, the dissolution.
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 (EXTRAJUDICIAL);
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 (EXTRAJUDICIAL);
a. If a partner contributed the use or employment only of a specific thing and it was
lost BEFORE the delivery to the partnership, the partnership is dissolved.
b. If a partner contributed the use or employment only of a specific thing and it was
lost AFTER the delivery to the partnership, the partnership is dissolved.
c. If a partner contributed the ownership of a specific thing and it was LOST BEFORE
the delivery to the partnership, the partnership is dissolved.
 d. If a partner contributed the ownership of a specific thing and it was LOST AFTER
the delivery to the partnership, the partnership is NOT dissolved.
e. Principle: The owner bears the risk of loss
5. By the death of any partner (EXTRAJUDICIAL);
6. By the insolvency of any partner or of the partnership (EXTRAJUDICIAL);
7. By the civil interdiction of any partner (EXTRAJUDICIAL);
a. Civil interdiction – deprives the offender during the time of his sentence of the
right to manage his property and dispose of such property by any act or any
conveyance inter vivos.
8. By decree of court under the following article (JUDICIAL).

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;
a. The presumption is in favor of sanity
b. Insanity must be duly proved in court
c. Insanity will make a person incapacitated to enter into a contract
2. A partner becomes in any other way incapable of performing his part of the
partnership contract;
3. A partner has been guilty of such conduct as tends to affect prejudicially the
carrying on of the business;
4. A partner willfully or persistently commits 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;
a. The intention and essence of every business partnership is to divide the profits
among themselves
6. Other circumstances render a dissolution equitable.
a. If excellent relations exist among the partners at the start of business and all the
partners are more interested in seeing the firm grow rather than get immediate
returns, a deferment of sharing in the profits is perfectly plausible.
 b. It would be incorrect to stated that if a partner does not assert his rights anytime
within the agreed period from the start of the operations, such rights are
irretrievably lost.
c. The Court may decree a dissolution of the partnership.
d. There shall be a liquidation and winding up of partnership affairs, return of capital,
and other incidents of dissolution because the continuation of the partnership has
become inequitable.

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.

WHO CAN SUE FOR JUDICIAL DISSOLUTION?

1. A partner or any of numbers 1 to 6

2. The purchaser of a partner’s interest in the partnership under Art. 1813 or 1814 after
the termination of the specified term or particular undertaking or if the partnership is at will
when the interest was assigned or when the charging order was issued

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.

ARTICLE 1833

Where the dissolution is caused by the act, death or insolvency of a partner, each partner
is liable to his copartners 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.

Any transactions entered into by partners without their knowledge of the withdrawal of a
partner is valid and binding to the partnership.

If a partner has knowledge about the withdrawal of a partner and he transactions with a third
person who has no knowledge about the withdrawal, the transaction creates a liability which
makes it still valid and binding to the partnership.

• The third person must be in good faith

• After the payment to the third person, the partner can ask for reimbursement of his
share

If the cause of dissolution is the death or insolvency of a partner and a partner who HAS
knowledge of the death of a partner entered into a contract with a third person who has NO
knowledge about the death, the transaction creates a liability which makes it still valid and
binding to the partnership

• After the payment to the third person, the partner can ask for reimbursement of his
share

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 business. (n)

PARTNERSHIP IS LIABLE

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
a. The third person must be in good faith
b. The partnership is liable to the contract of sale
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.
a. If the fact of dissolution had been advertised in a newspaper of general circulation,
then the partnership is not liable.

PARTNERSHIP NOT LIABLE

Where the partner has no authority to wind up partnership affairs; EXCEPT by a

transaction with one who:

a. As a general rule, any transaction entered into by the remaining partners after the
dissolution is not binding to the partnership; hence, the partnership is not liable

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.

GENERAL RULE: The dissolution of the partnership does not of itself discharge the
existing liability of any partner.

In order for the liability of a partner to be discharged the following must agree:

1. The partner;
2. The other partners; and
3. The creditors

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.

KINDS OF WINDING-UP OR LIQUIDATION

1. Extrajudicial
a. Liquidation is done without the intervention of the court
b. Who will wind-up?
i. The liquidating partner or partners as agreed upon by all of the partners
ii. The partners who have not wrongfully dissolved the partnership
iii. The legal representative of the last surviving partner who is not insolvent
2. Judicial
a. Liquidation is done under the control and direction of the court, upon proper cause
that is shown to the court
b. Who will wind-up?
i. The person appointed by the court

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.

WITHOUT CONTRAVENTION OR VIOLATION OF THE PARTNERSHIP AGREEMENT

1. To have the partnership property applied to discharge the liabilities of the

partnership; and
2. To have the surplus, if any, applied to pay in cash the net amount owing to the
respective partners.

During liquidation, the non-cash assets of the partnership must be converted into cash to pay
the creditors. If there is remaining cash, it will be distributed to the partner-creditor of the
partnership.
Notes

If dissolution is caused by expulsion of a partner, bona fide (good faith) under the
partnership agreement, and if the expelled partner is discharged from all partnership liabilities,
either by payment or agreement between him, the other partners, and the partnership creditors,
he shall receive in cash only the net amount due him from the partnership.

CONTRAVENTION OR VIOLATION OF THE PARTNERSHIP AGREEMENT

1. Rights of partner who has not caused dissolution wrongfully:

a. To have the partnership property applied to discharge the liabilities of the
partnership;
b. To have the surplus, if any, applied to pay in cash the net amount owing to the
respective partners;
c. To be indemnified for damages caused by the partner who caused the dissolution
wrongfully;
d. To continue the business in the same name whether by themselves or jointly with
others during the agreed term of the partnership and for that purpose may possess
the partnership property.
2. Rights of partner who wrongfully caused the dissolution:
a. If the business is not continued by the other partners:
i. To have the partnership property applied to discharge the liabilities of the
partnership;
ii. To receive in cash his share of the surplus less damages caused by his
wrongful dissolution.
b. If the business is continued by the other partners
i. 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
ii. To be released from all existing liabilities of the partnership

Notes

• In ascertaining the value of the partner’s interest who wrongfully caused the dissolution of
the partnership, the value of the goodwill of the business shall not be considered
 • All authority of any partner to act for the partnership is terminated except so far as may be
necessary to wind up the partnership affairs or to complete transactions begun but not yet
finished.
• Until the partnership accounts are determined, it cannot be ascertained how much any of
the parties is entitled to, if at all.

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 (Right of lien/retention);
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 (Right of subrogation); and
3. To be indemnified by the person guilty of the fraud or making the representation
against all debts and liabilities of the partnership (Right of indemnification).

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.

Notes

• Generally, in the pursuit of a partnership business, its capital is either increased by profits
earned or decreased by losses sustained. It does not remain static and unaffected by the
changing fortunes of the business
• 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

REQUIRED NEW CONTRIBUTION

• If the partnership assets were exhausted, the partners shall contribute the amount
necessary to satisfy the liabilities.
 • WHO CAN ENFORCE?
o An assignee for the benefit of creditors or any person appointed by the court
shall have the right to enforce the contributions
o Any partner or his legal representative shall have the right to implement the said
enforced contributions, to the extent of the amount which he has paid in excess of
his share of the liability

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 retires and assigns (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.

RATIONALE

o 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.
o Article 1840 treats more of a commercial partnership with a goodwill to protect rather than
a professional partnership, with no saleable goodwill but whose reputation depends on the
personal qualifications of its individual members.
o 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, since the name of a commercial partnership is a
partnership asset inseparable from the goodwill of the firm.
 ARTICLE 1841

RIGHTS OF A PARTNER WHO RETIRES OR DIES AND THE BUSINESS IS CONTINUED

WITHOUT ANY SETTLEMENT OF ACCOUNTS

1. To have the value of his interest at the date of dissolution ascertained

2. To 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.

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.

WHO HAS THE RIGHT TO AN ACCOUNT OF HIS INTEREST?

Shall accrue to any partner or his legal representative

WHO HAS AN OBLIGATION TO RENDER AN ACCOUNT?

1. The winding up partners; or

2. Surviving partners; or
3. The person or partnership continuing the business.

WHEN TO RENDER AN ACCOUNT?

o At the date of dissolution, except of any stipulation to the contrary

Notes

o For as long as the partnership exists, any of the partners may demand an accounting of
the partnership’s business.
o Prescription of the said right starts to run only upon the dissolution of the partnership when
the final accounting is done.
o In the absence of a final accounting, prescription will not begin
o There shall be liquidation and winding up of partnership affairs, return of capital, and other
incidents of dissolution because the continuation of the partnership has become
inequitable.
AEC 65 Business Laws and Regulations
Partnership Chapter 4 Limited Partnership
1. Define a Limited Partnership

Art. 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 beyond his capital contribution.

2. What are the characteristic features of a limited partnership?

a) It is formed by compliance in good faith with the statutory requirements;

b) One or more general partners control the business and are personally liable to
creditors;
c) One or more limited partners (also known as special partner/s) contributes to the
capital and share in the profits but do not participate in the management of the
business;
d) The limited partners are not personally liable for partnership obligations beyond their
capital contributions;
e) The limited partners may ask for the return of their capital contributions; and
f) The partnership debts are paid out of the common fund and the separate properties of
the general partners.

3. What are the requirements to form a limited partnership?

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 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

4. Must the certificate of limited partnership contain all the requisites enumerated
above?

It must contain all the numerated items in the aforementioned article.

5. What is the effect of non-compliance with the statutory provisions governing the
formation of a limited partnership?

There is no limited partnership in case of non-compliance with the above-requirements.

However, there can be a general partnership.

6. What may be the contribution of a limited partner?

The contributions of a limited partner may be cash or property, but not services.

7. Why is it that a limited partner cannot contribute service?

He cannot, otherwise, he would become an industrial and general partner, therefore, he shall
not be exempted from personal liability.

8. Can an industrial partner be at the same time a limited partner?

An industrial partner can only become a general partner. Article 1845 states that a limited
partner cannot contribute services.

9. Must a surname of a limited partner appear in the partnership name?

The surname of a limited partner shall not appear in the partnership 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.

10. Under what cases shall a limited partner be not liable as a general partner
although his surname appears in the partnership name?

As stated in 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.
11. What is the basis of the liability of a partner for false statement in the certificate?

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

12. When shall a limited partner be held liable as a general partner?

When he takes part in the control of business management and affairs.

13. May additional limited partners admitted after the formation of the limited
partnership?

As stated in Article 1849, after the formation of a limited partnership, additional limited
partners may be admitted upon filing an amendment to the original certificate in
accordance with the requirements of Article 1865.

14. What are the rights and liabilities of a general partner in a limited partnership?

Similar to that of a general partnership. 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 perform acts of strict dominion, or have no authority to:
a) Do any act in contravention of the certificate;
b) Do any act which would make it impossible to carry on the ordinary business of the
partnership;
c) Confess a judgment against the partnership;
d) Possess partnership property, or assign their rights in specific partnership property, for
other than a partnership purpose;
e) Admit a person as a general partner;
f) Admit a person as a limited partner, unless the right so to do is given in the certificate;
g) 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.

15. Why is it that for the above acts the consent of all the general and limited partners
is necessary to be binding upon the partnership?

Since partners do not own, but co-own, partnership properties, and since the above
enumerations pertain to acts of strict dominion, the general partners are required to secure
written consent or ratification by all of the limited partners.

16. What are the rights of a purely limited partner in a limited partnership?

As stated in Article 1851, a limited partner shall have the same rights as a general partner to:
 a) 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;
b) 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
c) 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.

17. What is the status of a person who contributed to the capital of the partnership,
erroneously believing himself a limited partner?

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.

18. Can a person be a general and limited partner in the same partnership at the same
time?

As stated in 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.

19. What are the right and liabilities of a person who is both a general and limited
partner in the same partnership?

As stated in Article 1853, 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.

20. Can a limited partner loan money or transact other business with the partnership?

Yes. A limited partner is allowed to (1) lend money to the partnership; (2) to transact
business with the partnership; and, UNLESS he is also a general partner, (3) receive on
account of resulting claims against the partnership, with general creditors, a pro rata share of
the assets. However, a limited partner is prohibited to (1) receive or hold as collateral
security and 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/limited partners.
21. Among several limited partners who among them shall be preferred as to return of
their contribution and as to compensation by way of income, or as to any other
matter?

As stated in 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
(1) as to the return of their contributions, (2) as to their compensation by way of income, or
(3) 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.

22. Under what circumstances may a limited partner receive from the partnership his
share of the profits or the compensation by way of income stipulated for in the
certificate?

As stated in 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.

23. What are the requisites to be followed before a limited partner can have the return
of his contribution?

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 above, 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 given 6 months’ notice in writing to all other members, if no time is
specified, either for the return of the contribution or for the dissolution of the
partnership.

24. In what form shall the return of the contribution to a limited partner be made?

In the form of cash, UNLESS there is a (1) stipulation to the contrary, or (2) all partners
consent to the return in other forms.

25. What are the causes by which a limited partner may ask for the dissolution of the
partnership?
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.

26. What are the liabilities of a limited partner to the partnership?

As stated in 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.

27. When is a limited partner considered a trustee of certain property for the
partnership?

As given in Article 1858, 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.

28. May these liabilities of a limited partner be waived or compromised?

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.

29. Will the rightful return of the capital a limited partner has contributed discharge
the partner from his liabilities to the partnership?

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.

30. Is a limited partner’s interest in the partnership assignable without the consent of
the other partners?

Yes.

31. Distinguish a substituted partner from an assignee.

a) A substituted partner is a person admitted to all the rights of a limited partner, and
subject to all the restrictions and liabilities of his assignor; while
b) An assignee has to right to require any information or account of the partnership
transactions or to inspect the partnership books. They are only entitled to receive the
share of the profits or other compensation by way of income, or the return of the
assignor’s contribution.
32. How can an assignee become a substituted limited partner?

1. All the partners must consent or if the limited partner-assignor, being empowered in
the certificate of limited partnership, gives the assignee that right;
2. The certificate of limited partnership must be amended; and
3. The amended certificate of limited partnership must be registered in the Securities
and Exchange Commission.

33. What are the rights and liabilities of a substituted limited partner?

1. 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.
2. The substitution of the assignee as a limited partner does not release the assignor
from liability to persons who suffered damage by reliance on a false statement in
the certificate of limited partnership and to creditors who extended credit or
whose claims arose before the substitution.

34. Will the substitution of an assignee as a limited partner release the assignor from
his liability to the partnership?

The substitution of the assignee as a limited partner does not release the assignor from
liability to the partnership under Articles 1847 and 1848.

35. What are the causes for the dissolution of a limited partnership?

The retirement, death, insolvency, insanity or civil interdiction of a general partner dissolves
the partnership. EXCEPT if right to continuation is stated in the certificate or with the consent
of all remaining members.

36. Does death of a limited partner dissolved the partnership?

No.

37. If death of a limited partner does not dissolve the partnership, what is the effect of
such death upon the partnership?

As given in Article 1860, 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.

38. Is the interest of a limited partner in the partnership subject to attachment by a

personal creditor of the limited partner?

Yes. As stated in 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.

39. In the event the interest of the limited partner is ordered sold, may it be
redeemed?

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

40. How shall the assets of the limited partnership be distributed after dissolution?

As given in Article 1863, In setting 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.

41. In the event the partnership assets are insufficient to pay the claims of the limited
partners for capital and profits how shall the share of the limited partners in respect
to such claims be determined?

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.

42. When shall the certificate of limited partnership be cancelled?

The certificate shall be cancelled when the partnership is dissolved or all limited partners
cease to be such.

43. When shall the certificate be amended?

A certificate shall be amended when:

1. There is a change in the name of the partnership or in the amount or character of
the contribution of any limited partner;
2. A person is substituted as a limited partner;
3. An additional limited partner is admitted;
4. A person is admitted as a general partner;
5. A general partner retires, dies, becomes insolvent or insane, or is sentenced to
civil interdiction and the business is continued 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.

44. What are the requisites for the amendment of the certificate?

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.

45. In case of cancellation of the certificate who shall sign such?

As stated in Article 1865, the writing to cancel a certificate shall be signed by ALL members.

46. Who shall execute the writing to either amend or cancel the certificate?

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.

47. What is the procedure to be taken by a partner who desires the cancellation or
amendment of a certificate in the event the partner designated in the partnership to
execute the writing refuses to do so?

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.

48. When shall the certificate be considered amended or cancelled?

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.
49. Who is considered a contributor in a limited partnership?

As stated in 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.

50. Is a limited partner a proper party to be sued by or against the partnership?

A limited partner is NOT a proper party to proceedings by or against a partnership because

he does not take control nor participate in the management of the business of the
partnership.

51. How are limited partnerships formed prior to the effectivity of the New Civil Code
(Aug. 1, 1950) governed?

As given in 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.

52. When shall such partnership be governed by the provisions of the New Civil
Code?

The partnership shall be governed by the New Civil Code when such limited partnership is
formed under the law after the effectivity of such Code.