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NOTES

IN ATP (PARAS) RACHEL ANDRELEE I. ACAL



DISSOLUTION AND WINDING UP

ARTICLE 1828

The dissolution of a partnership is the change in the relation of the partners


caused by any partner ceasing to be associated in the carrying on as
distinguished from the winding up of the business.

• Definition of Dissolution

ARTICLE 1829

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

• Dissolution is that point of time when the partners cease to carry on the business together.
• Winding up is the process of settling business affairs after dissolution. Examples are paying up of
previous obligations; collecting of assets previously demandable; contracting for new business if
needed to wind up.
• Termination is the point in time after all the partnership affairs have been wound up.

EFFECTS ON OBLIGATIONS:

1. In dissolution, it does not necessarily mean that a partner can evade previous obligations entered
into by the partnership.
2. Generally, dissolution saves the former partners from new obligations to which the have not
expressly or impliedly consented unless the same be essential for winding up.

ARTICLE 1830

• Causes of Dissolution—includes Article 1831 (by decree of court)


• Under Article 1830 causes can be:
1. If there is no violation of agreement (4 instances)
2. If there is violation of agreement
3. Unlawfulness of the business
4. Loss—depends on whether the thing lost is a specific thing contributed or if only the use of the
thing is contributed.
5. Death of any partner
6. Insolvency of any partner
7. Civil Interdiction of any Partner
8. Decree of Court under 1831

• When there is no violation of agreement, the following causes of dissolution could be:
⁃ the termination of the definite term or specific undertaking which if otherwise continued after
the said period, it becomes a partnership at will.
⁃ the express will of a partner—good faith must be present and there is no definite term and no
specified undertaking; leaving in bad faith also dissolves the firm but the guilty party is liable

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for damages.
⁃ the express will of all the partners—except those partners who have assigned or whose
interest have been charged; there can be a dissolution by implied mutual consent of the
partners.
⁃ the expulsion in good faith of a member—in here, there is dissolution because the number of
partners is decreased; expulsion in bad faith can also result to eventual dissolution as there
would be lack of confidence, without prejudice to liability for damages.

• When there is violation of agreement—this happens if a partner withdraws even before the expiration of
the period/definite term, with or without justifiable cause. And if he withdraws without justifiable
cause, there is liability for damages; in no case can a partner be compelled to remain in the firm.

• When the business of the firm becomes unlawful, it follows that it will not be allowed to carry on, hence,
the dissolution. If the business or its object had been unlawful from the beginning, the firm never
had any juridical personality.

• When there is loss of:


⁃ SPECIFIC THING before the delivery, the firm is dissolved since there is lack of contribution; if after
the delivery, the firm bears the loss and the partnership remains
⁃ SPECIFIC THING and only its USE is contributed, the firm is dissolved—even if loss occurred
before or after delivery to the firm, because it is as if there is no contribution; naked owner, having
reserved the ownership, bears the loss.

• When there is death of any partner—known or unknown to others, causes automatic dissolution (but not
automatic termination) because of the decrease in number of partners; it can be total or partial:
partial as when the surviving partners continue the business among themselves; and total, when
the survivors instead of continuing the business proceed to the liquidation of the partnership’s
assets—the status of the firm would be a “partnership in liquidation”; without prejudice to Article
1833

• When there is insolvency of any partner or the partnership; insolvency need not be judicially declared;
there is dissolution because a firm requires solvency or ability to meet the financial demands of
creditors.

• When there is civil interdiction of any partner, he becomes incapacitated to enter into dispositions of
property, inter vivos

• When there is dissolution by decree of court under Article 1831, it must be by final judgment rendered
by a court of competent jurisdiction.

NOTE: The partners cannot decrease the causes of dissolution.

ARTICLE 1831

• Dissolution by court decree or judicial dissolution; in here, proof of the existence of the firm is required.

WHO CAN SUE FOR DISSOLUTION?

a) A partner for any of the 6 causes mentioned in the first paragraph of this article;
b) The purchaser of a partner’s interest in the partnership under Article 1813 or 1814—provided that

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the period has expired or the firm was a partnership at will when the interest was assigned or
charged, otherwise, he cannot sue for the dissolution.

6 CAUSES:

1) Insanity of a Partner—only requires to be duly proven in court; insane partner need not to be
judicially declared insane by the court; causes dissolution because of the incapacity of the insane
partner
2) Incapability to Perform Part—such as when a partner enters into government service prohibiting
him to participate in the firm; or when a partner stays abroad for a long time.
3) Prejudicial Conduct—examples are managing partner failing to hold regular meetings as provided
in the agreement, failure to give proper financial reports, when accounting is unjustifiably refused,
exclusion from the management of one of the authorized managing partners, etc.; but it does not
cover occasional friction among the managers or trivial faults.
4) Persistent Breach of Agreement or Conducting himself in matters relating to partnership business
that it is not reasonably practicable to carry on the business in partnership with him—must be willful
or persistent
5) The business of the partnership can only be carried on at a loss;
6) Other circumstances render a dissolution equitable.

• The court may appoint receiver in a court dissolution but this is not necessary if all the assets of the
firm are in the hands of a sheriff or when the existence of a partnership with the plaintiff is denied

WHEN IS PARTNERSHIP DISSOLVED BY JUDICIAL DECREE?


⁃ at the time the judicial decree of dissolution becomes a final judgment.

ARTICLE 1832

• Effects of Dissolution

GR: Dissolution terminates all authority of any partner to act for the partnership:
ü With respect to the partner:
- when the dissolution is not by the act, insolvency or death of a partner;
or
- when the dissolution is by such act, insolvency or death of a partner,
in cases where Article 1833 so requires.
ü With respect to persons not partners, as declared in Article 1834.

XPN: When the act is necessary to wind up partnership affairs or to complete transactions begun
but not then finished, such act still binds the partnership.

• Contracts and obligations previously entered will not be ceased automatically as this would be unfair.
Thus, the firm is till allowed to collect previously acquired credits; and it is also bound to pay off its
debts. A dissolved partnership still has personality for the winding up of its affairs.
• If the obligations and rights of a dissolved firm are transferred to another firm, the creditors cannot hold
the former firm liable as long as the new firm can indeed take care of the said creditors.

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ARTICLE 1833

• Effects if dissolution is caused by the act, death or insolvency

GR: All the partners are still bound to each other; each partner is liable to his co-partners for his
share of any liability created by any partner acting for the partnership as if the partnership had not
been dissolved.

XPN: 2 instances:
ü If the dissolution being by the act of any partner, the partner acting for the
partnership has KNOWLEDGE of the dissolution; or
ü If 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.

In these cases, only the partner acting assumes liability. The firm maybe held by strangers
and even if the partners will still be individually liable, still the other partners can always
recover from the partner acting.

2 KINDS OF CAUSES FOR DISSOLUTION

1. By A.I.D. (act, insolvency, death)


2. By other things like termination of the period.

KNOWLEDGE v. NOTICE

“Knowledge”- implies actual knowledge


“Notice”- implies lack of actual knowledge; e.g. hearsay; sufficient if the fact to be notified is an
ordinary business fact.

• Note that for the general rule to apply—partners are bound, the third person with whom an acting
partner transacted must be in good faith. The third person must not have known about the dissolution
otherwise, the firm cannot be held liable. Neither can the other partners not acting be liable and later
be reimbursed.

ARTICLE 1834

• This provision provides when a partnership is bound and not bound to strangers.
• If a partnership is bound to strangers, a partnership liability is created.

WHEN IS A PARTNERSHIP BOUND TO STRANGERS?

ü If the act is appropriate for winding up partnership affairs or completing transactions


unfinished at dissolution—like selling firm property/mortgaging firm assets to pay off
partnership debts;
ü If the act is for a completely new business with innocent third persons, a transaction which
would bind the partnership if dissolution had not taken place, provided that the third person:
o Had extended credit to the partnership before its dissolution and had no
knowledge or notice of the dissolution—thus he was a previous creditor;
or
o Had known of the partnership before its dissolution—though he has not

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extended credit, and having no knowledge or notice of dissolution since
the same has not been advertised in a newspaper of general circulation
(…) (If a partner had been unknown as a partner to the person with whom
the contract is made; and had been unknown and inactive in the
partnership affairs to the point that the business reputation of the
partnership could not be said to have been in any degree due to his
connection with it, the liability of such partner shall be satisfied out of
partnership assets alone.)

ILLUSTRATION: Amy, Ben and Cat are partners. Amy dies. Ben knew about
the death of Amy but still, he later transacts a new business with Dom. The
business was not connected with winding up. A notice of dissolution was
published in the news paper but Dom did not read the notice. Thus, when Dom
transacted with Ben, the former thought that the firm had not yet been
dissolved.

If Dom had been a previous creditor, is the firm liable?


- YES. Under Art. 1834 (par. 1, no. 2 (a)). But later on, as among
partners, Ben alone will be liable since Ben knew about Amy’s death.

If Dom had never extended credit before, is the firm liable?


- NO. The publication of the dissolution precludes the firm from being
liable. It is Dom’s fault that he did not read the advertisement. Only
Ben will be personally liable to Dom. But if there has been no notice
of the dissolution and Dom did not actually know of the same, the firm
would be liable.

ILLUSTRATION: Amy, Bob and Cat are partners. Amy withdraws. Bob knows
about this but he still entered into a new contract with Dom—a previous
creditor of the firm who had no actually knowledge of the dissolution. Also,
Dom did not Cat to be ever a partner of the firm, so it could not be because of
Cat that Dom had transacted the business.

Is the firm liable?


- YES.

If the partnership assets are insufficient, can Dom go after the individual
properties of the partners?
- YES, except with reference to Cat because her liability shall only be
satisfied out of the partnership assets alone, as the law provides.

WHEN IS A PARTNERSHIP NOT BOUND TO STRANGERS?

ü In all instances not included in Article 1834 (par 1), if the business is:
o not for winding up
o not for completing unfinished transactions
o a completely new business but the third person to whom is was transacted
with is in bad faith.
ü When the firm was dissolved because it was unlawful to carry on the business; but the firm is
still bound if the act is for winding up;
ü When the partner that acted in the transaction has become insolvent.
ü When the partner is unauthorized to wind up; but if the third person transacted with is in good
faith the firm is still bound.

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• If after dissolution a stranger will represent himself as a partner although he is not one, he will be a
partner by estoppel. (Art. 1825)

ARTICLE 1835

DISCHARGE OF LIABILITIES OF PARTNERS


- Generally, dissolution of partnership does not presuppose automatic discharge of existing
liability of any partner. Otherwise, creditors would be prejudiced.

HOW IS A PARTNER DISCHARGED FROM LIABILITY?


- There must be an agreement of such discharge by the following:
ü Partner to be discharged
ü Co-partners
ü Creditors

• A deceased partner’s estate is still liable for his share in the partnership obligations incurred while he
was still a partner but his individual (personal) creditors shall be preferred over the firm creditors.
• The death of a partner while an action for accounting is pending discontinues such action and the suit
must be conducted in the settlement proceedings of the deceased’s estate—if desired by the
administrator of the deceased partner’s estate. To substitute his heirs in the action for accounting is
erroneous.
• If there is a novation of the old partnership debts and the novation is done after one of the partners has
retired and there is absence of consent on the part of the retired partner for such novation, the said
partner cannot be held liable by creditors who made the novation with knowledge of the firm’s
dissolution.

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.

• Winding up is the process of settling business affairs after dissolution. Some examples of winding up
are: paying of previous obligations, collecting of assets previously demandable, even the contracting
of a new business if the same is necessary for winding up.
• Winding up can be EXTRAJUDICIAL or JUDICIAL

EXTRAJUDICIAL WINDING UP
- The following have the right to wind up firm affairs extra-judicially:
ü Partners who have not wrongfully dissolved the partnership; or
ü Legal representative of the last surviving partner provided that:
o All the partners are already dead
o The last surviving partner was not insolvent.
ü Managing Partners if the have the necessary authority to liquidate the firm’s
affairs under its articles of partnership (Paras example)

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JUDICIAL WINDING UP
- The winding up of partnership affairs done with the control and direction of the court
- Requires proper cause which must be shown to the court.
- The person to wind up is appointed by the court who must not be a legal representative of a
deceased partner but should be instead a surviving partner. (Po Yeng Cheo v. Lim Ka Yam)
- However, the petition for judicial winding up can be done by the following:
ü Any partner; or
ü His legal representative; or
ü His assignee.

• If the surviving member of the firm is not the general manager or administrator thereof, he is not
required to serve as liquidator thereof without compensation.

PROFITS
- The excess of revenues over expenses over a transaction; the gain realized from business or
investment over and above expenditures. Thus, these are supposed to accrue only during the
existence of the partnership before dissolution.
- Profits accumulated as a consequence of transactions already made before the dissolution of the
firm are included being profits existing at the time of the dissolution.
- Any other earned after the dissolution are not profits but merely additional income to the capital—
which is to be distributed under the rules of co-ownership, divided in proportion to the amount
of capital given. The agreement as to distribution of profits, if any, is not applicable.

ARTICLE 1837

TWO ASPECTS OF CAUSES OF DISSOLUTION


- A partnership can be dissolved:
ü although the partnership contract is not violated; or
o in here, each partner—as against his co-partner and all persons claiming
through them in respect of their interest in the partnership may:
§ have the partnership property applied to discharge its
liabilities; and
§ have the surplus applied to pay in cash the net amount
owing to the respective partners.
unless otherwise agreed.
o But if dissolution is caused by expulsion of a partner bona fide under
partnership agreement and if the expelled partner is discharged from all
partnership liabilities—either by payment or agreement, he shall receive in
cash only the net amount due him from the partnership.
ü in contravention of the partnership agreement.
o in here, the partners shall have the following rights:
§ As to partners who have not caused the wrongful
dissolution of the firm, they shall have:
1. All rights as if the cause of dissolution is not by
violation of the partnership contract; and
2. The right to damages for breach of agreement
against every partner who has caused the
dissolution wrongfully.
3. The right to continue the business in the same
name—by themselves or jointly with others, during
the agreed term of the partnership;

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4. Pursuant to no. 3, the right to possess the
partnership property provided that they: secure the
payment by bond approved by the court, or pay to
any partner who has caused the dissolution
wrongfully the value of his interest in the
partnership at the dissolution less any damages
recoverable and indemnify him against all present
or future partnership liabilities.

§ As to partners who have caused the dissolution wrongfully


they shall have:
1. All the rights as if the the partnership has not been
dissolved wrongfully subject to liability for
damages. This right is acquired if the business is
not continued by the other partners.
2. The right to have the value of his interest in the
partnership ascertained and paid to him in cash or
the payment secured by a bond approved by the
court, as against his co-partners and all claiming
through them in respect of their interests in the
partnership, less damages. This right is acquired
only if business is continued.
3. The right to be released from all existing liabilities
of the partnership. This right is acquired only if
business is continued.
o NOTE: In the ascertaining of the value of
the partner’s interest, the value of the
goodwill of the business shall not be
considered.

• Innocent partners have better rights than the partners who caused the wrongful dissolution of the firm.
The latter are required to indemnify for the damages they caused.
• On the right of innocent partners to continue the business, there is really a new partnership. They may
use the same firm name and ask new members to join but the rights granted by law to the guilty partners
are safeguarded by: a bond approved by the court, a payment of his interest at the time of dissolution
minus damages, furthermore, the guilty partner excluded will be indemnified against all present or future
partnership liabilities—this is because he is no longer a partner.
• In case of non-continuance of business, the interest of the partner should, if he desires, be given in
cash. In which case, firm assets may be sold for this purpose.
• When a partner is wrongfully excluded in the firm, such partner is innocent partner and the others as
the guilty partners. In which case, the guilty partners must account not only for what is due to him at
the date of the dissolution but also damages, or his share of the profits realized from the appropriation
of the partnership business and good will. He has pecuniary interest in every existing contract that was
incomplete and in the trade name of the co-partnership and assets at the time he was wrongfully
expelled.

ARTICLE 1838

• A partnership contract may be rescinded (or technically, annulled) on the ground of the fraud or
misrepresentation of one of the parties thereto.
• In which case, the party entitled to rescind, among other rights, is entitled:

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ü To a lien on, or the right of retention of, the surplus of the partnership
property 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, after satisfying the partnership liabilities to third persons;
ü To subrogation in place of creditors of the firm for any payments
made by him in respect of the partnership liabilities, after all liabilities
to third persons have been satisfied;
ü To indemnification by the partner guilty of the fraud or making the
representation against all debts and liabilities of the partnership.

ARTICLE 1839

• This provision provides the rules or methods in settling the account between the partners after
dissolution. Its liquidation.
• These are subject to any agreement by the parties to the contrary. However, such agreement must not
be prejudicial to innocent third parties.
• Before liquidation is made, no action for accounting of a partner’s share in the profit or for a return of
his capital assets can properly be made. This is because it is essential to first pay off the creditors.

ASSETS OF THE PARTNERSHIP


1. Partnership property (including goodwill)
2. Contributions of the partners, which are made to pay-off the partnership liabilities.

ORDER OF PAYMENT OF FIRM’S LIABILITIES


1. To creditors who are strangers to the firm;
2. To partners who are also firm creditors for credits which are neither capital nor profits (e.g.
reimbursement of business expenses);
3. To partners as to their capital;
- Capital should be given ahead of profit because it is only the surplus profit over
capital that should be considered as the gain or the profit of the firm.
- An industrial partner, except if he contributed money or property or when there is
a contrary stipulation, is not entitled to participate in the capital.
4. To partners as to their profits.
- If during the liquidation some profits for a certain period cannot be exactly
determined, the court should determine the profit for the said period by finding the
average profits during the period before and after the period of time in question.

• If the partnership assets are insufficient, the other partners must contribute more money or property.
Thus, the following can enforce these contributions:
ü In general, any assignee for the benefit of the creditor, or any person appointed
by the court.
ü Any partner, or his legal representative (to the extent of the amount which he
has paid in excess of the share of the liability)

• When the partnership properties and the individual properties of the partners are in possession of the
court for distribution, the following are the rules of preference with respect to assets:
ü Partnership creditors are preferred regarding partnership properties;
ü Individual creditors are preferred regarding individual properties of the partners.
saving the rights of lien or secured creditors.

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RULES IF THE PARTNER IS INSOLVENT OR HIS ESTATE HAS BECOME INSOLVENT:
− Such insolvent partner’s individual properties shall be distributed in the following order:
1. To his individual or separate creditors;
2. To the partnership creditors;
3. To those owing to the other partners by ways of contribution.
− In here, insolvency does not mean that he has no longer money or property, it is enough that his
assets are less than his liabilities.

ARTICLE 1840

• This provision provides when the creditors of the dissolved partnership are also creditors of the person
or partnership continuing the business.
• Thus, in the following cases, the creditors of the dissolved partnership are also creditors of the person
or partners continuing the business:
1. If the business is continued without liquidation of partnership affairs, when a new partner
is admitted into the partnership, or when any partner retires and assigns (or the
representative of the deceased partner assigns) his rights in the partnership property to
two or more of the partners, or to one or more of the partners and one or more third
persons.
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 the
partnership property;
4. When all the partners or their representatives assign their rights in the 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 newly admitted partner’s liability to the creditors of the dissolved partnership shall be satisfied out
of partnership property only, unless there is a contrary stipulation.
• When the business of a partnership after dissolution is continued under any conditions set forth in this
article, the creditors of the dissolved partnership 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 provision 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.
• The ratio of this provision is for the old firm’s creditors not to lose their preferential rights as creditors to
the partnership property.

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ARTICLE 1841

• This provision provides the rights of retiring partners or of the estate of the deceased partners when
the business is continued without any statement of accounts.
• Hence, this applies only if:
ü A partner retires or dies;
ü The business is continued without settlement of accounts as between him or his estate
and the person or partnership continuing the business;
ü There is no stipulation to the contrary

• A retiring partner or the estate of the deceased partner shall have the following rights:
1. Right to have the value of his interest at the date of dissolution ascertained;
2. Right to receive as an ordinary creditor an equal amount to the value of his interest in
the dissolved partnership with interest; or
3. At his option or to the option of his legal representative, right to profits attributable to the
use of his right in the property of the dissolved partnership

• Creditors of the dissolved partnership as against the separate creditors, or the representative of the
retired or deceased partner shall have priority on any claim arising under this provision as provided by
Article 1840, par. 3.

• As a general rule, a retired partner of the firm is entitled to the payment of what may be due him after
liquidation. But no liquidation is needed when there already is a settlement as to what the retiring partner
shall receive.

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.

• Under this provision, the right to demand the account accrues at the date of dissolution in the
absence of any contrary agreement.
• A legal representative of a partner is also entitled to the accounting under this provision.

POSSIBLE DEFENDANTS:
- The action can be against:
1. The winding up partners; or
2. The surviving partners; or
3. The person or partnership continuing the business.

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LIMITED PARTNERSHIP

ARTICLE 1843

A limited partnership is one formed by two or more persons under the provisions
of the following article, having as members one or more general partners and one
or more limited partners. The limited partners as such shall not be bound by the
obligations of the partnership.

• Definition of limited partnership


• A limited partner is a partner in all respects like any other partner, except that to obtain the privilege of
a limitation on his liability, he has to conform to the statutory requirements in respect to filing a certificate
and refraining from participation in the conduct of the business.
• Failure to follow requirements loses his privilege of limited liability and becomes, as far as those dealing
with the business are concerned, in all respects a partner.

ARTICLE 1844

REQUISITES IN THE FORMATION OF A LIMITED PARTNERSHIP

1. The signing under oath of the required certificate with all the enumerated items under this
provision; and
2. The filing for record of the certificate in the Office of the Securities and Exchange
Commission.

• If there is non-fulfillment of the requisites substantially, the partnership formed is not considered a
limited one but at best, a general partnership. This is because a firm transacting as a partnership is
presumed to be a general partnership.
• If only an aggregate contribution of limited partners is stated, the law is not complied with as it requires
that the contribution of each limited partner must be stated.
• The omission of the term “limited” in the firm name, the same cannot be considered the firm name of a
limited partnership.

THE FOLLOWING MUST BE STATED IN THE CERTIFICATE:


1. Name of the partnership which shall include the word “limited”;
2. The character of the business;
3. The location of the principal place of business;
4. The name and place of residence of each member, general and limited partners being respectively
designated;
5. The term of existence of the partnership;
6. The amount of cash and a description of and the agreed value of other property contributed by
each limited partner;
7. 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;
8. The time, if agreed upon, when the contribution of each limited partner is to be returned;
9. The share of the profits or the other compensation by way of income which each limited partner
shall receive by reason of his contribution;
10. The right, if given, of a limited partner to substitute an assignee as contributor in his place, and the

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terms and conditions of the substitution;
11. The right, if given, of the partners to admit additional limited partners;
12. 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;
13. 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
14. The right, if given, of a limited partner to demand and receive property other than cash in return for
his contribution.

ARTICLE 1845

The contributions of a limited partner may be cash or other property,


but not services.

• A limited partner is not allowed to contribute industry or services alone.


• But there can be an industrial partner in a limited partnership in which he shall be regarded a general
partner.

ARTICLE 1846

The surname of a limited partner shall not appear in the partnership name unless:

1. It is also the surname of a general partner; or


2. Prior to the time when the limited partner became such, the
business had been carried on under a name in which his
surname appeared.

A limited partner whose surname appears in the 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.

• A limited partner violating this provision shall be liable as a general partner to innocent third parsons
without, however, the rights of a general partner.

ARTICLE 1847

• If there is a false statement in the certificate any party to the same shall be liable to anyone who suffers
loss by reliance on such statement, provided that the party to the certificate knew the statement to be
false:
ü At the time he signed the certificate; or
ü 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.

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NOTES IN ATP (PARAS) RACHEL ANDRELEE I. ACAL



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.

• If a limited partner takes part in the control of the business, he becomes liable as a general
partner without, however, the rights of a general partner.

EXAMPLES:

ACTS NOT CONSIDERED AS “TAKING PART IN THE CONTROL OF THE BUSINESS”


v Mere dealing with a costumer
v Mere consultation on one occasion with the general partners.

ACTS CONSIDERED AS “TAKING PART IN THE CONTROL OF THE BUSINESS”


v Selection of who will be the managing partners
v Supervision over superintendent of the business of the firm

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.

• New limited partners may still be admitted even after the formation of the limited partnership the law
requires that there be a proper amendment to the certificate for the same.
• The failure to properly amend the certificate with the SEC, however, does not necessarily mean the
dissolution of the limited partnership. (Tec Bi and C. v. Collector of Int. Rev.)

ARTICLE 1850

• To exercise acts of strict dominion, the general partners must get the written consent or ratification of
all the limited partners in the limited partnership, even if the general partners have already decided
unanimously.
• The reason behind the law is that these acts are not generally essential for the routine or ordinary
conduct of the firm’s business.

ACTS OF STRICT DOMINION/OWNERSHIP


1. Acts in contravention of the certificate;
2. Acts which would make it impossible to carry on the ordinary business of the partnership;
3. Confess a judgment against the partnership;
4. Possess partnership property, or assign their rights in specific partnership property, for other than
a partnership purpose;
5. Admit a person as a limited partner, unless the right to do so is given in the certificate;
6. 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.

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NOTES IN ATP (PARAS) RACHEL ANDRELEE I. ACAL



ARTICLE 1851

RIGHTS OF A LIMITED PARTNER


1. Right to have the partnership books kept at the principal place of business of the firm;
2. Right to inspect and copy any of the partnership books at a reasonable hour;
3. Right to demand true and full information of all things affecting the partnership;
4. Right to a formal account of partnership affairs whenever circumstances render it just and
reasonable;
5. Right to have dissolution and winding up by decree of court;
6. Right to receive a share of the profits or other compensation by way of income;
7. Right to the return of his contribution provided in Articles 1856 and 1857.

• A limited partner has lesser rights than a general partner.


• A limited partner cannot bind the firm by a contract.

ARTICLE 1852

Without prejudice to the provisions of Article 1848, a person who has contributed
to the capital of a business conducted by a person or partnership erroneously
believing that he has become a limited partner in a limited partnership, is not by
reason of his exercise of the rights of a limited partner, a general partner with the
person or in the partnership carrying on the business, or bound by the obligations
of such person or partnership, provided that on ascertaining the mistake he
promptly renounces his interest in the profits of the business, or other
compensation by way of income.

• This provisions speaks of when a contributor erroneously believes he has become a limited partner.

GR: The partner erroneously believing he is a limited partner should not be considered
liable as a general partner.
XPN: He is liable as a general partner:
ü unless on ascertaining the mistake, he promptly renounces his
interest in the profits of the business, or other compensation by way
of income; or
ü unless partnership creditors are not prejudice even if no such
renouncing has been made.

ARTICLE 1853

• A person may be a general and a limited partner at the same time in the same partnership, provided
that the same is stated in the certificate.
• A general-limited partner generally has rights and powers of a general partner as well as all the
restrictions of a general partner. Except in respect to his contribution, on which he has the rights against
all the other members which he would have had if he is only a limited partner.
• As to his contributions, a general-limited partner has the rights of a limited partner.
• Thus, third parties can go against the general-limited partner’s individual properties unlike a limited
partner.

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NOTES IN ATP (PARAS) RACHEL ANDRELEE I. ACAL



ARTICLE 1854

• A limited partner may loan money to and transact other business with the partnership.
• Unless the limited partner is also a general partner, he may also receive a pro rata share of the assets
on account of resulting claims against the partnership with general creditors. However, in respect to
such claim, a limited partner cannot:
ü Receive or hold as collateral security any partnership property—but he is not
prohibited to purchase partnership assets which are used to satisfy
partnership obligations towards third parties; or
ü Receive from a general partner or the partnership any payment,
conveyance, or release from liability, if at the time, the assets of the
partnership are not sufficient to discharge partnership liabilities to persons
not claiming as general or limited partners.

• This provisions speaks of the right of a limited partner to lend money and transact other business with
the firm.
• Third parties are always given preferential rights insofar as the firm’s assets are concerned.

ARTICLE 1855

Where there are several limited partners the members may agree that one or more
of the limited partners shall have a priority over other limited partners as to the
return of their contributions, as to their compensation by way of income, or as to
any other matter. If such an agreement is made it shall be stated in the certificate,
and in the absence of such statement all the limited partners shall stand upon
equal footing.

• This provision speaks of the preference to some limited partners.


• Preference may be given to some limited partners over other limited partners but such must be stated
in the certificate in order to be binding.

NATURE OF THE PREFERENCE


- Such preference may involve the:
ü return of contributions;
ü compensations;
ü other matters.

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 the 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.

• As to the receipt of a limited partner from the partnership the share of profits or compensation by
way of income under this provision, the partnership assets must be in excess of partnership liabilities
to third persons, not liabilities to partners.

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NOTES IN ATP (PARAS) RACHEL ANDRELEE I. ACAL



ARTICLE 1857

• This provision provides when contributions of limited partners can be returned.


• The following are the conditions that must exist before a contribution of a limited partner may be
returned to him:
ü All liabilities of the partnership excluding liabilities to general partners/limited
partners as to their contributions have been paid or there remains property of the
partnership sufficient to pay them;
ü Consent of all members is obtained, unless the return of the contribution may be
rightfully demanded; and
ü The certificate is canceled or amended as to set forth the withdrawal or reduction.
ü Return of contribution without fulfillment of the above-mentioned contributions, the previous creditors
can sue in which case, they must allege and prove the non-existence of the conditions.

TIME WHEN SUCH CONTRIBUTIONS CAN BE RETURNED


- Provided all the conditions are complied with, the contributions of limited partners can be returned:
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 a month’s notice in writing to all other members, if no time is
specified in the certificate, either for the return of the contribution or for the
dissolution of the partnership.

• Generally, a limited partner has only the right to demand and receive CASH in return for his
contribution irrespective of the nature of his contribution. This is without prejudice to any statement in
the certificate to the contrary or the consent of all members of the firm.

WHEN MAY A LIMITED PARTNER HAVE THE PARTNERSHIP DISSOLVED AND ITS AFFAIRS
WOUND UP?
ü When he has rightfully but unsuccessfully demands the return of his contribution,
or;
ü The other liabilities of the partnership have not been paid, or the partnership
property is insufficient for their payment as required by Art. 1857 par. 1 (no. 1),
and the limited partner would otherwise be entitled to the return of his contribution.

ARTICLE 1858

LIABILITIES OF A LIMITED PARTNER TO THE PARTNERSHIP


1. The difference between his actual contribution and that which is stated in the certificate;
2. 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.

• Aside from the liabilities of a limited partner, this provision also holds a limited partner as trustee for the
partnership of the following:
1. Specific property stated in the certificate as contributed by him but which was not contributed
or which has been wrongfully returned; and
2. Money or other property wrongfully paid or conveyed to him on account of his contribution.

• The liabilities of a limited partner can be waived or compromised by the consent of all members but
such 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
liabilities.

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NOTES IN ATP (PARAS) RACHEL ANDRELEE I. ACAL



• 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.
ILLUSTRATION: Amy is a limited partner. She received the return of her
contribution on the date stated in the certificate. Later, it was discovered
that the remaining assets of the firm were insufficient to pay two
creditors—Bob and Cat. Bob’s claim arose before the return of Amy’s
contribution while Cat’s claim arose after the return of Amy’s contribution.

Should Amy be compelled to give back what she had received to satisfy
Bob’s claim?
• YES. Bob’s claim must be satisfied out of what has been
returned to Amy because such claim arose before the return.
However, if the same is still insufficient, Amy cannot be held
liable for the deficit because she is only a limited partner.

Should Amy be compelled to give back what she had received to satisfy
Cat’s claim?
• NO. Cat’s claim only arose after the return. Her claim must be
directed against the general partners.

ARTICLE 1859

• A limited partner’s interest is assignable but such assignee does not necessarily become a substitute
limited partner.

SUBSTITUTE LIMITED PARNTER


- A person admitted to all the rights of a limited partner who has died or has assigned his interest
in the partnership
- Not necessarily equivalent to an assignee of a limited partner’s interest
- 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.

• A mere assignee does not have the following rights unless he becomes a substituted limited partner:
1. Right to require any information or account of the partnership transaction;
2. Right to inspect the partnership books.

• A mere assignee is only entitled to the following to which the assignor would otherwise be entitled:
1. Receive the share of the profits or other compensation by way of income; or
2. Return of his contribution.

• A mere assignee has a right to become a substituted limited partner if all the members consent thereto,
or if the assignor was empowered in the certificate to make the assignee a substituted limited partner
and he makes him as such.

• But a mere assignee only becomes a substituted limited partner when the certificate has been
appropriately amended in accordance with Art. 1865.

• The substitution of the assignee as a limited partner does not release the assignor from liability to the

18
NOTES IN ATP (PARAS) RACHEL ANDRELEE I. ACAL



partnership under Art. 1847 (false statement in the certificate) and 1858 (to creditors who extended
their credit or whose claims arose before the assignment).

ARTICLE 1860

SOME CAUSES FOR DISSOLUTION OF A LIMITED PARTNERSHIP

GR: Retirement, death, insolvency, insanity or civil interdiction of a general partner dissolves the
partnership.

XPN: Unless the business is continued by the remaining general partners under a right so to do
stated in the certificate, or with the consent of all the members.

• At any event, there should be an amendment of the certificate.


• The instances under this provision do not apply in the case of a limited partner, the firm is not dissolved
in such case.

ARTICLE 1861

EFFECTS OF THE DEATH OF A LIMITED PARTNER


ü The deceased limited partner’s executor or administrator shall have the rights of a limited partner
for the purpose of settling his estate;
ü The executor or administrator of the deceased limited partner also has the power to constitute
assignee as a limited partner if the deceased limited partner was given such right to constitute.
ü The estate of the deceased limited partner shall be liable for all his liabilities as a limited partner.

ARTICLE 1862

• This provision provides the power of the court of competent jurisdiction, on due application, to charge
the interest of a limited partner with the payment of a debt to any creditor of a limited partner.
• The court may also appoint a receiver and make all other orders, directions and inquiries which the
circumstances of the case may require.
• The interest may be redeemed with the separate property of any general partner but may not be
redeemed with partnership property.
• The remedies in here are not exclusive of others which may exist.

ARTICLE 1863

ORDER OF PAYMENT OF LIABILITIES OF THE LIMITED PARTNERSHIP


1. 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. Limited partners as to their:
1. share in the profits and other compensation by way of
income on their contributions; and then
2. to the capital of their contributions
3. General partners as to liabilities:

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NOTES IN ATP (PARAS) RACHEL ANDRELEE I. ACAL



1. other than to capital and profits; then
2. as to their profits; and then
3. as to their capital.

• Notice that profits are given priority over capital.


• 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. But this is subject to any statement in the certificate
or to subsequent agreement.

ARTICLE 1864

• The certificate of limited partnership is cancelled (not merely amended) when the partnership is
dissolved or all limited partners cease to be such. This is because in such cases, there is no more a
limited partner therefore a limited partnership no longer exists.
• The writing to cancel a certificate shall be signed by all members. (Art. 1865 par. 2)

INSTANCES WHEN THERE SHALL BE AN AMENDMENT OF THE CERTIFICATE


1. Change in the name of the partnership or character of the contribution of any limited partner;
2. Change in the character of the business of the partnership;
3. Change in the time stated in the certificate for the dissolution of the partnership or for the return
of a contribution;
4. Change in any other statement in the certificate in order that it shall accurately represent the
agreement among them, as desired by the members.
5. Admission of an additional limited partner;
6. Admission of a person as a general partner;
7. Retirement, Death, Insolvency, Insanity, Civil Interdiction of a general partner and the business
is continued under Article 1860;
8. False or erroneous statement in the certificate;
9. Substitution of a person as a limited partner;
10. Having fixed time for the dissolution or the return of a contribution, no time having been specified
in the certificate.

ARTICLE 1865

REQUISITES FOR AMENDING OR CANCELLING THE CERTIFICATE


ü Conform to the requirement of Article 1844 (sign, swear, file) as may be necessary to set forth
clearly the change in the certificate desired to make;
ü All members shall sign and swear to the writing, and:
o If amendment consists of substituting limited partner or adding a limited or general partner,
the member substituted or added must also sign;
o In case of substituting a limited partner, the assigning limited partner must also sign.
ü The writing to cancel a certificate shall be signed by all the members.

• A person desiring the cancellation or amendment of a certificate may petition the court to order a
cancellation or amendment thereof if any person designated as a person who must execute the writing
refuses to do so.
• Should the court find that the petitioner has a right to have the writing executed by the person refusing
to do so, it shall order the SEC where the certificate is recorded to record the cancellation or amendment
as the case may be.

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NOTES IN ATP (PARAS) RACHEL ANDRELEE I. ACAL



• The court shall also cause to be filed for record in said office of SEC a certified copy of its decree setting
forth the amendment.
• A certificate is amended or cancelled when there is filed for record in the office of the SEC where the
certificate is recorded, the following:
1. A writing in accordance with the provisions of Article 1865 (par. 1&2);
2. A certified copy of the order of court in accordance with the provisions of Article 1865 (par.
4);
3. After the certificate is duly amended in accordance with this article, the amended certificate
shall thereafter be for all purposes the certificate provided for in this Chapter.

ARTICLE 1866

A contributor, unless he is a general partner, is not a proper party to proceeding by


or against a partnership, except where the object is to enforce a limited partner’s
right against or liability to the partnership.

• PARAS: Self-explanatory.

ARTICLE 1867

MAY A LIMITED PARTNERSHIP FORMED UNDER THE OLD LAW BECOME A LIMITED PARTNERSHIP
UNDER THIS CODE?
• YES. It becomes a limited partnership under the New Civil Code by complying with the
provisions of Article 1844, provided that the certificate states the following:
• Amount of the original contribution of each limited partner, and the time
when the contribution was made; and
• 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 old law shall continue to be governed by the provisions of the
said old law, unless and until it becomes a limited partnership under the New Civil Code.

21