Limited Partnership

Nature, Formation, and Registration

ART. 1843. A limited partnership is one formed by two or more persons under the provisions of the
following article, having as members one or more general partners and one or more limited partners.
The limited partners as such shall not be bound by the obligations of the partnership.

1. Essence of the Medium of Limited Partnership

Article 1843 of the New Civil Code defines a limited partnership as" one formed by two or more persons
under the provisions of the following article, having as members one or more general partner and one
or more limited partners. The limited partners as such shall not be bound by the obligations of the
partnership."

As a species of contract, a limited partnership may be characterized as a formal or solemn contract, in

that no limited partnership is formed unless the formalities provided for under Article 1844 of New Civil
Code are complied with; and failure to so comply with the formalities only brings about the creation of a
general partnership.

On the other hand, having complied with the formalities mandated by Partnership Law to form such a
medium of doing business, the distinguishing feature of a limited partnership is that it has through the
limited partners been able to institute a form of "limited liability," in that the limited partner as such
shall not be bound by the obligations of the partnership.

2. Requirements for the formation of a limited partnership

Article 1844 of the New Civil Code lays down the rules which two or more persons desiring to form a
limited partnership need to comply with, thus:
(a) Sign and swear to a Certificate of Limited Partnership, which shall contain the following provisions
describing or designating the:
1. partnership name, adding thereto "Limited;"
2. character of the business;
3. principal place of business;
4. term of existence;
5. name and residence of each of the partners, with clear designation of who are the general and
limited partners; and the right, if given, of partners to admit additional limited partners;
6. contributions to the partnership, and the terms under which additional contributions are to be
made by the limited partners;
7. right, if given, of a limited partner to substitute an assignee in his place;
8. time, if agreed upon, when the contributions of limited partners shall be returned; and the right,
if given, to demand and receive property other than cash in return for such contributions;
9. share of the profits or the other compensation by way of income which each limited partner
shall receive by reason of his contribution; and the right, if given, of one or more of the limited
partners to priority over other limited partners;
 10. 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;
(b) File such Certificate with the SEC.

The indicated provisions under Article 1846 which would provide for a right "if given" must yield to the
legal conclusion that in effect the right alluded to does not exist if not expressly provided for in the
Certificate of Limited Partnership or by another provision in the New Civil Code.

Hoefer v. Hail, explains the rationale in American jurisdiction, on the formalities required of limited
partnership under the Uniform Limited Partnership Act, thus —

xxx. The main purpose of the statutory regulation is to ensure the limitation on the
liability of limited partners. It naturally follows that in order to obtain the privilege of
limited liability, one must conform to the statutory requirements.. Obviously, the
purpose of the requirement that the certificate shall be recorded is to acquaint third
persons dealing with the partnership with the essential features of the partnership
arrangement.

With respect to the contents, swearing and SEC-filing of the Certificate of Limited Partnership, Article
1846 of the New Civil Code recognizes the doctrine of"substantial compliance:" "A limited partnership is
formed if there has been substantial compliance in good faith with the foregoing requirements." While
there is no doubt that the execution of a sworn Certificate and its registration with the SEC are essential
elements to establish a limited partnership, the question would be: Which of the enumerated contents
of the Certificate under Article 1844 are a "must" to reach the level of "substantial compliance?"

To compare, under the Code of Commerce then in place, Jo Chung Cang v. Pacific Commercial Co., held:

To establish a limited partnership there must be, at least one general partner and the
name of at least one of the general partners must appear in the firm name. But neither
of these requirements have been fulfilled. The general rule is, that those who seek to
avail themselves of the protection of laws permitting the creation of limited
partnerships must show a substantially full compliance with such laws. A limited
partnership that has not complied with the law of its creation is not considered a limited
partnership at all, but a general partnership in which all the members are liable. It can
thus be concluded, that the institution of who is or are the general partners, and who is
or are the limited partners, including the amount or nature of their contributions, are
essential contents of the Certificate of Limited Partnership. In other words, limited
partners cannot claim the benefits of limited liability unless they find themselves
expressly classified as such in the duly filed and registered Certificate of Limited
Partnership.

Nonetheless, the formal requirements to establish a limited partnership are relevant only insofar as
establishing the limited liability rights against third parties.
The mandatory requirement of the filing of the Certificate with the SEC constitutes the registration or
notice that binds the public to the essential nature of the partnership as one constituting a limited
liability on the part of the limited partners. This is consistent with the commercial law practice that a
diminution of rights or the limitation of remedies brought about by a commercial medium shall come
about only when there has been registration that can bind the dealing public. American jurisprudence
requires that the filing of the Certificate of Limited Partnership with the proper government agency (the
SEC in our case), must be done within a reasonable time.18

In our jurisdiction, the fact of non-filing of the Certificate of Limited Partnership does not bring about a
limited partnership, and what is deemed constituted is a general partnership.

3. False Statement in the SEC Certificate

Under Article 1847 of the New Civil Code, if the Certificate contains a false statement, one who suffers
loss by reliance on such statement may hold liable "any party to the certificate who knew the statement
to be false" at the time he signed the certificate or subsequently learning of such false statement, failed
to cancel or amend the certificate or to file a petition for such cancellation or amendment!

The language covering liability under Article 1847 indicates that a limited partner who signs the
Certificate knowing provisions therein to be false, may be held unlimitedly liable to a person who suffers
loss by reason of such false statement. But it does not create general unlimited liability, because only
third parties who relied upon such false statements, and have suffered loss thereby, can hold the limited
partner liable beyond his contribution.

Thus, in the American decision in Gilman Paint & Varnish Co. v. Legum,is it was held that falsely
indicating in the articles of limited partnership the contribution of the limited partner at lower amount
than what was actually contributed cannot be a basis to hold such limited partner liable beyond his
contribution, since it would be inconceivable that a creditor could suffer loss by relying on an investment
stated in the certificate of partnership which was smaller than the amount actually contributed; and that
it is when the actual contribution is less than amount stated in the certificate that reliance upon it may
cause loss to a creditor.

4. Name of Limited Partnership

Under Article 1844 of the New Civil Code, among the contents of the Certificate of Limited Partnership
should be "The name of the partnership, adding thereto the word 'Limited.'" At present time, it is not
critical under the terms of Article 1844 that the firm name should contain the names of the general
partners, or any of them, and what is imposed is to add the word "Limited." In fact, under Article 1815
(which is the first article under the section denominated as "Obligations of the Partners with Regard to
Third Persons'), "Every partner shall operate under a firm name, which may or may not include the
name of one or more of the partners." This can only lead to the conclusion that under our present Law
on Partnerships, it is not required as an essential element to establish a limited partnership, that the
firm name should contain the names of the general partners, or any of them.
a. Surname of Limited Partner

Under Philippine Partnership Law, one of the key elements by which limited partners are to be accorded
their limited liability rights, is that they practically must become invisible to the public when it comes to
partnership dealings: they are mere passive investors in the partnership business, and they do not
participate in its management nor are they agents of the partners and of the partnership. And every
indication that would lead the dealing public to believe or presume that a limited partner participates in
management or control of the firm becomes a basis by which such limited partners shall be stripped of
their limited liability right.

Thus, Article 1846 of the New Civil Code provides that the "surname of a limited partner shall not appear
in the partnership name, unless it happens to be the surname of a general partner or that prior to the
time when the limited partner became such, the business had been carried or under a name in which
such surname appeared.

As a consequence, "A limited partner whose surname appears in a partnership name . . . shall be liable
as a general partner to partnership creditors who extend credit to the partnership without actual
knowledge that he is not a general partner." Estoppel is therefore the legal basis upon which a limited
partner becomes liable to a creditor who acted on the belief that by the inclusion of his surname, the
partner was a general partner.

Article 1846 relies upon the principal of "without actual knowledge," to the exclusion of the principle of
constructive knowledge. It would seem therefore that the default rule in Philippine Partnership Law is
that articles of partnership and certificates of limited partnership, even when formally registered with
the SEC, do not constitute a form of constructive notice to the public dealing with such partnerships, and
there is no obligation on the part of the dealing public to determine the legal status of the partnership,
and the intramural arrangements between and among the partners, much less to determine the extent
of the sharing and division of powers among the partners.

b. The inclusion of the Term Limited

What happens if the firm name adopted by limited partnership formally in the Certificate of Limited
Partnership does not contain the word "Limited," does it qualify the firm to be a limited partnership?

We believe this is only a formal and not a substantial requirement, which cannot strip the limited
partners of their right to claim limited liability, for a member of the dealing public cannot claim to have
sustained loss by reason of the non-inclusion of the word "Limited" in the firm name, since the
Certificate clearly indicates who are the limited partners. Again, the drawback of this position is that it
places the burden on the dealing public to know the contents of the Certificate filed with the SEC.

c. No Firm Name Provided in the Certificate

What happens if the sworn Certificate on file with the SEC does not provide at all for a firm name, would
it break the limited liability rights of the expressly designated limited partners therein?
We believe that in such a case, there is no "substantial compliance" with the requirements under Article
1846. The firm name of every partnership is the very means by which its existence as a juridical person,
separate and distinct from its members, and distinguishable from other firms and juridical persons,
constitutes the essence of the "person" of the partnership and thereby the nexus upon which the
obligatory force of its contracts and transactions are fastened.

The firm name of a partnership is the essence by which to enforce its standing in its contractual
relationship, and the legal basis upon which its creditors can enforce its obligations and other
contractual commitments. As the firm name is critical to partnerships in general, then it becomes more
so in the case of a limited partnership, where the limited partners can fasten their limited liability within
the four comers of the partnership business enterprise duly constituted within the person of the created
limited partnership.

5. Contributions to the Limited Partnership

a. Contribution of Service

Article 1845 of New Civil Code expressly provides that the contributions of a limited partner may be cash
or other property, but not service. To allow otherwise would be to place a limited partner into the
management of the firm, and thereby constitute a breach of the fundamental reason for being accorded
limited liability privileges.

When the contribution of a limited partner is service or industry, then he does not only become
unlimitedly liable, but really becomes a general partner.

b. Indication of the Amount Contributed

The language of Article 1844(1 )(f) of the New Civil Code requires that the Certificate should indicate
"The amount of cash and a description of and the agreed value of the other property contributed by
each limited partnerhas been taken to mean that it is imperative that the contributions of limited
partners must be given prior to or at the time of the execution of the Certificate and that the indication
of the obligation to give the contribution is not sufficient, and would at least constitute a false statement
in the Certificate which would give rise to an obligation to pay the loss suffered by any person who relied
upon such statement as provided under Article 1847.

This position is not supported by the language of Article 1858 of the New Civil Code which makes the
limited partner liable to the partnership for the difference between his contribution "as having been
made" and "[fjor 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." The unmistakable language of Article 1858 shows
that it is valid for the partners to agree under the terms of the Certificate for the limited partner or
partners to pay their contributions at some future time.

6. When Certificate Cancelled or Amended

a. When Certificate must be cancelled

Under Article 1864 of the New Civil Code, the Certificate shall be cancelled when the partnership is
dissolved or all limited partners cease to be such. In these two cases, the partnership has ceased to be a
limited partnership, and may proceed but only as a general partnership. In all other cases covered
below, the Certificate need only be amended.

Article 1865 of New Civil Code provides that the writing to cancel the Certificate shall be signed by all
members in order to be effective.

b. When Certificate Must be Amended

Under Article 1864 of the New Civil Code, the Certificate must be amended when:

(a) There is a change in the partnership name or in the amount or character of the contribution of
any limited partner;
(b) A person is substituted as a limited partner;
(c) An additional limited partner is admitted;
(d) A person is admitted as a general partner;
(e) A general partner retires, dies, becomes insolvent or insane, or is sentenced to civil interdiction
and the business is continued;
(f) There is a change in the character of the partnership business;
(g) There is a false or erroneous statement;
(h) There is a change in the time for the dissolution of the partnership or for the return of a
contribution;
(i) A time is fixed for the dissolution of the partnership, or for the return of contribution, where no
time having been specified in the certificate; or
(j) The members desire to make a change in any other statement in the certificate in order that it
shall accurately represent the agreement among them.

Except for the return of contributions of limited partners, the foregoing provisions must be interpreted
to mean that if the certificate is not amended to cover the instances enumerated, then such changes
cannot be given legal affect as between and among the partners and the public.

c. Procedure to Amend Certificate

Article 1865 of the New Civil Code provides that the writing to amend a certificate shall:

(a) Conform to the requirements of Article 1844 as far as necessary to set forth clearly the change
in the certificate which it is desired to make; and
(b) Be signed and sworn to by all members, and an amendment substituting a limited partner or
adding a limited or general partner shall be signed also by the member to be substituted or
added, and when a limited partner is to be substituted, the amendment shall also be signed by
the assigning limited partner.

The article also provides that when a person desiring the cancellation or amendment of a certificate may
petition the courts to order such cancellation or amendment whenever any person designated to
execute the writing refuses to do so. A certificate is amended or cancelled when there is filed for record
with the SEC:

(a) In writing accomplished in accordance with the provisions for cancellation or amendment of the
certificate;
(b) A certified copy of the order of court ordering such cancellation or amendment; and
(c) After the certificate is duly amended, the amended certificate shall thereafter be for all
purposes the certificate provided in the provisions of the Law on Partnership.

General and Limited Partners

1. The General Partners

a. Who is a General Partner in Limited Partnership?

When a limited partnership is duly constituted, then every partner who does not qualify as a limited
partner by compliance with the formal requirements mandated under Article 1844 of the New Civil
Code, is deemed to be a general partner and subject to the unlimited liability rule for partnership
obligations.

b. Rights and powers of General Partners

Under Article 1850 of the New Civil Code, a general partner shall have the rights and powers and be
subject to all the restrictions and liabilities of a partner in a partnership without limited partners, except
that such general partner or all of the general partners in a limited partnership have no power nor
authority to do any of the following acts, without the written consent or ratification of the specific act by
all the limited partners, thus:

(a) Do any act in contravention of the Certificate;

(b) Do any act which would make it impossible to carry on the ordinary business of the partnership;
(c) Confess a judgment against the partnership;
(d) Possess partnership property, or assign their rights in specific partnership property, for other
than a partnership purpose;
(e) Admit a person as a general partner;
(f) Admit a person as a limited partner, unless the right so to do is given in the certificate.

Article 1850 therefore enumerates six (6) instances when the acts of the general partners on behalf of
the partnership would not be valid without the written consent of, or ratification by all the limited
partners. In other words, outside of the enumerated instances under Article 1850, limited partners have
no voice in partnership affairs.

Firstly, although Article 1850 provides that the written consent or ratification of all the limited partners
is required for the admission of a new limited partner, "unless the right to do so is given in the
certificate," the same cannot be interpreted to mean that when the right to do so is given in the
Certificate, the admission of a new limited partner no longer requires the consent of all the limited
partners. For even when such right is granted, the provisions of Article 1865 in laying down the
procedure for the amendment of the Certificate requires the written consent of all the partners.
Otherwise, if the Certificate is not amended to include formally the additional limited partner, he or she
does not become a limited partner, and would be exposed to the unlimited liability of a general partner.

Secondly, although the act of the general partners in relation to any of the six instances covered by
Article 1850 would be void without the written consent or ratification of all the limited partners, the
declaration refers to intra-partnership issues, because insofar as third persons dealing in good faith with
the partnership, the lack of consent or ratification by the limited partners, cannot be a basis by which
they cannot treat their contracts with the partnership as valid, binding and enforceable.

Thirdly, the enumeration of the instances under Article 1850 which would require written consent or
ratification of all the limited partners, stand apart from the enumerated "act of ownership" or "acts of
strict dominion" under Article 1818 which cannot be effected by "less than all partners," thus —

(a) Assign a partnership property in trust for creditors or on the assignee's promise to pay the debts
of the partnership;
(b) Dispose of the goodwill of the business;
(c) Confess a judgment;
(d) Enter into a compromise concerning a partnership claim or liability;
(e) Submit a partnership claim or liability to arbitration; and
(f) Renounce a claim of the partnership.

Only two (2) instances are common to both Articles 1818 and 1850, namely:

(a) To do any other act which would make it impossible to carry on the ordinary business of a
partnership; and
(b) To confess a judgment against the partnership.

Do we take it to mean that in a limited partnership, by expressly enumerating the six (6) instances under
Article 1850 where the written consent or ratification of all the limited partners is required, that all the
other instances granted under Article 1818 would only need the consent of" all the general partners"
and do not require the consent of the limited partners, to be valid and binding? The difference in the
matters pertaining to Article 1818 is that without the requisite unanimous consent, the acts done would
be void, not only against the partnership and the other partners who did not consent, but even as to
third parties who dealt on the other side of the transactions, because such acts or transactions are not
deemed to be in the ordinary course of partnership business, and third parties have no right to expect
that the same is within the power of any one or more, but not all of the partners, to enter into.

c. Duties and Obligations of the General Partner

A general partner is saddled with the same fiduciary duty of loyalty, in that he cannot engage in any
business that conflicts with that of the limited partnership. A general partner who is such as an\
industrial partner is also saddled with the same fiduciary duty of loyalty, of being disqualified from
engaging in any business venture.

2. The Limited Partners

a. Who is a limited Partner?

Under Article 1844 of the New Civil Code, no member of a partnership shall be considered a limited
partner, unless he is so designated in the Certificate duly filed with the SEC; under Article 1846, his
surname cannot be part of the firm name; and under Article 1845, he does not have the right or option
to contribute service to the partnership.

b. Erroneous but in Good faith limited partner

Under Article 1852 of the New Civil Code, 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, does
not by his exercise of the rights of a limited partner:

(a) become a general partner with the person or in the partnership carrying on the business; nor
(b) be 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.

Article 1852 must cover a situation where although there exists a partnership business, it is conducted
not within the medium of a limited partnership. Therefore, if one becomes a member of the partnership
with the intention that he becomes a limited partner, and sticks only to exercising the rights of a limited
partner, he does not incur liability of a general partner even as to the partnership creditors, provided he
undertakes the "acts of good faith" mandated by law. It is only when he takes part in the control of the
business (as provided in Article 1848), that he then becomes liable as a general partner, or when having
realized the mistake in affiliating with the partnership he does not renounce his interests in the
partnership profits, and severe his relationship with the partnership venture.

c. When limited and general partner at the same time

Article 1853 of the New Civil Code provides that a person may be a general partner and a limited partner
in the same partnership at the same time, provided that this fact shall be stated in the Certificate of
Limited Partnership. Why would a general partner want to be a limited partner at the same time, and
vice versa? It pertains to availing of the rights of a limited partner with respect to his contribution as
such.

Under Article 1853, even when a limited partner is at the same time a general partner, nonetheless "in
respect to his contribution, he shall have the rights against the other members which he would have had
if he were not also a general partner." What would those rights be peculiar to him as a limited partner,
which are not available to him as a general partner?
Certainly it cannot be "limited liability" rights, for being a general partner at the same time, he cannot
have any claim for limited liability against partnership debts and claims. The only viable rights of a
limited partner which are not undermined by the fact that he is also a general partner at the same time,
may pertain only to the priority right to the return of his contributions, share in the profits as it pertains
to him as a limited partner.

3. Rights and Powers of the Limited Partner

The New Civil Code provides the following rights to every limited partner in a duly constituted limited
partnership, thus:

(a) Right to limited liability (Arts. 1843 and 1848);

(b) Right to the return of his contribution (Art. 1851);
(c) Right to receive his share in the profits and compensation by way of income (Art. 1851);
(d) Right to assign his equity interest (Art. 1851);
(e) Right to have the partnership books kept at the principal place of business of the partnership,
and at a reasonable hour to inspect and copy any of them (Art. 1851[1]);
(f) Right to have on demand true and full information of all things affecting the partnership, and a
formal account of partnership affairs whenever circumstances render is just and reasonable (Art.
1851 [2]);
(g) Right to have the dissolution and winding-up by decree of court (Arts. 1851 [3] and 1857).

a. Right to Limited Liability

Article 1843 of the New Civil Code provides that the essence of the doctrine of "limited liability" is that
limited partners who are entitled thereto "shall not be bound by the obligations of the partnership"
beyond what they contributed or legally bound to contribute to the partnership's common fund.

The grant of the limited liability status to limited partners comes with a price, in that:

(a) They cannot have their surnames form part of the partnership name (Art. 1846);
(b) They cannot participate in the control of the partnership business (Art. 1848); and
(c) Therefore they are prohibited from contributing service or industry into the partnership (Art.
1845).

If a limited partner violates any of these restrictions, he becomes unlimitedly liable as in the case of
general partners.

The feature of limited liability is poised primarily in relationship to the creditors of the partnership in
that they have a right to expect that all partners are unlimitedly liable for partnership debts, unless they
are so indicated in the Certificate as being limited partners who assume the role of mere passive
investors.

b. Right to Return of Contributions

Article 1844(1 )(h) of the New Civil Code provides that one of the provisions that may be found in the
Certificate of Limited Partnership is the time, if agreed upon, when the contribution of each limited
partner is to be returned."

Does that mean that when there is no agreement or provision in the Certificate on this matter, limited
partners, like general partners, do not have a right to demand return of contributions during the life of
the partnership? The answer is in the negative. Since the nexus of a limited partner's relationship in the
partnership arrangement is his contribution and the profits that he is entitled by reason of such
contribution, then the ability of the limited partner, as really a mere passive investor, must commercially
be linked to his ability to be able to liquidate his investment within a reasonable time that cannot be
linked to the entire "going concern" life of the partnership business venture.

Article 1855 of the New Civil Code provides that where there are several limited partners the entire
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, but that "If such an agreement is made it shall be stated in the certificate of limited
partnership, and in the absence of such a statement all the limited partners shall stand upon equal
footing."

Priority in return of contributions or share in income to the limited partners must not only be agreed
upon by all the partners, but must find itself expressed in the Certificate either as originally indicated or
by way of amendment thereto. In the absence of such provision in the Certificate, there is no priority
between and among the limited partners, and they shall be treated to be at equal footing. Return of
contributions of the limited partners, therefore, is not necessarily associated with the dissolution of the
partnership.

Under Article 1857 of the New Civil Code, a limited partner shall not receive from a general partner or
out of partnership property any part of his contribution until:

(a) All liabilities of the partnership, except liabilities to general partners and to limited partners on
account of their contributions, have been paid, or there remains property of the partnership
sufficient to pay them;
(b) The consent of all members is had, unless the return of the contribution may be rightfully
demanded under the law;
(c) The certificate is cancelled or so amended as to set forth the withdrawal or reduction.

On the other hand, when all liabilities to third party creditors have been paid or there will remain
enough assets to cover them, a limited partner may rightfully demand the return of his contribution:

(a) On the dissolution of the partnership; or

(b) When the date specified in the certificate for its return has arrived; or
(c) After he has given six months’ notice in writing to all other members, if no time is specified in
the certificate, either for the return of the contribution or for the dissolution of the partnership.
Article 1857 also provides that "In the absence of any statement in the certificate to the contrary or the
consent of all members, a limited partner, irrespective of the nature of his contribution, has only the
right to demand and receive cash in return for his contributions."

One of the conditions for the valid return of a limited partner's contribution is that there has to be the
proper amendment of the Certificate which under the specific provisions governing the same can only
be done with the written consent of all the partners.

Nonetheless, the acknowledgment of the right of limited partners to have the return of their
contribution upon compliance with the 6-month notice rule, would mean that in the event the other
partners oppose such a return and they refuse to sign on the amendment to the Certificate nonetheless,
it would authorize the withdrawing limited partner to seek court order for the proper amendment
thereof.

c. Right to profit or compensation by way of income

Under Article 1856 of the New Civil Code, 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, whether from the partner property or property 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. Even in a limited partnership, the law recognizes the priority
standing of partnership creditors to those of the limited and general partners in terms of payment from
the partnership property.

The term "compensation by way of income," means any arrangement by which the distribution of
profits is termed "compensation" or "salary" done on a regular or periodic basis as may be agreed upon
in the Certificate of Limited Partnership, and paid to the partner by reason of his simply being a partner,
and not by virtue of the services or industry he renders to the firm.

d. Right to assign limited partner’s interest

Under Article 1859 of the New Civil Code, a limited partner's interest is assignable, and like in an
ordinary partnership, the assignee steps into the shoes of the assigning limited partner only when
admitted by the other members: "A substituted limited partner is a person admitted to all the rights of a
limited partner who had died or has assigned his interest in a partnership." The article also provides that
"An assignee shall have the right to become a substituted limited partner if all the members consent
thereto or if the assignor, being thereunto empowered by the certificate, gives the assignee that right."
But in the end Article 1859 provides expressly that there is a need to amend the certificate, thus: "An
assignee becomes a substituted limited partner when the certificate is appropriately amended."

In addition, Article 1859 provides that the substituted limited partner has all the rights and powers, and
is subject to all the restrictions and liabilities of his assignor, except those liabilities which he was
ignorant of at the time he became a limited partner and which could not be ascertained from the
certificate.
The article also provides that the substitution of the assignee as a limited partner does not release the
assignor from liability to the partnership for false statement in the Certificate under Article 1847, and for
his contributions liabilities under Article 1858.

Finally, Article 1859 provides that an assignee who does not become a substituted limited partner, has
no right to require any information or account of the partnership transactions or to inspect the
partnership books. He is only entitled to receive the share of the profits or other compensation by way
of income, or the return of his contributions, to which his assignor would otherwise be entitled.

On the other hand, under Article 1849 of the New Civil Code, after the formation of a limited
partnership, additional limited partners may be admitted only upon filing an amendment to the original
certificate in accordance with the procedure of amendments provided under Article 1865. Since Article
1849 does not provide a particular procedure or voting threshold by which additional limited partners
may be admitted into the partnership, then the requirements would have to track the procedure
mandated under Article 1865 on the amendment of the Certificate which provides that the amending
certificate "Be signed and sworn to by all members, and an amendment substituting a limited partner or
adding a limited or general partner shall be signed also by the member to be substituted or added, and
when a limited partner is to be substituted, the amendment shall also be signed by the assigning limited
partner.”

e. Limited Rights as to partnership affairs

Article 1851 of the New Civil Code provides that a limited partner shall have the same rights as a general
partner only to:

(a) Have the partnership books kept at the principal place of business; and to inspect and copy
them at reasonable hours; and
(b) Have on demand true and full information of all things affecting the partnership, and a formal
account of partnership affairs whenever circumstances render it just and reasonable.

f. Limited Partner may loan money to the partnership

Under Article 1854 of the New Civil Code, a limited partner may loan money to, and transact other
business with, the partnership without adverse consequences to his standing as a limited partner and
his right to demand only limited liability exposure. When he is not also a general partner, a limited
partner may receive on account of resulting claims against the partnership with general creditors a pro
rata share of the assets. Nonetheless, in all these cases, a limited partner shall not:

(a) receive or hold as collateral security any partnership property; or

(b) 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 as general or limited partners.

The violation of any of the immediately foregoing prohibitions shall constitute fraud on the creditors of
the partnership.
g. Right to Dissolve the Limited Partnership

Under Article 1857 of the New Civil Code, a limited partner may have the partnership dissolved and its
affairs wound-up when:

(a) He rightfully but unsuccessfully demands the return of his contribution; or

(b) The other liabilities of the partnership have not been paid, or the partnership property is
insufficient for their payment, and the limited partner would otherwise be entitled to the return
of his contribution.

4. Obligations of Limited Partners

Aside from the prohibition against giving service as contribution to the limited partnership as provided
in Article 1845 of the New Civil Code, under Article 1858 a limited partner is liable to the partnership for
the difference between his contribution as having been made and for any unpaid contribution which he
agreed in the certificate to make in the future at the time and on the conditions stated therein

Under Article 1844(1)(g) of the New Civil Code, a limited partner may be obliged during the life of the
partnership to give additional contribution if such obligation is provided for in the Certificate of Limited
Partnership. The default rule therefore is that in the absence of a provision in the Certificate, limited
partners cannot be compelled to give additional contribution to the partnership.

Article 1858 of the New Civil Code provides that "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."

Under Article 1858 of the New Civil Code, aside from the fact that a limited partner is liable to the
partnership for his unpaid contributions when it has become due under the terms of the certificate, he
would become liable as a trustee for the partnership for:

(a) Specific property stated in the certificate as contributed by him, which was not been delivered
or wrongfully returned to him;
(b) Money or other property wrongfully paid or conveyed to him on account of his contribution.

The foregoing liabilities of a limited partner can be waived or compromised only by the consent of all
members, and provided it shall not affect the right of a creditor of the partnership who extended credit
or whose claim arose after the filing and before a cancellation or amendment of the certificate, to
enforce such liabilities.

It has been posited by writers, such as the De Leons, that while a capitalist general partner cannot
engage in competitive business with the partnership business, a limited partner is not prohibited from
engaging in such competitive business, thus: "In the absence of statutory restrictions, a limited
partnership may carry on any business which could be carried on by a general partnership."
The SEC has ruled that limited partners that are foreign corporations are not deemed to be doing
business in the Philippines. The SEC ruling supports the position that limited partners are not deemed to
participate in management of the business enterprise, nor do they constitute mutual agents to one
another or are they deemed agents representing the limited partnership.

Under Article 1866, a contributor, unless he is a general partner (which means that "contributor" covers
a limited partner), is not a proper party to proceedings by or against a partnership, except where the
object is to enforce a limited partner's right against or liability to the partnership.

Dissolution and Winding up of limited Partnership

1. Causes of Dissolution

Under Article 1860, the retirement, death, insolvency, insanity or civil interdiction of a general partner
dissolves the partnership, but not that in the case of a limited partner. But even in those cases the
partnership is not dissolved if the business is continued by the remaining general partners:

(a) under a right so to do stated in the certificate; or

(b) with the consent of all members.

Under Article 1861 of the New Civil Code, in case of death of a limited partner, his executor or
administrator shall have all the rights of a limited partner for the purpose of settling his estate, and such
power as the deceased had to constitute his assignee a substituted limited partner. In turn, the estate of
the deceased limited partner shall be liable for all his liabilities as a limited partner.

Under Article 1862 of the New Civil Code, on due application by any creditor of a limited partner, and
without prejudice to other existing remedies, the courts may charge the interest of the indebted limited
partner with payment of the unsatisfied amount of such claim, and may appoint a receiver, and make all
other orders, directions, and inquiries which the circumstances of the case may require. Such interest
may be redeemed with the separate property of any general partner, but may not be redeemed with
partnership property.

It should also be noted that upon the declaration of insanity of the general partner, it would constitute a
cause for the dissolution of the limited partnership. This is in contrast to the rule for non- limited
partnerships, particular under Article 1831 of the-New Civil Code which provides that the insanity of a
partner becomes only a basis by which to go to court for a judicial declaration of dissolution of the
partnership.

2. Settling of Accounts

Under Article 1863 of the New Civil Code, in settling accounts after dissolution, the liabilities of the
partnership shall be entitled to payment in the following order:

(a) Those to creditors, in the order of priority as provided by law, except those to limited partners
on account of their contributions, and to general partners;
 (b) Those to limited partners in respect to their share of the profits and other compensation by way
of income on their contributions;
(c) Those to limited partners in respect to the capital of their contributions;
(d) Those to general partners other than for capital and profits;
(e) Those to general partners in respect to profits;
(f) Those to general partners in respect to capital.

Article 1863 specifically provides that "Subject to any statement in the certificate or to subsequent
agreement, limited partners share in the partnership assets in respect to their claims for capital, and in
respect to their claims for profits or for compensation byway of income on their contribution
respectively, in proportion to the respective amounts of such claims."