LAWS

on
BUSINESS
ORGANIZATIONS
By:

JUDGE BRYAN JASPER D. SOLIS

Law Professor, College of Accountancy
 BOOK ONE
LAW ON PARTNERSHIP

Definition.
1. As a contract
It is a contract whereby two or more persons bind themselves to
CONTRIBUTE money, property, or industry to a common fund with the intention of
dividing the profits among themselves or in order to exercise a profession.
2. As a business organization
It has a juridical personality separate and distinct from that of each of the
partners. It begins from the moment of the execution of the contract, unless it is
otherwise stipulated.

Characteristics of partnership as contract

1. Consensual
2. Principal
3. Bilateral or multilateral
4. Nominate
5. Preparatory
6. Onerous

Essential requisites of partnership

1. There must be a valid contract.
2. Contribution of money, property or industry to a common fund.
3. Object/purpose must be a lawful one.
4. Intention of dividing the profits among the partners
5. “Affectio societatis”
The desire to formulate an active union, with people among whom there exist
a mutual confidence and trusts.
6. New Personality
The object must be for profit and not merely for the common enjoyment
otherwise only a co-ownership has been formed. However, pecuniary profit need
not be the only aim; it is enough that it is the principal purpose.

Artificial persons as partners

For artificial persons like partnerships and corporation, the weight of authority is
that a partnership can form a partnership with individuals and other partnerships, but
not so in the case of corporation on the ground of public policy.

Consequences of partnership as juridical entity

1. Its juridical personality is separate and distinct from that of each partner
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 2. The partnership can in general:
a. acquire and possess property of all kinds
b. incur obligations
c. bring civil and criminal actions
d. can be adjudged insolvent even if the individual members be each financially
solvent.
e. unless he is generally sued, a partner has no right to make a separate
appearance in court, if the partnership being sued is already represented

Comparative Table: Advantages vs. disadvantages of Partnership

Advantages
a. It easier to organize since it can be a. There is unlimited liability on the
formed by mere agreement of the
partners and does not entail a high
cost of formation.
b. Compared to a corporation, there is
less governmental supervision and
control in a partnership.
c. It is composed of people who have
trust and confidence in one another;
hence, one cannot be admitted into
the partnership without the consent
of all the partners.
d. In the absence of a contrary
agreement, every partner has a voice
in the conduct of its business since
each one is considered an agent of
the partnership.
Disadvantages
part of the general partners who can
be held liable even to the extent of
their separate assets.
b. A partnership is easily dissolved
since the death, withdrawal, and
insolvency of a general partner,
among other causes, dissolves the
partnership.
c. A partnership has limited existence
because it has no power of
succession.
d. It is more difficult to raise huge
amount of capital in a partnership
since it can be formed only by
people who have trust and
confidence in one another.
e. An industrial partner cannot
generally engage in a business of his
own even if the same is of a kind
different from partnership business.

Rules to determine whether a partnership exists

1. Persons who are not partners to each other are not partners as to third persons
2. Co-ownership of a property does not itself establish a partnership, whether or not
such co-owners or co-possessors share in any profits made by the use of the
property.

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 3. Sharing of gross returns alone does not indicate a partnership whether or not the
persons sharing them have a joint or common right or interest in any property
from which the returns are derived.
4. General Rule: The receipt of the share in the profits is a strong presumptive
evidence of partnership. However, no such inference will be drawn if such profits
were received in payment:
a. as a DEBT by installments or otherwise
b. as WAGES of an employee
c. as RENT to a landlord
d. as an ANNUITY to a widow or representative of a deceased partner
e. as INTEREST on a LOAN, though the amount of payment vary with the
profits of the business
f. as the CONSIDERATION for the sale of a GOOD WILL of a business or other
property or otherwise

Effects of unlawful partnership.

1. If the illegality of the partnership constitutes a crime:
a. The partnership is void.
b. The partners will be criminally prosecuted.
c. The proceeds of the crime and the instruments or tools with which it
was committed shall be forfeited in favor of the government, unless
they be the property of a third person not liable for the offense, but
those articles which are not subject of a lawful commerce shall be
destroyed.
2. If the illegality of the partnership does not constitute a crime or there has been
no criminal prosecution.
a. The partnership is void.
b. The proceeds or profits, but not the contributions of the partners shall
be forefeited.

Form of partnership contract

General Rule: a partnership may be constituted in any form.

Exceptions:
1. Where immovable property or real rights thereto are contributed (regardless
of the amount thereof)
a. The partnership contract must be in a public instrument, and
b. An inventory or listing of the said property must be made, signed by the
parties and attached to the public instrument. This requirement is
satisfied if the inventory is incorporated in the public instrument itself
especially in cases where only few of such immovable property have been
contributed.

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 Failure to comply with the above requirements produces the following effects:
a. The partnership contract is VOID.
b. The partnership does not acquire juridical personality.
2. Where the partnership capital is Php3,000.00 in money or property
a. The partnership must be in a public instrument.
b. Registered with the Securities and Exchange Commission (SEC).
Failure to comply with the above requirements produces the following effects:
a. The partnership contract is still VALID. Accordingly, the partnership still
acquires juridical personality.
b. The liability of the partnership and members thereof to third persons are
not affected.
3. If the partnership is a limited partnership
a. A certificate must be signed and sworn to by the partners, and
b. Recorded with the SEC.
Failure to comply with the above requirements produces the following effects:
a. The partnership will be considered a general partnership.
b. The partnership still has a juridical personality.

Registration with the SEC.

It is NOT a condition precedent for the acquisition by the partnership of a juridical
personality, still registration is required for the following reasons:
1. For issuance of business permits by the local government where the partnership
is to operate business.
2. For issuance of BIR Registration Certificate where registration with the SEC is
required.
3. For third persons or the public who may require proof of existence of the
partnership.

Kinds of partnerships.
1. As to object
a. Universal partnership
i. Universal partnership of all present property.
ii. Universal partnership of profits.
b. Particular partnership.
2. As to liability of partners
a. General partnership—one where all the partners are general partners
who are liable to the extent of their separate properties.
b. Limited partnership—one where there is at least one general partner and
at least one limited partner. The general partners are liable to the extent
of their separate properties, while the limited partners are liable only to
the extent of their contributions to the firm.
3. As to duration
a. Partnership for a fixed term.
b. Partnership for a particular undertaking.
c. Partnership at will.
4. Other kinds
a. Partnership by estoppel.
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Kinds of partners.
1. As to liability
a. General partner—one who is liable for partnership debts to the extent of
his separate property after all the assets of the partnership have been
exhausted.
b. Limited partner—one who is liable for partnership debts to the extent of
his capital contribution only.
c. General-limited partner—one who has all the rights and powers and is
subject to all the restrictions of a general partner, except that in respect
to his contribution, he shall have all the rights against the other members
which he would have had if he were not also a general partner. Hence, he
shall be liable pro rata to partnership creditors to the extent of his
separate property after the partnership assets have been exhausted, but
he can demand reimbursement of the amount he has paid from the
general partners.
2. As to contribution
a. Capitalist partner—one who contributes money and/or property to the
common fund.
b. Industrial partner—one who contributes his services or industry to the
partnership. Such industry may be physical or intellectual industry.
c. Capitalist-industrial partner—one who contributes not only money
and/or property, but also services to the partnership.
3. Other classifications
a. Managing partner—one who manages the business or affairs of the
partnership.
b. Liquidating partner—one who takes charge of the winding up of the
affairs of the partnership.
c. Nominal partner—one who is not actually a partner but who may
become liable as such to third persons (such as partner by estoppel)
d. Ostensible partner—one is active and known to the public as a partner,
such as by allowing his name to be included in the firm name.
e. Secret partner—one whose connection with the partnership is kept from
the public.
f. Silent partner—one who has no voice or active part in the management
of the business of the partnership (though he shares in the profits and
losses and may be known to the public as partner)
g. Dormant partner—one who does not participate in the management of
the business and is not known to the public as a partner; he is a secret
and silent partner.

Kinds of universal partnership

1. Universal partnership of all present property
a. Concept—this is a partnership which all the partners contribute all the
properties which actually belong to them to a common fund, with the
intention of dividing the same among themselves, as well as the profits
which they may acquire therewith.
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 b. Properties which shall belong to the common fund
i. properties belonging to the partners at the time of the constitution of
the partnership (present properties)
ii. profits that may be acquired from the present properties
iii. properties acquired by each partner after the formation of the
partnership but only if stipulated. The property shall include:
a. The property itself, except that the stipulation does not
cover proeprties acquired by INHERITANCE, LEGACY or
DONATION.
b. The profits and fruits therefrom, including those from
properties acquired by inheritance, legacy or donation.
2. Universal partnership of profits.
a. Concept—this comprises all that the partners may acquire by their work or
industry during the existence of the partnership.
b. Profits/properties belonging to the common fund—
i. Profits acquired by the partners by their work or industry during the
existence of the partnership (profits acquired by the partners without
exertion of physical or intellectual efforts are excluded, e.g. lottery
winnings, donation or inheritance)
ii. The usufruct (the use) of the properties belonging to each partner at
the time of the constitution of the partnerhip; ownership of the
properties themselves still belong to the individual partners as only the
usufruct passes to the partnership.
iii. The profits and fruits from the properties aforementioned.
iv. Profits and fruits, if stipulated, of properties acquired by each partner
after the constitution of the partnership.

Rule when articles universal partnership does not specify its nature
1. When there is no specification of nature of universal partnership, such only
constitutes a universal partnership of profits.
2. Reason for the rule: If the doubt in interpretation refers to the incidents of a
gratuitous contract, less transmission of rights shall prevail.

Prohibition to enter into a universal partnership

Persons who are prohibited from giving each other any donation or advantage
cannot enter into a universal partnership. The following donations are void:
1. Donations between spouses during the marriage, except
moderate gifts given on the occasion of a family rejoicing. This applies to
persons living together as husband and wife without the benefit of marriage.
2. Those made between persons who were guilty of adultery or
concubinage at the time of donation.
3. Those made between two persons found guilty of the same
criminal offense, in consideration thereof.
4. Those made to a public officer or his wife, descendants or
ascendants, by reason of his office.

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Particular partnership
A particular partnership has for its object:
1. Determinate things
2. The use or fruits of determinate things
3. Specific undertaking
4. Exercise of a profession

Obligations of the partners

A partnership begins from the moment of the execution of the contract. Even if
contributions have not yet been made the firm already exists, for partnership is a
consensual contract.

Kinds of partnership as to duration

1. Partnership for a fixed term—one for which a duration is fixed by the
partners, such as partnership formed for a term of 5 years upon the expiration
of which the partnership is deemed dissolved.
2. Partnership for a particular undertaking—one which is organized for a
certain undertaking, such as partnership that is formed to sell 50 condominium
units, and is deemed dissolved upon the sale of the last unit.
3. Partnership at will—one that may be terminated at any time by one or more
or all of the partners. It may be:
a. One where the partners did not agree on a definite term or a specific
undertaking.
b. One where the partnership was formed for a fixed term or a specific
undertaking and such term expires or such undertaking is attained, but
the business is continued by the partners.

Obligations of a partner with respect to contribution of specific things

1. To deliver to the partnership at the time it was constituted or on the date
stipulated the property he has promised to contribute.
2. To take care of the property before its delivery to the partnership with the
diligence of a good father of the family.
3. To be liable for damages in case of default.
4. To answer for eviction in case the partnership is deprived of the property he
has contributed.

Appraisal of contribution
Goods contributed to the capital of a partnership should be appraised to determine
the amount to be credited to the capital account of the partner making the contribution.
The goods contributed to the capital of a partnership shall be appraised:
1. According to the manner stipulated in the contract of partnership.
2. In the absence of stipulation, the appraisal shall be made by experts chosen by
the partners, according to present prices.
Any improvement or diminution in the value of the goods after their appraisal shall
be for the account of the partnership. Thus, any loss taking place after appraisal shall
be borne by the partnership.

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Obligations of a partner with respect to contribution of money
1. To deliver to the partnership at the time it was constituted or on the date
stipulated the money he has promised to contribute to the partnership.
2. To pay interest on the amount he had promised to contribute from the time he
should have complied with his obligation.
3. To pay damages suffered by the partnership by reason of his default.

Obligation of a partner with respect to amount appropriated

1. To reimburse to the partnership the amount that he has taken from the
partnership coffers.
2. To pay interest on the amount he had converted for his own use from the time
of conversion.
3. To pay the damages suffered by the partnership by reason of the conversion.

Right of an industrial partner to engage in business apart from the partnership

business.
An industrial partner CANNOT engage in business for himself unless the
partnership expressly permits him to do so. The prohibition applies even if the business
he will engage in is of a kind that is different from the partnership business.
Reason for the prohibition: The partnership is the owner of the services of the
industrial partner, which are his contribution to the common fund of the partnership.
Effect if the industrial partner engages in business for himself without the express
permission of the partnership:
a. Exclude him from the partnership business, with a right to damages (this
results in the dissolution of the partnership)
b. Avail themselves of the benefits obtained from the business he engaged in, with
a right to damages.

Obligation of partners to contribute equal shares

The partners are obliged to contribute equally to the capital of the partnership,
unless they agree to contribute different amounts.

Obligation to contribute additional capital

In case of an imminent loss of the business of the partnership, each partner is
obliged to contribute additional share to the capital to save the business. This
obligation, however, does not apply to the following:
a. Industrial partner
b. Capitalist partner who, by agreement, are not required to give additional
contribution to the capital.
Effect if capitalist partner refuses to contribute unless exempt: Such partner shall
be obliged to sell his interest to the other partners, unless his financial condition does
not permit him to make such additional contribution. The sale by such partner of his
interest in the firm will, however, result in the dissolution of the partnership because he
ceases to be associated in the carrying on of the business, though the remaining
partners may continue the business.

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Rule when payment is made by a third person who owes separate demandable debts
to the partnership and to the partner authorized to collect the credits of the
partnership.
a. If the partner authorized to receive payment issues the receipt of the
partnership, payment shall be applied in its entirety to the partnership credit.
b. If the partner authorized to receive payment issues his own receipt, payment
shall be applied to the two credits proportionately.

When payment is applied in its entirety to the partner’s credit:

a. When the debt is owed by the third person to a partner not authorized to collect
the credits of the partnership.
b. When the debt to the partnership is not yet due.
c. When the debt owed by the third person to the partner authorized to receive
payment is more onerous to the debtor and the latter avails himself of the right
to apply the payment to such debt.

Liability of a partner for damages suffered by the partnership due to his fault.
Every partner is responsible to the partnership for damages suffered by it through
his fault. He cannot compensate them with the profits and benefits, which he may have
earned for the partnership by his industry. However, the courts may equitably lessen his
responsibility if through the partner’s extraordinary efforts, unusual profits have been
realized.

When partnership bears risk of loss

The partnership shall bear the risk of loss for the following contributions of
partners:
a. Fungible things or those that cannot be kept without deteriorating.
b. Things contributed to be sold.
c. Things brought and appraised in the inventory, unless the contrary was
stipulated.

When partners bears the risk of loss

Loss of specific and determinate things, not fungible, contributed to the
partnership so that only their use and fruits may be for the common benefit is borne by
the partner.
Such loss will result in the automatic dissolution of the partnership since he is
deemed not to have contributed anything to the partnership.

Obligations of partnership to partners

1. To pay the partner for the amounts he may have disbursed on behalf of the
partnership with interest from the time the expenses were made.
2. To pay for the obligations which a partner may have contracted in good faith in
the interest of the partnership business.
3. To answer for risks in consequence of the management of partnership affairs.

Rules on division of profits and losses

1. If all the partners are CAPITALIST partners
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 a. Profits and losses shall be divided according to their agreement.
b. If only the sharing of the partners in the profits have been agreed upon, the
share of each partner in the losses shall be in the same proportion as the
share in each in the profits.
c. In the absence of both, the share of each partner in the profits and losses
shall be in proportion to his capital contribution.
2. If aside from the capitalist partners, there is also an INDUSTRIAL partner
a. Profits--
i. The profits shall be divided according to their agreement.
ii. In the absence of any agreement thereon, the industrial partner
shall first receive a just and equitable share of the profits, and
thereafter, each capitalist partner shall share in the profits in
proportion to his capital contribution.
b. Losses
i. The industrial partner shall not share in the losses
ii. The capitalist partners shall share In the losses as follows:
1. According to their agreement
2. In the absence of any agreement, each capitalist partner
shall share in the losses in the same proportion as the
share of each in the profits.
3. In the absence of both, each capitalist partner shall share
in the losses in proportion to his capital contribution.

3. If aside from capitalist partners, there is also CAPITALIST-INDUSTRIAL

PARTNER
a. Profits—
i. the profit shall be divided according to their agreement
ii. in the absence of any agreement, the profits shall be divided
as follows:
1. The capitalist-industrial partner shall first receive a
just and equitable share of the profits in his capacity as
industrial partner.
2. Thereafter, each capitalist partner, including the
capitalist-industrial partner in his capacity as capitalist
partner, shall share in the profits in proportion to his
capital contribution
b. Losses—
i. Losses shall be divided among the partners, including the
capitalist-industrial partner in his capacity as a capitalist
partner, according to their agreement.
ii. In the absence of any agreement thereon, losses shall be
divided among the partners including the capitalist-industrial
partner in his capacity as capitalist partner, according to the
ration of their capital contribution.
iii. In both of the above cases of loss, the capitalist-industrial
partner shall not share in the losses in his capacity as
industrial partner.
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Designation of share in the profits and losses by a third person
If the designation of the share of the partners in the profits and losses has been
entrusted to a third person, the same shall be binding upon the partners and may be
impugned only when it is manifestly inequitable. However, even if such designation be
manifestly inequitable, it can no longer be impugned:
1. By a partner who has begun to execute it; or
2. By any partner if three months had already lapsed from the time he obtained
knowledge thereof.

Designation of share in the profits and losses entrusted to one of the partners is
VOID. Accordingly, the profits and losses shall be divided among the partners as if there
was stipulation thereon; hence, according to the ration of their capital contribution.

Exclusion of one or more partners from sharing in the profits and losses
A stipulation excluding one or more partners from sharing in the profits and losses
is VOID for the reason that a partnership is established for the common benefit or
interest of the partners. The exception is in the case of an INDUSTRIAL partner who may
be validly excluded from losses by stipulation of the capitalist partners since the law
itself provides that he shall not be liable for losses.

When partner is appointed as manager in the articles of partnership

1. Scope of authority of the managing partner
The managing partner may execute all acts of administration despite the
opposition of his partners unless he acts in bad faith.
2. Revocation of the appointment of the managing partner
a. With just or lawful cause
His appointment can be revoked by the vote of the partners owning the
controlling interest.
b. Without just or lawful cause
His appointment can be revoked only with the consent of all the partners
including the managing partner because such revocation would be a
novation of the articles of partnership.

When the partner has been appoint manager after the partnership has been
constituted.
1. Scope of authority
The managing partner may execute all acts of administration, but in case of
opposition by the other partners, the partner owning the controlling interest
may resort to voting for his removal as manager.
2. Revocation of the authority of the managing partner.
He may be removed with or without just or lawful cause by the vote of the
partners owning the controlling interest. This is so because such partner is
only an agent whose authority may be revoked at any time by his principal
which is the partnership.

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Rule if two or more partners have been entrusted with the management of the
partnership
1. Scope of authority
If two or more partners have been appointed as managers and there is no
specification of their respective duties or there is no stipulation that one of them
shall not act without the consent of the others, each manager may separately
execute acts of admininistration.
2. In case of opposition by other managers.
a. The decision of the majority of the managing partners shall prevail.
b. In case of a tie, the vote of the managing partners owning the controlling
interest shall prevail.

Rule in case of two or more managing partners and none of them can act without
the consent of the others
If two or more partners have been appointed as managers and there is a
stipulation that none of them shall act without the consent of the others, these rules
govern:
1. The concurrence or consent of all shall be necessary for the validity of the acts
2. The absence or disability of any one of them cannot be alleged.

Rule when management has not been agreed upon

1. All the partners shall be considered agents of the partnership (all of them are
managers)
However, none of them may, without the consent of the others, make any
important alteration in the immovable property of the partnership, even if it
may be useful to the partnership. But if the refusal to give consent by one of
the partners is manifestly prejudicial to the interest of the partnership, the
court’s intevention may be sought.
2. Whatever any of them may do alone shall bind the partnership.
3. In case of the opposition of the other partners, the following rules shall be
observed:
a. The decision of the majority shall prevail
b. In case of a tie, the decision of the partners owning the controlling
interest shall prevail.

Right of a partner to associate another person with him in his share

A partner may enter into an agreement with another person to associate the latter
in his share which is personal property. However, the associate does not become a
partner unless all the other partners consent in view of the element of delectus
personae that characterizes a contract of partnership.

Partnership books
1. Every partner has an inherent right as co-owner of the business to have access
to partnership bools and inspect and copy any of them.
2. Where to keep books: at the place of business unless there is an agreement
among the partners that they shall be kep elsewhere

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 3. Time of inspection: during reasonable hours on any business day throughout
the year.

Partner’s obligation to render information

Each partner has an obligation to render on demand true and full information of
all things affecting the partnership to any partner or legal representative of any deceased
partners or of any partner under legal disability.

Partner’s obligation in respect to benefit and profits

Every partner has an obligation to account and hold as trustee for the partnership
any benefit or profits derived by him without the consent of the other partners from:
1. Any transaction connected with the formation, conduct or liquidation of the
partnership.
2. Any use by him of partnership property.

Right of capitalist partner to engage in business apart from partnership business

1. If the business he will engage in is of a kind DIFFERENT from the partnership
business, he can engage in such business without getting the consent of the
partnership or the other partners.
2. If the business he will engage in is of the SAME kind as the partnership
business, he cannot engage in such business unless there is a stipulation
among the partners allowing him to engage in such business. Otherwise, he
will be unduly competing with the partnership.
3. If capitalist partner engages in the SAME kind of business WITHOUT the
consent of the other partners:
a. The capitalist partner shall bring to the common fund any profits
accruing to him from his transaction.
b. He shall personally bear all the loses.

Partner’s right to a formal account of partnership affairs

Any partner shall have the right to a formal account of partnership affairs in the
following cases:
1. If he is wrongfully excluded from the partnership business or possession of the
partnership property by his co-partners.
2. If the right exists under the terms of any agreement.
3. With respect to benefits or profits derived by a partner without the consent of
his co-partners from any transaction connected with the formation, conduct or
liquidation of the partnership or from the use by him of partnership property.
4. Whenever other circumstances render it just and equitable.

Property rights of a partner

1. His rights in specific partnership property
2. His interest in the partnership
3. His right to participate in the management.

Right to specific partnership property

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 A partner is a CO-OWNER with his partners of specific partnership property. This,
special form of co-owernship is called tenancy in partnership, where each partner is a
co-owner of the entire partnership property and not the sole owner of any part of it.
1. Each partner has an equal right to possess and use specific partnership for
partnership purposes, but not for any other purposes unless the other partners
consent.
2. A partner’s right in specific partnership property is not assignable.
3. A partner’s right in specific partnership property is not subject to attachment
or execution.
4. A partner’s right in specific property is not subject to legal support.

Partner’s interest in the partnership

A partner’s interest in the partnership is his economic interest in the firm. More
specifically, it consists of his share in the profits and surplus. Surplus refers to the
funds and other assets of the partnership after the partnership has been dissolved and
its liabilities have been settled. A partner’s interest in the partnership is personal
property that may be conveyed or transferred to others.

Conveyance of a partner’s interest

A partner may voluntarily assign, sell, donate or in any other way convey his
interest in the partnership to third persons. He may even use such interest as collateral
for a personal debt although in such a case, there is no alienation of the interest.
Effects of conveyance of a partner’s interest:
1. The conveyance does not of itself dissolve the partnership.
2. The trasnferring partner shall continue to be a partner and shall enjoy the
rights and be subject to the liabilities of a partner.
3. The assignee or transferee of the partner’s interest does not become a partner
unless all the other partners give their consent thereto. Thus, not being
partner, he has no right to:
a. Interfere in the management of the business
b. Require any information of partnership transactions; and
c. Inspect partnership books

Rights of assignee
The rights of the assignee of a partner’s interest shall be limited to the following:
1. To receive the profits to which the assigning partner would otherwise be
entitled.
2. To avail himself of the usual remedies in case of fraud in management.
3. In case of the partnership is dissolved, to require an account from the date only
of the last account agreed to by all the partners.

Charging of a partner’s interest

1. The judgement creditor of a partner may ask the court to issue a charging order,
an order attaching or levying, the interest of a partner, for the satisfaction of the
amount of the judgment. While such charging order is allowed, partnership
creditors enjoy preference over a partner’s property rights including his interest
in the partnership.
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 2. Appointment of a receiver and other orders:
a. Court may appoint a receiver of the partner’s share of the profits, and of
any other money due or to fall due to him in respect of the partnership;
and
b. Make all other orders, directions, accounts, or inquiries which the debtor
partner might have made, or which the circumstances of the case may
require.
3. Redemption of the interest charged
Redemeption refers to the payment of the amount due in order to discharge
the lien on the interest charged. The interest charged may be redeemed at any
time before foreclosure, or in case of sale directed by the court:
a. With the separate property of any one or more of the partners; or
b. With partnership property, by any one or more of the partners with the
consent of all the partners whose interests are not so charged and sold.

Obligations of the partners with regard to third persons

1. Requirement of a firm name—as juridical person, the partnership must have a
name. A person who, not being a member of the partnership, includes his
name in the firm name shall be subject to the liability of a partner. Such
person, however, shall not have the rights of a partner such as the right to
participate in management, receive a share of the profits, and inspect the
partnership books.
2. All partners, including industrial ones, shall be liable pro rata with all their
property and after all the partnership assets have been exhausted, for the
contracts which may be entered in the name and for account of the partnership.
Any stipulation against such liability shall be VOID.
a. Nature of liability of partners to third persons
i. Pro rate—liability is equal (joint) among the partners because
it is meant to be imposed upon all of them including the
industrial partner.
ii. Subsidiary—each partner shall be liable with his separate
property (including the industrial partner) after all the
partnership assests have been exhausted.
b. Partners liable
All general partners whether:
i. Capitalist, or
ii. Industrial partner
c. Status of stipulation exempting a partner from liability to third persons
Any stipulation exempting a partner from liability to third persons shall
be VOID as regards such third persons, but VALID among the partners.

If there is such stipulation and/or there is an industrial partner, liabilities to third

persons shall be paid as follows:
1. The assets of the partnership shall first be used to pay the liabilities.
2. If the partnership assets are not sufficient, the liabilities shall be paid equally
from the separate assets of the partners including the industrial partner.

16
 3. Thereafter, the partners not exempted from subsidiary liability shall reimburse
according to their profit and loss agreement or in the ratio of their capital
contribution, whichever is applicable, to the following partners the amount paid
by them from their separate assets:
a. Industrial partner whom the law exempts from losses, as distinguished
from liabilities.
b. General partners exempted from liability to third persons by reason of
stipulation among the partners.

When partnership liable to third persons for acts of partners

1. When a partner is authorized to act for the partnership, whether or not the act
is for apparently carrying on in the usual way the business of the partnership.
2. If the partner is not authorized to act for the partnership but the act is for
apparently carrying on in the usual way the business of the partnership
and the third person was not aware of the partner’s lack of authority.

When partnership not liable to third persons for acts of partners

1. When although the act is for apparently carrying on in the usual way the
business of the partnership, the partner is not authorized to act for the
partnership and the third person has knowledge of the partner’s lack of
authority.
2. When the partner is not authorized to act for the partnership and the act is not
for apparently carrying on in the usual way the business of the partnership.

Acts not considered for apparently carrying on

The following are acts which are not for apparently carrying on in the usual way of
the business of the partnership and may not be performed by a partner unless he is
authorized by all the partners, or the other partners have abandoned the business:
1. Assignment of the partnership property in trust for creditors or on the
assignee’s promise to pay the debts of the partnership
2. Disposition of the goodwill of the business
3. Doing any other act which would make it impossible to carry on the ordinary
business of the partnership
4. Confession of judgement
5. Entering into a compromise concerning a partnership claim or liability
6. Submission of a partnership claim or liability to arbitration
7. Renunciation of a claim of the partnership.

Effect of admission or representation made by a partner

Any admission or representation made by a partner is evidence against the
partnership if the following requisites are present:
1. Admission or representation must concern partnership affairs.
2. It must be made within the scope of the authority of the partner making the
admission or representation.
3. It must be made during the existence of the partnership.
4. The existence of the partnership must be shown by evidence other than by such
admission or representation.
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Notice to a partner
Notice to any partner relating to partnership affairs is notice to the partnership.

Knowledge of a partner
1. Knowledge of a partner acting on the particular matter
Such knowledge is also knowledge of the partnership if he acquired the same:
a. While already a partner, or
b. Before his admission to the partnership, provided the same was still present
to his mind
2. Knowledge of any other partner
Such knowledge is also knowledge of the partnership provided the following
requisites are present:
a. He acquired the same while aready a partner, and
b. He could and should have reasonably communicated the information to
the partner acting on the particular matter.

Solidary liability of partnership and all partners for torts

The partnership shall be solidarily liable with all the partners in the following
cases:
1. For loss or injury to a third person or any penalty is incurred by reason of the
wrongful act or ommission of any partner acting in the ordinary course of the
business of the partnership or with authority of his co-partners.
2. When one partiner acting within the scope of his apparent authority receives
money or property from third person and misapplies it.
3. Where the partnership in the course of the business receives money or property
of a third person and such money or property is missapplied by any partner
while it is in the custody of the partnership.

Right of the partnership and the partners not at fault

If the partnership and/or any partner of the partners other than the partner at
fault are made to pay the damages, the former can recover from the partner at fault the
damages they paid to third person. Hence, the partner at fault is ultimately liable.

Partnership by estoppel
A partnership by estoppel occurs when an individual’s statement, conduct or
silence leads a third person to the reasonable belief that a partnership exists. It is not a
true partnership; rather, it is a doctrine applied by the courts to prevent injustice to
innocent thid persons who are misled into believing that a partnership exists.

Kinds of partnership by estoppel

a. When a person represents himself, or consents to another prerson representing
him to anyone, as a partner in an existing partnership.

18
 1. If all the partners consented to such misrepresentation, a partnership by
estoppel is created between the actual partners and the person who made, or
consented to, the misrepresentation. Here, a partnership liability results.
Thus, the assets of the partnership shall be used to pay the liability, and
after their exhaustion, both the actual partners and the person who made or
consented to the misrepresentation shall be liable with their separate
properties.
2. If not all the partners consented to the misrepresentation, no partnership
liability results. A partnership by estoppel is created among the actual
partners who consented to the misrepresentation and the person who made
or consented to the misrepresentation, each of whom shall be liable jointly
with their separate properties.
b. When a person represents himself as partner in a non-existing partnership
Here, no partnership liability arises as the partnership is non-existent. The
person who made the misrepresentation and all the persons who consented
to it are liable jointly or pro rata to the person who suffers damage on
account of such misrepresentation.

Liability of a newly-admitted partner

1. Obligations existing at the time of his admission
A person who joins an existing partnership is liable for partnership
obligations which were contracted prior to his admission as if he had been a
partner at the time they were incurred. His liability, however, is limited to his
contribution, unless there is a stipulation that his liability extends to his
separate property.
2. Obligations incurred subsequent to his admission
For partnership obligations contracted after his admission, the incoming
partner is liable pro rate with the other parners for their separate assets if the
partnership assets have been exhausted.

Preference of partnership creditors in partnership assets over the private creditor

of a partner
In the payment of liabilities of the partnership and the private debts of a partner,
preference shall be as follows:
1. Partnership creditors shall be paid first out of the partnership assets.
2. Thereafter, a partner’s separate creditor shall be paid out of the share of the
partner owing him if there is an excess. The separate creditor of a partner may
in fact ask for the attachment and public sale of the share of the partnership
assets for his claim, but without prejudice to the preferential rights of
partnership creditors over the proceeds.
3. If the share of the debtor partner in the remaining assets of the partnership is
not enough to settle his private debts, his private creditor can go after the
partner’s separate assets over which he enjoys preference.

Dissolution and winding up

Comparative table
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 Dissolution Winding up Termination
Dissolution is the change in Winding up is the process It refers to the point when
the relation of the partners of settling partnership all the business or affairs of
caused by any partner affairs after the dissolution. the partnership are
ceasing to be associated in completely wound up.
the carrying on of the
business

Causes of automatic dissolution

1. Without violation of the partnership agreement
a. By termination of the definite term specified in the agreement
b. By termination of the particular undertaking specified in the agreement
c. By express will of any partner when no definite term or particular
undertaking is specified
d. By the express will of all the partners either before or after the
termination of any specified term or particular undertaking
e. By expulsion of any partner
2. In violation of the partnership agreement—withdrawing partner is liable for
payment of damages
3. Partnership becomes unlawful
4. In the following cases of loss:
a. Loss before or after the delivery of property to the partnership where the
partner contributed only its use or enjoyment, he having reserved the
ownership thereof.
b. Loss before the delivery to the partnership of a specific property which a
partner has promised to contribute to the partnership.
Where a partner has promised to contribute a specific property to the
partnership and not merely its use or enjoyment, its loss before delivery
causes the automatic dissolution of the partnership. Being still the
owner, the partner bears the loss and is considered in default as regards
his contribution to the partnership. If the loss occurs after the
delivery of the property to the partnership, the partnership is not
dissolved. The partnership, having acquired ownership upon delivery,
bears the loss.
5. Death of a partner
6. Insolvency of any partner or of the partnership
7. Civil interdiction of a partner

Dissolution by decree of court

1. On application by or for a partner—a partner may seek judicial dissolution of
the partnership on any of the following grounds:
a. Insanity of a partner
b. Incapacity of a partner to perform his part of the partnership contract
c. Partner’s conduct affecting prejudicially the carrying on of the business
d. Willful or persistent breach of the partnership agreement by a partner
e. The partnership business cannot be carried on except at loss
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 f. Other circumstances rendering a dissolution equitable
2. On application of purchaser of a partner’s interest
a. After the termination of the term or undertaking, or at ay time when the
partnership was a partnership at will when the interest was assigned or the
changing order was issued.

Effect of dissolution on authority of a partner

Dissolution terminates all authority of any partner to act for the partnership,
except with respect to the following:
1. Acts to wind up partnership affairs.
2. Acts to complete transactions begun before dissolution.

When authority of a partner to enter into new transaction is terminated among the
partners.
1. If the cause of dissolution is not by the act, insolvency or death of a partner
2. If the cause of the dissolution is the act of a partner and the partner who
entered into the new transaction had knowledge of the dissolution
3. If the cause of dissolution is the insolvency or death of a partner and the
partner who entered into the new transaction had notice or knowledge of such
insolvency or death

When authority of a partner to enter into a new transaction is not terminated

among the partners
1. If the cause of dissolution is the act of a partner and the acting partner had no
knowledge of the dissolution
2. If the cause of the dissolution is the insolvency or death of a partner and the
acting partner had no notice or knowledge of such insolvency or death

When the act of a partner after dissolution binds the partnership

1. When the act is necessary for winding up of partnership affairs
2. When the act is necessary to complete the transactions begun before
dissolution
3. In case of a new transaction or business in the following cases:
a. If the other party to the transaction had extended credit to the
partnership before dissolution .
b. If the other party to the transaction had not so extended credit before
dissolution but had nevertheless known of the partnership before
dissolution, and the fact of dissolution had not been advertised in a
newspaper of general circulation in the place at which business is
regularly carried on.
In the above cases, a partner is not liable with his separate property after the
exhaustion of partnership assets:
a. If he is unknown as a partner to the person with whom the contract is
made
b. So far unknown and inactive in partnership affairs that the business
reputation of the partnership could not be said to have been in any
degree due to his connection with it
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 4. Where although the partner has no authority to wind up partnership affairs, the
other party to the transaction is:
a. One who had extended credit to the partnership before dissolution and he
had no notice or knowledge of the partner’s lack of authority
b. One who had not so extended credit before dissolution and having no
notice or knowledge of the partner’s lack of authority, the fact of want of
authority has not been advertised in a newspaper of general circulation in
the place at which the business is conducted.

When the act of partner after dissolution does not bind the partnership
1. Where the partnership is dissolved because it is unlawful to carry on the
business, unless the act is appropriate for winding up partnership affairs.
2. Where the acting partner is insolvent.
3. Where the partner had no authority to wind up partnership affairs, except with
innocent third persons
4. Where a partner’s authority is already terminated among the partners and third
person had actual or constructive knowledge, as the case may be, of the
dissolution of the firm.

Summary of rules on liability of partners and the partnership for acts of a partner
after dissolution
1. If a partner’s authority is terminated among the partners but the partnership is
bound by the transaction:
a. The third person can go after the assets of the partnership
b. If the assets of the partnership are not sufficient, the third person can go
after the separate assets of each partner.
c. Therafter, the other partners can go after the acting partner to recover the
amount they paid out of their separate assets and to demand the return of
the amount paid out of the partnership assets. This is so because in so far
as the partners are concerned, the authority of the acting partner was
already terminated

2. If a partner’s authority is not terminated among the partners and the

partnership is bound by the transaction
a. The third person can go after the assets of the partnership.
b. If the assets of the partnership are not sufficient, the third person can go
after the separate assets of each partner
c. Thereafter, the other partners cannot go after the acting partner for
recovery because after all the authority of the latter was not terminated
among all the partners. Here, the partnership and the partners are liable
as if there had been no dissolution of the firm.

3. If a partner’s authority is terminated among the partners and the partnership is

not bound by the transaction.

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 a. The partnership assets cannot be held to answer for the liability to the
third person.
b. The acting partner alone is liable to the third person with whom he
contracted, and he cannot call on the other partners to share in the
payment.

4. If a partner’s authority is not terminated among the partners, but the

partnership is not bound by the transaction—this may occur when a
partnership is dissolved by reason of the death of a partner and the acting
partner has no knowledge of such death. The transaction does not bind either
the partnership or the acting partner by reason of the bad faith of the third
person.

Effect of the dissolution on existing liabilities of partners

The dissolution of the partnership does not of itself discharge the existing liabilities
of any partner. A partner is discharged from liability only upon agreement of the
following:
1. The partner himself liable
2. The partnership creditor; and
3. The person or partnership continuing the business.

Separate property of deceased partner

The separate property of a deceased partner shall be liable for partnership
obligations incurred while he was a partner. However, preference shall be given to the
payment of his separate debts.

Who may wind up partnership affairs

1. Extrajudicially
a. By the partner or partners designated in the agreement
b. If none was designated
i. By the partner or partners who have not wrongfully dissolved
the partnership.
ii. If all the partners are dead, the legal representative of the last
surviving partner who was not insolvent.
2. Judicially
Under the direction and control of the court, upon proper causes shown by
any partner, his legal representative or assignee.
The appointee of the court should be a surviving partner, not the legal
representative of the deceased partner who was not insolvent, except when he was
the last surviving partner.

Power and right to dissolve: wrongful and non-wrongful dissolution

A partner has the power to dissolve a partnership at any time. However, he may
not have always the right. Thus, a partner has the power to withdraw from the
partnership before the end of the term specified in the agreement, but he does not have
the right because his withdrawal is in breach of his agreement to be with the partnership
23
up to the end of its specified term. In such a case, his dissolution of the partnership is
wrongful.
If a partner has the power and the right to dissolve the partnership at any time,
such as when he withdraws from the partnership in good faith when no term is specified
in the agreement, such dissolution is non-wrongful.

Dissolution without contravention of the partnership agreement.

If the partnership is dissolved without violating the partnership agreement, each
partner shall have the following rights:
1. To have the partnership property applied to discharge the liabilities of the
partnership.
2. To have the surplus, if any, applied to pay in cash the net amount owing to the
respective partners.
However, if the cause of the dissolution is the bona fide expulsion of a
partner and the expelled partner is discharged from all partnership liabilities,
either by payment or agreement of the expelled partner, the partnership creditors
and the partners continuing the business, he shall receive in cash only the net
amount due to him from the partnership.

Dissolution in contravention of the partnership agreement

1. Rights of partners who may have not caused the wrongful dissolution of the
partnership.
a. To have the partnership property applied to discharge the liabilities of the
partnership
b. To have the surplus, if any, applied to pay in cash the net amount owing to the
respective partners
c. To be indemnified for damages from the partner who has caused the wrongful
dissolution of the partnership
d. To continue the business of the partnership in the same name, either by
themselves or jointly with others, and for that purpose possess partnership
property provided that:
i. They pay the partner who has caused the wrongful dissolution of
the partnership the value of his interest in the partnership less
damages; or
ii. They secure its payment by a bond approved by the court
2. Rights of partner who has caused the wrongful dissolution of the partnership
a. If the business is not continued:
i. the partnership property applied to discharge the liabilities of
the partnership
ii. to receive his share in the surplus, less the damages suffered by
the other partners by reason of his having caused the wrongful
dissolution of the partnership
b. If the business is continued:
i. To have the value of his interest in the partnership less damages
paid to him in cash or have its payment secured by a bond
approved by the court. In ascertaining the value of such
24
 partner’s interest, the value of the goodwill shall not be
included. This is intended to penalize the partner for causing
the wrongful dissolution of the partnership.
ii. To be released from all existing liabilities of the partnership.

Grounds for rescission of partnership contract

1. Fraud
2. Misrepresentation of the parties to enter into the partnership contract

Rights of partner who was induced by fraud or misrepresentation

1. Right to a lien on or retention of, surplus profits 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.
2. Right to stand, after liabilities to third persons have been satisfied, in place of
partnership creditors for any payment made by him for partnership liabilities.
3. Right to be indemnified by the person guilty of fraud or misrepresentation against
all debts of the partnership.

Liquidation of dissolved partnership

This involves the sale of the assets of the partnership, the payment of its liabilities,
and the distribution of the remaining cash or other assets to the partners.

Order of payment of partnership liabilities

1. Those owing to creditors other than partners
2. Those owing to partners other than for capital and profits
3. Those owing to partners in respect of capital
4. Those owing to partners in respect of profits

Assets of the partnership

The following are the assets of the partnership to be applied in the order they are
declared for the payment of all the liabilities in the order that such liabilities are ranked:
1. The partnership property
2. The contributions of the partners necessary for the payment of liabilities
a. The contributions shall be made in accordance with the rules on the division
of the profits and losses
b. The individual property of a deceased partner shall be liable for such
contributions
c. The following may enforce payment of the contributions
i. An assignee for the benefit of the creditors
ii. Any person appointed by the court
iii. Any partner or his legal representative to the extent of the amount he
paid in excess of his share of the liabilities

Priority in the payment of liabilities if partnership property and the individual

property of the partners are in possession of the court for distribution.
Subject to the rights of lien or of secured creditors, the priority in the payment of
liabilities shall be as follows:
25
 1. Partnership creditors for partnership property
2. Separate creditors for individual property

Priority of claims against separate property of a partner who is insolvent or whose

estate is insolvent
1. Those owing to separate creditors
2. Those owing to partnership creditors
3. Those owing to partners by way of contributions

LIMITED PARTNERSHIP

Concept of limited partnership

A limited partnership is one formed by two or more persons 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 after the exhaustion of
partnership assets

Comparative table: Limited vs. General

Limited General

There should be at least one general
partner and at least one limited partner
There should be a certificate signed and
sworn to by the partners and recorded
with the SEC
All the partners are general partners
It may exist even if the agreement was
entered into orally by the partners, even
without the recording of the agreement
with the SEC

Advantages of a limited partnership to both general and limited partner

A limited partnership is advantageous for both general and limited partner. For
the general partner, he can generate additional capital without admitting another or
other general partners who should otherwise be entitled to management rights. He can
thus strengthen the firm’s finances while maintaining control of the business. For the
limited partner, he is entitled to a return on his investment, without risking his separate
assets since his liability is limited to his contribution to the property.

Requisites for the formation of limited partnership

A limited partnership may be formed by two or more persons by complying with
the following requirements:
1. They must sign and swear to a certificate stating the matters set forth in Art. 1844:
a. The name of the partnership, adding thereto the word “Limited”;
b. The character of the business
c. The location of the principal place of business
d. The name and place of residence of each member, general and limited
partners being respectively designated
e. The term for which the partnership is to exist
f. The amount of cash and a description of and the agreed value of the other
property contributed by each limited partner
26
 g. The additional contributions, if any, to be made by each limited partner and
the times at which or events on the happening of which they shall be made
h. The time, if agreed upon, when the contribution of each limited partner is to
be returned
i. The share of the profits or the other compensation by way of income which
each limited partner shall receive by reason of his contribution
j. The right, if given, of a limited partner to substitute an assignee as
contributor in his place, and the terms and conditions of the substitution.
k. The right, if given, of the partners to admit additional limited partners
l. The right, if given, of one or more of the limited partners to priority over
other limited partners as to contributions or as to compensation by way of
income, and the nature of such profits.
m. The right, if given, of the remaining general partner or partners to continue
the business on the death, retirement, civil interdiction, insanity or
insolvency of a general partner; and
n. The right, if given, of a limited partner to demand and receive property other
than cash in return for his contribution.
2. They must file for record the certificate in the Office of the Securities and Exchange
Commission.

Effect of failure to substantially comply with requirements

Failure on the part of the members to comply with the requirements set forth by
law will make the partnership a general partnership since the purpose of such
requirement is to protect the public. Accordingly, all the partners including those who,
by agreement, are to be limited partners, shall be liable to the extent of their separate
properties.

What a limited partner may contribute

A limited partner may contribute cash or other property, but not service. He must
be a capitalist partner.

Effect if a limited partner contributes services

A limited partner who contributes services shall be liable as a general partner
because in such a case he becomes an industrial partner.

Limited partner’s surname in firm name

A limited partner who knowingly allows his surname to be included in the firm
name shall be liable as a general partner to creditors who extend credit to the
partnership without actual knowledge that he is not a general partner.
A limited partner shall not be liable to partnership creditors although his surname
is included in the firm name in the following cases:
1. If it is also the surname of a general partner
2. Before his admission as a limited partner, the business of the firm had been
carried on under the name which included his surname.

Rights and powers of a general partner in a limited partnership

27
 A general partner in a limited partnership shall have all the rights and powers of a
general partner in a general partnership. Thus, a general partner is entitled to
management rights and can generally perform acts of administration.

Liabilities and restrictions of a general partner in a limited partnership

A general partner in a limited partnership shall be subject to all the restrictions and
liabilities of a partner in a general partnership. Thus, he can be held liable to the extent
of his separate property after partnership assets have been exhausted.
Without the written consent or ratification of the specific acts by all the limited
partners, a general partner or all the general partners have no authority to perform the
following acts which deviate from the ordinary course of business and are considered
acts of ownership or strict dominion:
1. Do any act in contravention of the certificate
2. Do any act which would make it impossible to carry on in 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 general partner
6. Admit a person as a limited partner, unless the right so to do is given in the
certificate
7. 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.

Rights of a limited partner

1. To have the partnership books kept at the principal place of business of the
partnership
2. To inspect and copy the partnership books or any of them at a reasonable
hour
3. To have on demand true and full information of all things affecting the
partnership
4. To have on demand a formal account of partnership affairs whenever
circumstances render it just and equitable
5. To have dissolution and winding up by decree of court.
6. To receive a share of the profits or other compensation by way of income as
stipulated in the certificate
7. To receive the return of contribution provided partnership assets exceed the
liabilities.
8. To loan money to the partnership
9. To transact business with the partnership
10. To receive, unless he is also a general partner, on account of resulting
claims against the partnership, with general creditors, a pro rata share of the
partnership assets.
11. To agree with other limited partners on the priority as to the return of
their contributions, compensation by way of income, and any other matter.

28
Obligations/restrictions of a limited partner
1. To be liable as general partner in the following case
a. If he allows the inclusion of his surname in the partnership name
b. If he takes part in the control of the business
c. If he is also a general partner at the same time as stated in the certificate
2. Not to receive or hold as collateral security any partnership property on account of
his claims for the loan granted to or other business transaction with the
partnership
3. Not to receive from general partner or the partnership on account of such claim
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
4. To be liable to the partnership for the following:
a. For the difference between his actual contribution and that stated in the
certificate
b. For any contribution which he agreed in the certificate to make in the future
and on the conditions stated in the certificate
5. To hold as trustee for the partnership the following:
a. Specific property stated in the certificate as contributed by him, but which
was not contributed
b. Specific property which has been wrongfully returned to him
c. Money or property wrongfully paid or conveyed to him on account of his
contribution.
6. To be liable to the partnership after he has rightfully received the return of his
capital contribution, for any sum not in excess of such return with interest, which
is necessary to discharge liabilities to all creditors who extended credit or whose
claims arose before such return.

General-limited partner
A person may be a general and a limited partner in the same partnership at the same
time, provided this fact is stated in the certificate. This is intended to protect third
persons who may be dealing with the partnership through the said general-limited
partner.

Rights of a general-limited partner

A general-limited partner shall have all the rights and powers of a general partner.
Thus, he is entitled to participate in the management and can generally perform acts of
administration. However, in respect to his contribution, he shall have the rights against
the other members of the partnership which he would have had if he were not also a
general partner.

Requirement for amendment of certificate

1. The amendment must be in writing, conform to the requirements on the
certificate of limited partnership, and shall set forth clearly the change in the
certificate which it desired to make.
2. It must be signed and sworn to by all the members including:
29
 a. The assigning of a limited partner and the substituted limited partner in
case of substitution.
b. The newly-admitted limited partner or partners
c. The newly-admitted general partner or partners.

Requirements for cancellation of certificate

1. The cancellation must be in writing
2. It must be signed by all the members
3. It must be filed with the Office of the Securities and Exchange Commission.

BOOK TWO

LAW ON PRIVATE CORPORATIONS

PRIVATE CORPORATION

Definition & Background

Sec. 2. Corporation defined. - A corporation is an artificial being created by

operation of law, having the right of succession and the powers, attributes
and properties expressly authorized by law or incident to its existence.

The law governing private corporations in the Philippines is the Corporation Code
of the Philippines (Batas Pambansa Blg. 68) which took effect on the date of its approval
on May 1, 1980.
A coporation is an artificial being created by opeation of law, having the right of
succession and the powers, attributes and properties expressly authorized by law or
incident to its existence.
The foregoing definition provides for the attributes of a corporation, namely:
a. It is an artificial being
b. It is created by operation of law
c. It has the right of succession
d. It has only the powers, attributes and properties expressly authorized by law or incident
to its existence

As a consequence of a separate juridical personality:

a. The debts of the corporation are not the debts of its stockholders, nor are the debts of the
stockholders the debts of the corporation.
b. The stockholders are not the owners of the assets of the corporation but have only an
indirect interest therein.

30
 c. Its connection with corporate property or affairs, stockholders cannot maintain actions in
their own name and they have no right to recover possession of property belonging to the
corporation or to recover damages for injury thereto.
d. In taxation, the income of the corporation is not the income of the stockholders who may
still be required to pay taxes on the dividends they may derive from such income.

Doctrine of Piercing the Veil of Corporate Fiction

Piercing the Veil of Corporate Fiction

It means that while the corporation cannot be generally held liable for acts or
liabilities of its stockholders or members, and vice versa because a corporation
has a personality separate and distinct from its members or stockholders,
however, the corporate existence is disregarded under this doctrine when the
corporation is formed or used for illegitimate purposes, particularly, as a
shield to perpetuate fraud, defeat public convenience, justify wrong, evade a
just and valid obligation or defend a crime.

Circumstances that may indicate that the piercing doctrine should be applied:
1. The parent corporation owns all or most of the capital of the subsidiary.
2. The parent and subsidiary corporations have common directors or officers.
3. The parent company finances the subsidiary.
4. The parent company subscribed to all the capital stock of the subsidiary or otherwise causes
its incorporation.
5. The subsidiary has grossly inadequate capital.
6. The subsidiary has substantially no business except with the parent corporation or no
assets except those conveyed to or by the parent corporation.
7. The papers of the parent corporation or in the statements of its officers, the subsidiary is
described as department or division of the parent corporation, or its business or financial
responsibility is referred to as the parent corporation’s own.
8. The parent corporation uses the property of the subsidiary as its own.
9. The directors or executives of the subsidiary do not act independently in the interest of the
subsidiary but take their orders from the parent corporation.
10. The formal legal requirements of the subsidiary are not observed.
(Phil. National Bank v. Ritratto Group, Inc., 362 SCRA 216 [2001])

Corporation is created by operation of law

Unlike partnerships, corporations do not come into existence by the mere
agreement of the parties. They require special authority from the sovereign power. Such
authority may be grainted either through a general law providing the guidelines for the
incorporation of private corporations, which under our jurisdiction is the Corporation
Code of the Philippines, or by a special law which by itself confers juridical status upon
the corporation, whether public (such as in the case of local governments) or private
(such as in the case of government-owned or controlled corporations, like the Philippine
Postal Corporation).

31
Corporation has the right of succession.
A corporation continues to exist for the period for which was formed regardless of
the changes in the ownership of its shares of stock or in its membership. Its existence is
not affected by the death, insolvency, or incapacity of the individual stockholders or
members.

Corporation has the powers, attributes and properties expressly authorized by law
or incident to its existence.
A corporation, being a mere creation of the law, operates under the doctrine of
limited capacity. Hence, it can only perform acts within the powers expressly granted
to it by its charter, those implied from such powers expressly conferred, and those that
are incidental to its existence. Any act performed beyond the range of such powers is
considered ultra vires.

Similarities between partnership and corporation

1. Both have a separate juridical personality
2. Both are artificial persons, they have no bodily existence, and can only act through agents
3. Both are composed of a group of persons with the exception of a corporation sole.
4. A partnership, with the exception of a general professional partnership, is taxed as a
corporation

Distinctions between corporation and partnership

Corporation Partnership
As to manner of Commences only from the By mere agreement.
creation. issuance of a Certificate of
Incorporation by the SEC. Or
in proper cases, passage of a
special law
As to the At least 5 At least 2
number of
organizers
As to powers Restricted due to limited Subject to agreement of the
personality partners
Authority of Stockholders are not agents Mutual agency between the
those who of the corporation in the partners
compose absence of express authority
Transfer of Freely transferrable without Cannot be transferred
Interest the consent of the other without the consent of the
stockholders (unless there is other partners.
a stipulation to the contrary)
Succession Existence continues even as Death of a partner ends the
persons who compose it partnership.
change.
Management Acts through its board of Acts through all the general
directors partners each one of whom
is considered an agent of the

32

Liability of Stockholders and members
members for are not liable for the
debts obligations of the corporation
Commencement Commences to have juridical
of existence personality on the date of the
issuance of its certificate of
incorporation.
Transferability A stockholder can ransfer his
of interest shares to another person
without the consent of the
other stockholders
Term of May exist for a period not
existence exceeding 50 years, although
the same may be extended
provided such extension does
not exceed 50 years
Dissolution Cannot be dissolved without May be dissolved by the
the consent of the State partners
partnership, unless
otherwise agreed.
General partners are liable
with their separate property
for partnership debts
Commences to have
juridical personality upon
the execution of the
partnership contract unless
a different date is set by the
partners
A partner cannot transfer
his interest to a third person
for the purpose of making
the latter a partner without
the consent of the other
partners, by reason of the
element of delectus
personae which is inherent
in a partnership contract.
May be formed for an
indefinite period of time

Advantages and disadvantages of a corporation

Advantages Disadvantages
1. The stockholders have a limited The credit available is limited on
liability for the debts of the account of the limited liability of
business the stockholders.
2. As a legal entity, it can act as a The transferablity of shares allows
single distinct unit under its own persons and entitites of
name incompatible interests to be in one
organization because of the
absence of personal element in
their relationship.
3. The stockholders can transfer their Stockholders’ voting rights have
shares without the consent of the become theoretical particularly in
other stockholders large corporations because of the
broad ownership of the shares.
4. It has continuity of existence A corporation is subject to greater
(power of succession) which governmental control and supervision
provides for greater stability

33
 5. It has a greater source of capital on A corporation cannot engage in a
account of its being able to gather business other than for the purpose or
funds from many investors purposes for which it was formed.
6. Its centralized management in a
board of directors allows it to
operate with maxium efficiency

Classes of Corporation
1. As to wthere shares of stock are issued or not
a. Stock corporation— one that has capital stock divided into shares and is authorized
to distribute dividends or allotments of surplus profits on the bases of the shares
held.
b. Non-stock corporation—one no part of the income of which is distributable as
dividends to its members, trustees or officers.

2. As to the state or country under whose laws it was created

a. Domestic corporation—one incorporated under Philippine laws (or one operating
within the country under whose laws it was incorporated).
b. Foreign corporation—one formed, organized and existing under any laws other than
those of the Philippines and whose laws allow Filipino citizens and corporations to
do business in its own country.

Test to determine nationality of a corporation

1. Incorporation test—the nationality of a corporation follows that of the country

under whose laws it was incorporated. This is the test applied in the
Philippines.
2. Control test—the nationality of a corporation follows that of the stockholders
owning the controlling interest. This test is applied during war time for the
purpose of the security of the state.
3. Business domiciliary test—the nationality of a corporation is that of the country
where its principal business is conducted.

What is the “Grandfather Rule” and its application?

The “Grandfather Rule” is a method by which the percentage of Filipino equity

in corporations engaged in nationalized and/or partly nationalized areas of
activities, provided for under the Philippine Constitution and other
naturalization laws, is accurately computed, and the diminution of such equity
prevented. The presence of corporate stockholders with alien stockholding
would as a result diminish effective control of Filipinos, if this were not applied.

The rule applies with respect to the registration of the subsidiary if the capital
structure of both the parent corporation and its subsidiary does not comply
with the 60%:40% Filipino to foreign ownership in the investing corporation
exceeds 40%.

34
If both the parent and the subsidiary corporations comply with the 60%:40%
ratio, the “Grandfather rule” will not be applied as the parent corporation will
be considered 100% Filipino. Thus, the application of the subsidiary for
registration will be given due course.

3. As to number of persons composing them

a. Corporation aggregate—one that is composed of more than one corporator.
b. Coporate sole—one composed of only one person, like a bishop or a rabbi.

4. As to whether its purpose is public or private

a. Public corporation—one that is organized for the government of a portion of the
state, like provinces, cities, municipalities and barangays.
b. Private Corporation—one that is formed for a private purpose or end, like San
Miguel Corporation. It includes the following:
i. Government-owned or controlled corporations—these refer to
corporations created by special law, other than those for the
government of a portion of the state, such as Landbank, GSIS, SSS,
and those formed under the Corporation Code, where the government
owns at least a majority of its outstanding voting capital stock. They
may be performing governmental or propriety function.
ii. Quasi-public corporations—those organized for profit which are
granted a franchise by the State to perform public service, such as the
Maynilad Water and the Meralco.

5. As to wthere its purpose is religious or not

a. Ecclesiastical or religious corporation—One formed for a religious purpose
b. Lay corporation—one formed for a purpose other than ecclesiastical or religious.

6. As to whether its purpose is charitable or not

a. Eleemosynary corporation—one organized for public charity.
b. Civil corporation—one organized for business or profit.

7. As to their legal right to corporate existence

a. De jure corporation—one that has been created in strict compliance with all the
legal requirements and whose right to exist as a corporation cannot be successfully
attacked in direct proceeding for that purpose by the State.
b. De facto corporation—one that is defectively created but there is an actual exercise
of corporate rights and franchise resulting from an attempt in good faith to
incorporate on the part of the members. It has all the powers of a de jure
corporation but its due existence can be attacked directly in a quo warranto
proceeding.

8. As to their relation to another corporation or other corporations

a. Parent or holding corporation—one which owns the shares of another corporation
and having then power, directly or indirectly, over the latter including the election of
directors thereof.
35
 b. Subsidiary corporation—one whose shares of stock are owned by another
corporation, called the parent corporation, which has the power to elect its
directors.

9. As to whether its shares may be held by the public or not

a. Close corporation—one whose shars are limited to a few, restricted as to their
transfer, and not listed in any stock exchange.
b. Open corporation—one whose shares are open to the public, such as those whose
shares are listed in the stock exchanges.

10. Other classifications

a. Corporation by prescription—one which has exercised corporate powers for such a
length of time without interference from the State and which, by fiction of law, is
given the status of a corporation, such as the Roman Catholic Church.
b. Corporation by estoppel—one which is not in reality a corporation but is considered
as one with respect to those who are precluded by their admission or conduct from
denying its existence.

Q. May a Corporation be a partner in a partnership?

A. In Aurbach v. Santiary Wares Manufacturing Corporation (180 SCRA 130), the

Court ruled against corporations as being partners in partnerships but clarified
that they may enter into joint ventures. In that same case, a distinction was
made between partnerships and joint ventures.

The main distinction is that the partnership contemplates a general business with
some degree of continuity, while the joint venture is formed for the execution of a
single transaction, and is thus of a temporary nature.

Comparative Table: De Jure vs. De Facto Corporations

De Jure De Facto
Created in strict or substantial Actually exists for all practical purposes
conformity with the statutory as a corporation but which has no legal
requirements for incorporation. right to corporate existence as against
the State.
Right to exist cannot be successfully Right to exercise powers cannot be
attacked even in a direct proceeding by inquired into collaterally in any private
the State. suit. But such inquiry may made by the
State through a quo warranto
proceedings filed by Solicitor General

36
Components of a corporation
1. Incorporators—those mentioned in the articles of incorporation as originally forming and
composing the corporation, having signed the articles and acknowledged the same before a
notary public.
a. They must be natural persons.
b. At least 5 but not more than 15;
c. Majority must be residents of the Philippines; and
d. Each must own or subscribe to at least one share.

2. Corporators—All the stockholders and members of a corporation including the

incorporators and stockholders.

3. Stockholders—Corporators in a stock corporation.

4. Members—Corporators in a non-stock corporation.

5. Directors and trustees—The board of Directors is the governing body in a stock

corporation.

6. Corporate Officers—They are the officers who are identified as such in the Corporation
Code, the Articles of Incorporation or the By-Laws of the corporation.

7. Promoter—A self-constituted organizer who finds an enterprise or venture and helps to

attract investors, forms a corporation and launches it in business, all with a view to
promotion profits.

Share of stock
A share of stock is one of the units which the capital stock is divided. It represents
the intangible interest or right which an owner has in the management, profits, and
assets of the corporation. It is property subject to conversion.
Distinguished from stock certificate
1. Share of stock represents the rights and interest of a stockholder in a corporation.
Stock certificate is the written evidence of such rights and interest.
2. Share of stock is intangible personal property, while stock certificate is tangible
personal property.
3. Share of stock may be issued even if not fully paid, except shares without par value
which are deemed fully paid and non-assessable upon issuance. Stock certificate, as a
rule, is issued only if the subscription is fully paid.

Kinds of shares
1. Common Shares—A basic class of stock ordinarily and usually issued without
extraordinary rights or privileges and entitles the shareholder to a pro rata division of
profits.
2. Founders Shares—Given rights and privileges not enjoyed by owners of other stocks;
exclusive right to voter and be voted upon in the election of directors shall not exceed 5
years (note: within this period commons shares are deprived of their voting rights)
37
 3. Preferred Shares—Issued only with par value; given preference in distribution of assets
in liquidation and in payment of dividends and other preferences stated in the articles of
incorporation; may be deprived of voting rights.
a. Preferred stock as to asset—One that entitles the holder to preference in the
distribution of assets over common stock upon liquidation of the corporation.
b. Preferred stock as to dividends—one that entitles the holder to preference in the
distribution of dividends over common stock.
4. Par value stock—one the nominal value of which appears on the stock certificate.
5. No par value stock—one without any nominal or par value appearing on the stock
certificate.
6. Redeemable Shares—Expressly provided in articles; have to be purchased/taken up
upon expiration of period of said shares purchased whether or not there is unrestricted
retained earnings; may be deprived voting rights.
7. Treasury Stocks—stocks previously issued and fully paid for and reacquired by the
corporation through lawful means (purchase, donation, etc.); not entitled to vote and no
dividends could be declared thereon as corporations cannot declare dividends to itself.

Power of a corporation to classify its own shares

a. A corporation may divide its shares into classes or series of shares, or both. Such
classification may include the following:
1. Voting and non-voting shares
2. Common and preferred shares
3. Par value and no par value shares
4. Classification to insure compliance with constitutional or legal
requirements.
b. Any of which classes or series of shares may have such rights, privileges, or
restrictions as may be stated in the articles of incorporation.
c. Except as otherwise provided in the articles of incorporation and stated in the stock
certificate, each share shall be equal in all respects to every other share (Doctrine of
equality of shares)

Limitations on the issuance of non-voting shares

a. Only those classified as “preferred” or “redeemable” shares may be deprived of the
voting right, unless otherwise provided by the Corporation Code.
b. There shall always be a series or class of shares that have complete voting rights.
c. Non-voting shares may nevertheless vote in the following cases:
i. Amendment of the articles of incorporation
ii. Adoption and amendment of the by-laws
iii. Sale, lease, exchange, mortgage, pledge, or other disposition of all or
substantially all of the corporate property.
iv. Incurring, creating or increasing bonded indebtedness
v. Increase or decrease of capital stock
vi. Merger or consolidation of the corporation with another corporation
vii. Investment of corporate funds in another corporation or business
viii. Dissolution of the corporation

38
Limitations on the issuance of no-par value shares
a. Subscriptions to no-par value shares shall be deemed fully paid and non-assessable
and the holder of such shares shall not be liable to the corporation or to its creditors in
respect thereto.
b. Shares without par value may not be issued for a consideration less than P5.00 per
share.
c. The entire consideration received for no-par value shares shall be treated as capital
and shall not be available for distribution as dividends.
d. Banks, trust companies, insurance companies, public utilities, and building and loan
associations shall not be permitted to issue no-par value shares of stocks.

Limitations on the issuance of preferred shares

a. Preference such as to assets or dividends must be stated in the articles of incorporation
b. Preferred shares may be issued only without a stated par value.
c. The board of directors, when authorized in the articles of incorporation, may fix the
terms and conditions of preferred shares.
d. Such terms and conditions shall be effective upon filing of a certificate thereof with the
Securities and Exchange Commission.

CERTIFICATE OF STOCK
Written acknowledgement by the corporation of the stockholder’s interest in the
corporation. It is the personal property and may be mortgaged or pledged. Transfer
binds the corporation when it is recorded in the corporate books. A stockholder who
does not pay his subscription is not entitled to the issue of stock certificate. The total
par value of the stocks subscribed by him should first be paid.

METHODS OF COLLECTION OF UNPAID SUBSCRIPTIONS

1. Call, delinquency and sale at public auction of delinquent sales.
2. Ordinary civil action.
3. Collection from cash dividends and other amounts due to stockholders if allowed by
by-laws/agreed to by him.

CASES WHEN CORPORAITON CAN REACQUIRE STOCK

1. Eliminate fractional shares.

2. Corporate indebtedness arising from unpaid subscriptions.
3. Purchase delinquent sales.
4. Exercise appraisal right.

INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS

RULE: Except for instances specifically provided for by special law, there is no minimum
requirement for authorized capital stock to incorporate. There is however a requirement
39
of subscription of at least 25% of the authorized capital stock as stated in the articles of
incorporation and at least 25% of the total subscription must be paid upon subscription.

CONTENTS OF ARTICLES OF INCORPORATION

1. Name of corporation.
2. Purpose/s, indicating the primary and secondary purposes.
3. Place of principal office.
4. Term which shall not be more than 50 years.
5. Names, citizenship and residences of incorporators.
6. Numbers, names, citizenships and residences of directors.
7. If stock corporation, amount of authorized capital stock, number of shares.
8. In par value stock corporations, the par value of each share.
9. Number of shares and amounts of subscription of subscribers which shall not be less than
25% of authorized capital stock.
10.Amount paid by each subscriber on their subscription which shall not be less than 25% of
subscribed capital and shall not be less than Php5,000.00.
11.Name of treasurer elected by subscriber.
12.If the corporation engages in a nationalized industry, a statement that no transfer of stock
will be allowed if it will reduce the stock ownership of Filipinos to a percentage below the
required legal minimum.

DOCUMENTS THAT SHOULD BE FILED TO SECURE A CERTIFICATE OF

REGISTRATION OF A STOCK CORPORATION
1. Articles of Incorporation
2. Treasurer’s affidavit certifying that 25% of the total authorized capital stock has
been subscribed and at least 25% of such have been fully paid in cash or property.
3. Bank certificate covering the paid-up capital.
4. Letter authority authorizing the SEC to examine the bank deposit and other
corporate books and records to determine the existence of paid-up capital.
5. Undertaking to change the corporate name in case there is another person or entity
with the same or similar name that was previously registered.
6. Certificate of authority from proper government agency whenever appropriate.

REQUIREMENTS FOR AMENDING ARTICLES OF INCORPORATION:

1. A legitimate purpose for the amendment.
2. Majority vote of directors or trustees and the vote or written assent of the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock, without prejudice to
the appraisal right of dissenting stockholders, or two-thirds (2/3) of the members if it be a
non-stock corporation.
3. Indication in the articles, by underscoring, the change or changes made.
4. A copy of amended articles duly certified under oath by the corporate secretary and a
majority of the directors or trustees stating the fact that said amendment or amendments

40
 have been duly approved by the required vote of stockholders or members, as the case
may be.

GROUNDS FOR REJECTING INCOPORATION OR AMENDMENT TO ARTICLES OF

INCORPORATION.
1. Not in prescribed form.
2. Purpose illegal, inimical.
3. Treasurer’s affidavit false; and
4. Non-compliance with required Filipino stock ownership.

WHEN A CORPORATE NAME CANNOT BE USED.

1. Names which are identical, deceptively or confusingly similar to that of any existing
corporation including internationally known foreign corporation though not used in the
Philippines;
2. Name already protected by law;
3. Name which is contrary to law, morals or public policy.

Sec. 19. A private corporation

formed or organized under this Code
commences to have corporate
existence and juridical personality
and is deemed incorporated from the
date the Securities and Exchange
Commission issues a certificate of
incorporation under its official seal;
and thereupon the incorporators,
stockholders/members and their
successors shall constitute a body
politic and corporate under the name
stated in the articles of incorporation
for the period of time mentioned
therein, unless said period is
extended or the corporation is sooner
dissolved in accordance with law.

DE FACTO CORPORATIONS

A “de facto corporation “is one that is

defectively created so as not to
become a de jure corporation. It is
the result of an attempt to
incorporate under an existing law
coupled with the exercise of
corporate powers. The existence of a
de facto corporation can only be
41
attacked directly by the state
through quo warranto proceedings.
A de facto corporation will incur the
sdame obligations, have the same
powers and rights as a de jure
corporation.

REQUSITES OF A DE FACTO CORPORATION

1. Valid law under which the corporation was incorporated.
2. Attempt in good faith to form a corporation according to the requirements of the law. Here
the SC requires that you must have filed with the SEC articles of incorporation and gotten
the certificate with the blue ribbon and gold seal. For instance the majority of the
directors are not residents of the Philippines or the statement regarding the paid up
capital is not true, those defects that may make the corporation de facto.
3. User of corporate powers. The corporation must have performed acts which are peculiar
to a corporation like entering into subscription agreement, adopting by-laws, electing
directors.
4. It must act in good faith. So the moment, for example, there is a decision declaring the
corporation was not validly created, it can no longer claim good faith.

CORPORATION BY ESTOPPEL

It is a corporation which is so
defectively formed so that it is not a
de jure or a de facto corporation but
is considered as a corp with respect
to those who cannot deny its
existence because of some
agreement or admission or conduct
on their part. The existence of
corporation by estoppels requires
that there must be dealings among
the parties on a corporate basis.

BOARD OF DIRECTORS/TRUSTEES/OFFICERS
QUALIFICATIONS OF DIRECTORS:
1. Must own at least one(1) share capital stock of the corporation in his own name or must
be a member in the case of non-stock corporations.
2. A majority of the directors/trustees must be residents of the Philippines.
3. He must not have been convicted by final judgment of an offense punishable by
imprisonment for a period exceeding six (6) years or a violation of the Corporation Code,
committed within five (5) years before the date of his election.
4. He must be of legal age.
5. He must possess other qualifications as may be prescribed in the by-laws of the
corporation.

42
METHODS OF VOTING IN THE ELECTION OF DIRECTORS.
1. Straight Voting—Every stockholder “may vote such number of shares for as many
persons as there are directors”to be elected;
2. Cumulative Voting for One Candidate—a stockholder is allowed to concentrate his votes
and “give one candidate as many votes as the number of directors to be elected multiplied
by the number of his shares shall equal.”
3. Cumulative Voting by Distribution—a stockholder may cumulate his shares by
multiplying also the number of his shares by the number of directors to be elected and
distribute the same among as many candidates as he shall see fit.

INSTANCES WHEN A DIRECTOR IS LIABLE:

1. Wilfully and knowingly voting for and assenting to patently unlawful acts of the
corporation;
2. Gross negligence or bad faith in directing the affairs of the corporation;
3. Acquiring any personal or pecuniary interest in conflict with his duty.

DOCTRINE OF APPARENT
AUTHORITY

If a corporation knowingly permits

one of its officers, or any other agent,
to act within the scope of an
apparent authority, it holds him out
to the public possessing the power to
do those acts; and thus, the
corporation will, as against anyone
who has in good faith dealt with it
through such agent be estopped from
denying the agent’s authority.

REQUSITIES OF REMOVAL FROM THE BOARD

1. It must take place either at a regular meeting or special meeting of the stockholders or
members called for the purpose;
2. There must be previous notice to the stockholders or members of the intention to remove;
3. The removal must be by vote of the stockholders representing 2/3 of the outstanding
capital stock or 2/3 of the members, as the case may be;
4. The director may be removed without cause unless he was elected by the minority, in
which case, it is required that there is cause for removal.

FILLING OF VACANCIES IN THE BOARD

1. By the stockholders of members—if vacancy results because of:
a. Removal
b. Expiration of term

43
 c. The ground is other than removal or expiration of term where the remaining directors
do not constitute a quorum
d. Increase in the number of directors
2. By board if remaining directors constitute a quorum—cases not reserved to stockholders
or members.

GENERAL TYPES OF POWERS OF A COPORATION

1. Express—those expressly authorized by the Corporation Code and other laws, and its
Articles of Incorporation. Or Charter.
2. Implied Powers—those that can be inferred from or necessary for the exercise of the
express powers.
3. Incidental Powers—those that are incidental to the existence of the corporation.

EXPRESS POWERS UNDER THE CORPORATION CODE

1. General
a. Sue and be sued in its corporate name;
b. Succession;
c. Adopt and use a corporate seal;
d. Amend articles of incorporation;
e. To adopt, amend or repeal by-laws;
f. For stock corporations—issue stocks to subscribers and to sell treasury stocks; for
non-stock corporations—admit members;
g. Purchase, receive, take, or grant, hold, convey, sell, lease, pledge, mortgage and
otherwise deal with real and personal property, pursuant to its lawful business;
h. Enter into merger or consolidation;
i. To make reasonable donations for public welfare, hospital, charitable, cultural,
scientific, civil or similar purposes (Prohibited: for partisan political activity);
j. To establish for the benefit of directors, trustees, officers and employees; and
k. Other powers essential or necessary to carry out its purposes.

2. Specific
a. Power to extend or shorten corporate term;
b. Increase/Decrease Corporate stock;
c. Incur, create bonded indebtedness;
d. To deny pre-emptive rights;
e. Sell, dispose, lease, encumber all or substantially all of corporate assets;
f. Purchase or acquire own shares;
g. To invest in another corporation, business other than primary purpose;
h. To declare dividends;
i. To enter into management contracts;
j. To amend the articles of incorporation.

ULTRA VIRES ACTS

An act not within the express or

implied powers of the corporation as
44
fixed by its charter or the statutes.
The term not only includes contracts:
(1) Entirely without the scope and
purpose of the charter and not
pertaining to the objects for which
the corporation was chartered, but
also contracts; and (2) Beyond the
limitations conferred by the charter
although within the purposes
contemplated by the articles of
incorporation.

EEFECTS OF ULTRA VIRES ACT

1. Executed contract—Courts will not set aside or interfere with such contracts;
2. Executory contracts—No enforcement even at the suit of either party (void and
unenforceable)
3. Part executed and part executory—Principle against unjust enrichment shall apply.

THOSE WHO MAY EXERCISE THE POWERS OF THE CORPORATION

Generally, the Bpard of Directors ALONE exercises the powers of the corporation. These
are the instances when other persons or groups within the corporation may do so
similarly:
1. If (1) there is a management contract and (2) powers are delegated by majority of the
board to an Executive Committee;
2. Corporate Officers (e.g. President) via authority from (1) law, (2) corporate by-laws, and (3)
authorization from the board, either expressly or impliedly by habit, custom or
acquiescence in the general course of business;
3. A corporate officer or agent in transactions with third persons to the extent of the
authority to do so has been conferred upon him;
4. Those with apparent authority.

POWERS THAT CANNOT BE DELEGATED TO THE EXECUTIVE COMMITTEE

1. Approval of action requiring concurrence of stockholders;
2. Filling of vacancies in the board;
3. Adoption, amendment or repeal of by-laws;
4. Amendment or repeal of board resolution which by its terms cannot be amended or
repealed;
5. Distribution of cash dividends.

INSTANCES WHEN THE CONCURRENCE OF STOCKHOLDERS IS NECESSARY FOR

THE EXERCISE OF CORPORATE POWERS:
1. Concurrence of 2/3 of the outstanding capital stock
a. Power to extend or shorten corporate term;
b. Increase/decrease Corporate stock;
c. Incur, create bonded indebtedness;
d. To deny pre-emptive right;

45
 e. Sell, dispose, lease, encumber all or substantially all of corporate assets;
f. To invest in another corporation, business other than the primary purpose;
g. To declare stock dividends
h. To enter into management contract if (1) a stockholder or stockholders representing the
same interest of both the managing and the managed corporation own or control more
than 1/3 of the total outstanding capital entitled to vote of the managing corporation;
or (2) a majority of the members of the board of directors of the managing corporation
also constitute a majority of the members of the board of the managed corporation;
i. To amend the articles of incorporation

2. Concurrence of majority of the outstanding capital stock.

a. To enter into management contract if any of the two instances stated above are
absent;
b. To adopt, amend or repeal the by-laws;

3. Without board resolution

a. 2/3 of outstanding capitals stock—delegate to the board power to amend the by-laws;
b. Majority of the outstanding capital stock—revoke the power of the board to amend the
by-laws which was previously delegated.

BY-LAWS
BY-LAWS Relatively permanent and
continuing rules of action adopted by
the corporation for its own
government and that of the
individual composing it and those
having direction, management and
control of its affairs, in whole or in
part, in the management and control
of its affairs and activities.

REQUSITIES OF VALID BY-LAWS

1. It must be consistent with the Corporation Code, other pertinent laws and regulations.
2. It must be consistent with the Articles of Incorporation. In case of conflict, the Articles of
Incorporation prevails.
3. It must be reasonable and not arbitrary or oppressive.
4. It must not disturb vested rights, impair contract or property rights stockholders or
members or create obligations unknown to law.

BINDING EFFECTS OF PROVISIONS OF BY-LAWS:

1. As to the Corporation and its components—Binding not only upon the corporation but
also on its stockholder, members and those having direction, management and control of
its affairs.
2. As to Third Persons—Not binding unless there is actual knowledge. Third persons are
not even bound to investigate the content because they are not bound to investigate the
46
 content because they are not bound to know the by-laws which are merely provisions for
the government of a corporation and notice to them will not be presumed.

STOCKS AND STOCKHOLDERS

Sec. 60. Subscription Contract—
Any contract for the acquisition of
unissued stock in an existing
corporation or a corporation still to be
formed shall be deemed a
subscription within the meaning of
this Title, notwithstanding the fact
that the parties refer to it as a
purchase or some other contract.

KINDS OF SUBSCRIPTION CONTRACTS:

1. Pre-incorporation subscription—entered into before the incorporation and irrevocable
for a period of six (6) months from the date of subscription unless all other subscribers
consent or if the corporation failed to materialize. It cannot also be revoked after the filing
of the Articles of Incorporation with the SEC.

2. Post-incorporation subscription—entered into after incorporation.

VALID CONSIDERATIONS FOR SUBSCRIPTION AGREEMENTS:

1. Cash;
2. Property;
3. Labor or Services actually rendered to the corporation;
4. Prior corporate obligations;
5. Amounts transferred from unrestricted retained earnings to stated capital (in case of
declaration of stock dividends);
6. Outstanding shares in exchange for stocks in the event of reclassification or conversion.

UNDERWRITING AGREEMENT—An agreement between a corporation and a third

person, termed “underwriter,” by which the latter agrees, for a certain compensation, to
take a stipulated amount of stocks or bonds, specified in the underwriting agreement, if
such securities are not taken by those to whom they are first offered.

SHARES OF STOCK. This is the

interest or right which an owner has
in the management of the
corporation, and its surplus profits,
and, on dissolution, in all of its
assets remaining after the payment
of its debt. The stockholder may
own the share even if he is not
holding a certificate of stock.

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Shares of Stock Certificate of
Stock
Unite of interest Evidence of the
in a corporation. holder’s
ownership of the
stock and of his
right as a
shareholder and
up to the extent
specified therein.
It is an It is concrete and
incorporeal tangible.
intangible
property.
It may be issued May be issued
by the only if the
corporation even subscription is
if the fully paid.
subscription is
not fully paid.

Sec. 64. Issuance of stock

certificates—No certificate of stock
shall be issued to a subscriber until
the full amount of his subscription
together with interest and expense
(in case of delinquent shares), if any
is due, has been paid.

TRANSFER OF SHARES:
1. If
represented by a certificate, the following must be strictly complied with:
a. Delivery of the certificate;
b.Indorsement by the owner or his agent;
c.To be valid to third parties, the transfer must be recorded in the books of the
corporation.
2. If NOT represented by the certificate (such a s when the certificate has not yet been issued
or where for some reason is not in the possession of the stockholder):
a. By means of deed of assignment, and
b. Such is duly recorded in the books of the coporation.

TRUST FUND DOCTRINE the

subscribed capital stock of the
corporation is a trust fund for the
payment of debts of the corporation
which the creditors have the right to
look up to satisfy their credits.

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Corporations may not dissipate this
and the creditors may sue the
stockholders directly for their unpaid
subscriptions.

RIGHTS OF STOCKHOLDERS:
1. Direct or indirect participation in the management;
2. Voting rights;
3. Right to remove directors;
4. Proprietary rights;
a. Rights to dividends;
b. Appraisal rights;
c. Right to issuance of stock certificate for fully paid shares;
d. Proportionate participation in the distribution of assets in liquidation;
e. Right to transfer of stocks in corporate books;
f. Pre-emptive right.
5. Right to inspect books and records;
6. Right to be furnished with the most recent financial statement/financial report;
7. Right to recover stocks unlawfully sold for delinquent payment of subscription;
8. Right to file individual suit, representative suit and derivative suits.

OBLIGATIONS OF STOCKHOLDERS:
1. Liability to the corporation for unpaid subscription;
2. Liability to the corporation for interest on unpaid subscription if so required by the by-
laws;
3. Liability to the creditors for unpaid subscription;
4. Liability for watered stocks;
5. Liability for dividends unlawfully paid;
6. Liability for failure to create corporation.

SUITS BY STOCKHOLDERS/MEMBERS:
1. Derivative Suits—those brought by one or more stockholders/members in the name and
on behalf of the corporation to redress wrongs committed against it, or protect/vindicate
corporate rights whenever the officials of the corporation refuse to sue, or the ones to be
sued, or has control of the corporation.
2. Individual Actions—those brought by the stockholder in his own name against the
corporation when a wrong is directly inflicted against him;
3. Representative Actions—those brought by the stockholder in behalf of himself and all
other stockholders similarly situated when a wrong is committed against a group of
stockholders.

REQUISITES OF DERIVATIVE ACTIONS:

1. The party bringing the suit should be a shareholder as of the time of the act or
transaction complained of;
49
 2. He has exhausted intra-corporate remedies;
3. The cause of action actually devolved on the corporation, the wrongdoings or harm having
been caused to the corporation and not to the particular stockholder bringing the suit.

PRE-EMPTIVE RIGHT. A pre-

emptive right is the shareholder’s
right to subscribe to all issues or
dispositions of shares of any class in
proportion to his present
stockholdings, the purpose being to
enable the shareholder to retain his
proportionate control in the
corporation and to retain his equity
in the surplus.

INSTANCES WHEN PRE-EMPTIVE RIGHT IS NOT AVAILABLE:

1. Shares to be issued in compliance with laws requiring stock offering or minimum stock
ownership by the public;
2. Shares issued in good faith in exchange for property needed for corporate expansion;
3. Shares issued in payment of previously contracted debts;
4. In case the right is denied in the Articles of Incorporation;
5. It does not apply to shares that are being reoffered by the corporation after they were
initially offered together with all the shares.

VOTING TRUST—One or more stockholder of a stock corporation may create a voting

trust for the purpose of conferring upon a trustee or trustees the right to vote and other
rights pertaining to the shares for a period not exceeding 5 years at any one time.
However, if the voting trust was a requirement for a loan agreement, period may exceed 5
years but shall automatically expire upon full payment of the loan.

LIMITATIONS ON THE RIGHT TO VOTE:

1. When the Articles of Incorporation provides for classification of shares pursuant to Sec. 6,
non-voting shares are not entitled to vote except as otherwise provided in the said section.
2. Preferred or redeemable shares may be deprived of the right to vote unless otherwise
provided.
3. Fractional shares of stock cannot be voted unless they constitute at least one full share.
4. Treasury shares have no voting rights as long as they remain in treasury.
5. Holders of stock declared delinquent by the board for unpaid subscription;
6. A transferee of stock if his stock transfer is not registered in the stock and transfer book of
the corporation.
7. A stockholder who mortgages or pledges his shares and gives authority for creditor to vote.

BOOKS
BOOKS REQUIRED TO BE MAINTAINED

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 1. Book of minutes of stockholders meetings;
2. Book of minutes of board meetings;
3. Record or Book of all business transactions;
4. Stock and transfer book.
5.

STOCK AND TRANSFER BOOK.

Record of (1) all stocks in the names
of the stockholders alphabetically
arranged; (2) The instalment paid
and unpaid on all stock for which
subscription has been made, and the
date of payment of any instalment;
(3) A statement of every alienation,
sale or transfer of stock made; and
(4) such other entries as the by-laws
may prescribe.

DOCTRINAL RULINGS ON THE RIGHT TO INSPECT:

1. The demand for inspection should cover only reasonable hours on business days;
2. The stockholder, member, director or trustees demanding the exercise of the right is one
who has not improperly used any information secured through any previous examination
of the records of the corporation or any other corporation;
3. The demand must be accompanied with statement of the purpose of the inspection, which
must show good faith or legitimate purpose; and,
4. If the corporation or its officers contest such purpose or content that there is evil motive
behind the inspection, the burden of proof is with the corporation or such officer to show
the same.

MERGER AND CONSOLIDATION

MERGER . A corporation absorbs
the other and remains in existence
while the others are dissolved.

CONSOLIDATION. A new
corporation is created, and
consolidating corporations are
extinguished.

EFFECTS OF MERGER OR CONSOLIDATION

1. The constituent corporation shall become a single corporation;
2. The separate existence of the constituents shall cease except that of the surviving
corporation (in merger) or the consolidated corporation (in consolidation).

51
 3. The surviving or the consolidated corporation shall possess all the rights, privileges,
immunities and powers and shall be subject to all duties and liabilities of a corporation.
4. The surviving or the consolidated corporation shall possess all rights, privileges,
immunities and franchises of each constituent corporation and the properties shall be
deemed transferred to the surviving or the consolidated corporation.
5. All liabilities of the constituents shall pertain to the surviving or the consolidated
corporation.

PROCEDURE
1. The Board of each corporation shall draw up a plan of merger or consolidation setting
forth:

a. Names of the corporation involved;

b. Terms and mode of carrying it;
c. Statement of changes, if any, in the present articles of the surviving corporation or the
articles of the new corporation to be formed in the case of consolidation.

2. Plan for merger or consolidation shall be approved by majority vote of each of the board of
the concerned corporations separate meetings, and approved 2/3 of the outstanding
capital stock or members for non-stock corporations.

3. Any amendment to the plan must be approved by the majority vote of the board members
or trustees of the constituent corporations and affirmative vote of 2/3 of the outstanding
capital stock or members.

4. Articles of Merger or Articles of Consolidation shall be executed by each of the constituent

corporations, signed by the President or Vice-President and certified by secretary or
assistant secretary setting forth:

a. Plan of merger or consolidation;

b. For stock corporation, the number of shares outstanding; for non-stock, the number of
members;
c. As to each corporation, number of shares or members voting for and against such plan
respectively.

5. Four copies of the Articles of Merger or Consolidation shall be submitted to the SEC for
approval.

APPRAISAL RIGHT

APPRAISAL RIGHT The right to

withdraw from the corporation and
demand payment of the fair value of
his shares after dissenting from
certain corporate acts involving
fundamental changes in corporate
structure.

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INSTANCES WHEREIN APPRAISAL RIGHT MAY BE EXERCISED:

1. Extension or reduction of corporate term;

2. Change in the rights of stockholders, authorize preferences superior to those stockholders,
or restrict the right of any stockholder;
3. Corporation authorized the board to invest corporate funds in another business or
purpose;
4. Corporation decides to sell or dispose of all or substantially all assets of corporation;
5. Merger or consolidation.

EXERCISE OF APPRAISAL RIGHT:

1. The stockholder must be a dissenting stockholder;

2. The stockholder must made a written demand on the corporation within 30 days
after the vote was taken;
3. The proposed action is any one of the instances supra;
4. The price to be paid is the fair value of the shares on the date the vote was taken;
5. The fair value shall be agreed upon but in case there is no agreement within 60
days from the date the vote was taken, the fair value shall be determined by a
majority of the 3 distinguished persons one of whom shall be named by the
stockholder another by the corporation and the third by the two who were chosen;
6. The right of appraisal is extinguished when:

a. He withdraws the demand with the corporations consent;

b. The proposed action is abandoned;
c. The SEC disapproves the action.

NON-STOCK CORPORATIONS

SEC. 87. Definition – For the

purposes of this Code,a non-stock
corporation is one where no part of
its income is distributable as
dividends to its members, trustees,
or officers, subject to the provisions
of this Code on dissolution: Provided,
That any profit which a non-stock
corporation may obtain as an
incident to its operations shall,
whenever necessary or proper, be
used for the furtherance of the
purpose or purposes for which the
corporation was organized, subject to
the provisions of this Title. The
provisions governing stock

53
corporation, when pertinent, shall be
applicable to non-stock corporations,
except as may be covered by specific
provisions of this Title.

A non-stock corporation cannot be converted into a stock corporation through mere

amendment of its Articles of Incorporation as this would be in violation of Section 87
which prohibits distribution of income as dividends to members. (SEC Opinion, 20
March1995) However, a non-stock corporation can be converted into a stock corporation
only if the members dissolve it first and then organize a stock corporation. The result is a
new corporation. (SEC Opinion, 13 May 1992) On the other hand, a stock corporation
may be converted into a non-stock corporation by mere amendment provided all the
requirements are complied with. Its rights and liabilities will remain

CLOSE CORPORATIONS

SEC. 96. Definition and

applicability of Title. - A close
corporation, within the meaning of
this code, is one whose articles of
incorporation provide that: (1) All
the corporation's issued stock of all
classes, exclusive of treasury
shares, shall be held of record by
not more than a specified number of
persons, not exceeding twenty (20);
(2) all the issued stock of all classes
shall be subject to one or more
specified restrictions on transfer
permitted by this Title; and (3) The
corporation shall not list in any
stock exchange or make any public
offering of any of its stock of any
class. Notwithstanding the
foregoing, a corporation shall not be
deemed a close corporation when at
least two-thirds (2/3) of its voting
stock or voting rights is owned or
controlled by another corporation
which is not a close corporation
within the meaning of this Code.
Any corporation may be
incorporated as a close corporation,
except mining or oil companies,
stock exchanges, banks, insurance
companies, public utilities,
54
educational institutions and
corporations declared to be vested
with public interest in accordance
with the provisions of this Code.
The provisions of this Title shall
primarily govern close corporations:
Provided, That the provisions of other
Titles of this Code shall apply
suppletorily except insofar as this
Title otherwise provides.

CHARACTERISTICS:
1. The stockholders themselves can directly manage the corporation and perform the
functions of directors without need of election:
a. When they manage, stockholders are liable as directors;
b. There is no need to call a meeting to elect directors;
c. The stockholders are liable for tort.

2. Despite the presence of the requisites, the corporation shall not be deemed a close
corporation if at least 2/3 of the voting stocks or voting rights belong to a corporation
which is not a close corporation.

REQUIREMENTS FOR CLOSE CORPORATIONS:

1. The Articles of Incorporation must state that the number of stockholders shall not exceed
20;
2. The Articles of Incorporation must contain restriction on the transfer of issued stocks;
3. The stocks cannot be listed in the stock exchange nor be publicly offered.

COMPANIES THAT CANNOT BE CLOSE

CORPORATIONS:
1. Mining companies;
2. Oil companies;
3. Stock exchanges;
4. Banks;
5. Insurance companies;
6. Public utilities;
7. Educational institutions;
8. Other corporations declared to be vested with public interest.

SPECIAL CORPORATIONS
KINDS:
1. Educational Corporations
2. Religious Corporations
a. Corporation Sole
b. Religious Societies

CORPORATION SOLE Special form

of corporation, usually associated
55
with the clergy and consists of one
person only and his successors, who
are incorporated by law to give some
legal capacities and advantages.

A registered corporation sole can acquire land if its members constitute at least 60%
Filipinos. (SEC Opinion, 8 August 1994)

RELIGIOUS SOCIETIES Non-stock

corporation formed by a religious
society, group, diocese, synod or
district of any religious
denomination, sect or church after
getting the approval 2/3 of its
members.

DISSOLUTION

DISSOLUTION – Extinguishment of the franchise of a corporation and the termination of

its corporate existence.

MODES OF DISSOLUTION:

1. Voluntary dissolution where no creditors are affected

a. A meeting must be held on the call of directors or trustees;
b. Notice of the meeting should be given to the stockholders by personal delivery or
registered mail at least 30 days prior to the meeting;
c. The notice of meeting should also be published for 3 consecutive weeks in a newspaper
published in the place;
d. The resolution to dissolve must be approved by the majority of the directors/trustees and
approved by the stockholders representing at least 2/3 of the outstanding capital stock or
2/3 of members;
e. A copy of the resolution shall be certified by the majority of the directors or trustees and
countersigned by the secretary;
f. The signed and countersigned copy will be filed with the SEC and the latter will issue the
certificate of dissolution.

2. Voluntary dissolution where creditors are affected

a. Approval of the stockholders representing at least 2/3 of the outstanding capital stock or
2/3 of members in a meeting called for that purpose;
b. Filing a Petition with the SEC signed by majority of directors or trustees or other officers
having the management of its affairs verified by President or Secretary or Director. Claims
and demands must be stated in the petition;
c. If Petition is sufficient in form and substance, the SEC shall issue an Order fixing a
hearing date for objections;

56
 d. A copy of the Order shall be published at least once a week for 3 consecutive weeks in a
newspaper of general circulation or if there is no newspaper in the municipality or city of
the principal office, posting for 3 consecutive weeks in 3 public places is sufficient;
e. Objections must be filed no less than 30days nor more than 60 days after the entry of the
Order;
f. After the expiration of the time to file objections, a hearing shall be conducted upon prior
5 day notice to hear the objections;
g. Judgment shall be rendered dissolving the corporation and directing the disposition of
assets; the judgment may include appointment of a receiver.

3. Dissolution by shortening corporate term

– This is done by amending the Articles of Incorporation.

4. Involuntary dissolution – By filing a verified complaint with the SEC based on any
ground provided by law or rules, including:
a. Failure to organize and commence business within 2 years from incorporation;
b. Continuously inoperative for 5 years;
c. Failure to file by-laws within 30 days from issue of certificate of incorporation;
d. Continuance of business not feasible as found by Management Committee or
Rehabilitation Receiver;
e. Fraud in procuring Certificate of Registration;
f. Serious Misrepresentation; and
g. Failure to file required reports.

EFFECTS OF DISSOLUTION:
1. Transfer of Legal Title to Corporate Property
2. On Continuation of Corporate Business
3. Creation of a New Corporation
4. Reincorporation of Dissolved Corporation
5. Continuation of a Body Corporation
6. Cessation of Corporate Existence for all Purposes

LIQUIDATION – Process by which all the assets of the corporation are converted into
liquid assets in order to facilitate the payment of obligations to creditors, and the
remaining balance if any is to be distributed to the stockholders.

Reburiano v. Court of Appeals, 301 SCRA 342(1999) If full liquidation can only be
effected after the3-year period and there is no trustee, the directors may be permitted to
complete the liquidation by continuing as trustees by legal implication

FOREIGN CORPORATION

FOREIGN CORPORATION A corporation formed, organized or existing under any law

other than those of the Philippines, and whose laws allow Filipino citizens and
corporations to do business in its own country or state.

“DOING BUSINESS” with regard to FOREIGN CORPORATIONS Continuity of

commercial dealings incident to prosecution of purpose and object of the organization.

57
Isolated, occasional or casual transactions do not amount to engaging in business. But
where the isolated act is not incidental/casual but indicates the foreign
corporation’s intention to do other business, said
single act constitutes engaging in business in the Philippines.

“DOING BUSINESS” UNDER THE FOREIGN INVESTMENT ACT:

1. Doing Business
a. Soliciting orders, service contracts, opening offices
b. Appointing representatives, distributors domiciled in the Philippines or who stay for a
period or periods totaling 180 days or more;
c. Participating in the management, supervision or control of any domestic business, firm,
entity, or corporation in the Philippines;
d. Any act or acts that imply a continuity of commercial dealings or arrangements, and
contemplate to some extent the performance of acts or works or the exercise of some
functions normally incident to and in progressive prosecution of, the purpose and object of
its organization.

2. Not Doing Business

a. Mere investment as shareholder and exercise of rights as investor;
b. Having a nominee director or officer to represent its interest in the corporation;
c. Appointing a representative or distributor which transacts business in its own name and
for its own account.

Lorenzo Shipping Corp. v. Chubb & Sons, Inc., et al., 431 SCRA 266 (2004) “[n]o
foreign corporation transacting business in the Philippines without a license, or its
successors or assigns, shall be permitted to maintain or intervene in any action, suit or
proceeding in any court or administrative agency of the Philippines; but such corporation
may be sued or proceeded against before Philippine courts or administrative tribunals on
any valid cause of action recognized under Philippine laws.”

INSTANCES WHEN UNLICENSED FOREIGN CORPORATIONS SUE:

1. Isolated transactions;
2. Action to protect good name, goodwill, and reputation of a foreign corporation;
3. The subject contracts provide that Phil. Courts will be venue to controversies;
4. A license subsequently granted enables the foreign corporation to sue on contracts
executed before the grant of the license;
5. Recovery of misdelivered property;
6. Where the unlicensed foreign corporation has a domestic corporation.

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