Prepared by: Jayzell A.

Monroy
THE LAW ON PARTNERSHIPS AND PRIVATE CORPORATIONS
Part I: The Law on Partnerships
General Provisions
Articles 1767-1783
Civil Code

WHAT IS PARTNERSHIP?
Contract - is the meeting of minds between two persons whereby binds himself with respect to the other to give something or to
render some service.
Contract of Partnership - The parties bind themselves to contribute money, property or industry to a common fund with the
intention of dividing the profits among themselves. Two or more persons may also form a partnership for the exercise of a
profession.

OTHER CONCEPTS OR DEFINITION OF PARTNERSHIP

A partnership is an association of two or more persons to carry on as co-owners for a business for profit.
A partnership is a legal relation based upon the expressed or implied agreement of two or more competent persons whereby they
unite their property, labor or skill in carrying on some lawful business as principals for their joint profit.
A partnership is a joint undertaking to share in the profit and loss.
A partnership is an agreement to share as common owners; the profits of a business carried on by all or any of them on behalf
of all of them.
A partnership is an organization for the production of income to which a partner contributes one or both of the ingredients of
income, which are capital or service.
A partnership is an entity distinct and apart from the partners composing it.

“Two or more persons may also form a partnership for the exercise of a profession.”
The law does not allow individuals to practice a profession as a corporate entity. A profession deals with personal
qualifications for example, good moral character, college degree, age. Such qualifications cannot be possessed by a corporation.

CHARACTERISTICS ELEMENTS OF A PARTNERSHIP

1. Consensual - perfected by mere consent, express or implied.
2. Nominate - It has special name or designation in our law.
3. Bilateral - The rights and obligations arising therefrom are always reciprocal.
4. Onerous - Each of the parties aspire to procure for himself a benefit through the giving of something.
5. Commutative - The undertaking of each of the partner is considered as the equivalent of the others.
6. Principal - It does not depend for its existence or validity upon some other contract.
7. Preparatory - It is entered into as means to an end that is engage in business for the realization of profit to be divided
among the partners.

ESSENTIAL FEATURES OF A PARTNERSHIP

1. There must be a valid contract.
a) Parties must have a legal capacity to enter into a contract. The following cannot give consent:
 Unemancipated minors
 Insane or demented persons
 Deaf mutes who do not know how to write
 Persons who are suffering from civil interdiction
 Incompetents who are under guardianship
b) No one can become a member of the partnership without the consent of all the other partners (elements of delectus
personae).
c) It can be informally created, but it is customary to embody the terms of the association in a written document known
as Articles of Partnership.
d) Partnership excludes all other association which cannot have their origin in a contract. There is a partnership
created by law.
2. There must be a mutual contribution of money, property or industry to a common fund.
3. The object must be lawful.
4. The purpose must be to obtain profits and to divide the same among the partners.
5. The Articles of Partnership must be kept secret among the members.

SHARING OF PROFITS
Not necessarily in equal shares.
 Based on Agreement
 Based on Capital Contribution
Not conclusive evidence of partnership.
 It is evidence but rebuttable

SHARING OF LOSSES
Consequence of not having profit.

JURIDICAL PERSONALITY
A legal entity created by the law which is not a natural person, such as corporation created under state statutes.
Personality separate and distinct from that of each of the partners.
Legal entity having a distinct identity and legal rights and obligation under the law.

FAILURE TO COMPLY WITH STATUTORY REQUIREMENTS

Execution of a public instrument and registration with the SEC if capital exceeds 3,000.
Even in case of failure to comply, juridical personality is still acquired.

RULES TO DETERMINE IF A PARTNERSHIP EXISTS

1. Persons who are not partners as to each other are not partners as to third persons.
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 Matter of Intention
 Partnership of Estoppel
 Where persons by their acts, consents or representation have misled third persons into believing that they
are partners, they become involve to all who in good faith
2. While co-ownership is an essential element of partnership, it does not of itself establish the existence of partnership.

Partnership Co-ownership
Created by a contract. Created by law.
Has a juridical personality. No juridical personality.
Purpose is to realize profit. Purpose is the common enjoyment of a thing or
right.
No limitation of duration. The thing should not be undivided for more than ten
years.
Individual interest of a partner may not be A co-owner may freely dispose his interest.
disposed, to make the assignee a partner unless
agreed upon by all of the partners.
In the absence of a stipulation to the contrary, a A co-owner cannot represent the co-ownership.
partner may bind the partnership.
Death of a partner results in the dissolution of The death of a co-owner does not necessarily
the partnership. dissolve the co-ownership.

3. The ordinary sharing of gross returns does not indicate a partnership.

4. The receipt of a person of a share of the profits in prima facie evidence that he is a partner, except if profits are received
in payment of;
 Debt, wages of employees, rent to a landlord, annuity to a widow of a deceased partner, interest on a loan,
consideration for the sale of goodwill of business or other property.

CONJUGAL PARTNERSHIP OF GAINS

Formed by the marriage of husband and wife, the fruits and income from their separate properties and those acquired through
their efforts or by chance or place in a common fund.
Upon the dissolution of the marriage, divide equally the net gains or benefits obtained by either or both of them during the
marriage.

Business Partnership Conjugal Partnership of Gains

Arises when future spouses (a man and a woman)
Created by voluntary agreement of two or more agree that it shall govern their property relations
partners of either sex. during marriage.
As a rule, it is governed by the stipulations of Governed by law.
the parties.
It has a juridical personality. No juridical personality.
It commences from the moment the contract is Begins on the date of the celebration of the
executed. marriage.
Primary purpose is to obtain profits. To regulate the property relations during marriage.
Profits are divided according to agreement. Profits are divided equally.
Management belongs to the spouses jointly but the
Management is shared equally, unless a manager/s is husband’s decision shall prevail in case of
appointed. conflict.

OBJECT OR PURPOSE OF PARTNERSHIP

Must be lawful.
For the common benefit of the members.

EFFECTS OF UNLAWFUL PARTNERSHIP

The contract is void ab initio and the partnership never existed in the eyes of the law.
The profits shall be confiscated in favor of the state.
The instruments or tools or proceeds of the crime shall also be confiscated.
The contributions of the partners shall not be confiscated unless they fall on item above.
INSTANCES OF UNLAWFUL OBJECTS
1. Creation of illegal monopolies or combinations in restraint of trade.
 A new market structure characterized by a single seller, selling a unique product in the market.
 In a monopoly, the seller faces no competition, as he is the sole seller of goods with no close substitute. He enjoys
the power of setting the price for his goods.
2. To carry on gambling.
3. Smuggling products.
4. Leasing a furnished apartment to prostitutes.
5. Preventing competition in bidding of government contracts.
 Soliciting any gift or promise as a consideration for refraining from taking part in the public auction.
 The intent is the reduction of the price of the thing auctioned.

FORMS OF PARTNERSHIP CONTRACT

No special form is required.
 Either orally or in writing except :
a) When immovable property on real rights are contributed in which case a public instrument must be executed.
 An inventory of property contributed must be made, signed by the parties and attached to the public
instrument.
 If this is not complied with, the contract of partnership is void.
b) If the capital contribution is P3,000 or more the contract must;
 Must be in public instrument.
 Must be registered with the Securities and Exchange Commission (SEC).
 Failure to comply does not prevent the formation of a partnership or affect its
liability and that of the partners to third persons.
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WHY IS REGISTRATION NECESSARY?

A condition for the issuance of licenses to engage in business.
A way for the public to determine their membership and capital before dealing with them.
To avoid evasion of tax liabilities.

ACQUISITION AND CONVEYANCE

Immovable properties shall be acquired in the name of the partnership.
The title acquire can be conveyed only in the partnership name.

EFFECTS WHEN THE ARTICLES OF PARTNERSHIP IS KEPT SECRET

If the partnership articles or agreements are kept secret among the members and when anyone of them may contract in his own
name with third persons, the partnership is deprived of juridical personality.

IN A PARTNERSHIP :
The partners are merely agent who cannot act alone.
Article of Partnership are known to all partners and to the general public.

CLASSIFICATIONS OF PARTNERSHIP
1. As to its object
a) Universal Partnership
 Universal Partnership of all present property
 Universal Partnership of profits
b) Particular Partnership (for specific undertaking)
2. As to liability of the partners
a) General Partnership
b) Limited Partnership
3. As to its duration
a) Partnership at will – can be terminated at the will of any partner.
b) Partnership with a fixed term.
4. As to legality of existence
a) De Jure Partnership
b) De Facto Partnership – not yet completed legal requirements.
5. As to representation to others
a) Ordinary or Real Partnership
b) Ostensible Partnership or Partnership by Estoppel
6. As to publicity
a) Secret Partnership
b) Open Partnership
7. As to purpose
a) Commercial or Trading Partnership
b) Professional Partnership

KINDS OF PARTNERS
1. Capitalist Partner
2. Industrial Partner
3. General Partner
4. Limited Partner
5. Managing Partner (Real Partner)
6. Liquidating Partner
7. Partner by Estoppel
8. Continuing Partner
9. Surviving Partner
10. Sub-Partner

OTHER KINDS OF PARTNERS

1. Ostensible Partner
2. Secret Partner (active but known)
3. Silent Partner (known but not active)
4. Dormant Partner (secret and silent)
5. Original Partner
6. Incoming Partner
7. Retiring Partner

UNIVERSAL PARTNERSHIP OF ALL PRESENT PROPERTY

The partners contribute all the properties which actually belong to each of them at the time of the formation of the
partnership to a common fund with the intention of dividing the same among themselves as well as the profits which they may
acquire therewith.
The following become the common property of all the partners;
 Property which belonged to all of them at the time of the partnership formation.
 Profits that may be acquired from the property contributed.
As a general rule, future properties cannot be contributed.

UNIVERSAL PARTNERSHIP OF PROFITS

The partners retain their ownership over their present and future property. What the partnership acquires are the profits and usufruct
or use of the same.
Profits acquired through chance are not included.
Fruits or property subsequently acquired do not belong to the partnership.

PRESUMPTION: UNIVERSAL PARTNERSHIP OF PROFITS

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If the nature of the universal partnership is not specified if it is of present property or of profits, the law presumes that
it is a partnership of profits.

PERSONS WHO CANNOT ENTER INTO A UNIVERSAL PARTNERSHIP

1. Persons prohibited by law to give donations.
 Husband and wives; donations or grants of gratuitous advantage between the spouses during the marriage shall be void,
except moderate gifts, on the occasion of family rejoicing.
2. The above prohibition also applies to persons living together as husband and wife, even without a valid marriage.
3. Between persons who were guilty of adultery or concubinage at the time of donation.
4. Between persons found guilty of same criminal offense in consideration thereof.
5. Those made to a public officer or his wife, descendants or ascendants by reason of his office.

PARTICULAR PARTNERSHIP
Has for its object, determinate things, their use of fruits or a specific undertaking*, or the exercise of a profession or
vocation.
* A partnership may be formed for a single transaction or enterprise as distinguished from one organized for carrying on a
general business.
 Hence, a business of partnership need not be continuing in nature.

Chapter 2
Obligations of the Partners
Articles 1784 – 1827
Civil Code

Section 1
OBLIGATIONS OF THE PARTNERS AMONG THEMSELVES
What is Obligation?
An obligation is a juridical necessity to give, to do or not to do.
A tie or bond by which one is bound in favor of another to render something.
May consist in:
 Giving a thing
 Doing a certain act
 Not doing a certain act

SOURCES OF OBLIGATIONS
Law
Contracts
Quasi-contracts
Acts or omissions punished by law
Quasi-delicts

WHAT IS A PARTNERSHIP?
Contract of Partnership
The parties bind themselves to contribute money, property or industry to a common fund, with the intention of dividing the
profits among themselves.
Two or more persons may also form a partnership for the exercise of a profession.

RELATIONSHIPS CREATED BY A CONTRACT OF PARTNERSHIP

Example: J & K formed a partnership named L & M. N, a third party is their client. What are the relationships created?
Between J & K (partners among themselves)
Between J & K and L & M (partners with the partnership)
Between L & M and N (partnership with third person)
Between J & K and N (partners with third party)

COMMENCEMENT OF PARTNERSHIP
A partnership exist from the moment the contract is perfected by mere consent, however,
 The partners may specify some other date for the commencement of the partnership.
 If the agreement is only to enter into the contract of partnership at a future time, no partnership exists at the
moment.

PARTNERSHIP WITH A FIXED TERM

The term of its existence has been agreed upon expressly or impliedly.
Automatic dissolution happens when the term had expired.
The partnership may be extended or renewed by express agreement or impliedly by the mere continuation of the business without
liquidation.
 It becomes a partnership at will.
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OBLIGATIONS TO PROPERTY CONTRIBUTION
1. To contribute at the beginning of the partnership or at the stipulated time what he had promised.
2. To answer for eviction in case the partnership is deprived of the contributed determinate property.
3. To provide for the fruits of the delayed property contribution up to the time of actual delivery.
4. To preserve the property pending delivery to the partnership.
5. To indemnify the partnership for any damaged caused by the delay.

APPRAISAL OF GOODS OR PROPERTY CONTRIBUTED

Necessary to:
 Determine the partners’ capital contribution
 In the absence of stipulation, the share of the partners in the profits and losses is in proportion to the capital
contribution
How is appraisal done?
 In the manner prescribed in the contract
 In the absence of stipulation, by experts chosen by the partners, in accordance with current prices
 In the case of immovable property, the appraisal is made in the inventory of said property.

OBLIGATIONS PERTAINING TO CONTRIBUTION OF MONEY

1. To contribute on the date due.
2. To pay the agreed interest if contributions not made on time. The liability accrues from the time of the delay.
3. To reimburse any amount plus interest if he have taken money for his own use.
4. To indemnify the partnership for damages caused by the delay or the conversion of any sum for his personal benefit.

PROHIBITION AGAINST ENGAGING IN OTHER BUSINESS

Industrial Partner
1. Cannot engage in any business without the express permission of the partnership.
2. In case of violation, the capitalist partners have the right to either exclude him or to avail themselves of the benefits
obtained by him.
3. The guilty industrial partner is also liable for damages.

Capitalist Partner
1. Prohibition is only to any operation of the same kind of business.

Equal Capital Contribution

The partners’ contribution is presumed to be in equal shares. Except:
 If there is a stipulation to the contrary.
 Industrial partners are not covered, unless there is an agreement that besides his services, he also contributes
capital.

ADDITIONAL CONTRIBUTION REQUIRED FROM PARTNERS IN CASE OF IMMINENT LOSS

If there is no agreement to the contrary, a capitalist partner is bound to contribute additional share to save the venture.
If he refuses, he is obliged to sell his interest to the other partners.
The industrial partner is exempted from this rule.

OBLIGATION OF MANAGING PARTNER WHO COLLECTS DEBT

Example: O is the managing partner of Q & R, a partnership formed with P. S owes O Php 3,000 and also owes Q & R Php 6,000. Both
amounts are due and demandable. O collected Php 4,500. If O issued a receipt to collect his credit,
How much should go to him? Php 1,500
How much should go to the partnership? Php 3,000
 The collection should be applied proportionately.

Using the same cases, if O issued a receipt only for the account of the partnership,
How much should go to him? None.
How much should go to the partnership? Php 4,500
 If the receipt is issued for the account of the partnership, the amount shall be fully applied to the partnership.

Using the same cases, if the debt of S to Q & R does not bear interest while his debt to O bears an annual interest of 12%,
Can S choose to pay O? Yes, the debt to O being more onerous.

Using the same case, if S owes P Php 4,500 and P is the one who collected and issued a receipt only for his credit,
Can he apply the whole amount to his own credit? Yes, the rule to apply the amount proportionately pertains only to a managing
partner.

Using the same case, if there is no agreement as to the manner of management and O is the one who collected and issued a receipt, can
he apply the whole amount to his own credit?
No, in this case, every partner is considered a managing partner, so there should be a proportionate application, except:
 If the receipt is given under the partnership name, or
 If the debt to O is more onerous and S chose to pay him.

OBLIGATION OF A PARTNER WHO RECEIVED HIS SHARE OF PARTNERSHIP CREDIT

Example: T owes partnership U and Company Php 3,000. W, a partner previously received a share of Php 1,500 and he issued a receipt for
his share only. When other partners X & Y are collecting from T, they are not able to collect as T had become insolvent.
Can X & Y compel W to share the Php 1,500 with them? Yes, based on the community of interest among the partners, which is one
of the underlying principles of the contract of partnership.

OBLIGATION OF A PARTNER AT FAULT FOR DAMAGES TO PARTNERSHIP

Negligence (fault or culpa)
Any voluntary act or omission there being no malice which prevents the normal fulfillment of an obligation.
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If the partnership suffered damages due to a partner’s negligence, can that partner be obliged to indemnify the partnership?
Yes, any person guilty of negligence or fault shall be liable for damages.

Can the guilty partners compensate or offset the damages with the profits and benefits which he may have earned for the partnership?
No, it is the obligation of a partner to obtain profits and benefits for the partnership, therefore, whatever he had earned,
belongs to the partnership.
It is also the obligation of the partner to exercise diligence in the performance of his duties as a partner.
Exception. As a rule of equity, if unusual profits are gained through the extraordinary efforts of the negligent partner, the courts
are authorized by law to mitigate his liability.

RISK OF LOSS THINGS CONTRIBUTED

a. Borne by the partner
 Specific and determinate things which are not fungible where only the use is contributed.
b. Borne by the partnership
 Specific and determinate things, the ownership of which is transferred to the partnership.
 Fungible things or things which cannot be kept without deteriorating even if they are contributed only for the use of
the partnership.
 Things contributed to be sold.
 Things brought and appraised in the inventory.

RESPONSIBILITY OF A PARTNERSHIP TO PARTNERS

1. To refund amounts disbursed by the partner in behalf of the partnership.
2. To answer for the obligation the partner had contracted in good faith in the interest of the partnership.
3. To answer for risk in consequence of his management.

“The partner should be free from all faults and had acted within the scope of his authority.”

DISTRIBUTION OF PROFITS
1. In accordance to their profit sharing agreement.
2. If there is no agreement:
 In proportion to their capital distribution.
 The share of the industrial partner is in accordance with what may be deemed just and equitable under the
circumstances.
3. The share of the industrial partner must be satisfied first.

DISTRIBUTION OF LOSSES
1. In accordance to their loss sharing agreement.
2. If there is no agreement:
 In the same manner as the agreed profit sharing, if there is one.
 If there is no agreed profit sharing ratio, then according to their capital contribution.
3. The industrial partner is not liable for the losses.

EXCLUSION OF A PARTNER FROM PROFIT AND LOSS SHARING

1. Stipulation to exclude one or more partners is void.
2. The industrial partner is excluded by law to share in losses.
 Unlike the capitalist partners, he cannot withdraw his services already rendered.
 If there is no profit, then he has labored in vain.

DESIGNATION OF THE SHARE IN PROFITS AND LOSSES

1. Done with the consent of all the partners.
2. Cannot be entrusted to one of the partners.
 The fulfillment of a contract cannot be left to the will of one of the contracting parties alone.
3. Can be assigned to a third party by a common agreement.
 Designation is generally valid unless manifestly inequitable.
 A partner who has begun to execute the decision or who failed to impugn the same within three months can no longer
complain.

POWERS OF A PARTNER APPOINTED AS MANAGER

Each partner in a general partnership shares an equal right in the management of the business, unless otherwise stipulated in the
articles of the partnership.
The partners may also designate a managing partner or allocate functions according to the needs of the business particularly in a large
partnership.
1. If appointed as a manager in the articles of partnership,
 He may execute all acts of administration despite the opposition of his partners, except, when he acts in bad faith.
 His power is irrevocable without just or lawful cause.
 The vote of the partners representing the controlling interest shall be necessary for the revocation of power.
2. If appointed as a manager after the constitution of the partnership,
 His power may be revoked at any time for any cause.

SCOPE OF POWER
A partner appointed as a manager has all the necessary and incidental powers to carry out the object of the partnership,
except,
 When the powers are specifically restricted or expressly withheld.
 When the powers are neither necessary nor incidental to carry out the object of the partnership.

POWERS OF TWO OR MORE MANAGING PARTNERS WHEN THEIR RESPECTIVE DUTIES ARE UNSPECIFIED
Following are the interest of the partners in a partnership:
F = 15%, G = 25%, H = 5%, I = 10%, J = 15%, K = 30%

F, G and H were appointed as managing partners without specification of their respective duties. F entered into a contract. G opposed,
but H concurred. Is the contract valid?
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Yes, the contract is valid. The decision of the majority of the managing partner must prevail.

F, G and H were appointed as managing partners without specification of their respective duties. F entered into a contract. G & H
opposed, but I concurred. Is the contract valid?
No, the contract is not valid. In case of tie, the matter shall be decided by the partners owning the controlling interest.

F, G and H were appointed as managing partners without specification of their respective duties. If the matter is voted upon, F, I & J
are in favor. G & K opposed. Is the contract valid?
No, the partners in opposition own the controlling interest.

Assuming that the votes are as follows: In Favor: F, G & I while Against: H, J & K. Is the contract valid?
It is deemed in the case that the contract is not valid. When the partners are equally divided, those who are against must
prevail.

WHEN UNANIMITY OF ACTIONS IS STIPULATED

Concurrence of all other partners is necessary for the validity of acts, except:
 When there is an imminent danger of grave or irreparable injury to the partnership.
 In routine transactions.
Absence or disability of any of the partners is not an excuse.

WHEN MANNER OF MANAGEMENT HAS NOT BEEN AGREED UPON

All partners are considered managers.
 The action of anyone of them shall bind the partnership.
The consent of all partners is required for any important alteration in the immovable property of the partnership.

CONTRACT OF SUB-PARTNERSHIP
Example: L is a partner with M & N. L agreed that O can take part in his share of the partnership profits. Is the agreement between L
and O valid?
Yes, the agreement is valid.

Using the same case, if the agreement is with the knowledge of M & N, does O become a partner?
No, O does not become a partner even with the knowledge of M & N. Consent is required. As such, O does not acquire the rights
of a partner and is not liable for the partnership debts.

KEEPING OF PARTNERSHIP BOOKS

Should be kept at the principal place of business of the partnership.
Every partner shall have access to and may inspect and copy any of them at any reasonable hour.

FULL INFORMATION OF ALL THINGS AFFECTING THE PARTNERSHIP

All the partners have the duty to render true and full information of all things affecting the partnership upon request or demand.
To any partner
Or to the legal representative of any deceased partner
Or to any partner under legal disability

FIDUCIARY RELATIONSHIP OF PARTNERS

Example: J, P & Q are partners selling automobiles. P purchased ten units using partnership funds from a supplier who offered it at a
promotional discount for a limited time. P then sold the units with a big profit. Does Q have the right to demand for his share in the
profits?
Yes, Q has the right to share in the profits. P is the trustee of the profits derived from the transaction.

1. Duty to act for common benefit.

2. Duty to account his secret and similar profits
3. Duty to make full disclosure of information affecting the partnership.

CAN A CAPITALIST PARTNER ENGAGE IN BUSINESS FOR HIS OWN ACCOUNT?

Yes, a capitalist partner may engage in business for his own behalf as long as the partnership agreement does not prohibit
such activity. Except:
 If the business is the same as, or is in competition with the partnership.
 If there is a violation, the profits shall be brought to the common fund but the violator bears the losses alone.

RIGHTS OF PARTNER TO A FORMAL ACCOUNT

The rights of a partner to be informed of the partnership affairs are already sufficiently safeguarded in Article 1805 and 1806, hence,
as a general rule, a partner is not entitled to a formal accounting during the existence of a partnership. Except:
1. If he is wrongfully exceeded from the partnership business or possession of its property.
2. If the right exist under the terms of any agreement.
3. As provided by Article 1807.
4. Whenever other circumstances render it just and equitable.

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.
3. His rights to participate to the management.

Distinction Property Capital

Variable: May charge with the Fixed: As stipulated not affected
Changes in value changes in the market value of by changes in the market
the assets. structure of the assets.
Inclusions Original capital contributions Combined capital contributions
and all property subsequently made by the partners as fixed in
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acquired including partnership the agreement.
name and goodwill.

PROPERTY RIGHTS OF A PARTNER

1. His rights in specific partnership property.
 He is a co-owner;
a. Equal right of possession of the property for the partnership purposes subject to any agreement between the
partners.
 The right excludes the possession for any other purpose without the consent of his partners. There
is no co-ownership, if there is no ownership.
b. Right is not assignable, except, in connection with the assignment of his rights of all partners in the
same property.
c. Not subject to attachment or execution, except on a claim against the partnership.
d. Not subject to legal support.
2. His interest in the partnership.
 His share of the profits or surplus
 Profits - Net income for a given period of time.
 Surplus - Excess of the assets over the liabilities.

ASSIGNMENT OF A PARTNER’S INTEREST

Example: Can a partner’s interest be assigned to other persons even without the consent of the other partners?
Yes, in the absence of an agreement to the contrary, a partner’s interest maybe assigned (conveyed) to any of his partners or
to a third person.

“Will the partnership be dissolved with the assignment of a partner’s interest?”

No, it will not cause the dissolution of the partnership as the assignee does not become a partner. The status and rights of
the assignor are not affected.

The following rights are not conveyed:

1. To interfere with the management.
2. To require any information or account.
3. To inspect any of the partnership books.

ENTITLEMENTS OF AN ASSIGNEE
1. To receive the profits in accordance to his agreement with the assignor.
2. To make use of the usual remedies provided by law in the event of fraud in the management.
3. To receive the interest of the assigning partner in case of dissolution.
4. To require for an account of the partnership affairs when the partnership is dissolved.
“Thus, the assignee does not become the partner”

SEPARATE JUDGMENT CREDITOR OF A PARTNER

A party to which a debt is owed that has proved the debt in a legal proceeding and that is entitled to use judicial process to
collect the debt.
A party that wins a monetary award in a lawsuit is known as a judgmental creditor until the amount is paid on satisfied.
The losing party, which must pay the award, is known as judgmental debtor.
The process of enforcing the judgmental debt in this way is called execution.

Example: R is a partner with S and T. R is personally indebted to U who was granted by the court a favorable status as a judgment
creditor. R, being insolvent, U asked the same court that R’s interest in the partnership be collected for the payment of his debt
plus interest. Can R’s interest in the partnership be subject to execution?
Yes, a partner’s interest can be executed or charged against his indebtedness. But a partner’s right to specific property
can’t be subjected to attachment or execution.

Using the same case, can the other partner redeem R’s interest prior to foreclosure or to purchase the interest in case of sale, as
may be ordered by the court?
Yes, with the separate property, by any one or more of the partner’s obligations with regards to third persons, or with
partnership property, by any one or more of the partners with the consent of all the partners.
“The redemption or purchase will not cause dissolution.”

Section 3
Obligations of the Partners with Regard to Third Persons
Firm Name
What is Firm?
The name, title or style under which a company transacts business
A commercial house or a commercial enterprise.
A partnership of two or more persons.
The term also implies a “partnership” or a “company”.

The name may be that of:

The surnames of all the partners.
Or the surname of one, or the surnames of more of the members with the addition of “and Company”.
Or individual names wholly distinct from the names of any of the members.

The name must not be misleading:

Not identical with or deceptively similar to a name which was previously used by any other entity.
Or interfere with the rights of others.
Or is contrary to law.
“The firm must be registered with the Department of Trade and Industry (DTI).”

Example: W, who is not a partner, included his name in W, X, Y, Z Partnership. The partnership incurred obligations with A. Can A
compel W to be liable together with X, Y, & Z?
Yes, W becomes liable just like the other partners.
Prepared by: Jayzell A. Monroy

Using the same case, does W obtain the rights of a partner, just like X, Y and Z?
No, W does not obtain the rights of a partner.

Example: W, who is not a partner, included his name in W, X, Y, Z Partnership. W predeceased X, Y and Z. Can W’s name continue to be
included in the partnership name?
No, because W can no longer be held liable.

Using the same case, assuming X, predeceased Y and Z, can X’s name continue to be included as part of the partnership’s name?
Yes, Rule 302 of the Code of Professional Responsibilities. Provided that the firm indicates in all its communication that
said partner is deceased.

NATURE OF LIABILITY OF PARTNERS FOR THE PARTNERSHIP CONTRACTUAL OBLIGATIONS

Example: B is an industrial partner with C and D as general partners in BCD Partnership which became insolvent. The capital
contributions of C and D are P150,000 and P50,000 respectively. The partnership is indebted to E for P290,000. How much can E recover
from each of the partners?
From B P 00,000
From C P 217,500
From D P 72,500

1. Liability is subsidiary on secondary, the partners become liable only after all the partnership assets have been exhausted.
Assets P 200,000
Liabilities P 290,000
Deficit P 90,000
 From B P 00,000
 From C P 67,500
 From D P 22,500

2. Pro rata as used in this article means equally or jointly, not proportionately. It is based on the number of partners and not
on the amount of their capital contributions, subject to an adjustment among the partners.
 From B P 30,000
 From C P 30,000
 From D P 30,000

“The industrial partner is exempted from sharing the losses as stated in the Article 1797, while Article 1816 refers to liabilities.”
Example: B, C and D are all general partners in BCD Partnership which became insolvent. The capital contributions are P100,000 each
with the agreement that B’s liability shall not exceed his capital contribution. After the partnership assets had been used up to
settle the liabilities, P60,000 remains unsettled with creditor E. How much can E recover from each of the partners?
From B P 20,000
From C P 20,000
From D P 20,000

“The agreement to except a partner from pro rata and subsidiary liability imposed by Article 1816 is void as against third parties,
this is to protect the interest of third parties dealing with the partnership.”

Using the same case, can B recover P10,000 each from C and D so he can get back his P20,000 because of the stipulation that his
liability shall not exceed his capital contribution?
Yes, the agreement is valid among the partners.

Example: The partnership of F, G and H has for its business the buying and selling of real estates. H is not authorized to trade with
customers, however, he signed a purchase agreement with I to sell a unit of the real estate. I is not aware of the prohibition upon H.
Is the sale to I obligatory upon the partnership?
Yes, the sale is binding upon the partnership even if H had no authority because it is clear that it is for the carrying of
the business in a usual way.

Using the same case, assuming that I is aware of H’s absence of authority, is the sale to I binding upon the partnership?
No, the sale does not bind the partnership because H does not have authority and I is aware of that.

Example: Partners J, K and L own a merchandising firm retailing consumer goods. L received a very attractive offer from an entrepreneur
M who wants to buy the land and building where J, K and L are conducting business. L agreed to sell the land. Will the agreement of L
and M bind the partnership?
No, the sale is not apparently for carrying on of business in the usual way.

Using the same case, where can L’s action bind the partnership?
When the action is authorized by the other partners.

INSTANCES WHEREIN PARTNERS HAVE NO AUTHORITY

1. Assign the partnership property in trust for creditors or on the assignee’s promise to pay the debts of the partnership.
2. Dispose of the goodwill of the business.
3. Do any other act which would make it impossible to carry on the ordinary business of a partnership.
4. Confess a judgment.
5. Enter into a compromise (settlement) concerning a partnership claim or liability.

CONVEYANCE OF REAL PROPERTY BELONGING TO THE PARTNERSHIP

What is Conveyance?
Transfer of ownership or interest in real property from one person to another by a document, such as a deed, lease, or
mortgage that transfers legal title from the seller to the buyer.

Example: N & Co. is engaged in the real estate business. One of the partners, O, sold to Q a land registered in the name of the N & Co.
O, without authority which is not known to Q. The conveyance is executed in the name of the partnership. Can N & Co. recover the
property?
No. The sale is done in the usual way of business, therefore ownership is conveyed.

Using the same case, assuming that Q is aware that O does not have authority, can N & Co. recover the property? Why?
Prepared by: Jayzell A. Monroy
Yes, even of the sale is done in the usual way of business. Q acted in bad faith as he has lack of knowledge in authority.

Using the same assumption that Q is aware that O does not have authority but then Q had already the property to R who had no knowledge
of O’s lack of authority, can N & Co. recover the property from R?
No, R acquired the ownership in good faith.

Example: S & Co. normal course of business is the buying and selling of land. One of the authorized partners T, executed a sale of S &
Co.’s land in his own name. The sale was made to V. Does V, who is buyer in good faith, become the owner of the land?
No, V gets only the equitable interest of S & Co. V does not obtain even an equitable interest. If S & Co. is not engaged in
buying and selling of land, or if T does not have authority and V is aware of that.

Example: S & Co. normal course of business is the buying and selling of land. One of the authorized partners, T, executed a sale in his
own name. The land sold is registered in the name of T, and there is no disclosure in the records about the rights of S & Co. The sale
was made to V. Does V become the owner of the land?
Yes, the ownership is conveyed to V.

Using the same case, assuming the title of the land is in the name of T, in trust for the partnership and the sale is executed under
his name, is ownership conveyed to V?
No, only the equitable interest of S & Co. is conveyed to V.

Assuming that the sale is executed under the partnership name, is the ownership conveyed to V?
No, only the equitable interest of S & Co. is conveyed to V. The rule is the same.

Using the same case, assuming that the title of the land is in the name of all partners, and the sale is executed in all partners, is
ownership conveyed to V?
Yes, the conveyance executed by all the partners passes all their rights in said property.

ADMISSION OF REPRESENTATION BY ANY PARTNER

What is Admission?
Any act, assertions or statement made by a party to an action that is offered as evidence against that party by the opponent.
A defendant’s failure to deny or his voluntary acknowledgement of the truth of an allegation in a complaint, counterclaim or
request for admissions.
Evidence against the partnership if made by any of partner concerning partnership affairs, within the scope of his authority.

Example: A case if filed against W & Co. The partnership is made up of the partners W, X, Y & Z. The notice of the complaint was served
to W only. Is the notice to W sufficient as notice to the partnership or to all the partners?
Yes, notice to any partner relating to partnership affairs operates as a notice to, or knowledge of, the partnership except in
case of fraud.

Example: On behalf of the partnership, D, a partner, purchased a piece of land from G. Before the execution of the purchase, D obtained
knowledge that H has filed a case to recover the land from G. However, D did not communicate the information to the partnership.
Afterwards, H was able to repossess the land. Can G be made liable?
No, the knowledge of D is sufficient knowledge of the partnership.

Using the same case, except that the knowledge of D was acquired by him before he became a partner, can G be made liable?
No, even if the knowledge is acquired before D become a partner, such knowledge is assumed to be “then present to his mind”
unless, the partnership proves otherwise.

EFFECT OF NOTICE TO, OR KNOWLEDGE OF A PARTNER AFFECTING PARTNERSHIP AFFAIRS

Three cases of knowledge of a partner:
1. Knowledge of a partner acting in the particular matter acquired while a partner;
2. Knowledge of a 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.

Example: On behalf of the partnership, D, a partner purchased a piece of land from G. Before the execution of the purchase, partner E
obtained knowledge that H has filed a case to recover the land from G. E could and should have communicated the information to D, the
acting partner, or to the partnership, but he did not. Afterwards, H was able to repossess the land. Can G be made liable?
No, the knowledge of partner operates as knowledge of the partnership.

Example: On behalf of the partnership, D, as a partner, purchased a piece of land from G. Before the execution of the purchase, D,
obtained knowledge that H has filed a case to recover the land from G. However, D did not communicate the information to the
partnership for a consideration promised to him by G. Afterwards, H was able to repossess the land. Can G be made liable?
Yes, Article 1821 says, except in the case of fraud commitment by a partner or with the consent of that partner.

SOLIDARY LIABILITY OF PARTNERS ARISING FROM PARTNERS WRONGFUL ACT OR OMISSION

Anyone of them can be made liable for the fulfillment of the entire obligations. Requisites (1822);
1. The partner must be guilty of a wrongful act or omission, and;
2. The partner must be acting in the ordinary course of business or with the authority of his co-partners.

SOURCE OF LIABILITY
Misapplication of money or property of a third person received by;
 One partner acting within the scope of his apparent authority.
 The partnership in the course of its business and misapplied by any partner while it is in the custody of the
partnership.

PARTNERSHIP BY ESTOPPEL
1. One who directly represents himself to anyone as a partner in an existing partnership or in a non-existing partnership.
2. One who indirectly represents himself by consenting to another representing him as a partner in an existing or in a non-
existing partnership.

LIABILITY
When all the actual partners considered to the previous representation, a partnership liability exists.
Prepared by: Jayzell A. Monroy
When not all of the actual partners consented, then the liability of the person and the consenting partners is joint or pro
rata.
When none of the actual partners consented, the liability is separate.
When there is no existing partnership and all those represented as partners consented, the liability is joint and pro rata.
When there is no existing partnership and not all those represented as partners consented, the liability is separate.

LIABILITY OF INCOMING PARTNER

Example: J is admitted as a new partner into the partnership of K, L & M. J’s capital contributions is P10,000, while K, L & M
contributed P30,000 each. When J was admitted, the partnership is indebted to the bank for P145,000. Thus, exhausting the assets with a
deficit of P45,000. Is J also liable for the indebtedness to the bank?
Yes. He is liable for all the obligations of the partnership arising before his admission.

Using the same case, aside from his capital contribution, how much is J’s liability out of his separate property?
None. J’s liability shall be satisfied only out of the partnership property.

PREFERENCE OF PARTNERSHIP CREDITORS IN PARTNERSHIP PROPERTY

The creditors of the partnership are paid first before the private or personal creditors of each partner are paid as regards
to the assets of the partnership.
The private creditors of each partner may ask for the attachment and public sale of the share of the partner in the
partnership assets.
Attachment: A legal process by which a court of law at the request of a creditor designates specific property owned
by the debtor to be transferred to the creditor or sold for the benefit of the creditor.

Chapter 3
DISSOLUTION AND WINDING UP
DISSOLUTION OF PARTNERSHIP
What is Dissolution?
The change in the relation of the partners caused by any partner ceasing to be associated in the carrying on of the business.
Upon dissolution, the partnership is not yet terminated.
However, dissolution terminates the authority of the partners to act on behalf of the partnership except for winding up or
completing transactions that are unfinished at the time of dissolution.

CAUSES OF DISSOLUTION
a) Voluntary Dissolution - when caused by the will of one or more or all of the partners.
1. Without violation of the agreement between the partners:
a) Termination of the definite term or the specific undertaking.
b) The express will of any partner acting in good faith when no definite time or particular undertaking
specified.
c) The express will of all the partners – if done before the termination of the specified time or undertaking,
the agreement must be unanimous, not just majority. Consent of the partners who have assigned their interest
is not required.
d) Expulsion done in good faith, of any partner.
2. In contravention of the agreement:
a) Dissolution may be for any cause or reason:
 Power of dissolution always exists. A partner has the power, although not necessarily the right to
dissolve a partnership even though his co-partners wishes to continue.
 Withdrawing partner is liable for damages but cannot be compelled to remain in the partnership.

b) Involuntary Dissolution - when caused is independent of the will of the partner or by operation of law.
3. The business becomes unlawful.
4. Loss of the specific thing:
a) Before delivery: Partnership is dissolved.
b) After delivery: Partnership is not dissolved.
c) When only use or enjoyment is contributed, partnership is dissolved if the thing is lost either before or
after delivery.
5. Death of any partner, except if the partnership agreement provides that death will not affect the dissolution.
6. Insolvency of any partner or of the partnership:
 The insolvency of a partner makes it impossible for him to satisfy partnership obligations to its creditors
in the event that partnership assets have been exhausted.
 The insolvency of the partnership places its property in the hands of the partners who are liable for the
partnership obligation.
7. Civil Interdiction of any partner
 Civil interdiction deprives the offender during the time of his sentence of the right to manage and dispose
his property by any act or any conveyance inter vivos (not capable of selling the asset).
8. By decree of court under the following (article 1700a and 1701a) on application by or for a partner:
a) Insanity
b) Incapacity
c) Expulsion of a partner – misconduct and persistent breach of partnership agreement.
d) Business can be carried on only at a loss.
e) Other circumstance – abandonment of the business in the management.

9. By decree of court on application by a purchaser of a partner’s interest:

a) After the termination of the specific term or particular undertaking.
b) At any time if the partnership is a partnership at will.

AUTHORITY OF PARTNER UPON DISSOLUTION

Dissolution terminates all activity of any partner to act for a partnership. Except:
Prepared by: Jayzell A. Monroy
In acts needed to complete the winding up.
To complete any transaction begun but not then finished.

IF DISSOLUTION IS CAUSED BY THE ACT, INSOLVENCY, OR DEATH OF A PARTNER

The partnership is bound by a new contract entered into by a partner after dissolution, and;
The other partners are liable for their share of any liability created.
Except;
 If the cause of the dissolution is the act of any partner, and the partner who entered into a contract had knowledge
of the dissolution; or
 If the cause of the dissolution is the death or insolvency of a partner, and the partner who entered into a contract
had knowledge of such death or insolvency.

CASES WHERE A PARTNER CAN BIND THE PARTNERSHIP AFTER DISSOLUTION

1. To wind the partnership affairs or to complete any unfinished transactions.
2. Any transactions which would bind the partnership if dissolution did not happen as long as, the other party;
a) Had extended credit to the partnership prior to the dissolution and had no knowledge, nor notice of the dissolution.
b) Had known of the partnership prior to dissolution and had no knowledge, nor notice of the dissolution.
 Publication in a newspaper is sufficient.

CASES WHERE A PARTNER CANNOT BIND THE PARTNERSHIP AFTER DISSOLUTION

1. Partnership is dissolved because it is unlawful to carry on the business.
2. The partner has become insolvent (can no longer answer unlimited liability).
3. The partner has no authority to wind up partnership affairs.

EFFECTS OF DISSOLUTION TO PARTNERS EXISTING LIABILITY

Does not of itself discharge the existing liability of a partner, except,
 When there is an agreement between the partner, the partnership creditor, and the other partners.
The individual property of a deceased partner shall be liable for all obligations of the partnership while he was a partner.
However, the individual/separate creditor of the deceased partner has priority.

PERSONS AUTHRIZED TO WIND UP

1. The partner designated by the agreement.
2. If there is no agreement, all the partners who have not wrongfully dissolve the partnership.
3. The legal representative of the last surviving partner, not insolvent, or
4. Upon cause, any partner or his legal representative, or his assignee may obtain winding up by the court.

RIGHT OF A PARTNER TO APPLICATION OF PARTNERSHIP PROPERTY ON DISSOLUTION

a) Dissolution Not in Contravention of Agreement
1. To have the partnership property applied to the liabilities of the partnership.
2. To have the surplus, applied to pay in cash, the net amount owing to the respective partners.
b) Dissolution in Contravention of Agreement
1. Partner who has not caused the dissolution wrongfully:
a) To receive in cash his share of the surplus.
b) To continue the partnership in the same name during the agreed term of the partnership.
c) To have the partnership property applied for the payment of its liabilities.
d) To possess partnership property in case they decide to continue.
2. Partner who has caused the dissolution wrongfully:
a) To have the partnership property applied for the payment of its liabilities.
b) To receive in cash his share of the surplus less damages caused by the wrongful dissolution.
c) If the business is continued,
 To have the value of his interest in the partnership at the time of dissolution ascertained and
paid in cash or secured by bond approved by the court.
 To be released from all existing and future liabilities of the partnership.

RIGHT OF A PARTNER WHEN CONTRACT IF RESCINDED

What is Rescind?
To annul.
To cancel a contract, whether unilaterally or by mutual agreement and restore both parties to status quo onte.

CAN A PARTNER RESCIND THE CONTRACT OF PARTNERSHIP?

Yes if the partner is convinced to become a partner through fraud and misrepresentation. The contract is voidable.
 A contract where consent is given through mistake, violence, intimidation, undue influence, or fraud is voidable.
 Voidable refers to a contract that is valid and binding unless avoided or declared void by a party to the contract
who is legitimately exercising a power to avoid the contractual obligations.

RIGHTS OF INJURED PARTNER WHEN CONTRACT IS RESCINDED

1. Rights of lien on, or retention of, the surplus of the partnership property after satisfying partnership liabilities for any
sum of money paid or contributed by him.
2. Right of subrogation in place of partnership creditors after payment of partnership liabilities.
3. Right of indemnification by the guilty partner against all debts and liabilities of the partnership.

ASSETS OF THE PARTNERSHIP AFTER DISSOLUTION

1. Partnership property including goodwill.
2. Contributions of the partners necessary for the payment of liabilities.

PRIORITIES FOR SATISFYING LIABILITIES AFTER DISSOLUTION

1st those owing to partnership creditors.
2nd those owing to partners other than capital and profits.
3rd those owing for the return of the partners’ capital contribution.
4th the share of the profits due to each partner.
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RIGHT OF A PARTNER WHEN ASSETS ARE INSUFFICIENT
If the partnership assets are not sufficient to satisfy the liabilities, the partners shall contribute.
The following have the right to enforce the contributions of the other partners:
a) Any partner or his legal representative.
b) Any assignee for the benefit of creditors.
c) Any person appointed by the court.

LIABILITY OF A DECEASED PARTNER’S INDIVIDUAL PROPERTY

It shall be liable for his share of the contributions necessary to satisfy the liabilities incurred while he was a partner.

WHEN PARTNERSHIP PROPERTIES AND INDIVIDUAL PROPERTIES ARE IN THE HANDS OF THE COURT
Partnership creditors shall have priority over partnership assets.
Individual creditors shall have priority over individual assets.

DISTRIBUTION OF PROPERTY OF INSOLVENT PARTNER

1st to those owing to his separate creditor;
2nd to those owing to partnership creditors;
3rd to those owing to partners by way of contribution.

RIGHTS OF CREDITORS OF DISSOLVED PARTNERSHIP WHICH IS CONTINUED

They also become creditors of the person or partnership continuing the business.

LIABILITY OF PERSONS CONTINUING THE BUSINESS OF DISSOLVED PARTNERSHIP

The liability of the new or incoming partners shall be satisfied out of the partnership property only, unless there is
stipulation to the contrary.

RIGHTS OF RETIRING OR OF THE LEGAL REPRESENTATIVE OF DECEASED PARTNER WHEN BUSINESS IS

CONTINUED
1. To have the value of his interest in the partnership ascertained as of the date of dissolution.
2. To receive, as an ordinary creditor an amount equal to the value of his share with interest, or at his option, instead of
interest, the profit attributable to the use of his right.

PARTNER’S RIGHT TO ACCOUNT OF HIS INTEREST

The right to demand an accounting of the value of a partner’s interest arises after dissolution.
Persons who shall render an accounting:
a) The winding up partner, or
b) The surviving partner, or
c) The person/s continuing the business.