Physically Distanced But Academically Engaged Self-Instructional Manual (SIM) For Self-Directed Learning (SDL)

UNIVERSITY OF MINDANAO
College of Accounting Education
Program: BSA, BSIA, BSMA, BSAIS
Physically Distanced but Academically Engaged

Self-Instructional Manual (SIM) for
Self-Directed Learning (SDL)
Course/Subject: ACC 225 – Business Laws and Regulations
Name of Author: ATTY. ALNESSA THEA R. UY
THIS SIM/SDL MANUAL IS A DRAFT VERSION ONLY; NOT FOR REPRODUCTION

AND DISTRIBUTION OUTSIDE OF ITS INTENDED USE. THIS IS INTENDED ONLY
FOR THE USE OF THE STUDENTS WHO ARE OFFICIALLY ENROLLED IN THE
COURSE/SUBJECT.EXPECT REVISIONS OF THE MANUAL.
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3F, Business & Engineering Building
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Phone No.: (082)300-5456 Local 137
TABLE OF CONTENTS
Particulars Pages
Cover Page 1
Table of Contents 2
Course Outline Policy 2-6
Course Information 7-8
Big Picture Unit Learning Outcome (BP ULO)a: 8-10
Metalanguage 8-9
Essential Knowledge: Partnership 8-67
Full Text: The Law on Partnership 67-95
Self Help 95
Exercise 1: Identification 95-96
Exercise 2: True or False 97
Lets Analyze: Problems 1 & 2 98
Lets Analyze: Problems 3 to 5 99
Lets Analyze: Problem 6 100
In a Nutshell: Activity 1 100

In a Nutshell: Activity 2 & 3 101
In a Nutshell: Activity 4 102
In A Nutshell: Activity 5 103
Question and Answer List 103
Keywords Index 103
Course Schedules 104
Online Code of Conduct 104-105
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Course Outline: LAW 201 – Partnership and Corporation Law
Course Coordinator: Alnessa Thea R. Uy

Email: alnessauy@umindanao.edu.ph
Student Consultation: By appointment
Mobile: 0956-8162-430
Phone: (082) 2273166 or 3050647 loc. 102
Effectivity Date: June 2020
Mode of Delivery: Blended (On-Line with face to face or virtual sessions)
Time Frame: 54 Hours
Student Workload: Expected Self-Directed Learning
Requisites: None
Credit: 3
Attendance Requirements: A minimum of 95% attendance is required at all
scheduled Virtual or face to face sessions.
COURSE POLICY
Areas of Concern Details

Contact and Non-contact Hours This 3-unit course self-instructional manual is
designed for blended learning mode of instructional
delivery with scheduled face to face or virtual
sessions. The expected number of hours will be 54
including the face to face or virtual sessions. The
face to face sessions shall include the summative
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Matina, Davao City
Phone No.: (082)300-5456 Local 137
assessment tasks (exams) since this course is

crucial in the CPA Licensure examination.
Assessment Task Submission Submission of assessment tasks shall be on 3rd, 5th,

7th and 9th week of the term. The assessment paper
shall be attached with a cover page indicating the
title of the assessment task (if the task is
performance), the name of the course coordinator,
date of submission and name of the student. The
document should be emailed to the course
coordinator. It is also expected that you already paid
your tuition and other fees before the submission of
the assessment task.
If the assessment task is done in real time through

the features in the Blackboard Learning
Management System, the schedule shall be
arranged ahead of time by the course coordinator.
Since this course is included in the CPA Licensure

Examination, you will be required to take the
Multiple Choice Question exam inside the
University. This should be scheduled ahead of time
by your course coordinator.
This is non-negotiable for all board examination-
based programs.
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Phone No.: (082)300-5456 Local 137
Turnitin Submission To ensure honesty and authenticity, all assessment

(if necessary) tasks are required to be submitted through Turnitin
with a maximum similarity index of 30% allowed.
This means that if your paper goes beyond 30%, the
students will either opt to redo her/his paper or
explain in writing addressed to the course
coordinator the reasons for the similarity. In addition,
if the paper has reached more than 30% similarity
index, the student may be called for a disciplinary
action in accordance with the University’s OPM on
Intellectual and Academic Honesty.
Please note that academic dishonesty such as

cheating and commissioning other students or
people to complete the task for you have severe
punishments (reprimand, warning, expulsion).
Penalties for Late The score for an assessment item submitted after
the designated time on the due date, without an
Assignments/Assessments
approved extension of time, will be reduced by 5%
of the possible maximum score for that assessment
item for each day or part day that the assessment
item is late.
However, if the late submission of assessment paper
has a valid reason, a letter of explanation should be
submitted and approved by the course coordinator.
If necessary, you will also be required to
present/attach evidences.
Return of Assignments/ Assessment tasks will be returned to you two (2)
Assessments weeks after the submission. This will be returned by
email or via Blackboard portal.
For group assessment tasks, the course coordinator
will require some or few of the students for online or
virtual sessions to ask a clarification questions to
validate the originality of the assessment task
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submitted and to ensure that all the group members

are involved.
Assignment Resubmission You should request in writing addressed to the
course coordinator his/her intention to resubmit an
assessment task. The re-submission is premised on
the student’s failure to comply with the similarity
index and other reasonable grounds such as
academic literacy standards or other reasonable
circumstances e.g. illness, accidents financial
constraints.
Re-marking of Assessment You should request in writing addressed to the

Papers and Appeal program coordinator your intention to appeal or
contest the score given to an assessment task. The
letter should explicitly explain the reasons/points to
contest the grade. The program coordinator shall
communicate with the students on the approval and
disapproval of the request.
If disapproved by the course coordinator, you can
elevate your case to the program head or the dean
with the original letter of request. The final decision
will come from the dean of the college.
Preferred Referencing Style Please use the general practice of the APA 6th
Edition.
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Student Communication You are required to create a umindanao email

account which is a requirement to access the
BlackBoard portal. Then, the course coordinator
shall enroll the students to have access to the
materials and resources of the course. All
communication formats: chat, submission of
assessment tasks, requests etc. shall be through the
portal and other university recognized platforms.
You can also meet the course coordinator in person

through the scheduled face to face sessions to raise
your issues and concerns.
For students who have not created their student

email, please contact the course coordinator or
program head.
Contact Details of the Dean Lord Eddie I. Aguilar, CPA, MBA

0949-668-2557
aguilar_lordeddie@umindanao.edu.ph
Contact Details of the Program Mary Grace S. Sombilon, MSA, CPA

Heads Program Head – BSA, BSMA
Email:sombilon_marygrace@umindana
o.edu.ph Phone: 082-3050647 local 102
Devzon U. Porras, MSA, CPA
Program Head – BSAT, BSAIS, BSIA
Email: dporras@umindanao.edu.ph
Phone: 082-3050647 local 102
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Matina, Davao City
Phone No.: (082)300-5456 Local 137
Students with Special Needs Students with special needs shall communicate with
the course coordinator about the nature of his or her
special needs. Depending on the nature of the need,
the course coordinator with the approval of the
program coordinator may provide alternative
assessment tasks or extension of the deadline of
submission of assessment tasks. However, the
alternative assessment tasks should still be in the
service of achieving the desired course learning
outcomes.
Online Tutorial Registration You are required to enroll in a specific tutorial time
for this course via the www.devzonp@gmail.com.
Please note that there is a deadline for enrollment to
the tutorial.
Help Desk Contact bsais@umindanao.edu.ph
Library Contact Brigida E. Bacani
Email: library@umindanao.edu.ph
09513766681
for inquiries, you can email

at umlic.eresources@gmail.com, raphael_digal@u
mindanao.edu.ph or
chat with us here http://library.umindanao.edu.ph/
Facebook page: https://www.facebook.com/UM-
Learning-and-Information-Center-Davao-City-
962331877193048/
Well-Being Welfare Support Ronadora E. Deala

Help Desk
Email: Ronadora_deala@umindanao.edu.ph
09212122846
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Matina, Davao City
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GSTC Facilitator
Zerdszen P. Rañises
Emai: gstcmain@umindanao.edu.ph
09058924090
GSTC Facebook Page:

https://facebook.com/UM-GSTC-Main-CAE-
111901303784349/?modal=admin_todo_tour
Course Information – see/download course syllabus in the Black Board LMS
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CC’s Voice: Hello, future accountants! Welcome to our ACC LAW 201 course –
Partnership and Corporation Law. This is your 2nd law course in your
chosen profession. Hopefully, by now, you can adjust and see yourself
become an Accountant someday. Meeting with key executives in the
company and helping them in their respective businesses. Understanding
Partnership and Corporation Law is very important to be able to have a full
grasp of the existence and role of partnership and corporation, duties and
responsibilities of partners and corporation officers, understanding capital
and stocks, and the different kinds of corporation authorized under the
Philippine Laws.
CO: This course is a continuation of your LAW 101 – Law on Obligations and
Contracts. After finishing this course, you will be able to learn the basic
characteristics of Partnership and Corporation, its elements, advantages
and disadvantages, as well as its difference from other forms of business
entities. You will also earn knowledge on capital, stocks, shares, profits,
losses and the usual transactions involved in Partnership and Corporation.
This course will also integrate basic real life legal problems and cases on
Partnership and Corporation.
Our goal here is for you to be acquainted with the works of an Accountant
in the corporate world and in understanding Partnership and Corporation in
the viewpoint of an Accountant.
Let us begin!
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Big Picture
Week 1-3: Unit Learning Outcomes (ULO): At the end of the unit, you are expected to
a. Assess the Nature, Elements, Characteristics, kinds of Partnership,

kinds of partners and their obligations based on the provisions of the
law.
Big Picture in Focus: ULOa. Assess the Nature, Elements, Characteristics, kinds of
Partnership, kinds of partners and their obligations based on the provisions of the law.
Metalanguage
Glossary and Terminology
General partner: A partner who assumes unlimited liability for the debts of the
partnership; also, the general partner in a limited partnership is responsible for its
management.
General partnership: A partnership in which all partners have mutual agency and
unlimited liability for partnership debts.
Limited liability partnership: Restricts partners' liabilities to their own acts and the acts
of individuals under their control. A partnership in which each partner is not personally
liable for malpractice or negligence claims unless the partner was responsible for
providing the service that resulted in the claim.
Limited partners: Partners who have no personal liability for debts of the partnership
beyond the amounts they have invested in the partnership.
Limited partnership: Includes both general partner(s) with unlimited liability and a limited
partner(s) with liability restricted to the amount invested.
Mutual agency: The legal relationship among the partners whereby each partner is an
agent of the partnership and is able to bind the partnership to contracts within the
apparent scope of the partnership's business.
Partnership: An unincorporated association of two or more persons to pursue a business

for profit as co-owners.
Partnership contract: The agreement between partners that sets forth the terms under
which the affairs of the partnership will be conducted.
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Partnership liquidation: The dissolution of a business partner-ship by (1) selling non-

cash assets for cash and allocating the gain or loss according to partners' income-and-
loss ratio, (2) paying liabilities, and (3) distributing remaining cash to partners based on
capital balances.
Statement of partners' equity: A financial statement that shows the total capital
balances at the beginning of the period, any additional investment by the partners, the
net income or loss of the period, the partners' withdrawals during the period, and the
ending capital balances.
Unlimited liability of partners: The legal relationship among general partners that
makes each of them responsible for paying all the debts of the partnership if the other
partners are unable to pay their shares
Essential Knowledge
Essential knowledge is a detailed discussion of the topic or concept.
Introduction to Partnership Law
This part will discuss about the essential terms and concepts relating to the study of
Partnership Law and to present ULOa will be technically defined to establish a reference
as to how the course apply in your chosen field or career. Expect to encounter technical
terms as we go through the study of Partnership Law. Please use these terminologies in
case you will faced difficulty in understanding the partnership legal concepts.
Please proceed immediately to the “Essential Knowledge” part since the first
lesson will discuss about definition of technical terms.
Essential Knowledge
To discuss the big picture (unit learning outcomes) for the first three (3) weeks of the
course, you need to understand the following essential knowledge that will be laid down
in the succeeding pages. Please take note that you are not limited to only refer to these
resources. Hence, you are expected to explore other books, research articles and
resources that are available in the university’s library e.g. ebrary, search.proquest.com,
www.iiap.com.ph, www.acfe.com.
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LAW ON PARTNERSHIP
First, we have to define what partnership is.
‘Partnership’ Defined
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. (See Art. 1767).
A person can become a partner if he/she is willing to contribute money (cash or any of its
equivalent – such as check payment), property (real or personal) which has value for
money and industry (which means labor or services) that can be contributed to the
existence of partnership.
It is also a status and a fiduciary relation subsisting between persons carrying on a

business in common with a view on profit.
Requisites for Existence of Partnership
In general, to show the existence of a partnership, all of its essential characteristics must
be proved; in particular, it must be proved that:
(a) there was an intention to create a partnership

(b) there was a common fund obtained from contributions
(c) there was a joint interest in the profits.
In partnership, it is very important to note that the intention is clearly to create partnership.
There is an end goal to have profit and divide it (according to the ratio of your contribution).
There is also partnership when two or more persons. Two or more persons may also form
a partnership for the exercise of a profession, like lawyers and accountants. Under Article
1771, a partnership may be constituted in any form, except where immovable property or
real rights are contributed thereto, in which case a public instrument shall be necessary.
Article 1784, on the other hand, provides that a partnership begins from the moment of
the execution of the contract, unless it is otherwise stipulated.
Read the recent case of ANICETO G. SALUDO, JR., PETITIONER, VS. PHILIPPINE
NATIONAL BANK, RESPONDENT. [ G.R. No. 193138, August 20, 2018] for the
discussion on Partnership and its definition.
Article 1767 of the Civil Code provides that by a contract of partnership, two or more
persons bind themselves to contribute money, property, or industry to a common fund,
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with the intention of dividing the profits among themselves. Two or more persons may
also form a partnership for the exercise of a profession. Under Article 1771, a partnership
may be constituted in any form, except where immovable property or real rights are
contributed thereto, in which case a public instrument shall be necessary. Article 1784,
on the other hand, provides that a partnership begins from the moment of the execution
of the contract, unless it is otherwise stipulated.
The subsequent registration of the Articles of Partnership with the SEC, on the other hand,
was made in compliance with Article 1772 of the Civil Code, since the initial capital of the
partnership was P500,000.00.[47] Said provision states:
Art. 1772. Every contract of partnership having a capital of Three thousand pesos or more,
in money or property, shall appear in a public instrument, which must be recorded in the
Office of the Securities and Exchange Commission.
THEREFORE:
(a) mere co-ownership or co-possession (even with profit- sharing)
(b) mere sharing of GROSS returns (even with joint ownership of the properties involved)
do not establish a partnership.
CONTRACT
Read the case of G.R. No. 138018 July 26, 2002 RIDO MONTECILLO vs IGNACIA
REYNES and SPOUSES REDEMPTOR and ELISA ABUCAY, respondents.
Article 1318 of the Civil Code, "[T]here is no contract unless the following requisites
concur: (1) Consent of the contracting parties; (2) Object certain which is the subject
matter of the contract; (3) Cause of the obligation which is established."
Characteristics of the Contract
A. The contract is consensual, because it is perfected by mere consent, although such

consent must be manifested in certain cases by the proper formalities;
bilateral or multi-lateral, because it is entered into between two or more persons;
nominate, because it is designated by a specific name;
principal, because its existence does not depend on the life of another contract
Onerous, because certain contributions have to be made; and preparatory, in the sense
that after it has been entered into, other contracts essential in the carrying out of its
purposes can be entered into.
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B. There must be contribution to a common fund
For critical thinking: True or False?
a. A promissory note evidencing collectible may be contributed to a common

fund.
b. Political Credit is not a valid contribution.
c. A license to construct may validly part of the contribution.
d. The “industry” contributed may be intellectual or physical
e. A limited partner cannot contribute mere “industry.
C. The object must be a lawful one.
D. There must be an intention of dividing the profit among the partners
(Art. 1767) since the firm is for the common benefit or interest of the partners
A partnership was validly created where two people jointly borrowed from their
father a sum of money which, together with their own personal funds, was used by them
in buying real properties for lease to third parties, such investment consisting of a series
of transactions and the management thereof being under one person for more than 10
years. (Evangelista, et al. v. Coll. of Int. Rev., L-9996, Oct. 15, 1957)
NOTE: The object must be for profit and not merely for common enjoyment; otherwise,
only a co-ownership has been formed.
E. There must be the affectio societatis — the desire to formulate an ACTIVE union
(Fernandez v. De la Rosa, 1 Phil. 671) with people among whom there exist mutual
confidence and trust (delectus personarum).
Partnership’ Distinguished from ‘Business Trusts’
When certain persons entrust their property or money to others who will manage the same
for the former, a business trust is created. The investors are called cestui que trust; the
managers are the trustees. In a true business trust, the cestui que trust (beneficiaries) do
not at all participate in the management; hence, they are exempted from personal liability,
in that they can be bound only to the extent of their contribution.
Partnership’ Distinguished from ‘Agency’

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“Agency” may in one sense be considered the broader term because “partnership” is only
a form of “agency.’’
An agent never acts for himself but only for his principal; a partner is both a principal (for
his own interests) and an agent (for the firm and the others).
Agents must perform their duties within their authority and for the benefit of the Principal.
D Reathe case of G.R. No. 205657, March 29, 2017 INTERNATIONAL EXCHANGE
BANK NOW UNION BANK OF THE PHILIPPINES, Petitioner, v. SPOUSES JEROME
AND QUINNIE BRIONES, AND JOHN DOE, Respondents.
In a contract of agency, "a person binds himself to render some service or

to do something in representation or on behalf of another, with the consent
or authority of the latter."44 Furthermore, Article 1884 of the Civil Code
provides that "the agent is bound by his acceptance to carry out the agency,
and is liable for the damages which, through his non-performance, the
principal may suffer."45
Rallos v. Felix Go Chan & Sons Realty Corporation46 lays down the elements of agency:
Out of the above given principles, sprung the creation an acceptance of

the relationship of agency whereby one party, called the principal (mandante),
authorizes another, called the agent (mandatario), to act for and in his behalf in
transactions with third persons. The essential elements of agency are: (1) there is
consent, express or implied, of the parties to establish the relationship; (2) the
object is the execution of a juridical act in relation to a third person; (3) the agent
acts as a representative and not for himself; and (4) the agent acts within the scope
of his authority.47 (Emphasis in the original, citation omitted)
Partnership’ Distinguished from a ‘Joint Adventure’ (or JOINT ACCOUNTS)

A joint adventure (an American concept similar to our joint accounts) is a sort of informal
partnership, with no firm name and no legal personality. In a joint account, the
participating merchants can transact business under their own name, and can be
individually liable therefor.
Usually, but not necessarily, a joint adventure is limited to a SINGLE TRANSACTION,

although the business of pursuing it to a successful termination may continue for a
number of years; a partnership generally relates to a continuing business of various
transactions of a certain kind.
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Capacity to Become Partner: True or False?

In general, a person capacitated to enter into contractual relations may become a partner.
An unemancipated minor cannot become a partner unless his parent or guardian

consents. Without such consent, the partnership contract is voidable, unless other
partners are in the same situation, in which case the contract is unenforceable.
A married woman, even if already of age, cannot contribute conjugal funds as her
contribution to the partnership, unless she is permitted to do so by her husband (See Art.
125, Family Code), or unless she is the administrator of the conjugal partnership, in which
latter case, the court must give its consent/authority.
A partnership being a juridical person by itself can, it is believed, form another partnership,
either with private individuals or with other partnerships, there being no prohibition on the
matter.
The majority view is that a corporation cannot become a partner on grounds of public
policy; otherwise, people other than its officers may be able to bind it.
However, a corporation can enter into a joint venture with another where the nature of
that venture is in line with the business authorized in its charter. Thus, a corporation, like
the Gregorio Araneta Co., may act as a sort of “managing partner” of another corporation,
for the purpose of conducting a lawsuit in line with the corporate business of the
corporations concerned.
Effect on Non-Compliance With Art. 1772, 1st Paragraph (Registration With the Securities
and Exchange Commission) Under Art. 1772, “every contract of partnership having a
capital of P3,000 or more, in money or property, shall appear in a public instrument, which
must be recorded in the office of the Securities and Exchange Commission.”
Now then, suppose this requirement has not been complied with, is the partnership still a
juridical person, assuming that all other requisites are present?
ANS.: Yes, in view of the express provision of Art. 1768.

Art. 1772 “is not intended as a prerequisite for the acquisition of juridical personality by
the partnership, but merely as a condition for the issuance of licenses to engage in
business or trade.
In this way, the tax liabilities of big partnerships cannot be evaded, and the public can
also determine more accurately their membership and capital before dealing with them.”
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Consequences of the Partnership Being a Juridical Entity

A. Its juridical personality is SEPARATE and DISTINCT from that of each of the partners.
(Thus, in the partnership “Sundiang and Castillo,” there are three persons:
1.) Sundiang,
2.) Castillo, and
3.) the firm “Sundiang and Castillo”.)
B. The partnership can, in general:

1) acquire and possess property of all kinds
2) incur obligations (Art. 46, Civil Code);
3) bring civil or criminal actions (Art. 46, Civil Code);
4) can be adjudged INSOLVENT even if the individual members be each financially
solvent.
(C) Unless he is personally sued, a partner has no right to make a separate appearance
in court, if the partnership being sued is already represented.
Limitations on Alien Partnerships

If at least 60% of the capital of a partnership is not owned by Filipinos, the firm cannot
acquire by purchase or otherwise agricultural Philippine lands.
Foreign partnerships may lease lands provided the period does not exceed 99 years,
there being no prohibition regarding lease.
Foreign partnerships may be the mortgagees of land, the mortgage to last for 5 years,
renewable for another years. However, they cannot purchase the same at the foreclosure
sale.
Rules in Case of Associations Not Lawfully Organized as Partnerships
(a) If an association is not lawfully organized as a partnership (though it apparently carries

on the business as a partnership), it possesses no legal personality. Therefore, it cannot
sue as such. However, the “partners”, in their individual capacity, can
(b) One who enters into contract with a “partnership” as such (as when he borrows money
therefrom) cannot, when sued later on for recovery of the debt, allege the lack of legal
personality on the part of the firm, even if indeed it had no personality. The reason is that
the borrower is in estoppel.
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Sharing of Net Profits

Sharing of NET profits is prima facie evidence that one is a partner except in the five
instances enumerated under Art. 1769 (No. 4).
(4) The receipt by a person of a share of the profits of a business is prima facie evidence
that he is a partner in the business, but no such inference shall be drawn if such profits
were received in payment:
(a) As a debt by installments or otherwise;

(b) As wages of an employee or rent to a landlord;
(c) As an annuity to a widow or representative of a deceased partner;
(d) As interest on a loan, though the amount of payment varies with the profits of
the business;
(e) As the consideration for the sale of a goodwill of a business or other property
by installments or otherwise.
Case Analysis:
I. D, to carry on a business, borrowed money from C.
It was agreed that D would return the money in installments and that said installments
would come from D’s profits in the business.
Issue: Is a partnership created between D and C?

ANS.: No. A difference must be made between LENDING money to a business proprietor,
and contributing money and INVESTING it as CAPITAL in the business.
II. Fortis v. Gutierrez Hermanos 6 Phil. 100

FACTS: Fortis was a bookkeeper in a partnership named “Gutierrez Hermanos”, with a
yearly salary amounting to 5% of the net profits for each year. Fortis, however, had no
vote at all in the management of the business.
Issue: Was he a partner?
HELD: No, for clearly this was a mere contract of employment.
III. Bastida v. Menzi and Co. 58 Phil. 188

FACTS: Bastida worked for Menzi and Co., as procurer of contracts for fertilizers to be
manufactured by the firm, and as supervisor of the mixing of the fertilizers. However, he
had no voice in the management of the business except in his task of supervising the
mixing of said fertilizers.
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For his services, he was entitled to 35% of the net profits in the fertilizer business. Aside
from this, he sued the firm for 35% of the value of its goodwill on the ground that he had
become a partner thereof.
Was he a partner?
HELD: He was not a partner, but a mere employee with no power to vote. While the
parties had used the phrase “en sociedad con,” the truth is that this should not be
interpreted to mean “in partnership with” but only as “en reunion con” or “in association
with.”
IV. Lyons v. Rosenstock 56 Phil. 632

FACTS: Eliser and Lyons were real estate dealers who often associated with each other
in their business deals, and who owned together a certain parcel of land. With Lyon’s
consent, Eliser mortgaged the common land to obtain money for the development of the
San Juan Estate. Lyons however expressed a desire not to participate in the project of
development.
The business of Eliser prospered and later on Lyons asked for a share obtained from the
mortgage of the common property, and that therefore, he and Eliser had been partners.
Was there a partnership created?
HELD: No partnership was created, for Lyons himself did not want to engage in the
development project, the mortgage of the common property being immaterial.
V. Valderrama and Co.
Valderrama and Co., a general merchandise partnership, has become insolvent for
maladministration of the business and entered into an agreement with its creditors to the
effect that the business should be continued for the time being under the direction and
management of an experienced businessman appointed by the creditors, an arrangement
to be carried out until the claims of the creditors are fully satisfied.
Can you consider the creditors who are parties to the agreement partners? Reasons.
ANS.: The creditors are not partners, for their only interest in the sharing of profits is the
receipt or payment of their credits. (Art. 1769).
Moreover, in a partnership, the partners are supposed to trust and have confidence in all
the partners — this element is not present in the instant case.
Partnership by Estoppel
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Phone No.: (082)300-5456 Local 137
If two persons not partners represent themselves as partners to strangers, a partnership

by estoppel results.
Similarly, when 2 persons, who are partners, in connivance with a friend (who is not a
partner), inform a stranger that said friend is their partner, a partnership by estoppel may
also result to the end that the stranger should not be prejudiced.
Lawful Object or Purpose

If a partnership has several purposes, one of which is unlawful, can the partnership still
validly exist?
ANSWER: Yes, so long as the illegal purpose can be separated from the legal purposes.
Is a Judicial Decree Needed to Dissolve an Unlawful Partnership?

ANS.: No, for the contract is void from the very beginning, and therefore never existed
from the viewpoint of the law.
However, there would be nothing wrong in having the court dissolve the partnership. This
will be good and convenient for everybody; moreover, there may be a question as to
whether or not the partnership is indeed unlawful. This is particularly true when the object
was lawful at the beginning but has later on become unlawful.
Instances When a Partnership Is Unlawful

A partnership formed to furnish apartment houses which would be used for prostitution.
A partnership for gambling purposes
A partnership formed for the purpose of acquiring parcels of land much in excess of the
maximum allowed by the Friar Lands Act
Consequences of Unlawful Partnership

(a) If the firm is also guilty of a crime, the Revised Penal Code governs both the criminal
liability and the “forfeiture of the proceeds of the crime and the instruments or tools with
which it was committed.
Such proceeds and instruments or tools shall be confiscated and 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 lawful commerce shall be destroyed.” (Art. 45, Rev.
Penal Code).
(b) The partners forfeit the proceeds or profits, but NOT their contributions, provided no
criminal prosecution has been instituted. (Arbes v. Polistico, 53 Phil. 489). If the
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Phone No.: (082)300-5456 Local 137
contributions have already been made, they can be RETURNED; if the contributions have
not yet been made, the partners cannot be made to make the contribution.
(c) An unlawful partnership has no legal personality.
Case Analysis:
I. Arbes v. Polistico, et al. 53 Phil. 489
FACTS: An organization, “Turnuhan Polistico and Co.,” was engaged in conducting a
lottery among its partners-members every weekend. The members contributed a weekly
amount, all of which except a certain amount were distributed in turn to the lottery winners.
Obviously, the court had no alternative except to declare the partnership an unlawful one.
Issue: Can the partners get back their capital? their profits?
HELD: Capital- YES, Profit- No

The partners can get back their capital, for the law speaks only of the confiscation of
profits which certainly should not be returned, first because of the express provision of
the law on profits, and second, because to legally get profits, the action must be based
on a lawful contract or transaction, not an illegal one like this.
Recovery of the capital indeed may be had, except if the same can come under the
category of “instruments and effects of the crime.”
Formalities Needed
(a) For VALIDITY of the contract (among the parties) as well as for ENFORCEABILITY,
NO FORM is required as a general rule, regardless of the value of the contributions.
Therefore, the contract may even be ORAL. (Magalona v. Pesayco, 59 Phil. 453). (Note
that a partnership contract is not one of those covered by the Statute of Frauds.)
Exception: Whenever real properties or real rights in real properties are contributed —
regardless of the value — a PUBLIC INSTRUMENT is needed.
(The contract itself must be in the public instrument; moreover, there must be an
INVENTORY of the immovable. This INVENTORY must be signed by the parties and
attached to the public instrument.) (See Art. 1773, Civil Code).
[NOTE: Without the public instrument, the partnership is VOID.
[NOTE: The inventory is important to show how much is due from each partner to
complete his share in the common fund and how much is due to each of them in the event
of liquidation. (Tablason v. Bollozos, et al., C.A., 51 O.G. 1966). Without such inventory,
the contract is void.
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(b) For EFFECTIVITY of the partnership contract insofar as innocent third persons are
concerned, the same must be REGISTERED if REAL PROPERTIES are involved.
Case Illustration
I. A partnership was formed orally though more than P500 was contributed in cash.
Now then, under the last paragraph of Art. 1358, contracts “where the amount
involved exceeds P500 [such contract] must appear in writing, even a private one.”
Should the oral partnership formed be considered valid?
ANS.: Yes, because Art. 1358 applies only for the purpose of convenience and not for
validity or enforceability. Being valid, the contract can be put in writing upon the demand
of any of the parties.
Had real property been contributed, the oral partnership would be void; and therefore not
one of the partners can compel the others to execute the public instrument.
II. Magalona v. Pesayco 59 Phil. 453
FACTS: Pesayco, a partner in an oral partnership for the catching of fish, with cash as
the only contributions thereto refused to account for proceeds of the firm on the ground
that the agreement was not in writing. Is he correct?
HELD: No, because the oral partnership is valid, real properties not having been
contributed.
III. Agad v. Mabato L-24193, Jun. 28, 1968

FACTS: On Aug. 29, 1952, a partnership was entered into between Mauricio Agad and
Severino Mabato “to operate a fishpond.” Neither partner contributed a fishpond or a real
right to any fishpond. Their contributions were limited to the sum of P1,000 each.
The partnership contract was in a public instrument, but an inventory of the fishpond to
be operated was not attached to said instrument.
ISSUE: Is the contract of partnership valid?
HELD: Yes, the contract is valid, despite the lack of the inventory. The purpose of the
partnership was not “to engage in a fishpond business” but “to operate a fishpond.”
Neither said fishpond nor a real right thereto was contributed to the partnership, or
became part of the capital thereof, even if a fishpond or a real right thereto could become
part of its assets.
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Phone No.: (082)300-5456 Local 137
Art. 1773 which states that “a contract of partnership is void, whenever

immovable property is contributed thereto, if inventory of said property is
not made, signed by the parties, and attached to the public instrument,” is,
therefore, NOT APPLICABLE.
Sample Problems:
I. If two persons agree to form a partnership in the future, does the partnership
immediately arise from the moment of said agreement?
ANS.: No. An agreement to form a partnership does not of itself create a

partnership. When there are conditions to be fulfilled or when a certain period is to
elapse, first, the partnership is not created till after the fulfillment of the conditions
or the arrival of the term, and this is true even if one of the parties has already
advanced his agreed share of the capital.
II. A and B today orally agreed to form a partnership one and a half years from today,
each one to contribute P1,000. If at the arrival of the period, one refuses to go
ahead with the agreement, can the other enforce the agreement?
ANS.: No, because the agreement was merely oral and executory. It is true
that a partnership contract is not governed by the Statute of Frauds but here, there
is merely an agreement to form a partnership in the future.Since therefore the
agreement is to be enforced after one year from the making thereof, the same
should be in writing to be enforceable under the Statute of Frauds.
Specific Performance not applicable

[NOTE: In one case our Supreme Court ruled that even if there was a prior agreement to
form in the future a partnership, still if one of those who had so agreed refuses to carry
the agreement and to execute the necessary partnership papers, he cannot be obliged to
do so. For here, his obligation is one to DO, not to GIVE.
This is, therefore, a very personal act (acto personalisimo) of courts may not compel
compliance, as it is an act of violence to do so.
Classification of Partnerships
(a) According to manner of creation:
1) orally constituted
2) constituted in a private instrument
3) constituted in a public instrument
4) registered in the Office of the Securities and Exchange Commission
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Phone No.: (082)300-5456 Local 137
(b) According to object:

1) universal
a) with all present property
b) with all profits (the individual properties here continue to be owned
by the partners, but the usufruct thereof passes to the firm)
2) particular — here the object are determinate things, their use or fruits; a
specific undertaking, or the exercise of a profession or occupation (Art. 1783, Civil Code).
(c) According to liability:

1) limited partnership — that where at least one partner is a general partner, and
the rest are limited partners. (NOTE: A general partner is liable beyond his contribution;
a limited partner is liable only to the extent of his contribution.)
2) general partnership — that where all the partners are general partners.
(d) According to legality:

1) lawful or legal
2) illegal or unlawful
(e) According to duration:

1) for a specific period or till the purpose is accomplished
2) partnership at will
a) here, no period, express or implied, is given and so its duration depends
on the will of the partners;
b) if the period has expired, but the partnership continued, without
liquidation, by the partners who habitually acted as such during the term.
(Art. 1785, Civil Code).
(f) According to representation to others:

1) ordinary partnership
2) partnership by estoppel
Classification Into General and Limited

A general partnership is one where all the partners are general partners (that is, they are
liable even with respect to their individual properties, after the assets of the partnership
have been exhausted).
A limited partnership is one where at least one partner is a general partner and the others
are limited partners. (A limited partner is one whose liability is limited only up to the extent
of his contribution.)
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Matina, Davao City
Phone No.: (082)300-5456 Local 137
All are limited partners?

A partnership where all the partners are “limited partners” cannot exist as a limited
partnership; it will even be refused registration.
If at all it continues, it will be a general partnership, and all the partners will be general
partners.
Formalities Needed for the Creation of a Partnership

(a) Personal property
1) less than P3,000 (total) — may be oral
2) P3,000 or more — must be in a public instrument and registered in the Securities and
Exchange Com- mission. But even if this is not complied with, the partnership is still valid
and possesses a distinct personality. (Arts. 1772, 1768, Civil Code).
Evidently, the requirement is merely for administrative and licensing purposes.

(b) Real property — Regardless of the value contributed, a public instrument is needed,
with an attached inventory; otherwise the partnership is VOID and has NO juridical
personality even as between the parties. (Art. 1773, Civil Code).
Moreover, to be effective against third parties, the partnership must also be registered in
the Registry of Property of the province where the real property contributed is found.
After all, there is an alienation here of a real right on real property.
(c) Limited partnership — must be registered AS SUCH in the Office of the Securities
and Exchange Commission; otherwise, it is not valid as a limited partnership.
(NOTE: However, even without such registration, it may still be considered a general
partnership, and as such, possesses juridical personality)
Kinds of Universal Partnerships

(a) Partnership of all present property
(b) Partnership of all profits
NOTE: All Present Property

Profits from other sources may become COMMON, but only if there is a stipulation to
such effect.). Properties subsequently acquired by inheritance, legacy, or donation,
cannot be included in the stipulation, BUT the fruits thereof can be included in the
stipulation.)
Future Property Can Not Be Included

Reasons why future (by inheritance, legacy, donation) property cannot be included in the
stipulation regarding the universal partnership of all present property:
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(a) First, as a rule, contracts regarding successional rights cannot be made.

(b) Secondly, a partnership demands that the contributed things be determinate, known,
and certain.
(c) Thirdly, a universal partnership of all present properties really implies a donation, and
it is well-known that generally, future property cannot be donated.
ALL PRESENT PROPERTY

Sample Problem:
I. A and B entered into a universal partnership of all present property. No stipulation

was made regarding other properties. Subsequently, A received a parcel of land
by inheritance from his father; and another parcel of land from the San Beda
College as remuneration for A’s work as professor therein.
Question: Are the two parcels of land and their fruits to be enjoyed by the partnership?
ANS.: No, because there was no stipulation regarding future properties or their fruits.
Same as (a) except that in the contract, it was stipulated that all properties subsequently
acquired would belong to the partnership.
ANS.: The land acquired as salary as well as its fruits will belong to the firm; but the land
acquired later by inheritance will NOT belong to the partnership since this cannot be
stipulated upon. (Art. 1780).
The fruits of the inherited land will go to the firm because said fruits may be considered
as properties subsequently acquired, and there is no prohibition to stipulate on fruits, even
if the fruits be those of properties acquired later on by inheritance, legacy, or donation.
On Profits
Sample Problem:
I. In a universal partnership of profits, A contributed the use of his car. At the end of
the partnership, should the car be returned to him?
ANS.: Yes, because the naked ownership had always been with him, and upon the end
of the usufruct, full ownership reverts to him. Remember that only its use had been
previously contributed.
II. A and B entered into a universal partnership of profits. Subsequently, A won 1st
prize in the sweepstakes. Will the money belong to the partnership?
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Matina, Davao City
Phone No.: (082)300-5456 Local 137
ANS.: No, because it was not acquired by “industry or work.
III. A and B entered into a universal partnership of profits. Subsequently A became a

teacher at the Poveda Learning Centre. Will A’s salary belong to the partnership?
ANS.: Yes, even though no stipulation was made on this point because after all the salary
was acquired by A’s “industry or work during the existence of the partnership.”(Art. 1780,
par. 1). Such “profit” belongs therefore to the firm as a matter of RIGHT.Of course, had
there been a stipulation that such salary would be excluded, the stipulation would be
VALID.
IV. A and B entered into a universal partnership of profits. Later, A purchased a parcel
of land. Will the fruits of said land belong to the partnership?
ANS.: As a rule, NO, because the usufruct (use and fruits) granted to the firm under Art.
1780, par. 2 refers only to that of the property possessed by the partner at the time of the
celebration of the contract.
It follows that fruits of after-acquired property do not belong to the firm as a matter of right.
However, it would be valid to stipulate that the usufruct of after-acquired properties would
belong to the partnership.
Presumption:
Art. 1781. Articles of universal partnership, entered into without specification of its nature,
only constitute a universal partnership of profits.
Persons Who Together Cannot Form a Universal Partnership

(a) Husband and wife — as a rule. (Art. 133, Civil Code).
(b) Those guilty of adultery or concubinage. (Art. 739, Civil Code).
(c) Those guilty of the same criminal offense, if the partnership was entered into in
consideration of the same. (Art. 739, Civil Code).
Reason for the Article

A universal partnership is virtually a donation to each other of the partner’s properties (or
at least, their usufruct). Therefore, if persons are prohibited to donate to each other, they
should not be allowed to do indirectly what the law forbids directly.
Particular Partnership’
To construct a building; to buy and sell real estate; to practice the law profession. Here in
a sense, it is as if all the members are industrial partners.
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NOTE: A husband and his wife may enter into a particular partnership.)
OBLIGATIONS OF THE PARTNERS AMONG THEMSELVES
Different Relationships
When two persons, A and B, form a partnership, different relations may arise:
(a) Relations between A and B;
(b) Relations between A and B on the one hand, and the
partnership on the other hand;
(c) Relations between A and B on the one hand, and third
persons on the other hand;
(d) Relations between the partnership and the third persons.
Some Obligations of a Partner

(a) To give his contribution.
(b) Not to convert firm money or property for his own use.
(c) Not to engage in unfair competition with his own firm.
(d) To account for and hold as trustee, unauthorized personal profits. (e) Pay for
damages caused by his fault.
(f) Duty to credit to the firm, payment made by a debtor who owes him and the firm.
(g) To share with the other partners the share of the partnership credit which he has
received from an insolvent firm debtor.
Some Rights of a Partner

(a) property rights. (Art. 1810, Civil Code).
1) rights in specific partnership property (example —rights in a car contributed to

the firm).
2) interest in the partnership (share in the profits and surplus). (Art. 1812, Civil
Code).
3) right to participate in the management. (Art. 1810, Civil Code).

[NOTE: This right is not given to the limited partner. (Art. 1848, Civil Code).]
(b) right to associate with another person in his share. (Art. 1804, Civil Code).
(c) right to inspect and copy partnership books. (Art. 1805, Civil Code).
(d) right to demand a formal account. (Art. 1809, Civil Code).
(e) right to ask for the dissolution of the firm at the proper time.
Rule if Contributions Have Not Yet Been Actually Made
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Generally, even if contributions have not yet been made, the firm already exists, for
partnership is a consensual contract (of course all the requisite formalities for such
consent must be present).
Duration of a Partnership
A partnership is unlimited as to its duration in the sense that no time limit is fixed by law.
The duration may be agreed upon — expressly (as when there is a definite period) or
impliedly (as when a particular enterprise is undertaken — it being understood that the
firm ends as soon as its purpose has been achieved).
Partnership “At Will”

There are two kinds of a partnership “at will.”
(a) 1st kind — when there is no term, express or implied
(b) 2nd kind — when it is continued by the habitual managers — although the period has
ended, or the purpose has been accomplished.
This is “prima facie” evidence of the firm’s continuation.)
It is called “at will” because its continued existence really depends upon the will of the
partners, or even on the will of any of them.
Three Important Duties of Every Partner

(a) the duty to contribute what had been promised;
(b) the duty to deliver the fruits of what should have been delivered; and
(c) the duty to warrant.
The Duty to Contribute

The contribution must be made ordinarily at the time the partnership is entered into,
unless a different period is stipulated. In either case, no demand is needed to put the
partner in default, because in a partnership the obligation to contribute is one where time
is of the essence (for without the contribution, the partnership is useless).
The partner must exercise due diligence in preserving the property to be contributed,
before he actually contributes the same; otherwise, he can be held liable for losses and
deterioration.
The Duty to Deliver the Fruits

If property has been promised, the fruits thereof should also be given. The fruits referred
to are those arising from the time they should have been delivered, without need of any
demand. If the partner is in bad faith, he is liable not only for the fruits actually produced,
but also for those that could have been produced.
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Matina, Davao City
Phone No.: (082)300-5456 Local 137
Kinds of fruits (Art. 441) that the debtor is also obliged to deliver (NIC):
a. Natural Fruits - They are the spontaneous products of the soil, and the young and other
products of animals. (Art. 442) Examples: trees that naturally grows. Young and other
products of animals.
b. Industrial Fruits - Industrial fruits are those produced by lands of any kind through
cultivation or labor. (Art. 442) Examples: corn and other crops, rice, other products that is
a result of cultivation and intervention of human labor.
c. Civil Fruits -They are the result of a juridical relation such as the rents of buildings, the
price of leases of lands and other property and the amount of perpetual or life annuities
or other similar income. (Art. 442)
If money has been promised, “interest and damages from the time he should have
complied with his obligation” should be given. (Art. 1788). Here again, no demand is
needed to put the partner in default.
Query: Who owns the property before it is delivered?

ANS.: It is submitted that both in the case of money or property, it is the partner who still
owns the same before delivery, for it is delivery, actual or constructive, that transfers
ownership.
The Duty to Warrant

The warranty in case of eviction refers to “specific and determinate things” already
contributed.
There is “eviction” whenever by a final judgment based on a right prior to the sale or an
act imputable to the partner, the partnership is deprived of the whole or a part of the thing
purchased. The parties may however suppress, increase, or diminish this legal obligation.
(See Art. 1548, Civil Code). The partner who made the contribution should be summoned
in the suit for eviction, at the instance of the partnership.
If a partner fails to contribute within the stipulated time what was promised, may the
partnership contract be rescinded?
ANS.: As a general rule, NO. The reason is, rescission is not the proper remedy; the
remedy should be to collect what is owing, as well as damages. The general rule in
obligations cannot apply in the case of partnership. (Sancho v. Lizarraga, 55 Phil. 601).
However, if the defaulting partner is already dead, rescission may prosper
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Phone No.: (082)300-5456 Local 137
When Contribution Consists of Goods

Appraisal of value is needed to determine how much has been contributed.
How Appraisal Is Made
(a) Firstly, as prescribed by the contract.
(b) Secondly, in default of the first, by EXPERTS chosen by the partners, and at
CURRENT prices.
Necessity of the Inventory-Appraisal

Proof is needed to determine how much goods or money had been contributed. An
inventory is therefore useful.
Risk of Loss
After goods have been contributed, the partnership bears the risks of subsequent
changes in their value.
Why No Demand Is Needed to Put Partner in Default?

In the case of the contribution, because time is of the essence, a partnership is formed
precisely to make use of the contributions, and this use should start from its formation,
unless a different period has been set; otherwise the firm is necessarily deprived of the
benefits thereof. Thus, the injury is constant.
In the case of conversion, because the firm is deprived of the benefits of the money, from
the very moment of conversion.
[NOTE: Even if no actual injury results, the liability exists, because the article is absolute.
Case Analysis:
I. Teague v. Martin, 53 Phil. 504
A partner who uses for his own purposes partnership funds must ACCOUNT for the same.
II. U.S. v. Clarin, 17 Phil. 84

Mere failure of the managing partner to return to the others their share of the capital does
not necessarily constitute estafa.
(NOTE: After all, there may really have been a business loss. Moreover, what should be
brought is a civil case.)
Classification of Partners
A). Capitalist partner — one who furnishes capital. (He is not exempted from losses; he
can engage in other business provided there is NO COMPETITION between the partner
and his business.)
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B.) Industrial partner — one who furnishes industry or labor. [He is exempted from
losses as between the partner; he cannot engage in any other business without the
express consent of the other partners; otherwise:
1) he can be EXCLUDED from the firm (PLUS DAMAGES);

2) OR the benefits he obtains from the other businesses can be availed of by the
other partners (PLUS DAMAGES). (Art. 1789)
[NOTE: The rule remains true whether or not there is COMPETITION. Reason: All
his industry is supposed to be given only to the partnership. (Limuco v. Calinao,
C.A., L-10099-R, Sept. 30, 1953).]
(c) Capitalist-industrial partner — one who contributes both capital and industry.
D) General partner — one who is liable beyond the extent of his contribution.
E.) Limited partner — one who is liable only to the extent of his contribution.
[NOTE: An industrial partner can only be a general partner, never a limited partner. (See
Art. 1845, Civil Code).]
F.) Managing partner — one who manages actively the firm’s affairs.
G.)Silent partner — one who does not participate in the management (though he shares
in the profits or losses).
H.)Liquidating partner — one who liquidates or winds up the affairs of the firm after it
has been dissolved.
I.)Ostensible partner — one whose connection with the firm is public and open (that is,
not hidden). (Usually his name is included in the firm name.)
J.)Secret partner — one whose connection with the firm is concealed or kept a secret.
K.)Dormant partner — one who is both a secret (hidden) and silent (not managing)
partner.
L.) Nominal partner — one who is not really a partner but who may become liable as
such insofar as third persons are concerned.
(Example: a partner by estoppel.)
Distinctions Between a ‘Capitalist’ and an ‘Industrial Partner’

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(a) As to contribution:
1) the capitalist partner contributes money or property

2) the industrial partner contributes his industry
(mental or physical)
(b) As to prohibition to engage in other business:

1) the capitalist partner cannot generally engage in the same or similar enterprise as that
of his firm (the test is the possibility of unfair competition).
2) the industrial partner cannot engage in any business for himself (Reason: all his
industry is supposed to be contributed to the firm).
(c) As to profits:
1) the capitalist partner shares in the profits according to the agreement thereon; if none,
pro rata to his contribution. (Art. 1797)
2) the industrial partner receives a just and equitable share. (Art. 1797, Civil Code).
(d) As to losses:
1) capitalist
a) first, the stipulation as to losses
b) if none, the agreement as to profits
c) if none, pro rata to contribution
2) the industrial partner is exempted as to losses (as between the partners). But is liable
to strangers, without prejudice to reimbursement from the capitalist partners. (Art. 1816,
Civil Code).
Amount of Contribution
(a) It is permissible to contribute unequal shares, if there is a stipulation to this effect.
(b) In the absence of proof, the shares are presumed equal.
To Whom Applicable
The rule applies to capitalist partners apparently; however, the share of the industrial
partner is undoubtedly also available, for his industry may be worth even more than the
entire capital contributed.
When a Capitalist Partner Is Obliged to Sell His Interest to the Other Partners
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(a) If there is imminent loss of the business of the partnership;
(b) and he refuses (deliberately and not because of poverty, otherwise this would be
unjust) to contribute an additional share to the capital;
(c) and provided further that there is no agreement to the contrary.
Reason
Because of his apparent lack of interest, and granting that he sincerely believes that
efforts to save the firm would be futile, the capitalist partner referred to should get out of
the firm.
Note that the industrial partner is exempted.

Reason: He is already giving his entire industry.
Art. 1792. If a partner authorized to manage collects a demandable sum which was owed
to him in his own name, from a person who owed the partnership another sum also
demandable, the sum thus collected shall be applied to the two credits in proportion to
their amounts, even though he may have given a receipt for his own credit only; but should
he have given it for the account of the partnership credit, the amount shall be fully applied
to the latter.
Rule if Managing Partner Collects a Credit

The following requisites must concur:
(a) The existence of at least 2 debts (one where the firm is the creditor; the other, where
the partner is the creditor).
(b) Both sums are demandable.
(c) The collecting partner is a managing partner.
Sample Problems:
I. P, a managing partner, is X’s creditor to the amount of P1 million, already
demandable. X also owes the partnership P1 million, also demandable. P collects
P1 million.
(a) If P gives a receipt for the firm, it is the firm’s credit that has been collected.
(b) If P gives a receipt for his own credit only, P500,000 will be given to him; the
other P500,000, to the firm. (Note the use of the word “proportion.”)
[Reason for the law: To prevent furtherance of the partner’s personal interest to
the detriment of the firm.
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Exception: X may decide that he is paying only P’s credit in accordance with his
right of “application of payment.” (Art. 1262, Civil Code). This is all right; BUT only
if the personal credit of P is more onerous to X
II. X owes a firm P1 million. P, a partner, was given his share of P500,000, there
being only two partners. Later X becomes insolvent. Must P share the P500,000
with the other partner?
ANS.: Yes, even if P had given a receipt for his share only.
Reason for the law: Equity demands proportionate share in the benefits and losses.
Who bears the Risk

(a) Specific and determinate things (NOT fungible) — whose usufruct is enjoyed by a
firm — like a car — partner who owns it bears loss for ownership was never transferred
to the firm.
(b) Fungible or Deteriorable — Firm bears loss for evidently, ownership was being
transferred.
(c) Things Contributed to be Sold — Firm bears loss for evidently, firm was intended to
be the owner; otherwise, a sale could not be made.
(d) Contributed under Appraisal — Firm bears loss because this has the effect of an
implied sale.
Responsibility of Firm
(a) To refund amounts disbursed on behalf of firm plus interest (legal) from the time
expenses were made (and not from demand, since after all, a partner is an agent, and
the rule on agency applies to him).
[NOTE: Refund must be made even in case of failure of the enterprise entered into,
provided the partner is not at fault. Reason: Being a mere agent, the partner should not
assume personal liability. Moreover, conversion by the partner results in liability from the
moment of conversion.
[NOTE: A partner who advances funds from his own pocket for taxes on partnership land,
must be reimbursed the same from partnership assets. If the firm is insolvent, the other
partners must reimburse the paying partner except for the latter’s proportionate share in
the taxes.
(b) To answer to each partner for obligations, he may have entered into in good faith in
the interest of the partnership, as well as for RISKS in consequence of its management.
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(Reason: The partner is an AGENT.)
How are Profit & Loss Distributed?
Art. 1797. The losses and profits shall be distributed in conformity with the agreement. If
only the share of each partner in the profits has been agreed upon, the share of each in
the losses shall be in the same proportion. In the absence of stipulation, the share of each
partner in the profits and losses shall be in proportion to what he may have contributed,
but the industrial partner shall not be liable for the losses. As for the profits, the industrial
partner shall receive such share as may be just and equitable under the circumstances.
If besides his services he has contributed capital, he shall also receive a share in the
profits in proportion to his capital.
(1) How Profits Are Distributed

(a) according to agreement (but not iniquitously to defeat).
(b) if none, according to amount of contribution.
(2) How Losses Are Distributed

(a) according to agreement — as to losses (but not iniquitously)
(b) if none, according to agreement as to profits
(c) if none, according to amount of contribution.
(3) Industrial Partner’s Profits

A just and equitable share (under the old law, a share equivalent to that of the capitalist
partner with the least capital).
(4) Industrial Partner’s Losses

While he may be held liable by third persons, still he can recover whatever he is made to
give them, from the other partners, for he is exempted from LOSSES, with or without
stipulation to this effect.
(5) Non-Applicability to Strangers

Art. 1797 applies only to the partners, not when liability in favor of strangers are
concerned, particularly with reference to the industrial partner.
Designation by Third Person of Shares in Profits and Losses

(a) The Article speaks of a “third person,” not a partner.
Reason: To avoid partiality.
(b) When designation by 3rd party may be impugned — “when it is MANIFESTLY

INEQUITABLE.”
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(c) When designation by third party cannot be impugned even if manifestly inequitable:
1) if the aggrieved partner has already begun to execute the decision;

2) or if he has not impugned the same within a period of three months from the
time he had knowledge thereof (not from the time of making).
Stipulation Excluding a Partner from Profits or Losses

(a) The general rule is that a stipulation excluding one or more partners from any share
in the profits or losses is void.
Reason: The partnership is for COMMON BENEFIT.
(b) One exception is in the case of the industrial partner whom the law itself excludes
from losses. (Art. 1797, par. 2).
If the law itself does this, a stipulation exempting the industrial partner from losses is
naturally valid.
Reason Why Industrial Partner Is Generally Exempted from Losses

While capitalist partners can withdraw their capital, the industrial partner cannot withdraw
any labor or industry he had already exerted. Moreover, in a certain sense, he already
has shared in the losses in that, if the partnership shows no profit, this means that he has
labored in vain.
Sample Problem:
A, B, and C were partners, the first one being an industrial partner. During the first year
of operation, the firm made a profit of P3 million. During the second year, a loss of P1.5
million was sustained. Thus, the net profit for the two years of operation was only P1.5
million. In the articles of partnership, it was stipulated that A, the industrial partner would
get 1/3 of the profits, but would not participate in the losses.
(a) Is the stipulation valid? Why?

The stipulation is valid, for even the law itself exempts the industrial partner from
losses. His share in the profits is presumably fair.
(b) How much will A get: 1/3 of P3 million or 1/3 of P1.5 million? Why?
A will get only 1/3 of P1.5 million, the net profit and not 1/3 of P3 million.
While it is true that he does not share in the losses, this only means that he will not share
in the net losses. It is understood that he shares in the losses insofar as these can be
accommodated in the profits. It is but fair to compute all the various transactions in
determining the net profits or losses
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Appointment of Manager
Art. 1800 speaks of two modes of appointment:
(a) appointment as manager in the articles of partnership;

(b) appointment as manager made in an instrument other than the articles of partnership
or made orally.
Appointment in Articles of Partnership

(a) Power is irrevocable without just or lawful cause.
THEREFORE:
1) to remove him for JUST cause, the controlling partners (controlling financial interest)
should vote to OUST HIM. (See Art. 1800, par. 1)
2) to remove him WITHOUT CAUSE, or FOR AN UNJUST CAUSE, there must be

UNANIMITY (including his own vote).
Reason: This represents a change in the will of the parties: a change in the terms of the
contract; a novation, so to speak, requiring unanimity.
Extent of power:
1) if he acts in GOOD faith, he may do all acts of ADMINISTRATION (not ownership)

despite the opposition of his partners.
2) if in BAD faith, he cannot (however, he is presumed to be acting in good faith;
moreover, if he really is in bad faith the controlling interest should remove him.
Appointment Other Than in the Articles of Partnership

(a) Power to act may be revoked at any time, with or without just cause.
[Reason: Such appointment is a mere delegation of power, revocable at any time.
Removal should also be done by the controlling interest].
(b) Extent of power: As long as he remains manager, he can perform all acts of
ADMINISTRATION, but of course, if the others oppose and he persists, he can be
removed.
Rule When There Are Two or More Managers

Art. 1801 applies when:
(a) two or more partners are managers;
(b) there is NO specification of respective duties;
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(c) there is no stipulation requiring unanimity.
THEREFORE: Art. 1801 does not apply if unanimity is required; or when there is a
designation of respective duties.
Specific Rules
(a) Each may separately execute all acts of administration (unlimited powers to
administer).
(b) Except if any of the managers should oppose. =MAJORITY of the managers shall
prevail.
(Suppose there is a tie, = CONTROLLING INTEREST prevail — provided they are also
managers.)
[NOTE: The rights to oppose is not given to non- managers because in appointing their
other partners as managers, they have stripped themselves of all participation in the
administration.
When must the other managers make the opposition?

ANS.: Before the acts produce legal effects insofar as third persons are concerned.
Reason — For them to delay or for them to protest after third parties are affected would
be unfair to said third parties. Moreover, the acts of the firm would be unstable
Duty of Third Persons

The rule that third persons are not required to inquire as to whether or not a partner with
whom he transacts has the consent of all the managers, for the presumption is that he
acts with due authority and can bind the partnership applies only when they innocently
deal with a partner apparently carrying on in the usual way the partnership business (See
Art. 1818) because under Art. 1802, it is imperative that if unanimity is required it is
essential that there be unanimity; otherwise, the act shall not be valid, that is, the
partnership is not bound. (Art. 1802, first clause).
It would be wise therefore if the third person could inquire whether or not unanimity is
required, and if so, if such unanimity is present. This is for his own protection. Thus, it has
been held that a sale by a partner of partnership assets without the consent of the other
managers is not valid.
Case Analysis:
Smith, Bell and Co. v. Aznar
FACTS: Tobes, an industrial partner, was authorized to “manage, operate, and direct the
affairs, business, and activities of the partnership” and “to make, sign, seal, execute, and
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deliver contracts — upon terms and conditions acceptable to him duly approved in writing
by the capitalist partner.” The firm was engaged in the business of buying and selling
merchandise of all kinds.
One day, Tobes purchased “on credit” certain goods regularly purchased by the
Company, but without first getting the authority of the capitalist partner.
ISSUE: Is the partnership bound?

HELD: Yes, since the transaction, even if “on credit” was a routine one.
Moreover, authority to purchase carries with it the implied authority to purchase on credit.
The requirement of written authority refers obviously to formal and unusual contracts in
writing.
Rules to Be Observed When Manner of Management Has Not Been Agreed Upon
(a) Generally, each partner is an agent.
(b) Although each is an agent, still if the acts of one are opposed by the rest, the majority
should prevail (Art. 1801) for the presumed intent is for all the partners to manage, as in
Art. 1801.
(c) When a partner acts as agent, it is understood that he acts in behalf of the firm;
therefore, when he acts in his own name, he does not bind the partnership generally.
Generally, a sale made by a partner of partnership property is not binding on the firm if
not authorized. However, said transaction may be ratified as when the proceeds thereof
are spent for the benefit of the firm.
D.) On the other hand, paragraph 1 or the authority to bind the firm does not apply if
somebody else had been given authority to manage in the articles of organization or thru
some other means. Of course, proof on this point that somebody else was authorized
must be given; otherwise, the general rule — “all are agents” — prevails.
(e) Alterations require unanimity.
Associate of Partner
(a) For a partner to have an associate in his share, consent of the other partners is not
required.
(b) For the associate to become a partner, ALL must consent (whether the partner having
the associate is a manager or not).
Reasons:
1) mutual trust is the basis of partnership;
2) change in membership is a modification or novation
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of the contract.
Partnership Books
(a) The right in this Article is granted to enable the partner to obtain true and full
information of the partnership affairs (Art. 1806), for after all, he is a co-owner of the
properties, including the books.
(b) However, the Article presupposes a “going partnership,” not one pending dissolution,
for here the right depends on the court’s discretion nor to one already dissolved, for here,
although the books belong to all the partners (in the absence of a contrary agreement),
still no single partner is duty-bound to continue the place of business for the benefit of the
others. Neither is a purchaser of the firm’s goodwill duty-bound to keep the books for the
inspection of the former partners.
(c) Art. 1806 says a reasonable hour.” - Our Supreme Court has held that the reasonable
hour should be on business days throughout the year, and not merely during some
capricious or arbitrary period selected by the managers.
Value of Partnership Books of Account as Evidence

They constitute an admission of the facts stated therein, an admission that can be
introduced as evidence against the keeper or maker thereof. And this is true even if the
books are kept strictly in accordance with the provision of the law.
The only way out is to prove that the entries had been placed therein as a result of fraud
or mistake, which of course must be proved
Duty of Partners to Give Information

Reason for the law — There must be no concealment between partners in all matters
affecting the firm’s interest.
This is required by good faith. Thus, this duty to give on demand “true and full information.”
[NOTE: Even without the demand, honesty demands the giving of vital information, the
refraining from all kinds of concealment.
Who Can Demand Information

Note that under Art. 1806, the following are entitled to true and full information:
(a) any partner
(b) legal representative of a dead partner
(c) legal representative of any partner under legal disability
[NOTE: The duty to give information is distinct from the duty to account under Art. 1807.]
Duty to Account
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(a) Reason for the law: The fiduciary relations between the partners are relationships of
trust and confidence which must not be abused (Pang Lim & Galvez v. Lo Seng, 42 Phil.
282) or used to personal advantage.
(b) The trust relations exist only during the life of the partnership, not before, nor after.
Hence, fiduciary relations do not exist between the persons still negotiating for the
formation of partnership The trust relations end with the death of the partnership unless
the foundation for the breach of trust took place even during the existence of the firm.
Sample Problems:
I. A partner with partnership funds, and unknown to the others, purchased a house
in his own name. Who owns the house?
ANS.: The partnership owns the house. The buying partner should only be considered a
trustee. (See Art. 1807).
II. A partner in the real estate business, without the knowledge of the other partners,
bought a parcel of land in his daughter’s name and subsequently sold the same at
a profit. Should the other partners share in the profits?
ANS.: Yes, for the transaction can be considered an affair of the partnership.
III. A, B and C are partners. A, as a result of a transaction connected with the conduct
of the partnership, has in his hands, so that it may be traced, a specific sum of
money or other property. A is insolvent. Is the claim of the partnership against A a
claim against him as an ordinary creditor, or is it a claim to the specific property or
money in his hands?
ANS.: The words “and hold as trustee for the partnership any profits” indicate clearly that
the partnership can claim as their own (hence, specific property) any property or money
that can be traced.
Business Prohibition on Capitalist Partners

Note that while the industrial partner is prohibited from engaging “in business for himself”
(any business),
the capitalist partner is prohibited from engaging for his own account in any operation
“which is of the kind of business in which the partnership is engaged” (same or similar
business that may result in competition).
The competition may become unfair in view of the knowledge by the capitalist partner of
the firm’s business secrets.
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Instances When There Is No Prohibition

(a) When it is expressly stipulated that the capitalist partner can so engage himself. (Art.
1808, par. 1).
(b) When the other partners expressly allow him to do so.
(c) When the other partners impliedly allow him to do so.
(Example: When ALL of them are likewise violating the article.)
(d) When the company ceases to be engaged in business (hence during the period of
liquidation and winding up, the article no longer applies, even if the “engaging” partner is
himself the “liquidating partner”).
The reason is clear: there can possibly be no unfair competition.
(e) When the general-capitalist partner becomes merely a limited partner in a competitive
enterprise for after all, a limited partner does not manage.
Effect of Violation
(a) the violator shall bring to the partnership all the profits illegally obtained
(b) but he shall personally bear all the losses.
Sample Problem:
Suppose he gains a total of P10 million and losses for a total of P2 million, how much
must he bring to the firm?
ANS.: Strictly construed, he must bring P10 million, and suffer the P2 million loss all by
himself; however, this would be unduly harsh, and the proper interpretation, it is
submitted, is for him to give only P8 million. In other words, losses can be deducted from
profits.
It is only net losses which he must shoulder.
(c) Although not mentioned in the law expressly, it is believed that the violator can be
ousted from the firm on the ground of loss of trust and confidence, particularly if the
violation is repeated after due warning.
This would of course result in the dissolution of the firm.
Right to Demand a Formal Account
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(a) Generally, no formal accounting is demandable till after dissolution. Reason: After all
there is access to the books. (Art. 1805).
(b) However, in the instances enumerated in Art. 1809, it is evident that the formal
accounting can properly and justifiably be asked for thus:
1) in No. 1 — he may have access to the books
2) in No. 2 — there is no express stipulation
3) in No. 3 — it is unfair if other partners can take undue advantage of partnership funds
or partnership transactions.
4) in No. 4 — as when one partner has been travelling for a long period of time on a
business involving the firm.
Art. 1810. The property rights of a partner are:

(1) His rights in specific partnership property;
(2) His interest in the partnership; and
(3) His right to participate in the management.
Property Rights of a Partner

(a) Example of “specific partnership property”:
A and B each contributed a car for the partnership.
The two cars are specific partnership property.
(b) Example of “interest in the partnership” — the partner’s share of the profits and losses
(without mentioning any particular or specific property).
(c) Note that the right to participate in the management is a very valuable property right.
Rights of a Partner in Specific Partnership Property

(Example: a car contributed by one of the partners to the partnership)
(a) In general, he has an equal right with his partners to possess the car but only for
partnership purposes (not for other purposes, except if the others expressly or impliedly
give their consent).
(b) He cannot assign his right in the car (except if all the other partners assign their rights
in the same property).
[NOTE: If this rule is violated, the assignment is VOID where the other partners were able
to recover what had been sold or assigned).
The same rule applies if the right is mortgaged.
The assignee or purchaser does NOT become a co-owner of the specific partnership
property with the other partners.
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NOTE: Reason for rule of non-assignability: It is hard to determine how much it exactly is
until after liquidation.
(c) His right in the car is not subject to the attachment or execution (except on a claim
against the partnership).
(NOTE: If there is a partnership debt, the specific property can be attached. Here, the
partners or any of them or the representatives of a deceased partner cannot claim any
right under the homestead or exemption laws. This is because in a sense, the property is
not considered their individual or separate property.)
[NOTE: Reason why in general, the right of the partner in the car cannot be attached by
his separate or individual creditor: If he cannot make a voluntary assignment, neither
should his separate creditors be allowed an involuntary assignment because “the
beneficial rights of the separate creditors of a partner in specific partnership property
should be no greater than the beneficial rights of their debtor.”
D. His right in the car is NOT subject to legal support under Art. 291 (said Article
enumerates the people who are obliged to support each other).
Case Analysis:
I. Kimbal v. Hamilton F. Ins. Co.
FACTS: A and B were partners. Without A’s consent B assigned all the specific
partnership properties to X.
Do A and B have insurable interest in said properties?
HELD: Yes, for the assignment is void and is clearly against the law.
II. McGrath v. Cowen

FACTS: A and B were partners. A mortgaged his right in a certain specific partnership
property. Later the firm creditor wanted to get said property.
Who should prevail, the firm creditor or the mortgagee?
HELD: The firm creditors, for the mortgage in specific partnership property is void, B not
having also assigned his right. This is so, even if the mortgagee’s right therein be entirely
destroyed (without prejudice of course to his recovery from A).
A Partner’s Interest in the Partnership
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While in general, a partner’s interest in specific partnership property cannot be assigned,

cannot be attached, and is not subject to legal support,
a partner’s interest in the partnership (his share in the profits and surplus) can in general
be assigned, be attached, be subject to legal support
Effects of Conveyance By Partner of His Interest in the Partnership

(a) If a partner CONVEYS (assigns, sells, donates) his WHOLE interest in the partnership
(his share in the profits and surplus),
either of two things may happen:
1) the partnership may still remain; or

2) the partnership may be dissolved.
(NOTE: However, such mere conveyance does NOT of itself dissolve the firm, therefore
in general the partnership remains.)
(b) The assignee (conveyed) does not necessarily become a partner. The assignor is still
the partner, with a right to demand accounting and settlement.
(c) The assignee cannot even interfere in the management or administration of the
partnership business or affairs.
(d) The assignee cannot also demand:

1) information;
2) accounting;
3) inspection of the partnership books.
Preferential Rights of Partnership Creditors

The law says “without prejudice to the preferred rights of partnership creditors under Art.
1827.” What does this mean?
ANS.: This simply means that partnership creditors are entitled to priority over partnership
assets (including the partner’s interest in the profits),
that is, the separate creditors will get only after the firm creditors have been satisfied.
OBLIGATIONS OF THE PARTNERS WITH REGARD TO THIRD PERSONS
Firm Name
(a) This is the name of the juridical entity.
(b) Under Art. 126 of the Code of Commerce, the name of at least one of the general
partners in the general partnership should appear with the words “and company” (in case
not all the partners were included).
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The rule has now been changed. Thus, under the Civil Code, the firm name may or may
not include the name of one or more of the partners.
(c) Suppose the firm name is changed in good faith but the members remain the same,
will the partnership under the new name retain all the rights it had under the old name?
ANS.: Yes. (See Sharruf case).
Case Analysis:
Sharruf and Co. v. Baloise Fire Insurance Co.
FACTS: Sharruf and Eskenazi, partners under the name “Sharruf and Co.,” insured for
P40,000 their goods. Later, the name was changed to “Sharruf and Eskenazi.”
The insured goods were subsequently burned, but the insurance company refused to pay
on the ground that its name, having been changed, the partnership now had no juridical
personality to sue, nor did it have insurable interest in the goods.
HELD: The change of name is not important, not having been done to defraud the
insurance company. Moreover, the members remain the same. Therefore, the firm can
collect the insurance indemnity.
Liability Distinguished from Losses

While an industrial partner is exempted by law from losses (as between the partners), he
is not exempted from liability (insofar as third persons are concerned).
This means that the third person can sue the firm and the partners, including the industrial
partner. Of course, the partners will be personally liable (jointly or pro rata) only after the
assets of the partnership have been exhausted.
Even the industrial partner would have to pay, but of course he can recover later on what
he has paid, from the capitalist partners, unless there is contrary agreement.
Liability of a Partner Who Has Withdrawn

Sample Problem:
A partner who withdraws is not liable for liabilities contracted after he has withdrawn, for
then he is no longer a partner. If his interest has not yet been paid him, his right to the
same is that of a mere creditor.
Unequal Contribution of Capitalist Partners

Suppose capitalist partners had contributed unequally to the capital, will their liability to
strangers be equal or proportionate to their contributions?
ANS.: Proportionate for the law says “pro rata” (proportionate). (See Art. 1815).
Sample Problem:
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X, Y, and Z organized and registered a commercial regular general co-partnership with a

capital of P10 million, X contributing 50% of the capital, Y 30% and Z 20%. A certain
creditor who has a claim of P2 million against the co-partnership desired to file suit to
collect his claim.
(a) Who should be made party defendant or defendants in the creditor’s suit?
(b) Whose assets are liable for the satisfaction of the creditor’s judgment? Explain the
extent of liability of the defendant or defendants.
Answers:
(a) The defendants should be the firm itself and the three partners. (Art. 1816). (NOTE
— Since there are no more commercial partnerships today, the new Civil Code provisions
should be applied).
(b) First, the assets of the firm (P10 million) must be exhausted, then X, Y and Z will be
liable pro rata in the proportion of 50-30-20 for the remaining P10 million. (Art. 1860).
Hence, X will pay from his individual assets P5 million; P3 million; and Z, P2 million.
As among themselves the losses will be divided, in the absence of agreement on losses
or profits, in accordance with their contribution of 50%, 30%, and 20%. (Art. 1797).
Effect of Stipulation Exempting Liability to Third Persons

Suppose it is stipulated that all the industrial partners and some of the capitalist partners
would be exempted from liability insofar as third persons are concerned, would the
stipulation be valid?
ANS.: The stipulation would be null and void
CASE ANALYSIS SELF HELP: Read the Case of G.R. No. 206147 MICHAEL C.
GUY, Petitioner, vs. ATTY. GLENC.GACOTT, Respondent.
Article 1816. All partners, including industrial ones, shall be liable pro rata with all their
property and after all the partnership assets have been exhausted, for the contracts
which may be entered into in the name and for the account of the partnership, under its
signature and by a person authorized to act for the partnership. However, any partner
may enter into a separate obligation to perform a partnership contract.
Partner Acting in His Own Name

Note that under Art. 1816, any partner may however “enter into a separate obligation to
perform a partnership contract.” (Here, he does not act in behalf of the partnership; he
acts in his own name, although for the benefit of the partnership.)
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Stipulation Eliminating Liability

Query: As among the partners, is it permissible to stipulate that a capitalist partner be
exempted from liability?
ANS.: The answer is YES, under Art. 1817. And yet under Art. 1799, a stipulation which
excludes one or more partners (capitalist) from any share in the profits or losses is VOID.
How can these two articles be reconciled?
It would seem that the only way to harmonize the two articles (insofar as capitalist partners
are concerned) is this:
it is permissible to stipulate among them that a capitalist partner will be exempted from
liability in excess of the original capital contributed; but will not be exempted insofar as
his capital is concerned.
A, B, and C, capitalist partners, each contributed P1 million. The firm’s indebtedness

amounts to P9 million. It was stipulated that A would be exempted from liability.
Assuming that the capital of P3 million is still in the firm, what would be the rights of the
firm’s creditors?
ANS.: To get the P3 million and to get still P2 million each from the 3 partners (a total of
P9 million). A will thus be liable to the third persons for P2 million. How much, if any, can
A recover from B and C? It is submitted that he can recover P2 million from B and C (P1
million each) for as to liability as among them, he is exempted (Art. 1817) but he cannot
recover his original capital of P1 million
In the articles of a general co-ownership, one of the partners is expressly exempted from
personal liability for the losses of the partnership. Is this agreement valid? Explain.
Answer:
(a) If the exempted partner is an industrial one — the agreement is valid as among
themselves, but not insofar as creditors are concerned.
(b) If the exempted partner is a capitalist one — the agreement is void as against creditors
of the firm. As among themselves, it is valid — regarding contributions in excess of the
capital (Art. 1817); but void, regarding the original contribution. (Art. 1799).
When Will the Act of the Partner Not Bind the Partnership
(a) When, although for “apparently carrying on in the usual way the business of the
partnership,” still the partner has in fact NO AUTHORITY, and the 3rd party knows that
the partner has no authority. (This is to penalize customer or client in bad faith.)
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(b) When the act is NOT for “apparently carrying on in the usual way” of the partnership
and the partner has NO AUTHORITY.
Here, whether or not the 3rd party knows of the LACK of AUTHORITY is NOT
IMPORTANT. As long as there was really no authority, the firm is not bound.
[The 7 kinds of acts enumerated in Art. 1818 are instances of acts which are NOT for
“apparently carrying on in the usual way the business of the partnership.”
In those seven instances, the authority must be UNANIMOUS (from ALL the partners)
except if the business has been abandoned.
Reasons Why the 7 Acts of Ownership are “Unusual”

(a) “assign the partnership property” — the firm will virtually be dissolved
(b) “dispose of the goodwill” — goodwill is valuable property
(c) “do any other act which would make it impossible to carry on” — this is evidently
prejudicial
(d) “confess a judgment” — if done before a case is filed, this is null and void; if done
later, the firm would be jeopardized
(e) “compromise” — this is an act of ownership and may be said to be equivalent to
alienation (which may not be justified)
(f) “arbitration” — this is also an act of ownership which may not be justified
(g) “renounce a claim” — why should a partner renounce a claim that does not belong to
him but to the partnership?
Conveyance of Real Property

Notice that real property may be registered or owned in the name of:
1) the partnership;
2) all the partners;
3) one, some, or not all the partners;
4) one, some, or not all the partners in TRUST for the partnership;
5) third person in TRUST for the partnership.
PROPERTIES UNDER THE CIVIL CODE OF THE PHILIPPINES.
Art. 414. All things which are or may be the object of appropriation are considered either:
(1) Immovable or real property; or
(2) Movable or personal property. (333)
WHAT ARE IMMOVABLE PROPERTIES?

Art. 415. The following are immovable property:
(1) Land, buildings, roads and constructions of all kinds adhered to the soil;
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(2) Trees, plants, and growing fruits, while they are attached to the land or form an
integral part of an immovable;
(3) Everything attached to an immovable in a fixed manner, in such a way that it

cannot be separated therefrom without breaking the material or deterioration of the
object;
(4) Statues, reliefs, paintings or other objects for use or ornamentation, placed in
buildings or on lands by the owner of the immovable in such a manner that it
reveals the intention to attach them permanently to the tenements;
(5) Machinery, receptacles, instruments or implements intended by the owner of

the tenement for an industry or works which may be carried on in a building or on
a piece of land, and which tend directly to meet the needs of the said industry or
works;
(6) Animal houses, pigeon-houses, beehives, fish ponds or breeding places of

similar nature, in case their owner has placed them or preserves them with the
intention to have them permanently attached to the land, and forming a permanent
part of it; the animals in these places are included;
(7) Fertilizer actually used on a piece of land;
(8) Mines, quarries, and slag dumps, while the matter thereof forms part of the bed,
and waters either running or stagnant;
(9) Docks and structures which, though floating, are intended by their nature and
object to remain at a fixed place on a river, lake, or coast;
(10) Contracts for public works, and servitudes and other real rights over
immovable property. (334a)
WHAT ARE MOVABLE PROPERTIES?

Art. 416. The following things are deemed to be personal property:
(1) Those movables susceptible of appropriation which are not included in the
preceding article;
(2) Real property which by any special provision of law is considered as personal
property;
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(3) Forces of nature which are brought under control by science; and
(4) In general, all things which can be transported from place to place without
impairment of the real property to which they are fixed. (335a)
Art. 417. The following are also considered as personal property:

(1) Obligations and actions which have for their object movables or demandable
sums; and
(2) Shares of stock of agricultural, commercial and industrial entities, although they
may have real estate. (336a)
Art. 418. Movable property is either consumable or non-consumable. To the first class
belong those movables which cannot be used in a manner appropriate to their nature
without their being consumed; to the second class belong all the others.(337
Example : The Partnership

A, B, C, and D are partners of the firm “Edimus.” A parcel of land registered under the
name “Edimus” was sold by A on behalf and in the name of the firm “Edimus,” but without
express authority. The purchaser is X. Does X become the ownership.
ANS.: Ordinarily YES, but the firm may get back the land unless:
(a) the firm is engaged in the buying and selling of land (consequently, the act of A is
“usual”);
Example of Par. No. 2

A, B, C, and D are partners of the firm “Edimus” engaged in the buying and selling of land.
A parcel of land registered in the name “Edimus” was sold by A in his own name. Does
the buyer become the owner of the land? If not, what right does the buyer have? ANS.:
The buyer does not become the owner of the land. However, he gets the “equitable
interest” of the firm insofar as the land is concerned, because after all the selling of land
was in the “usual” course of business.
Of course, the buyer may later on ask for the reformation of the contract, so that now, the
seller’s name would appear to be that of Edimus, provided of course that the other
partners would not object.
(NOTE: If the partnership had not been engaged in the purchase and sale of land, the
buyer would not even be entitled to the “equitable interest.”)

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A, B, C and D were partners in the real estate firm of “Edimus.” Although a certain parcel
of land really belonged to the firm, it was registered in the name of A and B. A and B sold,
in their own name, the land to X. May the firm get back the land?
ANS.: Since the firm is engaged in the real estate business, the act of selling the land was
for carrying on in the usual way the firm’s business. So, the firm cannot get back the land,
for title thereto has been conveyed to X.
Question: Suppose in the preceding problem A and B had not been expressly authorized
by the firm to sell land, would your answers remain the same?
ANS.: It depends:
(a) If X had been in good faith, that is, he had no knowledge of the lack of authority, the
answer would be the same. (1st par., Art. 1818).
(b) If X had been in BAD FAITH, the firm can get back the land unless X in turn had sold
the property to Y who is in GOOD faith. (Here the assignee Y of the purchaser X is a
“holder for value without knowledge.”)
Example of Par. No. 4.

A, B, C, and D were partners in the real estate firm of “Edimus.” A certain parcel of land
was in the name of “A, in trust for the firm Edimus.”
(a) If A sells the land to X in the name of Edimus, will X become the owner?
ANS.: No. What X gets will only be the equitable interest of the firm.
(b) If A sells the land to X in his (A’s) own name, will X become the owner?
ANS.: No. What X gets will also be only the equitable interest of the firm.
Reason: It is clear in both instances that under the registry records A is only the trustee.

A, B, C and D were partners in the real estate firm of “Edimus.” A certain parcel of land
was registered, not in the name of the firm, but in the name of A, B, C and D. If A, B, C,
and D will sell the land to X, will X become the owner, or will he have only the equitable
interest?
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ANS.: X will get the title. Consequently, he becomes the owner, for the law says that
“where the title to real property is in the names of all the partners, a conveyance executed
by all the partners passes all their rights in such property.” (Art. 1819, par. 5).
Wrongful Act or Omission of a Partner
A, B, and C were partners. While acting within the scope of the firm’s business, A
committed a tort against X, a third person. Is the firm liable?
ANS.: Yes. (Art. 1822). Moreover, A, B, and C, as well as the firm itself, are liable in
solidus. (Art. 1824). Note that even the innocent partners are civilly personally liable,
without prejudice of course to their right to recover from the guilty partner.
Injury to an Employee
The law speaks of an injury to “any person, not being a partner.”
Does Art. 1822 apply to an injury to an employee, not a partner, of the firm?
ANS.: It would seem that the answer is YES, for a mere employee is not necessarily a
partner. And yet in a Utah case, the court decided otherwise apparently because the injury
should have been caused a person not connected in any way with the firm.
When the Firm and the Other Partners are NOT Liable
(a) If the wrongful act or omission was not done within the scope of the partnership
business and for its benefit or with the authority of the co-partners. (Art. 1822).
(b) If the act or omission was NOT wrongful. (See Art. 1822 which uses the term
“wrongful”.)
(c) If the act or omission, although wrongful, did not make the partner concerned liable
himself.
(d) If the wrongful act or omission was committed after the firm had been dissolved
(stopped its business) and same was not in connection with the process of winding up.
Solidary Liability of the Partners With the Partnership

(a) While in torts and crimes, the liability of the partners is solidary, in contractual
obligations, it is generally merely joint. (Art. 1816).
While Art. 1816 speaks of pro rata liability of the partners, and while the Code Commission
says that pro rata in this article means “in proportion to their contribution” still the Supreme
Court has ruled that “pro rata” here means joint,
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(b) Note that torts and crimes result from individual acts of the partners; while contractual
liabilities arise from partnership obligations.
(c) Note that it is not only the partners that are liable in solidum; it is also the partnership.
A and B are partners. A misappropriates a sum of money belonging to a customer X but

which was already in the custody of the partnership. Whom can X hold liable?
ANS.: X can hold liable either the firm or A or B, and the liability is for the whole amount
because it is solidary.
However, if B is made to pay the full amount, he can recover the whole amount, plus the
interest from A later on instead of only A’s share, for the simple reason that it is only A
who is guilty.
Entry of a New Partner into an Existing Partnership

A, B, and C are partners. D is admitted as a new partner. Will D be liable for partnership
obligations contracted PRIOR to his admission to the partnership?
ANS.: Yes, but his liability will extend only to his share in the partnership property, not to
his own individual properties. (Art. 1826).
(NOTE: Had he been an original partner, he would be liable both insofar as his share in
the firm is concerned, and his own individual property.)
Creation of a New Partnership in View of the Entry

Does the admission of a new partner dissolve the old firm and create a new one?
ANS.: Yes, and it is precisely because of this principle that Art. 1826 has been enacted.
The reason is simple: since the old firm is dissolved, the original creditors would not be
the creditors of the new firm, but only of the original partners; hence, they may lose their
preference.
To avoid this injustice, under the new Civil Code (together with the new creditors of the
new firm), they are also considered creditors of the NEW firm.
DISSOLUTION AND WINDING UP

Dissolution is the change in the relation of the partners caused by any partner ceasing to
be associated in the carrying on of the business. (Art. 1828). It is that point of time when
the partners cease to carry on the business together
Winding up is the process of settling business affairs after dissolution.
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Examples of winding up: the paying of previous obligations; the collecting of assets
previously demandable; even the contracting for new business if needed to wind up, such
as the contracting with a demolition company for the demolition of the garage used in a
“used car” partnership.)
Termination is the point in time after all the partnership affairs have been wound up.
Effect on Obligations
(a) Just because a partnership is dissolved, this does not necessarily mean that a partner
can evade previous obligations entered into by the partnership. (Testate Estate of Mota
v. Serra, 47 Phil. 464).
(b) Of course, generally, dissolution saves the former partners from new obligations to
which they have not expressly or impliedly consented, unless the same be essential for
winding up. (See Art. 1843, par. 1;
Causes of Dissolution
(a) Arts. 1830 and 1831 give the causes for dissolution.
(b) Note that in Art. 1830, eight causes are given, the first one of which is subdivided into
four instances.
Cause No. 1 – Whene there is No Violation of Agreement

In No. 1 cause (in Art. 1830), the partnership agreement has NOT been violated —
(a) termination of the definite term or specific undertaking
Here the contract is the law between the parties, if the firm however still continues after
said period, it becomes a partnership at WILL.
(b) express will of a partner who must act in good faith when there is NO definite term
and NO specified undertaking
If he insists on leaving in bad faith, the firm is dissolved, but he may be responsible for
damages.
(c) express will of all partners (except those who have AS- SIGNED or whose interests
have been CHARGED)
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If one partner says he will not have anything more to do with the firm, and the other does
not object, there is dissolution by implied mutual consent.
(d) expulsion in good faith of a member
(NOTE: If one is expelled, the number of partners is decreased; hence, the dissolution.)
(NOTE: If a partner is expelled in bad faith, there can also be eventual dissolution for
here, there would be apparent lack of confidence, without prejudice of course to liability
for damages.)
Cause No. 2 — When there is a Violation of Agreement

Even if there is a specified term, one partner may cause its dissolution by expressly
withdrawing even before the expiration of the period, with or without justifiable cause.
Of course, if the cause is not justified, or no cause was given, the withdrawing partner is
liable for damages, but in no case can he be compelled to remain in the firm. With his
withdrawal, the number of members is decreased, hence, the dissolution.
Cause No. 3 — Unlawfulness of the Business

If the business later on becomes unlawful, it follows that the firm will not be allowed to
carry on.
On the other hand, if the business or object had been unlawful from the very beginning,
the firm never had any juridical personality.
Cause No. 4 — LOSS

(a) If a specific thing promised as contribution is lost BEFORE delivery.
Reason: The firm is dissolved because the partner has NOT given his contribution.
If lost after delivery, the firm bears the loss, and the partner remains, since after all, he
had given his contribution.
The rules just given do not apply to generic things, for genus does not perish.
(b) If only the use of a specific thing is contributed, and it is LOST BEFORE or AFTER
delivery to the firm.
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Reason: Here, the naked owner reserved the ownership, its loss is borne by him, so it
is as if he had not contributed anything.
(6) Cause No. 5 — DEATH of ANY Partner
The death of any partner, whether known or unknown to the others causes a decrease in
the number of partners, hence there is automatic dissolution (but not automatic
termination for the affairs must still be wound up)
Be it noted that a deceased partner is no longer associated in the active business of the
partnership; in a sense however, this dissolution may be partial or total: partial, when the
surviving partners continue the business among themselves; and total, when the
survivors, instead of continuing the enterprise, proceed to the liquidation of partnership’s
assets.
Goquiolay v. Sycip
FACTS: The articles of a general partnership expressly stipulated that “in the event of the
death of any of the partners at any time before the expiration of said term, the co-
partnership shall not be dissolved, but will have to be continued, and the deceased partner
shall be represented by his heirs or assigns in said co-partnership.”
One of the partners subsequently died, and this was before the expiration of the
partnership life. The deceased partner was then replaced by his widow.
Issue: Does the widow or substitute become also a general partner or only a limited
partner?
HELD: She became a mere general partner. The articles did not provide that the heirs of
the deceased would be merely limited partners; on the contrary, they expressly stipulated
that in case of death of either partner, “the co-partnership... will have to be continued”
with the heirs or assigns.
Cause No. 6 — Insolvency of any Partner or of the Partnership

(a) The insolvency need not be judicially declared; it is enough that the assets be less
than the liabilities.
It is submitted that no judicial decree is needed to dissolve the partnership here, for
otherwise, this cause would have been inserted under No. 8, “by decree of the court.”
(b) Reason why insolvency is a ground for dissolution: The business of a firm requires
solvency or ability to meet the financial demands of creditors.
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(8) Cause No. 7 — Civil Interdiction of any Partner
Civil interdiction (or civil death) results in incapacity to enter into dispositions of property,
inter vivo.
(9) Cause No. 8 — Decree of the Court under Art. 1831
The decree must be a final judgment rendered by a court of competent jurisdiction.
Walter Jackson v. Paul Blum, et al.
FACTS: A and B were partners in a partnership at will. They dissolved the partnership,
and A assigned his interest to X. Because of a debt, the partnership assets were in the
possession of a fourth party, Y, as security.
May X demand accounting from Y?
HELD: Yes, even if X was not a partner of A and B for after the partnership was dissolved,
A and B became co- owners and A could assign his interest or share.
One of A’s rights was to demand an accounting so that his share could be determined.
This right, he could transfer to X. So X can demand the accounting.
Dissolution by Judicial Decree

This Article speaks of a dissolution by decree of the court. In a suit for dissolution, proof
as to the existence of the firm must first be given.
Who Can Sue for Dissolution
(a) A partner for any of the 6 causes given in the first paragraph.
(b) The purchaser of a partner’s interest in the partnership under Art. 1813 or 1814,
provided that the period has expired or if the firm was a partnership at will when the
interest was assigned or charged. If the period is not yet over, said purchaser cannot sue
for dissolution
Insanity of a Partner
(a) Even if a partner has not yet been previously declared insane by the court, dissolution
may be asked, as long as the insanity is duly proved in court.
(b) Reason for making insanity a cause: The partner will be incapacitated to contract.
Two Kinds of Causes for Dissolution

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Dissolution may be caused:

(a) On the one hand by:
A — act (like withdrawing of a partner)
I – insolvency
D — death
(b) On the other hand by other things, like TERMINATION of the period.
Dissolution Caused by A-I-D

Art. 1833 speaks of dissolution caused by A-I-D, and the effects on the partners as among
themselves, if a partnership liability is incurred (that is, if the firm is STILL BOUND).
If the firm is not bound, see Art. 1834, where only the partner acting is liable.
Effect of A-I-D
In Art. 1833, all the partners are still bound to each other generally, except in the 2
instances mentioned, namely:
(a) If the partner acting had KNOWLEDGE (as distinguished from mere NOTICE, but
without actual knowledge), if dissolution is caused by an ACT (like withdrawing, retiring).
(Here, only the partner acting assumes liability, in that even if the firm may be held by
strangers, and even if the partners will still be individually liable, still the other partners
can always recover from the partner acting.)
(b) If the partner acting had KNOWLEDGE or NOTICE, if dissolution was caused by
death or insolvency.
Here again, while the firm may be liable, in proper cases, recovery can be had by the
other partners from the partner acting.
A, B, and C were partners. A resigned from the firm. Therefore, it was dissolved. B knew
this, and yet he still deliberately entered into new transactions with X, an innocent
customer. (The meaning of “innocent customer” will be discussed in the next article.) The
transactions were not needed for winding up. Will the firm be still liable?
ANS.: Yes. (See Art. 1834). If the firm assets are not enough, X can still go after the
individual assets of A, B, and C.
After all of them have paid X, can A and C still recover from B, the partner who acted
despite his knowledge of the firm’s dissolution?
ANS.: Yes, because B should not have done what he did.
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(b) If in the preceding problem, X knew of the dissolution, the firm cannot be held liable.
Neither will A or C be liable. Only B and X are concerned, and they will have to settle with
each other, depending on their reason why they still entered into the contract.
(c) Note that for (a) to apply, B, must have knowledge, not merely notice. If A had died or
had become insolvent, the principles in (a) will be followed whether B had knowledge or
mere notice.
[NOTE: Death or insolvency, being more ordinary than an “act, notice is enough. Hence,
the law provides “knowledge or notice.” However, it is still essential that there be
“knowledge or notice” of the fact of death or insolvency to justify non-liability of the other
partners to the partner acting.
Otherwise, it would be unfair to let the partner acting assume the whole liability
When Firm Is Bound or Not Bound

This Article speaks of two possibilities:
(a) when the partnership is bound to strangers;
(b) when the partnership is not bound to strangers.
When Partnership Is BOUND (a partnership liability is created)

(a) business is for WINDING UP
Example: Selling of property of firm to pay off partnership debts; mortgaging firm
assets for same purposes.
(b) business is to complete unfinished transactions
(c) COMPLETELY NEW BUSINESS with third parties considered innocent. [See (a) &
(b) of No. (2) of the 1st paragraph.]
The differences between (a) and (b), No. 2 of the 1st paragraph are these:
In (a), the customer had previously extended credit, that is, was a previous creditor. In
case of dissolution he deserves to ACTUALLY KNOW.
In (b), he was not a previous creditor. Here, if there was publication of the dissolution, it
is presumed he already knows, regardless of actual knowledge or non- knowledge.]
A, B, and C are partners. A dies. B knows this, but still he later transacts new business
with X, a business not connected with winding up. This notice of dissolution was in the
paper but X did not read the notice, and when X transacted with B, X thought all the time
that the firm had not yet been dissolved.
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(a) If X had been a previous creditor, is the firm liable?

ANS.: Yes [Art. 1834, 1st par. (2)(a)] BUT later on, as among the partners, B alone will
be liable, because he knew of A’s death.
(b) If X had never extended credit before, is the firm liable?

ANS.: No, because after all there had been a publication of the dissolution and it is his
fault that he did not read the advertisement. He did not deserve special attention for after
all he had never been a previous creditor of the firm.
Only B would be personally liable to X
Had there been no notice of dissolution and X did not actually know of the dissolution, the
firm would have been liable
Liability of the Unknown or Inactive Member:

A, B, and C are partners. A withdraws. B knows this, but he entered into a new contract
with X, a previous creditor of the firm who had no actual knowledge of the dissolution. C
was not known by X to be ever a partner of the firm, so it could not be because of C that
X had transacted the business.
Question: Is the firm liable?

ANS.: YES.
Question: If the partnership assets are insufficient, can X go after the individual
properties?
ANS.: Yes, except with reference to C, because the law says that C’s liability “shall be
satisfied out of the partnership assets alone.”
When Is the FIRM Not BOUND?

(a) in all cases not included in our answer in COMMENT No. 2 of this article.
Example: new business with 3rd parties who are in BAD FAITH, as already
explained.
(b) where the firm was dissolved because it was UNLAWFUL to carry on the business
(as when its objects were later declared by law to be outside the commerce of man)
EXCEPT — when the act is for WINDING UP
(c) where the partner that acted in the transaction has become
INSOLVENT
(d) where the partner is UNAUTHORIZED to wind up

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EXCEPT — if the transaction is with a customer in good faith (as already defined or
explained).
It is understood that if after dissolution a stranger will represent himself as a partner

although he is not one, he will be a partner by estoppel.
Case Analysis:
I. JCH Service Station v. Patrikes
FACTS: After a firm was dissolved, a partner borrowed money under the firm name from
X. X knew that the firm had already been dissolved. Is the firm liable?
HELD: No, because of X’s knowledge of the dissolution.
How a Partner’s Liability is Discharged?

There must be an agreement. The following must agree:
(a) the partner concerned;
(b) the other partners;
(c) the creditors.
II. A, B, and C are partners. A dies. Is A’s estate (separate properties) liable for his
share of the partnership obligations incurred while he was still a partner?
ANS.: Yes, but of course his individual creditors (as distinguished from the firm creditors)
are to be preferred. (3rd par., Art. 1835).
Three Rights
The Article speaks of 3 rights (without prejudice to his other rights under other legal
provisions):
(a) right of LIEN or RETENTION
(b) right of SUBROGATION
(c) right of INDEMNIFICATION
Right of LIEN or RETENTION

To a lien on, or right of retention of, the surplus of the partnership property after satisfying
the partnership liabilities to third persons for any sum of money paid by him for the
purchase of an interest in the partnership and for any capital or advances contributed by
him;
Right of SUBROGATION
To stand, after all liabilities to third persons have been satisfied, in the place of the
creditors of the partnership for any payments made by him in respect of the partnership
liabilities; and
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Right of INDEMNIFICATION
To be indemnified by the person guilty of the fraud or making the representation against
all debts and liabilities of the partnership.
Order of Payment of Firm’s Liabilities

(a) First give to creditors (who are strangers), otherwise they may be prejudiced.
(b) Then give to partners who are also creditors (they should be placed in a subordinate
position to outside creditors for otherwise they may prefer their own interests).
c) Then give to the partners their capital
Capital should be given ahead of profit for it is only the surplus profit over capital that
should be considered as the gain or the profit of the firm.
An industrial partner, who has not contributed money or property at all is, in the absence
of stipulation, not entitled to participate in the capital. He shares in the profits, however.
(d) Lastly, the profits must be distributed.
If, during the liquidation of a firm, the profits for a certain period of time cannot be exactly
determined because no evidence or insufficient evidence thereof is available, the court
should determine the profit for the period by finding the average profits during the period
BEFORE and AFTER the period of time in question.
New Contributions
If the partnership assets are insufficient, the other partners must contribute more money
or property. Who can enforce these contributions?
ANS.: (a) In general, any assignee for the benefit of the creditor; or any person appointed
by the court (like a receiver). . (Reason: Said enforced contributions may be considered
as partnership assets, and should therefore be available to the creditors).
(b) Any partner or his legal representative (to the extent of the amount which he has paid
in excess of the share of the liability). (
A, B, and C are partners. A died. Is A’s estate still liable for the contributions needed to
pay off the partnership obligations?
ANS.: Yes. (Generally, as long as the said obligations had been incurred prior to his
death.)
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CASE ANALYSIS SELF HELP: Read the Case of G.R. No. 144214 July 14, 2003
LUZVIMINDA J. VILLAREAL, DIOGENES VILLAREAL and CARMELITO
JOSE, petitioners, vs. DONALDO EFREN C. RAMIREZ and Spouses CESAR G.
RAMIREZ JR. and CARMELITA C. RAMIREZ, respondents.
“Since it is the partnership, as a separate and distinct entity, that must refund the shares
of the partners, the amount to be refunded is necessarily limited to its total resources. In
other words, it can only pay out what it has in its coffers, which consists of all its assets.
However, before the partners can be paid their shares, the creditors of the partnership
must first be compensated.25 After all the creditors have been paid, whatever is left of the
partnership assets becomes available for the payment of the partners' shares”.
What if the capital of the partnership was reduced and is now deficit? Should the partners
be waived from the liability to pay?
It is a long established doctrine that the law does not relieve parties from the effects of
unwise, foolish or disastrous contracts they have entered into with all the required
formalities and with full awareness of what they were doing. Courts have no power to
relieve them from obligations they have voluntarily assumed, simply because their
contracts turn out to be disastrous deals or unwise investments.29
LIMITED PARTNERSHIP
Art. 1843. A limited partnership is one formed by two or more persons under the provisions
of the following article, having as members one or more general partners and one or more
limited partners. The limited partners as such shall not be bound by the obligations of the
partnership.
(1) Requisites in the Formation of a Limited Partnership

Two important things are needed:
(a) The signing under oath of the required certificate (with all the enumerated items), and
(b) The filing for record of the certificate in the Office of the Securities and Exchange
Commission.
Non-Fulfillment of the Requisites

If the proposed limited partnership has not conformed substantially with the requirements
of this article, as when the name of not one of the general partners appear in the firm
name, it is not considered a limited partnership but a general partnership.
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This is because a firm transacting business as a partnership is presumed to be a general

partnership
Effect if Only Aggregate Contribution Is Stated

The law says that the contribution of each limited partner must be stated. Therefore, if the
aggregate sum given by two or more limited partners is given, the law has not been
complied with.
Effect of Omitting the Term “Limited” in the Firm Name

The law requires the firm name to have the word “Limited.” If this provision is violated, the
name cannot be considered the firm name of a limited partnership
What the Limited Partner Can Contribute

Note that a limited partner is not allowed to contribute industry or services alone.
Industrial Partner Can Join

An industrial partner can become a general partner in a limited partnership, for the article
speaks only of a “limited partner.”
Non-Inclusion of Name of the Limited Partner

Note that a limited partner violating this article is liable as a general partner to innocent
third parties, without however the rights of a general partner.
Effect of Taking Part in the Control of the Business
(a) The following acts do not constitute taking “part in the control of the business”:
1) mere dealing with a customer.
2) mere consultation on one occasion with the general partners.
(b) The following have been held to constitute taking “part in the control of the business”:
1) selection of who will be the managing partners.

2) supervision over a superintendent of the business of the firm
(c) Participation in the control of the business makes the limited partner liable as a general
partner without however getting the latter’s rights.
When Additional Limited Partners May Be Admitted

Note that even after a limited partnership has already been formed, the firm may still admit
new limited partners, provided there is a proper amendment to the certificate.
Effect of Failure to Amend

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If additional limited partners are taken in, without proper amendment of certificate with the
SEC, this does not necessarily mean the dissolution of the limited partnership.
Acts of Strict Dominion

Note that as a rule, in the instances enumerated, the general partners (even if already
unanimous among themselves) must still get the written CONSENT or RATIFICATION of
ALL the limited partners.
Reason: In a sense the acts are acts of strict dominion or ownership, and are not generally
essential for the routine or ordinary conduct of the firm’s business.
Rights of a Limited Partner

(a) A limited partner necessarily has lesser rights than a general partner. These rights
are enumerated in the Article.
(b) Note however that among other things he also has the right to have dissolution and
winding up by decree of the court.
(c) He cannot however bind the firm by a contract.
Liabilities of a Limited Partner
Sample Problems:
I. A and B are limited partners of a partnership. In the certificate, it was stated that A
contributed P1.8 million when as a matter of fact he had given only P1.5 million.
In the certificate too is a promise made by B to pay P200,000 additional contributions on

Dec. 1, 2004. Should A and B make good the P300,000 and P200,000 respectively?
ANS.: Yes, A should pay now; B on Dec. 1, 2004.
Problem Involving Liability to Creditors

I. A, a limited partner, received the return of his contribution on the date stated in the
certificate. It was discovered that the remaining assets were insufficient to pay two
creditors, X and Y. X’s claim arose before the return; Y’s claim arose after the
return. Should A be compelled to give back what he had received?
ANS.: I distinguish:
(a) X’s claim should be satisfied out of what has been returned to A.
Reason: X’s claim arose before the return. If there is a balance, it should be returned to
A. If there is a deficit, A is not liable for this because he is only a limited partner.
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(b) Y’s claim does not have to be satisfied from what has been returned to A as
contribution.
Reason: His claim arose after the return. Y’s claim should be directed against the general
partners.
II. A, a limited partner, assigned his interest to B. In the certificate, A was expressly
given the right to give the assignee the right to become a substituted limited part-
ner. Is B now a substituted limited partner?
ANS.: Not yet. He has to wait until the certificate is appropriately amended.
III. A, a limited partner, assigned his right to X. In the certificate, A was not given the
right to give his assignee the right to become a substituted limited partner. How
can X acquire said right to become a substituted limited partner?
ANS.: Only if all the members of the partnership so consent. If they do consent, X
acquires the right to become a substituted limited partner, BUT is not yet one, until
after the certificate is appropriately amended
Art. 1860. The retirement, death, insolvency, insanity or civil interdiction of a general
partner dissolves the partnership, unless the business is continued by the remaining
general partners:
(1) Under a right so to do stated in the certificate, or
(2) With the consent of all members.
FULL TEXT OF THE LAW ON PARTNERSHIP

CHAPTER 1
GENERAL PROVISIONS
Art. 1767. By the contract of partnership two or more persons bind themselves to
contribute money, property, or industry to a common fund, with the intention of dividing
the profits among themselves.
Two or more persons may also form a partnership for the exercise of a profession. (1665a)
Art. 1768. The partnership has a judicial personality separate and distinct from that of
each of the partners, even in case of failure to comply with the requirements of Article
1772, first paragraph. (n)
Art. 1769. In determining whether a partnership exists, these rules shall apply:
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(1) Except as provided by Article 1825, persons who are not partners as to each other are
not partners as to third persons;
(2) Co-ownership or co-possession does not of itself establish a partnership, whether

such-co-owners or co-possessors do or do not share any profits made by the use of the
property;
(3) The sharing of gross returns does not of itself establish 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) The receipt by a person of a share of the profits of a business is prima facie evidence
that he is a partner in the business, but no such inference shall be drawn if such profits
were received in payment:
(a) As a debt by installments or otherwise;

(b) As wages of an employee or rent to a landlord;
(c) As an annuity to a widow or representative of a deceased partner;
(d) As interest on a loan, though the amount of payment varies with the profits of the
business;
(e) As the consideration for the sale of a goodwill of a business or other property by
installments or otherwise. (n)
Art. 1770. A partnership must have a lawful object or purpose, and must be established
for the common benefit or interest of the partners.
When an unlawful partnership is dissolved by a judicial decree, the profits shall be

confiscated in favor of the State, without prejudice to the provisions of the Penal Code
governing the confiscation of the instruments and effects of a crime. (1666a)
Art. 1771. A partnership may be constituted in any form, except where immovable
property or real rights are contributed thereto, in which case a public instrument shall be
necessary. (1667a)
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Art. 1772. Every contract of partnership having a capital of three thousand pesos or more,
in money or property, shall appear in a public instrument, which must be recorded in the
Office of the Securities and Exchange Commission.
Failure to comply with the requirements of the preceding paragraph shall not affect the
liability of the partnership and the members thereof to third persons. (n)
Art. 1773. A contract of partnership is void, whenever immovable property is contributed

thereto, if an inventory of said property is not made, signed by the parties, and attached
to the public instrument. (1668a)
Art. 1774. Any immovable property or an interest therein may be acquired in the
partnership name. Title so acquired can be conveyed only in the partnership name. (n)
Art. 1775. Associations and societies, whose articles are kept secret among the members,
and wherein any one of the members may contract in his own name with third persons,
shall have no juridical personality, and shall be governed by the provisions relating to co-
ownership. (1669)
Art. 1776. As to its object, a partnership is either universal or particular. As regards the
liability of the partners, a partnership may be general or limited. (1671a)
Art. 1777. A universal partnership may refer to all the present property or to all the profits.
(1672)
Art. 1778. A partnership of all present property is that in which the partners contribute all
the property which actually belongs to them to a common fund, with the intention of
dividing the same among themselves, as well as all the profits which they may acquire
therewith. (1673)
Art. 1779. In a universal partnership of all present property, the property which belongs to
each of the partners at the time of the constitution of the partnership, becomes the
common property of all the partners, as well as all the profits which they may acquire
therewith.
A stipulation for the common enjoyment of any other profits may also be made; but the
property which the partners may acquire subsequently by inheritance, legacy, or donation
cannot be included in such stipulation, except the fruits thereof. (1674a)
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Art. 1780. A universal partnership of profits comprises all that the partners may acquire
by their industry or work during the existence of the partnership.
Movable or immovable property which each of the partners may possess at the time of
the celebration of the contract shall continue to pertain exclusively to each, only the
usufruct passing to the partnership. (1675)
Art. 1781. Articles of universal partnership, entered into without specification of its nature,
only constitute a universal partnership of profits. (1676)
Art. 1782. Persons who are prohibited from giving each other any donation or advantage
cannot enter into universal partnership. (1677)
Art. 1783. A particular partnership has for its object determinate things, their use or fruits,
or specific undertaking, or the exercise of a profession or vocation. (1678)
CHAPTER 2
OBLIGATIONS OF THE PARTNERS
SECTION 1. - Obligations of the Partners Among Themselves
Art. 1784. A partnership begins from the moment of the execution of the contract, unless
it is otherwise stipulated. (1679)
Art. 1785. When a partnership for a fixed term or particular undertaking is continued after
the termination of such term or particular undertaking without any express agreement, the
rights and duties of the partners remain the same as they were at such termination, so
far as is consistent with a partnership at will.
A continuation of the business by the partners or such of them as habitually acted therein
during the term, without any settlement or liquidation of the partnership affairs, is prima
facie evidence of a continuation of the partnership. (n)
Art. 1786. Every partner is a debtor of the partnership for whatever he may have promised
to contribute thereto.
He shall also be bound for warranty in case of eviction with regard to specific and
determinate things which he may have contributed to the partnership, in the same cases
and in the same manner as the vendor is bound with respect to the vendee. He shall also
be liable for the fruits thereof from the time they should have been delivered, without the
need of any demand. (1681a)
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Art. 1787. When the capital or a part thereof which a partner is bound to contribute
consists of goods, their appraisal must be made in the manner prescribed in the contract
of partnership, and in the absence of stipulation, it shall be made by experts chosen by
the partners, and according to current prices, the subsequent changes thereof being for
account of the partnership. (n)
Art. 1788. A partner who has undertaken to contribute a sum of money and fails to do so
becomes a debtor for the interest and damages from the time he should have complied
with his obligation.
The same rule applies to any amount he may have taken from the partnership coffers,
and his liability shall begin from the time he converted the amount to his own use. (1682)
Art. 1789. An industrial partner cannot engage in business for himself, unless the
partnership expressly permits him to do so; and if he should do so, the capitalist partners
may either exclude him from the firm or avail themselves of the benefits which he may
have obtained in violation of this provision, with a right to damages in either case. (n)
Art. 1790. Unless there is a stipulation to the contrary, the partners shall contribute equal
shares to the capital of the partnership. (n)
Art. 1791. If there is no agreement to the contrary, in case of an imminent loss of the
business of the partnership, any partner who refuses to contribute an additional share to
the capital, except an industrial partner, to save the venture, shall he obliged to sell his
interest to the other partners. (n)
Art. 1792. If a partner authorized to manage collects a demandable sum which was owed
to him in his own name, from a person who owed the partnership another sum also
demandable, the sum thus collected shall be applied to the two credits in proportion to
their amounts, even though he may have given a receipt for his own credit only; but should
he have given it for the account of the partnership credit, the amount shall be fully applied
to the latter.
The provisions of this article are understood to be without prejudice to the right granted
to the other debtor by Article 1252, but only if the personal credit of the partner should be
more onerous to him. (1684)
Art. 1793. A partner who has received, in whole or in part, his share of a partnership
credit, when the other partners have not collected theirs, shall be obliged, if the debtor
should thereafter become insolvent, to bring to the partnership capital what he received
even though he may have given receipt for his share only. (1685a)
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Art. 1794. Every partner is responsible to the partnership for damages suffered by it
through his fault, and he cannot compensate them with the profits and benefits which he
may have earned for the partnership by his industry. However, the courts may equitably
lessen this responsibility if through the partner's extraordinary efforts in other activities of
the partnership, unusual profits have been realized. (1686a)
Art. 1795. The risk of specific and determinate things, which are not fungible, contributed
to the partnership so that only their use and fruits may be for the common benefit, shall
be borne by the partner who owns them.
If the things contribute are fungible, or cannot be kept without deteriorating, or if they were
contributed to be sold, the risk shall be borne by the partnership. In the absence of
stipulation, the risk of the things brought and appraised in the inventory, shall also be
borne by the partnership, and in such case the claim shall be limited to the value at which
they were appraised. (1687)
Art. 1796. The partnership shall be responsible to every partner for the amounts he may
have disbursed on behalf of the partnership and for the corresponding interest, from the
time the expense is made; it shall also answer to each partner for the obligations he may
have contracted in good faith in the interest of the partnership business, and for risks in
consequence of its management. (1688a)
Art. 1797. The losses and profits shall be distributed in conformity with the agreement. If
only the share of each partner in the profits has been agreed upon, the share of each in
the losses shall be in the same proportion.
In the absence of stipulation, the share of each partner in the profits and losses shall be
in proportion to what he may have contributed, but the industrial partner shall not be liable
for the losses. As for the profits, the industrial partner shall receive such share as may be
just and equitable under the circumstances. If besides his services he has contributed
capital, he shall also receive a share in the profits in proportion to his capital. (1689a)
Art. 1798. If the partners have agreed to in trust to a third person the designation of the
share of each one in the profits and losses, such designation may be impugned only when
it is manifestly inequitable. In no case may a partner who has begun to execute the
decision of the third person, or who has not impugned the same within a period of three
months from the time he had knowledge thereof, complain of such decision.
The designation of losses and profits cannot be entrusted to one of the partners. (1690)
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Art. 1799. A stipulation which excludes one or more partners from any share in the profits
or losses is void. (1691)
Art. 1800. The partner who has been appointed manager in the articles of partnership
may execute all acts of administration despite the opposition of his partners, unless he
should act in bad faith; and his power is irrevocable without just or lawful cause. The vote
of the partners representing the controlling interest shall be necessary for such revocation
of power.
A power granted after the partnership has been constituted may be revoked at any time.
(1692a)
Art. 1801. If two or more partners have been entrusted with the management of the
partnership without specification of their respective duties, or without a stipulation that
one of them shall not act without the consent of all the others, each one may separately
execute all acts of administration, but if any of them should oppose the acts of the others,
the decision of the majority shall prevail. In case of a tie, the matter shall be decided by
the partners owning the controlling interest. (1693a)
Art. 1802. In case it should have been stipulated that none of the managing partners shall
act without the consent of the others, the concurrence of all shall be necessary for the
validity of the acts, and the absence or disability of any one of them cannot be alleged,
unless there is imminent danger of grave or irreparable injury to the partnership. (1694)
Art. 1803. When the manner of management has not been agreed upon, the following
rules shall be observed:
(1) All the partners shall be considered agents and whatever any one of them may do
alone shall bind the partnership, without prejudice to the provisions of Article 1801.
(2) None of the partners 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 of
(3)
consent by the other partners is manifestly prejudicial to the interest of the partnership,
the court's intervention may be sought. (1695a)
Art. 1804. Every partner may associate another person with him in his share, but the
associate shall not be admitted into the partnership without the consent of all the other
partners, even if the partner having an associate should be a manager. (1696)
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Art. 1805. The partnership books shall be kept, subject to any agreement between the
partners, at the principal place of business of the partnership, and every partner shall at
any reasonable hour have access to and may inspect and copy any of them. (n)
Art. 1806. Partners shall render on demand true and full information of all things affecting
the partnership to any partner or the legal representative of any deceased partner or of
any partner under legal disability. (n)
Art. 1807. Every partner must account to the partnership for any benefit, and hold as
trustee for it any profits derived by him without the consent of the other partners from any
transaction connected with the formation, conduct, or liquidation of the partnership or from
any use by him of its property. (n)
Art. 1808. The capitalist partners cannot engage for their own account in any operation
which is of the kind of business in which the partnership is engaged, unless there is a
stipulation to the contrary.
Any capitalist partner violating this prohibition shall bring to the common funds any profits
accruing to him from his transactions, and shall personally bear all the losses. (n)
Art. 1809. Any partner shall have the right to a formal account as to partnership affairs:
(1) If he is wrongfully excluded from the partnership business or possession of its property
by his co-partners;
(2) If the right exists under the terms of any agreement;
(3) As provided by article 1807;
(4) Whenever other circumstances render it just and reasonable. (n)
SECTION 2. - Property Rights of a Partner
Art. 1810. The property rights of a partner are:

(1) His rights in specific partnership property;
(2) His interest in the partnership; and
(3) His right to participate in the management. (n)

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Art. 1811. A partner is co-owner with his partners of specific partnership property.
The incidents of this co-ownership are such that:
(1) A partner, subject to the provisions of this Title and to any agreement between the
partners, has an equal right with his partners to possess specific partnership property for
partnership purposes; but he has no right to possess such property for any other purpose
without the consent of his partners;
(2) A partner's right in specific partnership property is not assignable except in connection
with the assignment of rights of all the partners in the same property;
(3) A partner's right in specific partnership property is not subject to attachment or

execution, except on a claim against the partnership. When partnership property is
attached for a partnership debt the partners, or any of them, or the representatives of a
deceased partner, cannot claim any right under the homestead or exemption laws;
(4) A partner's right in specific partnership property is not subject to legal support under
Article 291. (n)
Art. 1812. A partner's interest in the partnership is his share of the profits and surplus. (n)
Art. 1813. A conveyance by a partner of his whole interest in the partnership does not of
itself dissolve the partnership, or, as against the other partners in the absence of
agreement, entitle the assignee, during the continuance of the partnership, to interfere in
the management or administration of the partnership business or affairs, or to require any
information or account of partnership transactions, or to inspect the partnership books;
but it merely entitles the assignee to receive in accordance with his contract the profits to
which the assigning partner would otherwise be entitled. However, in case of fraud in the
management of the partnership, the assignee may avail himself of the usual remedies.
In case of a dissolution of the partnership, the assignee is entitled to receive his assignor's
interest and may require an account from the date only of the last account agreed to by
all the partners. (n)
Art. 1814. Without prejudice to the preferred rights of partnership creditors under Article
1827, on due application to a competent court by any judgment creditor of a partner, the
court which entered the judgment, or any other court, may charge the interest of the
debtor partner with payment of the unsatisfied amount of such judgment debt with interest
thereon; and may then or later appoint a receiver of his share of the profits, and of any
other money due or to fall due to him in respect of the partnership, and make all other
orders, directions, accounts and inquiries which the debtor partner might have made, or
which the circumstances of the case may require.
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The interest charged may be redeemed at any time before foreclosure, or in case of a
sale being directed by the court, may be purchased without thereby causing a dissolution:
(1) With separate property, by any one or more of the partners; or
(2) With partnership property, by any one or more of the partners with the consent of all
the partners whose interests are not so charged or sold.
Nothing in this Title shall be held to deprive a partner of his right, if any, under the
exemption laws, as regards his interest in the partnership. (n)
SECTION 3. - Obligations of the Partners

With Regard to Third Persons
Art. 1815. Every partnership shall operate under a firm name, which may or may not
include the name of one or more of the partners.
Those who, not being members of the partnership, include their names in the firm name,
shall be subject to the liability of a partner. (n)
Art. 1816. All partners, including industrial ones, shall be liable pro rata with all their
property and after all the partnership assets have been exhausted, for the contracts which
may be entered into in the name and for the account of the partnership, under its signature
and by a person authorized to act for the partnership. However, any partner may enter
into a separate obligation to perform a partnership contract. (n)
Art. 1817. Any stipulation against the liability laid down in the preceding article shall be
void, except as among the partners. (n)
Art. 1818. Every partner is an agent of the partnership for the purpose of its business, and
the act of every partner, including the execution in the partnership name of any
instrument, for apparently carrying on in the usual way the business of the partnership of
which he is a member binds the partnership, unless the partner so acting has in fact no
authority to act for the partnership in the particular matter, and the person with whom he
is dealing has knowledge of the fact that he has no such authority.
An act of a partner which is not apparently for the carrying on of business of the
partnership in the usual way does not bind the partnership unless authorized by the other
partners.
Except when authorized by the other partners or unless they have abandoned the
business, one or more but less than all the partners have no authority to:
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(1) Assign the partnership property in trust for creditors or on the assignee's promise to
pay the debts of the partnership;
(2) Dispose of the good-will of the business;
(3) Do any other act which would make it impossible to carry on the ordinary business of
a partnership;
(4) Confess a judgment;
(5) Enter into a compromise concerning a partnership claim or liability;
(6) Submit a partnership claim or liability to arbitration;
(7) Renounce a claim of the partnership.
No act of a partner in contravention of a restriction on authority shall bind the partnership

to persons having knowledge of the restriction. (n)
Art. 1819. Where title to real property is in the partnership name, any partner may convey
title to such property by a conveyance executed in the partnership name; but the
partnership may recover such property unless the partner's act binds the partnership
under the provisions of the first paragraph of article 1818, or unless such property has
been conveyed by the grantee or a person claiming through such grantee to a holder for
value without knowledge that the partner, in making the conveyance, has exceeded his
authority.
Where title to real property is in the name of the partnership, a conveyance executed by
a partner, in his own name, passes the equitable interest of the partnership, provided the
act is one within the authority of the partner under the provisions of the first paragraph of
Article 1818.
Where title to real property is in the name of one or more but not all the partners, and the
record does not disclose the right of the partnership, the partners in whose name the title
stands may convey title to such property, but the partnership may recover such property
if the partners' act does not bind the partnership under the provisions of the first paragraph
of Article 1818, unless the purchaser or his assignee, is a holder for value, without
knowledge.
Where the title to real property is in the name of one or more or all the partners, or in a
third person in trust for the partnership, a conveyance executed by a partner in the
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partnership name, or in his own name, passes the equitable interest of the partnership,
provided the act is one within the authority of the partner under the provisions of the first
paragraph of Article 1818.
Where the title to real property is in the name of all the partners a conveyance executed
by all the partners passes all their rights in such property. (n)
Art. 1820. An admission or representation made by any partner concerning partnership

affairs within the scope of his authority in accordance with this Title is evidence against
the partnership. (n)
Art. 1821. Notice to any partner of any matter relating to partnership affairs, and the
knowledge of the partner acting in the particular matter, acquired while a partner or then
present to his mind, and the knowledge of any other partner who reasonably could and
should have communicated it to the acting partner, operate as notice to or knowledge of
the partnership, except in the case of fraud on the partnership, committed by or with the
consent of that partner. (n)
Art. 1822. Where, by any wrongful act or omission of any partner acting in the ordinary
course of the business of the partnership or with the authority of co-partners, loss or injury
is caused to any person, not being a partner in the partnership, or any penalty is incurred,
the partnership is liable therefor to the same extent as the partner so acting or omitting to
act. (n)
Art. 1823. The partnership is bound to make good the loss:
(1) Where one partner acting within the scope of his apparent authority receives money
or property of a third person and misapplies it; and
(2) Where the partnership in the course of its business receives money or property of a
third person and the money or property so received is misapplied by any partner while it
is in the custody of the partnership. (n)
Art. 1824. All partners are liable solidarity with the partnership for everything chargeable
to the partnership under Articles 1822 and 1823. (n)
Art. 1825. When a person, by words spoken or written or by conduct, represents himself,
or consents to another representing him to anyone, as a partner in an existing partnership
or with one or more persons not actual partners, he is liable to any such persons to whom
such representation has been made, who has, on the faith of such representation, given
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credit to the actual or apparent partnership, and if he has made such representation or
consented to its being made in a public manner he is liable to such person, whether the
representation has or has not been made or communicated to such person so giving
credit by or with the knowledge of the apparent partner making the representation or
consenting to its being made:
(1) When a partnership liability results, he is liable as though he were an actual member
of the partnership;
(2) When no partnership liability results, he is liable pro rata with the other persons, if any,
so consenting to the contract or representation as to incur liability, otherwise separately.
When a person has been thus represented to be a partner in an existing partnership, or

with one or more persons not actual partners, he is an agent of the persons consenting
to such representation to bind them to the same extent and in the same manner as though
he were a partner in fact, with respect to persons who rely upon the representation. When
all the members of the existing partnership consent to the representation, a partnership
act or obligation results; but in all other cases it is the joint act or obligation of the person
acting and the persons consenting to the representation. (n)
Art. 1826. A person admitted as a partner into an existing partnership is liable for all the
obligations of the partnership arising before his admission as though he had been a
partner when such obligations were incurred, except that this liability shall be satisfied
only out of partnership property, unless there is a stipulation to the contrary. (n)
Art. 1827. The creditors of the partnership shall be preferred to those of each partner as
regards the partnership property. Without prejudice to this right, the private creditors of
each partner may ask the attachment and public sale of the share of the latter in the
partnership assets. (n)
CHAPTER 3
DISSOLUTION AND WINDING UP
Art. 1828. The dissolution of a partnership is the change in the relation of the partners
caused by any partner ceasing to be associated in the carrying on as distinguished from
the winding up of the business. (n)
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Art. 1829. On dissolution the partnership is not terminated, but continues until the winding
up of partnership affairs is completed. (n)
Art. 1830. Dissolution is caused:
(1) Without violation of the agreement between the partners:
(a) By the termination of the definite term or particular undertaking specified in the
agreement;
(b) By the express will of any partner, who must act in good faith, when no definite term
or particular is specified;
(c) By the express will of all the partners who have not assigned their interests or suffered
them to be charged for their separate debts, either before or after the termination of any
specified term or particular undertaking;
(d) By the expulsion of any partner from the business bona fide in accordance with such
a power conferred by the agreement between the partners;
(2) In contravention of the agreement between the partners, where the circumstances do
not permit a dissolution under any other provision of this article, by the express will of any
partner at any time;
(3) By any event which makes it unlawful for the business of the partnership to be carried
on or for the members to carry it on in partnership;
(4) When a specific thing which a partner had promised to contribute to the partnership,
perishes before the delivery; in any case by the loss of the thing, when the partner who
contributed it having reserved the ownership thereof, has only transferred to the
partnership the use or enjoyment of the same; but the partnership shall not be dissolved
by the loss of the thing when it occurs after the partnership has acquired the ownership
thereof;
(5) By the death of any partner;
(6) By the insolvency of any partner or of the partnership;
(7) By the civil interdiction of any partner;

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(8) By decree of court under the following article. (1700a and 1701a)
Art. 1831. On application by or for a partner the court shall decree a dissolution whenever:
(1) A partner has been declared insane in any judicial proceeding or is shown to be of
unsound mind;
(2) A partner becomes in any other way incapable of performing his part of the partnership
contract;
(3) A partner has been guilty of such conduct as tends to affect prejudicially the carrying
on of the business;
(4) A partner willfully or persistently commits a breach of the partnership agreement, or

otherwise so conducts himself in matters relating to the partnership business that it is not
reasonably practicable to carry on the business in partnership with him;
(5) The business of the partnership can only be carried on at a loss;
(6) Other circumstances render a dissolution equitable.
On the application of the purchaser of a partner's interest under Article 1813 or 1814:
(1) After the termination of the specified term or particular undertaking;
(2) At any time if the partnership was a partnership at will when the interest was assigned
or when the charging order was issued. (n)
Art. 1832. Except so far as may be necessary to wind up partnership affairs or to complete
transactions begun but not then finished, dissolution terminates all authority of any partner
to act for the partnership:
(1) With respect to the partners:
(a) When the dissolution is not by the act, insolvency or death of a partner; or
(b) When the dissolution is by such act, insolvency or death of a partner, in cases where
article 1833 so requires;
(2) With respect to persons not partners, as declared in article 1834. (n)
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Art. 1833. Where the dissolution is caused by the act, death or insolvency of a partner,
each partner is liable to his co-partners for his share of any liability created by any partner
acting for the partnership as if the partnership had not been dissolved unless:
(1) The dissolution being by act of any partner, the partner acting for the partnership had
knowledge of the dissolution; or
(2) The dissolution being by the death or insolvency of a partner, the partner acting for
the partnership had knowledge or notice of the death or insolvency.
Art. 1834. After dissolution, a partner can bind the partnership, except as provided in the
third paragraph of this article:
(1) By any act appropriate for winding up partnership affairs or completing transactions
unfinished at dissolution;
(2) By any transaction which would bind the partnership if dissolution had not taken place,
provided the other party to the transaction:
(a) Had extended credit to the partnership prior to dissolution and had no knowledge
or notice of the dissolution; or
(b) Though he had not so extended credit, had nevertheless known of the partnership
prior to dissolution, and, having no knowledge or notice of dissolution, the fact of
dissolution had not been advertised in a newspaper of general circulation in the place (or
in each place if more than one) at which the partnership business was regularly carried
on.
The liability of a partner under the first paragraph, No. 2, shall be satisfied out of
partnership assets alone when such partner had been prior to dissolution:
(1) Unknown as a partner to the person with whom the contract is made; and
(2) So far unknown and inactive in partnership affairs that the business reputation of the
partnership could not be said to have been in any degree due to his connection with it.
The partnership is in no case bound by any act of a partner after dissolution:

(1) Where the partnership is dissolved because it is unlawful to carry on the business,
unless the act is appropriate for winding up partnership affairs; or
(2) Where the partner has become insolvent; or

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(3) Where the partner has no authority to wind up partnership affairs; except by a
transaction with one who:
(a) Had extended credit to the partnership prior to dissolution and had no
knowledge or notice of his want of authority; or
(b) Had not extended credit to the partnership prior to dissolution, and, having no
knowledge or notice of his want of authority, the fact of his want of authority has not been
advertised in the manner provided for advertising the fact of dissolution in the first
paragraph, No. 2 (b).
Nothing in this article shall affect the liability under Article 1825 of any person who, after
dissolution, represents himself or consents to another representing him as a partner in a
partnership engaged in carrying business. (n)
Art. 1835. The dissolution of the partnership does not of itself discharge the existing
liability of any partner.
A partner is discharged from any existing liability upon dissolution of the partnership by
an agreement to that effect between himself, the partnership creditor and the person or
partnership continuing the business; and such agreement may be inferred from the
course of dealing between the creditor having knowledge of the dissolution and the
person or partnership continuing the business.
The individual property of a deceased partner shall be liable for all obligations of the
partnership incurred while he was a partner, but subject to the prior payment of his
separate debts. (n)
Art. 1836. Unless otherwise agreed, the partners who have not wrongfully dissolved the
partnership or the legal representative of the last surviving partner, not insolvent, has the
right to wind up the partnership affairs, provided, however, that any partner, his legal
representative or his assignee, upon cause shown, may obtain winding up by the court.
(n)
Art. 1837. When dissolution is caused in any way, except in contravention of the
partnership agreement, each partner, as against his co-partners and all persons claiming
through them in respect of their interests in the partnership, unless otherwise agreed, may
have the partnership property applied to discharge its liabilities, and the surplus applied
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to pay in cash the net amount owing to the respective partners. But if dissolution is caused
by expulsion of a partner, bona fide under the partnership agreement and if the expelled
partner is discharged from all partnership liabilities, either by payment or agreement under
the second paragraph of Article 1835, he shall receive in cash only the net amount due
him from the partnership.
When dissolution is caused in contravention of the partnership agreement the rights of

the partners shall be as follows:
(1) Each partner who has not caused dissolution wrongfully shall have:
(a) All the rights specified in the first paragraph of this article, and
(b) The right, as against each partner who has caused the dissolution wrongfully, to
damages breach of the agreement.
(2) The partners who have not caused the dissolution wrongfully, if they all desire to
continue the business in the same name either by themselves or jointly with others, may
do so, during the agreed term for the partnership and for that purpose may possess the
partnership property, provided they secure the payment by bond approved by the court,
or pay any partner who has caused the dissolution wrongfully, the value of his interest in
the partnership at the dissolution, less any damages recoverable under the second
paragraph, No. 1 (b) of this article, and in like manner indemnify him against all present
or future partnership liabilities.
(3) A partner who has caused the dissolution wrongfully shall have:
(a) If the business is not continued under the provisions of the second paragraph,
No. 2, all the rights of a partner under the first paragraph, subject to liability for
damages in the second paragraph, No. 1 (b), of this article.
(b) If the business is continued under the second paragraph, No. 2, of this article, the right
as against his co-partners and all claiming through them in respect of their interests in the
partnership, to have the value of his interest in the partnership, less any damage caused
to his co-partners by the dissolution, ascertained and paid to him in cash, or the payment
secured by a bond approved by the court, and to be released from all existing liabilities
of the partnership; but in ascertaining the value of the partner's interest the value of the
good-will of the business shall not be considered. (n)
Art. 1838. Where a partnership contract is rescinded on the ground of the fraud or
misrepresentation of one of the parties thereto, the party entitled to rescind is, without
prejudice to any other right, entitled:
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(1) To a lien on, or right of retention of, the surplus of the partnership property after
satisfying the partnership liabilities to third persons for any sum of money paid by him for
the purchase of an interest in the partnership and for any capital or advances contributed
by him;
(2) To stand, after all liabilities to third persons have been satisfied, in the place of the
creditors of the partnership for any payments made by him in respect of the partnership
liabilities; and
(3) To be indemnified by the person guilty of the fraud or making the representation
against all debts and liabilities of the partnership. (n)
Art. 1839. In settling accounts between the partners after dissolution, the following rules
shall be observed, subject to any agreement to the contrary:
(1) The assets of the partnership are:
(a) The partnership property,

(b) The contributions of the partners necessary for the payment of all the liabilities
specified in No. 2.
(2) The liabilities of the partnership shall rank in order of payment, as follows:
(a) Those owing to creditors other than partners,
(b) Those owing to partners other than for capital and profits,
(c) Those owing to partners in respect of capital,
(d) Those owing to partners in respect of profits.
(3) The assets shall be applied in the order of their declaration in No. 1 of this article to
the satisfaction of the liabilities.
(4) The partners shall contribute, as provided by article 1797, the amount necessary to
satisfy the liabilities.
(5) An assignee for the benefit of creditors or any person appointed by the court shall
have the right to enforce the contributions specified in the preceding number.
(6) Any partner or his legal representative shall have the right to enforce the contributions
specified in No. 4, to the extent of the amount which he has paid in excess of his share
of the liability.
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(7) The individual property of a deceased partner shall be liable for the contributions
specified in No. 4.
(8) When partnership property and the individual properties of the partners are in
possession of a court for distribution, partnership creditors shall have priority on
partnership property and separate creditors on individual property, saving the rights of
lien or secured creditors.
(9) Where a partner has become insolvent or his estate is insolvent, the claims against
his separate property shall rank in the following order:
(a) Those owing to separate creditors;

(b) Those owing to partnership creditors;
(c) Those owing to partners by way of contribution. (n)
Art. 1840. In the following cases creditors of the dissolved partnership are also creditors
of the person or partnership continuing the business:
(1) When any new partner is admitted into an existing partnership, or when any partner
retires and assigns (or the representative of the deceased partner assigns) his rights in
partnership property to two or more of the partners, or to one or more of the partners and
one or more third persons, if the business is continued without liquidation of the
partnership affairs;
(2) When all but one partner retire and assign (or the representative of a deceased partner
assigns) their rights in partnership property to the remaining partner, who continues the
business without liquidation of partnership affairs, either alone or with others;
(3) When any partner retires or dies and the business of the dissolved partnership is
continued as set forth in Nos. 1 and 2 of this article, with the consent of the retired partners
or the representative of the deceased partner, but without any assignment of his right in
partnership property;
(4) When all the partners or their representatives assign their rights in partnership property
to one or more third persons who promise to pay the debts and who continue the business
of the dissolved partnership;
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(5) When any partner wrongfully causes a dissolution and the remaining partners continue
the business under the provisions of article 1837, second paragraph, No. 2, either alone
or with others, and without liquidation of the partnership affairs;
(6) When a partner is expelled and the remaining partners continue the business either
alone or with others without liquidation of the partnership affairs.
The liability of a third person becoming a partner in the partnership continuing the
business, under this article, to the creditors of the dissolved partnership shall be satisfied
out of the partnership property only, unless there is a stipulation to the contrary.
When the business of a partnership after dissolution is continued under any conditions
set forth in this article the creditors of the dissolved partnership, as against the separate
creditors of the retiring or deceased partner or the representative of the deceased partner,
have a prior right to any claim of the retired partner or the representative of the deceased
partner against the person or partnership continuing the business, on account of the
retired or deceased partner's interest in the dissolved partnership or on account of any
consideration promised for such interest or for his right in partnership property.
Nothing in this article shall be held to modify any right of creditors to set aside any
assignment on the ground of fraud.
The use by the person or partnership continuing the business of the partnership name, or
the name of a deceased partner as part thereof, shall not of itself make the individual
property of the deceased partner liable for any debts contracted by such person or
partnership. (n)
Art. 1841. When any partner retires or dies, and the business is continued under any of
the conditions set forth in the preceding article, or in Article 1837, second paragraph, No.
2, without any settlement of accounts as between him or his estate and the person or
partnership continuing the business, unless otherwise agreed, he or his legal
representative as against such person or partnership may have the value of his interest
at the date of dissolution ascertained, and shall receive as an ordinary creditor an amount
equal to the value of his interest in the dissolved partnership with interest, or, at his option
or at the option of his legal representative, in lieu of interest, the profits attributable to the
use of his right in the property of the dissolved partnership; provided that the creditors of
the dissolved partnership as
against the separate creditors, or the representative of the retired or deceased partner,
shall have priority on any claim arising under this article, as provided Article 1840, third
paragraph. (n)
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Art. 1842. The right to an account of his interest shall accrue to any partner, or his legal
representative as against the winding up partners or the surviving partners or the person
or partnership continuing the business, at the date of dissolution, in the absence of any
agreement to the contrary. (n)
CHAPTER 4
LIMITED PARTNERSHIP (n)
Art. 1843. A limited partnership is one formed by two or more persons under the provisions
of the following article, having as members one or more general partners and one or more
limited partners. The limited partners as such shall not be bound by the obligations of the
partnership.
Art. 1844. Two or more persons desiring to form a limited partnership shall:
(1) Sign and swear to a certificate, which shall state -
(a) The name of the partnership, adding thereto the word "Limited";
(b) The character of the business;
(c) The location of the principal place of business;
(d) The name and place of residence of each member, general and limited partners being
respectively designated;
(e) The term for which the partnership is to exist;
(f) The amount of cash and a description of and the agreed value of the other property
contributed by each limited partner;
(g) The additional contributions, if any, to be made by each limited partner and the times
at which or events on the happening of which they shall be made;
(h) The time, if agreed upon, when the contribution of each limited partner is to be
returned;
(i) The share of the profits or the other compensation by way of income which each limited
partner shall receive by reason of his contribution;
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(j) The right, if given, of a limited partner to substitute an assignee as contributor in his
place, and the terms and conditions of the substitution;
(k) The right, if given, of the partners to admit additional limited partners;
(l) The right, if given, of one or more of the limited partners to priority over other limited
partners, as to contributions or as to compensation by way of income, and the nature of
such priority;
(m) The right, if given, of the remaining general partner or partners to continue the
business on the death, retirement, civil interdiction, insanity or insolvency of a general
partner; and
(n) The right, if given, of a limited partner to demand and receive property other than cash
in return for his contribution.
(2) File for record the certificate in the Office of the Securities and Exchange
Commission.
A limited partnership is formed if there has been substantial compliance in good faith with
the foregoing requirements.
Art. 1845. The contributions of a limited partner may be cash or property, but not services.
Art. 1846. The surname of a limited partner shall not appear in the partnership name
unless:
(1) It is also the surname of a general partner, or
(2) Prior to the time when the limited partner became such, the business has been carried
on under a name in which his surname appeared.
A limited partner whose surname appears in a partnership name contrary to the provisions
of the first paragraph is liable as a general partner to partnership creditors who extend
credit to the partnership without actual knowledge that he is not a general partner.
Art. 1847. If the certificate contains a false statement, one who suffers loss by reliance on
such statement may hold liable any party to the certificate who knew the statement to be
false:
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(1) At the time he signed the certificate, or
(2) Subsequently, but within a sufficient time before the statement was relied upon to
enable him to cancel or amend the certificate, or to file a petition for its cancellation or
amendment as provided in Article 1865.
Art. 1848. A limited partner shall not become liable as a general partner unless, in addition
to the exercise of his rights and powers as a limited partner, he takes part in the control
of the business.
Art. 1849. After the formation of a lifted partnership, additional limited partners may be
admitted upon filing an amendment to the original certificate in accordance with the
requirements of Article 1865.
Art. 1850. A general partner shall have all the rights and powers and be subject to all the
restrictions and liabilities of a partner in a partnership without limited partners. However,
without the written consent or ratification of the specific act by all the limited partners, a
general partner or all of the general partners have no authority to:
(1) Do any act in contravention of the certificate;
(2) Do any act which would make it impossible to carry on the ordinary business of the
partnership;
(3) Confess a judgment against the partnership;
(4) Possess partnership property, or assign their rights in specific partnership property,
for other than a partnership purpose;
(5) Admit a person as a 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.
Art. 1851. A limited partner shall have the same rights as a general partner to:
(1) Have the partnership books kept at the principal place of business of the partnership,
and at a reasonable hour to inspect and copy any of them;
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(2) Have on demand true and full information of all things affecting the partnership, and a
formal account of partnership affairs whenever circumstances render it just and
reasonable; and
(3) Have dissolution and winding up by decree of court.
A limited partner shall have the right to receive a share of the profits or other
compensation by way of income, and to the return of his contribution as provided in
Articles 1856 and 1857.
Art. 1852. Without prejudice to the provisions of Article 1848, a person who has
contributed to the capital of a business conducted by a person or partnership erroneously
believing that he has become a limited partner in a limited partnership, is not, by reason
of his exercise of the rights of a limited partner, a general partner with the person or in the
partnership carrying on the business, or bound by the obligations of such person or
partnership, provided that on ascertaining the mistake he promptly renounces his interest
in the profits of the business, or other compensation by way of income.
Art. 1853. A person may be a general partner and a limited partner in the same
partnership at the same time, provided that this fact shall be stated in the certificate
provided for in Article 1844.
A person who is a general, and also at the same time a limited partner, shall have all the
rights and powers and be subject to all the restrictions of a general partner; except that,
in respect to his contribution, he shall have the rights against the other members which
he would have had if he were not also a general partner.
Art. 1854. A limited partner also may loan money to and transact other business with the
partnership, and, unless he is also a general partner, receive on account of resulting
claims against the partnership, with general creditors, a pro rata shares of the assets. No
limited partner shall in respect to any such claim:
(1) Receive or hold as collateral security and partnership property, or
(2) Receive from a general partner or the partnership any payment, conveyance, or
release from liability if at the time the assets of the partnership are not sufficient to
discharge partnership liabilities to persons not claiming as general or limited partners.
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The receiving of collateral security, or payment, conveyance, or release in violation of the

foregoing provisions is a fraud on the creditors of the partnership.
Art. 1855. Where there are several limited partners the members may agree that one or
more of the limited partners shall have a priority over other limited partners as to the return
of their contributions, as to their compensation by way of income, or as to any other
matter. If such an agreement is made it shall be stated in the certificate, and in the
absence of such a statement all the limited partners shall stand upon equal footing.
Art. 1856. A limited partner may receive from the partnership the share of the profits or
the compensation by way of income stipulated for in the certificate; provided that after
such payment is made, whether from property of the partnership or that of a general
partner, the partnership assets are in excess of all liabilities of the partnership except
liabilities to limited partners on account of their contributions and to general partners.
Art. 1857. A limited partner shall not receive from a general partner or out of partnership
property any part of his contributions until:
(1) All liabilities of the partnership, except liabilities to general partners and to limited
partners on account of their contributions, have been paid or there remains property of
the partnership sufficient to pay them;
(2) The consent of all members is had, unless the return of the contribution may be
rightfully demanded under the provisions of the second paragraph; and
(3) The certificate is cancelled or so amended as to set forth the withdrawal or reduction.
Subject to the provisions of the first paragraph, a limited partner may rightfully demand
the return of his contribution:
(1) On the dissolution of a partnership; or
(2) When the date specified in the certificate for its return has arrived, or
(3) After he has six months' notice in writing to all other members, if no time is specified
in the certificate, either for the return of the contribution or for the dissolution of the
partnership.
In the absence of any statement in the certificate to the contrary or the consent of all
members, a limited partner, irrespective of the nature of his contribution, has only the right
to demand and receive cash in return for his contribution.
A limited partner may have the partnership dissolved and its affairs wound up when:
(1) He rightfully but unsuccessfully demands the return of his contribution, or

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(2) The other liabilities of the partnership have not been paid, or the partnership property
is insufficient for their payment as required by the first paragraph, No. 1, and the limited
partner would otherwise be entitled to the return of his contribution.
Art. 1858. A limited partner is liable to the partnership:

(1) For the difference between his contribution as actually made and that stated in the
certificate as having been made; and
(2) For any unpaid contribution which he agreed in the certificate to make in the future at
the time and on the conditions stated in the certificate.
A limited partner holds as trustee for the partnership:

(1) Specific property stated in the certificate as contributed by him, but which was not
contributed or which has been wrongfully returned, and
(2) Money or other property wrongfully paid or conveyed to him on account of his
contribution.
The liabilities of a limited partner as set forth in this article can be waived or compromised
only by the consent of all members; but a waiver or compromise shall not affect the right
of a creditor of a partnership who extended credit or whose claim arose after the filing
and before a cancellation or amendment of the certificate, to enforce such liabilities.
When a contributor has rightfully received the return in whole or in part of the capital of
his contribution, he is nevertheless liable to the partnership for any sum, not in excess of
such return with interest, necessary to discharge its liabilities to all creditors who extended
credit or whose claims arose before such return.
Art. 1859. A limited partner's interest is assignable.
A substituted limited partner is a person admitted to all the rights of a limited partner who
has died or has assigned his interest in a partnership.
An assignee, who does not become a substituted limited partner, has no right to require
any information or account of the partnership transactions or to inspect the partnership
books; he is only entitled to receive the share of the profits or other compensation by way
of income, or the return of his contribution, to which his assignor would otherwise be
entitled.
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An assignee shall have the right to become a substituted limited partner if all the members
consent thereto or if the assignor, being thereunto empowered by the certificate, gives
the assignee that right.
An assignee becomes a substituted limited partner when the certificate is appropriately

amended in accordance with Article 1865.
The substituted limited partner has all the rights and powers, and is subject to all the
restrictions and liabilities of his assignor, except those liabilities of which he was ignorant
at the time he became a limited partner and which could not be ascertained from the
certificate.
The substitution of the assignee as a limited partner does not release the assignor from
liability to the partnership under Articles 1847 and 1848.
Art. 1860. The retirement, death, insolvency, insanity or civil interdiction of a general
partner dissolves the partnership, unless the business is continued by the remaining
general partners:
(1) Under a right so to do stated in the certificate, or
(2) With the consent of all members.
Art. 1861. On the death of a limited partner his executor or administrator shall have all the
rights of a limited partner for the purpose of setting his estate, and such power as the
deceased had to constitute his assignee a substituted limited partner.
The estate of a deceased limited partner shall be liable for all his liabilities as a limited
partner.
Art. 1862. On due application to a court of competent jurisdiction by any creditor of a

limited partner, the court may charge the interest of the indebted limited partner with
payment of the unsatisfied amount of such claim, and may appoint a receiver, and make
all other orders, directions and inquiries which the circumstances of the case may require.
The interest may be redeemed with the separate property of any general partner, but may
not be redeemed with partnership property.
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The remedies conferred by the first paragraph shall not be deemed exclusive of others
which may exist.
Nothing in this Chapter shall be held to deprive a limited partner of his statutory
exemption.
Art. 1863. In setting accounts after dissolution the liabilities of the partnership shall be
entitled to payment in the following order:
(1) Those to creditors, in the order of priority as provided by law, except those to limited
partners on account of their contributions, and to general partners;
(2) Those to limited partners in respect to their share of the profits and other compensation
by way of income on their contributions;
(3) Those to limited partners in respect to the capital of their contributions;
(4) Those to general partners other than for capital and profits;
(5) Those to general partners in respect to profits;
(6) Those to general partners in respect to capital.
Subject to any statement in the certificate or to subsequent agreement, limited partners

share in the partnership assets in respect to their claims for capital, and in respect to their
claims for profits or for compensation by way of income on their contribution respectively,
in proportion to the respective amounts of such claims.
Art. 1864. The certificate shall be cancelled when the partnership is dissolved or all limited
partners cease to be such.
A certificate shall be amended when:
(1) There is a change in the name of the partnership or in the amount or character of the
contribution of any limited partner;
(2) A person is substituted as a limited partner;
(3) An additional limited partner is admitted;
(4) A person is admitted as a general partner;

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(5) A general partner retires, dies, becomes insolvent or insane, or is sentenced to civil
interdiction and the business is continued under Article 1860;
(6) There is a change in the character of the business of the partnership;
(7) There is a false or erroneous statement in the certificate;
(8) There is a change in the time as stated in the certificate for the dissolution of the
partnership or for the return of a contribution;
(9) A time is fixed for the dissolution of the partnership, or the return of a contribution, no
time having been specified in the certificate, or
(10) The members desire to make a change in any other statement in the certificate in
order that it shall accurately represent the agreement among them.
Art. 1865. The writing to amend a certificate shall:

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

A person desiring the cancellation or amendment of a certificate, if any person designated
in the first and second paragraphs as a person who must execute the writing refuses to
do so, may petition the court to order a cancellation or amendment thereof.
If the court finds that the petitioner has a right to have the writing executed by a person
who refuses to do so, it shall order the Office of the Securities and Exchange Commission
where the certificate is recorded, to record the cancellation or amendment of the
certificate; and when the certificate is to be amended, the court shall also cause to be
filed for record in said office a certified copy of its decree setting forth the amendment.
A certificate is amended or cancelled when there is filed for record in the Office of the
Securities and Exchange Commission, where the certificate is recorded:
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(1) A writing in accordance with the provisions of the first or second paragraph, or
(2) A certified copy of the order of the court in accordance with the provisions of the fourth
paragraph;
(3) After the certificate is duly amended in accordance with this article, the amended
certified shall thereafter be for all purposes the certificate provided for in this Chapter.
Art. 1866. A contributor, unless he is a general partner, is not a proper party to

proceedings by or against a partnership, except where the object is to enforce a limited
partner's right against or liability to the partnership.
Art. 1867. A limited partnership formed under the law prior to the effectivity of this Code,
may become a limited partnership under this Chapter by complying with the provisions of
Article 1844, provided the certificate sets forth:
(1) The amount of the original contribution of each limited partner, and the time when the
contribution was made; and
(2) That the property of the partnership exceeds the amount sufficient to discharge its
liabilities to persons not claiming as general or limited partners by an amount greater than
the sum of the contributions of its limited partners.
A limited partnership formed under the law prior to the effectivity of this Code, until or
unless it becomes a limited partnership under this Chapter, shall continue to be governed
by the provisions of the old law.
Self-Help:
You can also refer to the following sources to help you further understand the lesson.
a. How to Register Partnership under Philippine Laws:
http://www.sec.gov.ph/services-2/company-2/registration/primary-
registration/partnership/
b. Basic difference of Sole Proprietorship, Partnership and Corporation

http://www.businesscoachphil.com/be-a-sole-proprietorship-
partnership-or-corporation
c. Civil Code of the Philippines
d. Reyes Book on Partnership and Corporation

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Let’s Check
EXERCISE 1
After reading all the legal terms, principles, and concepts on Partnership, let us check
your understanding of these. In the space provided, write the term/s being asked in the
following statements:
1. A partner who assumes unlimited liability for the debts of the partnership is called
a______________ partner.
2. Partners who have no personal liability for debts of the partnership beyond the amounts
they have invested in the partnership are called__________________ partners.
3. A partnership in which all partners have mutual agency and unlimited liability for
partnership debts is called a_______________ partnership.
4. A partnership that has two classes of partners, limited partners and general partners,
is called a_______________ partnership.
5. The legal relationship among the partners whereby each partner is an agent of the
partnership and is able to bind the partnership to contracts within the apparent scope of
the partnership's business is called _____________________.
6. An unincorporated association of two or more persons to pursue a business for profit

as co-owners is called a_____________________ .
7. The dissolution of a business partnership by 1) selling non-cash assets for cash and
allocating the gain or loss according to partners' income-and-loss ratio 2) paying liabilities
3) distributing remaining cash to partners based on capital balances is called
partnership __________________.
8. A partner who assumes unlimited liability for the debts of the partnership; also, the
general partner in a limited partnership responsible for its management is called
a______________A partnership in which all partners have mutual agency and unlimited
liability for partnership debts.
9. Partners who have no personal liability for debts of the partnership beyond the amounts
they have invested in the partnership is called a______________
10. A partnership that has two classes of partners, limited partners and general partners
is called a______________.
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11. The legal relationship among the partners whereby each partner is an agent of the
partnership and is able to bind the partnership to contracts within the apparent scope of
the partnership's business is called _____________.
12. An unincorporated association of two or more persons to pursue a business for profit
as co-owners is called ________________.
13. The agreement between partners that sets forth the terms under which the affairs of
the partnership will be conducted is called_______________.
14. The dissolution of a business partnership by 1) selling non-cash assets for cash and
allocating the gain or loss according to partners' income- and-loss ratio 2) paying liabilities
3) distributing remaining cash to partners based on capital balances is
called____________
15. Shows the capital balances at the beginning of the period, any additional
investments made by partners, the income or loss of the partnership, withdrawals by
partners, and the capital balances is called____________
16. The legal relationship among general partners that makes each of them
responsible for paying all the debts of the partnership if the other partners are unable to
pay their shares is called _____________.
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Exercise II-True/False Quiz
1. A partnership is an incorporated association of two or more persons to pursue a

business for profit as co-owners.
2. A written contract is necessary for the legal formation of a partnership.
3. Partnerships are subject to income taxes.
4. Partners can agree to limit the power of negotiating contracts for the partnership to any
one or more of the partners. Such an agreement is binding on all outsiders, whether or
not they know it exists.
5. If Partner A contributes cash of P20,000 to the partnership of A and B, and Partner B

contributes a building valued at P30,000 to the partnership, the investments become joint
property of both partners.
6. A general partnership may consist of limited partners and general partners.
7. Limited partners are liable for any debt that cannot be paid through the resources of
the partnership.
8. General partners are included in limited partnerships.
9. If Partner A invested twice as much as Partner B, and there are only two partners, the
income must be divided in a ratio of 2:1, respectively.
10. If partners agree to a method of sharing net income, but say nothing about net losses,
losses are shared in the same way as net income.
11. When a partnership agreement provides for the division of earnings based on time
spent and investment balances, the resulting amounts may be treated by the partners as
deductible salary expenses and interest expenses in determining the net income of the
partnership.
12. In the purchase of partnership interest, the capital accounts of the exiting partner(s)
will be reduced.
13. With a 100% purchase of the interest of a partner, a new partner has all the rights of
the remaining partner(s) .
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14. The capital of an existing partnership is P160,000 after Keith invested P40,000 in the
partnership. Keith is entitled to 25% (1/4) of the income or loss of the partnership.
15. When the current value of the partnership is greater than the recorded amounts of
equity, the bonus resulting from a purchase of interest is given to the old partner(s).
16. The withdrawal of a partner from a partnership may result in an increase in the capital
accounts of the remaining partners.
17. There is more than one reason for giving a withdrawing partner assets of value greater
than the withdrawing partner's recorded equity.
18. The death of a partner will require that all non-cash assets are sold for cash, all
liabilities are paid, and remaining cash be distributed to the estate of the dead partner on
the basis of the partnership income and loss agreement.
19. Partners will share gains and losses on liquidation in their capital investment ratio.
20. A capital deficiency occurs when a partner has insufficient equity to cover his or her
share of losses resulting from liquidation.
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Let’s Analyze
Problem 1
A. Can a husband and wife form a limited partnership to engage in real
estate business, with the wife being a limited partner?
B. Can two corporations organize a general partnership under the Civil Code of the
Philippines?
C. Can a corporation and an individual form a general partnership?
Problem 2
Conveyance of a Partner’s Share Dissolution (1998)
Dielle, Karlo and Una are general partners in a merchandising firm.

Having contributed equal amounts to the capital, they also agree on equal distribution of
whatever net profit is realized per fiscal period. After two years of operation, however,
Una conveys her whole interest in the partnership to Justine, without the knowledge and
consent of Dielle and Karlo.
1. Is the partnership dissolved?
2. What are the rights of Justine, if any, should she desire to participate in the
management of the partnership and in the distribution of a net profit of P360.000.00 which
was realized after her purchase of Una’s interest?
Problem 3
Dissolution of Partnership (1995)
Pauline, Patricia and Priscilla formed a business partnership for the purpose of engaging
in neon advertising for a term of five (5) years. Pauline subsequently assigned to Philip
her interest in the partnership. When Patricia and Priscilla learned of the assignment,
they decided to dissolve the partnership before the expiration of its term as they had an
unproductive business relationship with Philip in the past. On the other hand, unaware of
the move of Patricia and Priscilla but sensing their negative reaction to his acquisition of
Pauline’s interest, Philip simultaneously petitioned for the dissolution of the partnership.
1. Is the dissolution done by Patricia and Priscilla without the consent of Pauline or Philip
valid? Explain.
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2. Does Philip have any right to petition for the dissolution of the partnership
before the expiration of its specified term? Explain.
Problem 4
Effect of Death of Partner (1997)
Stating briefly the thesis to support your answer to each of the following cases, will the
death – of a partner terminate the partnership?
Problem 5
Obligations of a Partner (1992)
W, X, Y and Z organized a general partnership with W and X as industrial partners and Y

and Z as capitalist partners. Y contributed P50,000.00 and Z contributed P20,000.00 to
the common fund. By a unanimous vote of the partners, W and X were appointed
managing partners, without any specification of their respective powers and duties.
A applied for the position of Secretary and B applied for the position of Accountant of the
partnership.
The hiring of A was decided upon by W and X, but was opposed by Y and Z.
The hiring of B was decided upon by W and Z, but was opposed by X and Y.
Who of the applicants should be hired by the partnership? Explain and give your reasons.
Problem 6
Obligations of a Partner; Industrial Partner (2001)
Joe and Rudy formed a partnership to operate a car repair shop in Quezon City. Joe
provided the capital while Rudy contributed his labor and industry. On one side of their
shop, Joe opened and operated a coffee shop, while on the other side, Rudy put up a car
accessories store. May they engage in such separate businesses? Why?
In a Nutshell
ACTIVITY 1
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After learning the legal principles and concepts of Partnership, reading the articles found
in the Self-Help, and using other resources, what do you think are the pros and cons in
partnership? (300 words)
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Activity 2
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Ethics Challenge
Paul, Frank and Basil formed a partnership 10 years ago and Paul is about to retire. Paul
is not financially minded but he knows that he is entitled to one-third of partnership assets
upon his retirement. Total assets have a book value of P900,000 and Paul feels that he
is entitled to his share. Frank and Basil are aware that the market value of the firm's net
assets approximates P1,500,000. Frank and Basil plan to form a new partnership.
Required:
What are the financial and ethical and legal implications of distributing P300,000 to Paul
upon his retirement?
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Activity 3
Communicating in Practice
Your friend, Oliver Lung, recently completed his second year in his own business. Oliver's
business is growing rapidly and he needs an infusion of funds to help finance the
expansion. Oliver tells you about his friend Mary who has access to funds and is a creative
individual with whom Oliver gets along very well. Oliver is considering offering Mary a
piece of the business and forming a business partnership. Oliver says, "Mary and I go
way back and are close friends so I don't think we need any formal written partnership
agreement."
Required:
Write a memo to your friend Oliver to explain the purpose of a partnership. Comment on
why a written agreement is essential and what matters should be included in the
agreement.
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Activity 4
INDIVIDUAL RESEARCH
This activity is designed to reinforce the student’s understanding of the partnership form
of business.
1. A partnership is a form of multiple ownership. For legal and tax purposes no entity
is recognized. How does the entity concept relates to partnerships. Can entities be
partners?
2. Creditors of a partnership may sue the partnership jointly or severally. What are
the liabilities of a partner? What are the liabilities of the partnership? What do you
understand by jointly and severally?
3. What happens if the partner has withdrawn all of the income of the partnership?
4. Can a partner avoid paying income taxes legally by not withdrawing income from
the partnership?
Activity 5
Hitting the Road
Identify three partnership enterprises operating in you in the City of Davao. Contact these
businesses and ask how many partners comprise the partnership. Did any partners
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withdraw from the partnerships during the past year and did any new partners enter the
partnership?
Q&A LIST
Do you have any questions for clarification?
Questions/Issues Answers
1. 1.
2. 2.
3. 3.
4. 4.
5. 5.
KEYWORDS INDEX
This section lists down the keywords that help you for recall the discussions.
Partnership Dissolution Contract
Partners Disassociation Liquidation
Liability Winding up Agency
General Partners Properties Silent Partner
Limited Partners Profit Accounting of Books
Partnership Property Losses Jointly and Severally
Partnership Interests General Partnership Silent Partner
Partnership Books Real properties Withdrawal
Partnership Accounting Personal Properties Capital
Taxation Industrial Partner Managing Partner
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Course Schedule
This section calendars all the activities and exercises, including readings and lectures, as
well as time for making assignments and doing other requirements.
Activity Date Where to Submit

Orientation BlackBoard LMS
EXERCISE 1 BlackBoard LMS
EXERCISE 2 BlackBoard LMS
Let’s Analyze Problem 1 BlackBoard LMS
to Problem 2
Let’s Analyze Problem 3 BlackBoard LMS

to Problem 25
In a Nutshell Activity 1 BlackBoard LMS
In a Nutshell Activity 4 BlackBoard LMS - Forum
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Big Picture
Week 4-6: Unit Learning Outcomes (ULO): At the end of the unit, you are expected to
A. Explain the nature and characteristics of corporations and their

organization.
B. Discuss the different types of a Corporation.
C. Explain the legal basis on the issuance of ordinary and preference shares.
D. Analyze the legal basis in declaring cash and other forms of dividends.
E. Explain the legal basis in distributing dividends between ordinary and
preference shares.
Big Picture in Focus: ULOa. Explain the nature and characteristics of Corporations and
organization.
Metalanguage
Below are the essential terms that you are going to encounter in the pursuit of
ULOa: Analyze the pioneering works of prevention and detection fraudulent financial
reporting. Again, you are advised to frequently refer to these definitions to help you
understand the succeeding topics. I would like to highly recommend that you refresh your
knowledge about ULOa and ULOb to understand further ULOa.
Authorized shares: The total number of shares that a corporation's charter authorizes it to sell.
Federally incorporated companies are authorized to issue an unlimited number.
Book value per common share: The recorded amount of share-holders' equity
applicable to common shares divided by the number of common shares outstanding.
Book value per preferred share: The amount of shareholders' equity applicable to
preferred shares (equals the preferred share's call price or issue price if the preferred is
not callable, plus any cumulative dividends in arrears) divided by the number of preferred
shares outstanding.
Call price: The amount that must be paid to call and retire a preferred share.
Callable preferred shares: Preferred shares that the issuing corporation, at its option,
may retire by paying a specified amount (the call price) to the preferred shareholders plus
any dividends in arrears.
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Certificate of Stock: A written acknowledgement by the corporation of the interest, right

and participation of a person in the management, profit, and assets of a corporation.
Closely held shares: See privately held shares.
Common shares: Shares of a corporation when there is only one class of shares.
Convertible preferred shares: Preferred shares that give holders the option of
exchanging their preferred shares for common shares at a specified rate.
Cumulative preferred shares: Preferred shares on which undeclared dividends

accumulate until they are paid; common shareholders cannot receive a dividend until all
cumulative dividends have been paid.
Date of declaration: The date the directors vote to pay for a dividend.
Date of payment: The date when shareholders receive the dividend payment.
Date of record: The future date specified by the directors for identifying those
shareholders listed in the corporation's records to receive dividends.
Deficit: Arises when a corporation has a debit (abnormal) balance for retained earnings.
De Facto Corporation: One created in strict or substantial conformity with the mandatory
statutory requirements for incorporation and whose right to exist as a corporation cannot
be successfully questioned by any party even in a direct proceeding for that purpose by
the State.
Dividend in arrears: An unpaid dividend on cumulative preferred shares; it must be paid

before any current dividends on the preferred shares and before any dividends on the
common shares are paid.
Dividend preference: The rate per share at which dividends are paid when declared.
Equity financing: Obtaining capital, or money, by issuing shares.
Financial leverage: Achieving an increased return on common shares by paying

dividends on preferred shares or interest on debt at a r ate that is less than the rate of
return earned with the assets that were invested in the corporation by the preferred
shareholders or creditors.
Market value per share: The price at which stock is bought or sold.
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No-par value shares: A class of shares that has not been assigned a par value by the
corporate charter.
Noncumulative preferred shares: Preferred shares on which the right to receive

dividends is lost for any year that the dividends are not declared.
Nonparticipating preferred shares: Preferred shares on which dividends are limited to

a maximum amount each year.
Organization costs: The costs of bringing a corporation into existence, including legal
fees, promoters' fees, and amounts paid to the incorporating legal jurisdiction.
Outstanding shares: The number of shares held by shareholders.
Par value shares: An arbitrary value a corporation places on each of the corporation's
shares.
Participating preferred shares: Preferred shares with a feature that allows preferred
shareholders to share with common shareholders in any dividends paid in excess of the
percent stated on the preferred shares.
Preemptive right: The right to purchase additional shares of common shares issued by
the corporation in the future.
Preferred shares: Stock that gives its owners a priority status over common shareholders
in one or more ways, such as the payment of dividends or the distribution of assets on
liquidation.
Privately held shares: When a corporation offers its shares to only a few shareholders;
shares are not for public sale; also called closely held shares.
Progressive tax: Higher levels of income are taxed at higher rates and lower levels of
income are taxed at lower rates.
Proxy: A legal document that gives an agent of a shareholder the power to exercise the
voting rights of that shareholder's shares.
Public sale: Refers to trading in an organized stock market.
Publicly held shares: When a corporation offers it shares for public sale, which can result
in thousands of shareholders.
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Redeemable preferred shares: See callable preferred shares.
Retained earnings: The cumulative net income less losses and dividends retained by a
corporation.
Sell shares directly: When a corporation advertises its shares' issuance directly to
potential buyers. This is most common with privately held corporations.
Sell shares indirectly: When a corporation pays a brokerage house (investment banker)
to issue its shares.
Share: One unit of ownership in a corporation.
Share capital: Refers to all types (or classes) of a corporation's shares; also
called capital stock.
Shareholder(s): The owners of a corporation.
Shareholders' equity: The equity of a corporation; also called corporate capital.
Stock Corporation: The ordinary business corporation created and operated for the
purpose of making a profit which may be distributed in the form of dividends to
stockholders on the basis of their invested capital.
Statement of retained earnings: A financial statement unique to the corporate form of

organization that reconciles retained earnings for the period by taking retained earnings
at the beginning of the period, plus net income for the period (or less net loss), less
dividends declared for the period, to arrive at retained earnings at the en d of the period.
Underwrite: When a brokerage house buys the shares from the corporation and takes all
gains or losses from its resale to shareholders.
Essential Knowledge
The Revised Corporation Code

RA 11232
A corporation is:
● An artificial being
● Created by operation of law,
● Having the right of succession and
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the powers, attributes, and properties expressly authorized by law or incidental to its
existence. ( Sec. 2)
SUCCESSION of a Corporation
A corporation has a capacity of continuous existence, irrespective of the death,

withdrawal, insolvency, or incapacity of the individual members or stockholders and
regardless of the transfer of their interest or shares of stock.
Under the Corporation Code, the life of the corporation is limited to the period of
time stated in the Articles of Incorporation not exceeding 50 years from the date of the
incorporation. (De Leon, 2016)
Classes of Corporation
● Corporations formed or organized under this Code may be stock or nonstock

corporations.
● Stock corporations are those which have capital stock divided into shares and are
authorized to distribute to the holders of such shares, dividends, or allotments of the
surplus profits on the basis of the shares held.
● All other corporations are non-stock corporations ( Sec. 3)
Corporations Create by Special Laws or Charters
● Corporations created by special laws or charters shall be governed primarily by the

provisions of the special law or charter creating them or applicable to them,
● Supplemented by the provisions of this Code, insofar as they are applicable.
Corporates and Incorporators, Stockholders and Members
● Corporates are those who compose a corporation, whether as stockholders or

shareholders in a stock corporation or as a member in a non-stock corporation.
● Incorporators are those stockholders or members mentioned in the articles of

incorporation as originally forming and composing the corporation and who are
signatories thereof.
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● Can you amend the list of Incorporators?
Classification of Shares
● The classification of shares, their corresponding rights, privileges, restrictions, and

their stated par value, if any, must be indicated in the articles of incorporations.
● Each share shall be equal in all respects to every other share, except as otherwise
provided in the articles of incorporation and in the certificate of stock.
● The share stock corporations may be divided into classes or series of shares, or both.
No share may be deprived of voting rights except those classified and issued as
"preferred" or "redeemable" shares, unless otherwise provided in this
Code: Provided, That there shall be a class or series of shares with complete voting
rights.
Holders of nonvoting shares shall nevertheless be entitled to vote on the following

matters;
(a) Amendment of the articles of incorporation;
(b) Adoption and amendment of bylaws;
(c) Sale, lease, exchange, mortgage, pledge, or other disposition of all or substantially all
of the corporate property;
(d) Incurring, creating, or increasing bonded indebtedness;
(e) Increase or decrease of authorized capital stock;
(f) Merger or consolidation of the corporation with another corporation or other

corporations;
(g) Investment of corporate funds in another corporation or business in accordance with

this Code; and
(h) Dissolution of the corporation.
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Except as provided in the immediately preceding paragraph, the vote required under this
Code to approve a particular corporate act shall be deemed to refer only to stocks with
voting rights.
● The shares or series of shares may or may not have a par value:
-Provided, That banks, trust, insurance, and preneed companies, public utilities, building
and loan associations, and other corporations authorized to obtain or access funds from
the public whether publicly listed or not, shall not be permitted to issue no-par value
shares of stock.
-Preferred shares of stock issued by a corporation may be given preference in the

distribution of dividends and in the distribution of corporate assets in case of liquidation,
or such other preferences:
-Provided, That preferred shares of stock may be issued only with a stated par value. The
board of directors, where authorized in the articles of incorporation, may fix the terms and
conditions of preferred shares of stock or any series thereof:
-Provided, further, That such terms and conditions shall be effective upon filing of a
certificate thereof with the Securities and Exchange Commission, hereinafter referred to
as the "Commission".
-Shares of capital stock issued without par value shall be deemed fully paid and
nonassessable and the holder of such shares shall not be liable to the corporation or to
its creditors in respect thereto:
-Provided, That no-par value shares must be issued for a consideration of at least Five
pesos (₱5.00) per share: Provided, further, That the entire consideration received by the
corporation for its no-par value shares shall be treated as capital and shall not be available
for distribution as dividends.
-A corporation may further classify its shares for the purpose of ensuring compliance with
constitutional or legal requirements.
Founders’ Shares
● Rights and privileges not enjoyed by the owners of other stock.
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● Where the exclusive right to vote and be voted for in the election of directors is
granted, -not to exceed five (5) years from the date of incorporation: Provided, That
such exclusive right shall not be allowed if its exercise will violate Commonwealth Act
No. 108, otherwise known as the “Anti-Dummy Law”; Republic Act No. 7042,
otherwise known as the “Foreign Investments Act of 1991”; and other pertinent laws.
DIFFERENT KINDS OF CORPORATION
1. Stock Corporation
2. Non Stock Corporation
3. Corporation Aggregate
4. Corporation Sole
5. Ecclesiastical Corporation
6. Lay Corporation
7. Eleemosynary Corporation
8. Civil Corporation
9. Domestic Corporation
10. Foreign Corporation
11. De Jure Corporation
12. De Facto Corporation
13. Close Corporation
14. Open Corporation
15. Parent or Holding Corporation
16. Subsidiary Corporation
17. True Corporation
18. Quasi Corporation
19. Corporation by Prescription
20. Corporation by Estoppel
21. Public Corporations
22. Private Corporations
23. Government owned and controlled corporations
24. Quasi-Public Corporations
25. Corporations created by Special Laws or Charters
26. Educational Corporation
27. Special Corporations
CLASSES OF SHARES OF STOCKS

1. Par Value or No Par Value
2. Voting or Non- Voting
3. Common or Preferred (Voting, Convertible and Redeemable)
4. Cumulative or Non-Cumulative
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5. Participating or Non-Participating
6. Promotion Share
7. Share in Escrow
8. Convertible Stock
9. Founder’s Share
10. Redeemable Share
11. Treasury Share
Anti-Dummy Law and Foreign Investment Act
Badges of Dummy Status:
-The foreign investor provides for all the funds for the joint investment undertaken by a
Filipino;
-The foreign investor undertakes to provide practically all the technological support for the
joint venture
-The foreign investor while being a minority SH, manage the company and prepare all
economic viability studies
-FIA provides for the list of businesses where the foreign ownership is prohibited or
limited.
Redeemable Shares
-Redeemable shares may be issued when expressly provided in the AOI
-They are shares which may be purchased by the corporation.
-May be purchased by the corporation from the holders of such shares upon the expiration
of a fixed period, regardless of the existence of unrestricted retained earnings
Treasury Shares
-Shares of stock which have been issued and fully paid for, but subsequently reacquired
by the issuing corporation through purchase, redemption, donation, or some other lawful
means. Such shares may again be disposed of for a reasonable price fixed by the board
of directors.
Corporation vs. Partnership
● As to manner of creation:
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Partnership is created by mere agreement while the existence of the corporation

commences only from the issuance of the Certificate of Incorporation by the SEC or in
proper cases, passage of special law.
● As to number of organizers:
At least two (2) are required to form a partnership while there may be only one (1)
incorporator in a corporation.
● As to Powers:
A corporation is more restricted in its powers because of its limited personality while
partnership is subject only to what may be agreed upon by the partners
● Authority of those who compose:

There is mutual agency in partnership and each general partner can represent and bind
the partnership while stockholders are not agents of the corporation in the absence of
express authority.
● Transfer of Interest
Corporate shares are freely transferrable without the consent of other stockholders
(unless there is stipulation) while interest in the partnership cannot be transferred without
the consent of the other partners.
● Succession
Unlike in the case of a corporation, there is no right of succession in partnership as death
of a general partner dissolves the partnership.
● As to capacity to be a partner/stockholder:
A partnership can be a SH, and a Corp can also be a partner under RCCP
INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS
Section 10. Number and Qualifications of Incorporators
Any person, partnership, association or corporation, singly or jointly with others but not
more than fifteen (15) in number
Provided, That natural persons who are licensed to practice a profession, and
partnerships or associations organized for the purpose of practicing a profession, shall
not be allowed to organize as a corporation unless otherwise provided under special laws.
Incorporators who are natural persons must be of legal age.
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Each incorporator of a stock corporation must own or be a subscriber to at least one (1)
share of the capital stock.
A corporation with a single stockholder is considered a One Person Corporation as

described in Title XIII, Chapter III of this Code.
Foreign Stockholders
Can all the stockholders in a corporation be foreigners?
Ans:
Yes, except in fully or partly nationalized corporations
Where no foreigners are allowed:
Mass Media, except recording
Retail Trade enterprises with paid-up of less than US$2.5M except restaurant within a
hotel
Private Security Agencies
Small-scale mining
Utilization of Natural Resources
Cockpits
Manufacture, repair, stockpiling and/or distribution of nuclear weapons
STEPS IN THE CREATION OF CORPORATION

1. Promotion – when a business is generally brought into the existence
2. Incorporation – Section 10
3. Formal Organization and Commencement of business operations (Section 22)
Section 11. Corporate Term
A corporation shall have perpetual existence unless its articles of incorporation provides
otherwise.
Corporations with certificates of incorporation issued prior to the effectivity of this Code
and which continue to exist shall have perpetual existence, unless the corporation, upon
a vote of its stockholders representing a majority of its articles of incorporation:
Provided, That any change in the corporate right of dissenting stockholders in accordance
with the provisions of this Code.
A corporate term for a specific period may be extended or shortened by amending the
articles of incorporation:
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Provided, That no extension may be made earlier than three (3) years prior to the original
or subsequent expiry date(s) unless there are justifiable reasons for an earlier extension
as may be determined by the Commission:
Provided, further, That such extension of the corporate term shall take effect only on the
day following the original or subsequent expiry date(s).
A corporation whose term has expired may apply for revival of its corporate existence,
together with all the rights and privileges under its certificate of incorporation and subject
to all of its duties, debts and liabilities existing prior to its revival.
Upon approval by the Commission, the corporation shall be deemed revived and a
certificate of revival of corporate existence shall be issued, giving it perpetual existence,
unless its application for revival provides otherwise.
No application for revival of certificate of incorporation of banks, banking and quasi-

banking institutions, preneed, insurance and trust companies, non-stock savings and loan
associations (NSSLAs), pawnshops, corporations engaged in money service business,
and other financial intermediaries shall be approved by the Commission unless
accompanied by a favorable recommendation of the appropriate government agency
Thoughts to Ponder:
1. May an existence of corporation exceed 50 years?
2. What is the effect of the extension or the expiration of the term of the
coporation?
3. Can there be an automatic extension of term?
Section 12. Minimum Capital Stock
Stock corporations shall not be required to have minimum capital stock, except as
otherwise specially provided by special law.
Section 13. Contents of the Articles of Incorporation
All corporations shall file with the Commission articles of incorporation in any of the official
languages, duly signed and acknowledged or authenticated, in such form and manner as
may be allowed by the Commission, containing substantially the following matters, except
as otherwise prescribed by this Code or by special law:
(a) The name of corporation;

(b) The specific purpose or purposes
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(c) The place where the principal office

(d) The term for which the corporation is to exist, if the corporation has not elected
perpetual existence;
(e) The names, nationalities, and residence addresses of the incorporators;
(f) The number of directors or trustees which may be more than fifteen (15);
(g) The names, nationalities, and residence addresses of directors or trustees
(h) In stock ,, the amount of its ACS, number of shares into which it is divided, the par
value of each, names, nationalities, and subscribers, amount subscribed and paid by
each on the subscription, and a statement that some or all of the shares are without par
value, if applicable;
(i) If it be a non-stock corporation, the amount of its capital, the names, nationalities, and
residence addresses of the contributors, and amount contributed by each; and
(j) Such other matters consistent with law and which the incorporators may deem
necessary and convenient.
An arbitration agreement may be provided in the articles of incorporation pursuant to

Section 181 of this Code.
The Articles of incorporation and applications for amendments thereto may be filed with
the Commission in the form of an electronic document, in accordance with the
Commission's rule and regulations on electronic filing.
What should be filed with SEC?

1.) Reservation of the Corporate Name
2.) AOI and By-Laws. The BL can be filed as per Sec. 45
3.) Certificate of Authority or Favorable Recommendation from proper government
agencies as required under Sec. 16
Section 15. Amendment of Articles of Incorporation
A majority vote of the board and

at least two-thirds (2/3) of the OCS,
without prejudice to the appraisal right of dissenting stockholders in accordance with the
provisions of this Code.
The AOI of a non-stock corporation may be amended by the vote or written assent of
majority of the trustees and at least two-thirds (2/3) of the members.
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Section 16. Grounds When AOI May Be Disapproved.

1.) If the same is not compliant with the requirements of this Code:
Provided, That the Commission shall give the incorporators, directors, trustees, or officers
as reasonable time from receipt of the disapproval within which to modify the
objectionable portions of the articles or amendment.
The following are ground for such disapproval:
The AOI or any amendment thereto is not substantially in accordance with the form
prescribed herein;
(b) The purpose(s) of the corporation are patently unconstitutional, illegal, immoral or
contrary to government rules and regulations;
(c) The certification concerning the amount of capital stock subscribed and/or paid is false;
and
(d) The required % of Filipino ownership of the CS has not been complied with.
Section 17. Corporation Name. -
Corporate name shall be allowed by the Commission if:

It is not distinguishable from that already reserved or registered for the use if another
corporation, or if such name is already protected by law, rules and regulations.
A name is not distinguishable even if it contains one or more of the following:
(a) The word "corporation", "company", incorporated", "limited", "limited liability", or an

abbreviation of one if such words; and
(b) Punctuations, articles, conjunctions, contractions, prepositions, abbreviations,

different tenses, spacing, or number of the same word or phrase.
Section 18. Registration, Incorporation and Commencement of Corporation

Existence
A person or group of persons desiring to incorporate shall submit the intended corporate
name to the Commission for verification.
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If the Commission finds that the name is distinguishable from a name already reserved
or registered for the use of another corporation, not protected by law and is not contrary
to law, rules and regulation, the name shall be reserved in favor of the incorporators.
The incorporators shall then submit their articles of incorporation and bylaws to the
Commission.
If the Commission finds that the submitted documents and information are fully compliant
with the requirements of this Code, other relevant laws, rules and regulations, the
Commission shall issue the certificate of incorporation.
A private corporation organized under this Code commences its corporate existence and
juridical personality from the date the Commission issues the certificate of incorporation
Section 19. De facto Corporations
The due incorporation of any corporation claiming in good faith to be a corporation under
this Code, and its right to exercise corporate powers, shall not be inquired into collaterally
in any private suit to which such corporation may be a party.
Such inquiry may be made by the Solicitor General in a quo warranto proceeding
It is an action by the government ( Solgen) against a corporation being legally
incorporated without lawful authority so to act.
Section 20. Corporation by Estoppel
All persons who assume to act as a corporation knowing it to be without the authority to
do so shall be liable as general partners for all debts, liabilities and damages incurred or
arising as a result thereof:
Provided, however, That when any such ostensible corporation is sued on any
transaction entered by its as a corporation or on any tort committed by it as such, it shall
not be allowed to use on any its lack of corporate personality as a defense.
Anyone who assumes an obligation to an ostensible corporation as such cannot resist

performance thereof on the ground that there was in fact no corporation
Effects of Non-Use of Corporate Charter and Continuous Inoperation
If a corporation does not formally organize and commence its business within five (5) year
from the date of its incorporation, its certificate of incorporation shall be deemed revoked
as of the day following the end of the five (5)-year period.
However, if a corporation has commenced its business but subsequently becomes

inoperative for a period of at least five (5) consecutive years, the Commission may, after
due notice and hearing, place the corporation under delinquent status.
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A delinquent corporation shall have a period of two (2) years to resume operations and
comply with all requirements that the Commission shall prescribed. Upon the compliance
by the corporation, the Commission shall issue an order lifting the delinquent status.
Failure to comply shall cause the revocation of the corporation's certificate of

incorporation.
The Commission shall give reasonable notice to, and coordinate with the appropriate
regulatory agency prior to the suspension or revocation of the certificate of incorporation
of companies under their special regulatory jurisdiction.
Sec. 22 Board of Directors/ Board of Trustees and Officers
The board of directors or trustees shall exercise the corporate powers, conduct all
business, and control all properties of the corporation.
Directors shall be elected for a term of one (1) Year while trustees shall be elected for a
term not exceeding three (3) years from among the members of the corporation.
Each director and trustee shall hold office until the successor is elected and qualified.
A director who ceases to own at least one (1) share of stock or a trustee who ceases to
be a member of the corporation shall cease to be such.
The board of the following corporations vested with public interest shall have independent
directors constituting at least twenty percent (20%) of such board:
(a) Corporations covered by SRC namely: those registered with the Commission, listed
with an exchange , or with assets of at least Fifty million pesos (50,000,000.00) and
having two hundred (200) or more holders of shares, each holding at least one hundred
(100) shares of a class of its equity shares;
(b) Banks and quasi-banks, NSSLAs, pawnshops, corporations engaged in money

service business, preneed, trust and insurance companies and other financial
intermediaries; and
(c) Other corporations engaged in businesses vested with public interest similar to the
above, as may be determined by the Commission,
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An independent director is a person who, apart from shareholdings and fees received
from the corporation, is independent of management and free from any business or other
relationship which could, or could reasonably be perceived to materially interfere with the
exercise of independent judgment in carrying out the responsibilities as a director.
Independent directors must be elected by the shareholders present or entitled to vote in

absentia during the election of directors.
Independent directors shall be subject to rules and regulations governing their

qualifications, disqualifications, voting requirements, duration of term and term limit,
maximum number of board membership and other requirements that the Commission will
prescribed to strengthen their independence and align with international best practices.
Section 23. Election of Directors or Trustees
Except when the exclusive right is reserved for holders of founders' shares under Section
7 of this Code, each stockholder or member shall have the right to nominate any director
or trustee who possesses all of the qualifications and none of the disqualifications set
forth in this Code.
Either by person or by written proxy.
When so authorized in the BL, or by majority of the BOD, through remote communication
or in absentia: Provided that in Corp vested with PI, such mode may be exercised even
not in BL
A stockholder or member who participates through remote communication or in absentia,

shall be deemed present for purposes of quorum.
The election must be by ballot if requested by any voting stockholder or member.
In stock corporations, stockholders entitled to vote shall have the right to vote the number
of shares of stock standing in their own names in the stock books of the corporation at
the time fixed in the bylaws or where the bylaws are silent at the time of the election.
The said stockholder may:
(a) vote such number of shares for as many persons as there are directors to be elected;
(b) cumulate said shares and give one (1) candidate as many votes as the number of
directors to be elected multiplied by the number of shares owned; or
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(c) distribute them on the same principle among as many candidates as may be seen fit:
Provided, That the total number of votes cast shall not exceed the number of shares
owned by the stockholders as shown in the books of the corporation multiplied by the
whole number of directors to be elected:
Example: SH owns 10 shares. There are 15 BOD to be elected. The SH shall have a total
of 150 votes. He may give all his votes to one candidate or distribute among other
candidates.
However, in Non-Stock, unless otherwise provided in AOI or in the bylaws, members may
cast as many votes as there are trustees to be elected but may not cast more than one
(1) vote for one (1) candidate.
Example: 15 BOT are to be elected, a member will have a total of 15 votes but cannot
cast 2 or more votes for 1 candidate.
Nominees for directors or trustees receiving the highest number of votes shall be declared
elected.
The directors or trustees elected shall perform their duties as prescribed by law, rules of
good corporate governance, and bylaws of the corporation.
Section 24. Corporate Officers

Immediately after their election, the directors of a corporation must formally organize an
elect:
(a) a president, who must be a director;
(b) a treasurer, who must be a resident of the Philippines;
(c ) a secretary who must be a resident and a citizen of the Phils. and
(d) such other officers as may be provided in the bylaws. If the corporation is vested with
public interest, the board shall also elect compliance officer.
The same person may hold two (2) or more positions concurrently, except that no one
shall act as president and secretary or as president and treasurer at the same time, unless
otherwise allowed in this Code.
Section 26. Disqualification of Board or Officers

A person shall be disqualified from being a director, trustee or officer of any corporation
if, within five (5) years prior to the election or appointment as such, the person was:
(a) Convicted by final judgment:
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(1) Of an offense punishable by imprisonment for a period exceeding six (6) years;
(2) For violating this Code; and
(3) For violating Republic Act No. 8799, otherwise known as "The Securities Regulation
Code";
(b) Found administratively liable for any offense involving fraudulent acts; and
(c) By a foreign court or equivalent foreign regulatory authority for acts, violations or
misconduct similar to those enumerated in paragraphs (a) and (b) above.
Other disqualifications, which the Commission, the primary regulatory agency, or

Philippine Competition Commission may impose in its promotion of good corporate
governance or as a sanction in its administrative proceedings.
Sec 27. Removal of Director or Trustees
Any director or trustee of a corporation may be removed from office by:
Vote of the stockholders holding or representing at least two-thirds (2/3) of the OCS or
members,
Provided, That such removal shall take place either at a regular meeting of the corporation
or at a special meeting called for the purpose, and in either case, after previous notice to
stockholders or members of the corporation of the intention to propose such removal at
the meeting.
Vacancies in the Office of Director; Emergency Board.
Filling of Vacancies in the Board:
The replacement Director must be elected:

1.) By the SH or members- if the vacancy occurs because of:
i. Removal
ii. Expiration of Term
iii. The ground is other than removal or expiration ( e.g., death, resignation,
abandonment) where the remaining directors do not constitute a quorum;
iv. Increase in the number of directors or trustees
By the Board if the remaining directors / trustees

constitute a quorum
- cases not reserved to SH or members, like vacancies arising from resignation or death
of director or trustee
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Creation of Emergency Board Requirements:

1.) The remaining directors or trustees do not constitute a quorum
2.) There is a need for emergency action
3) The action is necessary to prevent grave, substantial, and irreparable loss or damage
to the corporation;
4.) The temporary replacement must come from the officers of the corporation
5.) The temporary replacement must be elected by unanimous vote of the remaining
directors or trustees; and
6.) Notice to the SEC within three (3) days from the creation of an EB.
Compensation of Directors or Trustees
In the absence of any provision in the bylaws fixing their compensation, the directors or
trustees shall not receive any compensation in their capacity as such, except for
reasonable per diems:
Provided, however, That the stockholders representing at least a majority of the

outstanding capital stock or majority of the members may grant directors or trustees with
compensation and approve the amount thereof at a regular or special meeting.
In no case shall the total yearly compensation of directors exceed ten percent (10%) of
the net income before income tax of the corporation during the preceding year.
Directors or trustees shall not participate in the determination of their own per diems or
compensation.
Corporations vested with public interest shall submit to their shareholders and the
Commission, an annual report of the total compensation of each of their directors or
trustees.
Liability of Directors, Trustees or Officers

(1) When directors and trustees or, in appropriate cases, the officers of the corporation:
i. vote or assent to patently unlawful acts of the corporation

ii. Act in bad faith or with gross negligence in directing the affairs of the corporation
iii. Are guilty of conflicts of interest to the prejudice of corporation, its
stockholders or members, and other persons
(2) When a director has consented to the issuance of watered stocks or who , not having
consented, but with knowledge thereof, did not forthwith file with the corporate secretary
his written objection thereto;
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(3) When the director, trustee or officer has contractually agreed os stipulated to hold
himself personally and solidarily liable with the corporation, and
4.) When a director, trustee of officer is made, by specific provisions of law, personally
liable for his corporate actions.
Dealings of Directors, Trustees or Officers with the Corporation
A contract of the corporation with one (1) or more of its directors, trustees, officers or their
spouses and relatives within the fourth civil degree of consanguinity or affinity is voidable,
at the option of such corporation, unless all the following conditions are present:
(a) The presence of such director or trustee in the board meeting in which the contract
was approved was not necessary to constitute a quorum for such meeting;
(b) The vote of such director or trustee was not necessary for the approval of the contract;
(c) The contract is fair and reasonable under the circumstances;
(d) In case of corporations vested with public interest, material contracts are approved by
at least a majority of the independent directors voting to approved the material contract;
and
(e) In case of an officer, the contract has been previously authorized by the board of
directors.
Where any of the first three (3) conditions set forth in the preceding paragraph is absent,
in the case of a contract with a director or trustee,
such contract may be ratified by the vote of the stockholders representing at least two-
thirds (2/3) of the outstanding capital stock or of at least two-thirds (2/3) of the members
in a meeting called for the purpose:
Provided, That full disclosure of the adverse interest of the directors or trustees involved
is made at such meeting and the contract is fair and reasonable under the circumstances.
Disloyalty of a Director
Where a director, by virtue of such office, acquires a business opportunity which should
belong to the corporation, thereby obtaining profits to the prejudice of such corporation,
the director must account for and refund to the latter all such profits, unless the act has
been ratified by a vote of the stockholders owning or representing at least two-thirds (2/3)
of the outstanding capital stock.
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This provision shall be applicable, notwithstanding the fact that the director risked one's
own funds in the venture.
Executive Management, and Other Special Committees

If the bylaws so provide, the board may create an executive committee composed of at
least three (3) directors.
Said committee may act, by majority of vote of all its members, on such specific matters
within the competence of the board, as may be delegated to it in the bylaws or by majority
vote of the board, except with respect to the:
(a) approval of any action for which shareholders' approval is also required;
(b) filing of vacancies in the board;
(c) amendment or repeal of bylaws or the adoption of new bylaws
(d) amendment or term is not amendable or repeatable; and
(e) distribution of cash dividends to the shareholders.
The board of directors may create special committees of temporary or permanent nature
and determine the members' term, composition, compensation, powers, and
responsibilities.
POWERS OF THE CORPORATIONS
Every corporation incorporated under this Code has the power and capacity:
(a) To sue and be sued in its corporate name;
(b) To have perpetual existence unless the certificate of incorporation provides otherwise;
(c) To adopt and use a corporate seal;
(d) To amend its articles of incorporation in accordance with the provisions of this Code;
(e) To adopt bylaws, not contrary to law, morals or public policy, and to amend or repeal
the same in accordance with this Code;
(f) In case of stock corporations, to issue or sell stocks to subscribers and to sell treasury
stocks in accordance with the provisions of this Code; and to admit members to the
corporation if it be a nonstock corporation;
(g) To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage, and
otherwise deal with such real and personal property, including securities and bonds of
other corporations, as the transaction of the lawful business of the corporation may
reasonably and necessarily require, subject to the limitations prescribed by law and the
constitution;
(h) To enter into a partnership, joint venture, merger, consolidation, or any other
commercial agreement with natural and juridical persons;
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(i) To make reasonable donations, including those for the public welfare or for hospital,
charitable, cultural, scientific, civic, or similar purposes: Provided, That no foreign
corporation shall give donations in aid of any political party or candidate or for purposes
of partisan political activity;
(Unlike the previous rule, this prohibition applies to foreign corporations only and does
not include domestic corporation)
(j) To establish pension, retirement, and other plans for the benefit of its directors,
trustees, officers, and employees; and
(k) To exercise such other powers as may be essential or necessary to carry out its
purpose or purposes as stated in the articles of incorporation.
Power to Extend or Shorten Corporate Term

A private corporation may extend or shorten its term as stated in the articles of
incorporation when:
approved by a majority vote of the board of directors or trustees, and
ratified at a meeting by the stockholders or members representing at least two-thirds
(2/3) of the outstanding capital stock or of its members.
Power to increase or Decrease Capital Stock; Incur, Create or Increase Bonded

Indebtedness
No corporation shall increase or decrease its capital stock or incur, create or increase any
bonded indebtedness unless approved by a majority vote of the board of directors and by
two-thirds (2/3) of the outstanding capital stock at a stockholders' meeting duly called for
the purpose.
Power to Deny Preemptive Right

All stockholders of a stock corporation shall enjoy preemptive right to subscribe to all
issues or disposition of shares of any class, in proportion to their respective
shareholdings, unless such right is denied by the articles of incorporation or an
amendment thereto:
Provided, That such preemptive right shall not extend to shares issued in compliance with
laws requiring stock offerings or minimum stock ownership by the public; or
to shares issued in good faith with the approval of the stockholders representing two-
thirds (2/3) of the outstanding capital stock in exchange for property needed for corporate
purposes or in payment of previously contracted debt.
Sale or Other Disposition of Assets

by a majority vote of its board of directors or trustees, sell, lease, exchange, mortgage,
pledge, or otherwise dispose of its property and assets
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A sale of all or substantially all of the corporation's properties and assets, including its
goodwill, must be authorized by the vote of stockholders representing at least two-thirds
(2/3) of the outstanding capital stock, or at least two-thirds (2/3) of the members, meeting
duly called for the purpose.
WON substantially ALL

The determination of whether or not the sale involves all or substantially all of the
corporation's properties and assets must be computed based on its net asset value, as
shown in its latest financial statements.
A sale or other disposition shall be deemed to cover substantially all the corporate
property and assets if thereby the corporation would be rendered incapable of continuing
the business or accomplishing the purpose of which it was incorporated.
Sec. 40 Power to Acquire Own Shares

Provided, That the corporation has unrestricted retained earnings in its books to cover
the shares to be purchased or acquired, a stock corporation shall have the power to
purchase or acquire its own shares for a legitimate corporate purpose or purposes,
including the following cases:
(a) To eliminate fractional shares arising out of stock dividends;
(b) To collect or compromise an indebtedness to the corporation, arising out of unpaid
subscription, in a delinquency sale, and to purchase delinquent shares sold during said
sale; and
(c) To pay dissenting or withdrawing stockholders entitled to payment for their shares
under the provisions of this Code.
Power to Invest Corporate Funds in Another Corporation or Business or for Any Other
Purpose.
A private corporation may invest its funds in any other corporation, business, or for any
purpose other than the primary purpose for which it was organized,
when approved by a majority of the board of directors or trustees and ratified by the
stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or by
at least two-thirds (2/3) of the outstanding capital stock, or by at least two-thirds (2/3) of
the members in the case of nonstock corporations at a meeting duly called for the purpose
Power to Declare Dividends

The board of directors of a stock corporation may declare dividends out of the unrestricted
retained earnings which shall be payable in cash, property, or in stock to all stockholders
on the basis of outstanding stock held by them:
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Provided, That any cash dividends due on delinquent stock shall be first be applied to the
unpaid balance on the subscription plus costs and expenses, while stock holders until
their unpaid subscription is fully paid:
Provided, further, That no stock dividend shall be issued without the approval of
stockholders representing at least two-thirds (2/3)of the outstanding capital stock at a
regular or special meeting duly called for the purpose.
Stock corporations are prohibited from restraining surplus profits in excess of one hundred
percent (100%} of their paid-in capital stock, except:
(a) when justified by the definite corporate expansion projects or programs approved by
the board of directors; or
(b) when the corporation is prohibited under any loan agreement with financial institutions
or creditors, whether local or foreign, from declaring dividends without their consent, and
such consent has not yet been secured; or
(c) when it can be clearly shown that such retention is necessary under special
circumstances obtaining in the corporation, such as when there is need for special reserve
for probable contingencies.
Power to Enter into Management Contract
No corporation shall conclude a management contract with another corporation unless

such contract is:
Approved by the board of directors and by the stockholders owning at least the majority
of the outstanding capital stock, or by at least a majority of the members in the case of a
nonstock corporation, OF BOTH the managing and the managed corporation, at a
meeting duly called for the purpose
Ultra Vires Acts of the Corporations.
No corporation shall possess or exercise corporate powers other than those conferred by
this Code or
by its articles of incorporation and except as necessary or incidental to the exercise of the
powers conferred.
BYLAWS
For the adoption of bylaws by the corporation, the affirmative vote of the stockholders
representing at least a majority of the outstanding capital stock, or of at least a majority
of the members in case on nonstock corporations, shall be necessarily
a. Signed by the SH or members voting

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b. Shall be Kept in the principal office of the corporation

c. File with the SEC and attached to the AOI.
When Filed?
bylaws maybe adopted and filed prior to incorporation; in such case, such bylaws shall
be approved and signed by all incorporators and submitted to the Commission, together
with the articles of incorporation.
In all cases, bylaws shall be effective only upon the issuance by the Commission of a
certification that the bylaws are in accordance with this Code.
The Commission shall not accept for filing the bylaws or any amendment thereto of any
bank, banking institution, building and loan association, trust company, insurance
company, public utility, educational institution, or any other corporations governed by
special laws, unless accompanied by a certificate of the appropriate government agency
to the effect that such by laws or amendments are in accordance with law.
Contents of Bylaws
(a) The time, place and manner of calling and conducting regular or special meetings of
the directors or trustees;
(b) The time and manner of calling and conducting regular or special meetings and mode
of notifying the stockholders or members thereof;
(c) The required quorum in meetings of stockholders or members and the manner of
voting therein;
(d) The modes by which a stockholder, member, director or trustees may attend meetings
and cast their votes;
(e) The form for proxies of stockholders and members and the manner of voting them;
(f) The directors' or trustees' qualifications, duties and responsibilities, the guidelines for
setting the compensation of directors or trustees and officers
(g) The time for holding the annual election of directors or trustees and the mode or
manner of giving notice thereof;
(h)The manner of election or appointment and the term of officers other than directors or
trustees;
(i) The penalties for violation of the bylaws;

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(j) In the case of stock corporations, the manner of issuing stock certificates; and
(k) Such other matters as may be necessary for the proper or convenient transaction of
its corporate affairs for the promotion of good governance and anti-graft and corruption
measures.
An arbitration agreement may be provided in the bylaws pursuant to Section 181 of this
Code .
MEETINGS
Meeting may be regular or special.
Regular meetings of stockholders or members shall be held annually on a date fixed in

the bylaws, or if not so fixed in the bylaws, or if not so fixed, on any date After April 15 of
every year as determined by the board of directors or trustees:
Provided, further, That written notice of regular meetings may be sent to all stockholders
or members of record through electronic mail or such other manner as the Commission
shall allow under its guidelines.
Place and Time of Meetings of Stockholders or Members

Stockholders' or members' meetings, whether regular or special, shall be held in the
principal office of the corporation as set forth in the articles of incorporation, or if not
practicable,
in the city or municipality where the principal office of the corporation is located:
Provided, That any city of municipality in Metro Manila, Metro Cebu, Metro Davao, and
other Metropolitan areas shall, for purposes of this section, be considered a city or
municipality.
Quorum in Meetings
- Unless otherwise provided in this Code or in the bylaws, a quorum shall consist of the
stockholders representing a majority of the outstanding capital stock or a majority of the
members in the case of nonstock corporations.
Who Shall Preside at Meetings
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The chairman or, in his absence, the president shall preside at all meetings of the
directors or trustees as well as of the stockholders or members, unless the bylaws provide
otherwise.
Voting in Case of Joint Ownership of Stock

The consent of all the co-owners shall be necessary in voting shares of stock owned
jointly by two (2) or more persons, unless there is a written proxy, signed by all the co-
owners, authorizing one (1) or some of them or any other person to vote such share or
shares:
Provided, That when the shares are owned in an "and/or" capacity by the holders thereof,
any one of the joint owners can vote said shares or appoint a proxy therefor.
Voting Right for Treasury Shares.

Treasury shares shall have no voting right as long as such shares remain in the Treasury.
Manner of Voting; Proxies.

Stockholders and members may vote in person or proxy in all meetings of stockholders
or members
When so authorized in the bylaws or by a majority of the board of directors, the

stockholders or members of corporations may also vote through remote communication
or in absentia: Provided, That the votes are received before the corporation finishes the
tally of votes.
A stockholder or member who participates through remote communication or in
absentia shall be deemed present for purposes of quorum.
Voting Trusts.
One or more stockholders of 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 five (5) years at any time:
Provided, That in the case of a voting trust specially required as a condition in a loan
agreement, said voting trust may be for a period exceeding five (5) years but shall
automatically expire upon full payment of the load. A voting trust agreement must be in
writing and notarized, and shall specify the terms and conditions thereof.
STOCKS AND STOCKHOLDERS

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.
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Pre-incorporation Subscription. - A subscription of shares in a corporation till to be

formed shall be irrevocable for a period of at least six (6) months from the date of
subscription, unless all of the other subscriber’s consent to the revocation, or the
corporation fails to incorporate within the same period or within a longer period stipulated
in the contract of subscription.
No pre-incorporation subscription may be revoked after the AOI is submitted to the

Commission.
Consideration for Stocks
Stocks shall not be issued for a consideration less than the par or issued price thereof.
Consideration for the issuance of stock may be:
(a) Actual cash paid to the corporation;
(b) Property, tangible or intangible, actually received by the corporation and necessary or
convenient for its use and lawful purposes at a fair valuation equal to the par or issued
value of the stock issued;
(d) Previously incurred indebtedness of the corporation;
(e) Amounts transferred from unrestricted retained earnings to stated capital;
(f) Outstanding shares exchanged for stocks in the event of reclassification or conversion;
(g) Shares of stock in another corporation; and/or
(h) Other generally accepted form of consideration.
Entries in Stock and Transfer Book

All stocks in the name of the SH which are alphabetically arranged;
Amount paid and unpaid on all stocks and the date of payment of any installment;
Alienation, sale or transfer; and
Other entries as the by-laws may prescribe
Liability of Directors for Watered Stocks

A director or officer of a corporation who:
(a) consents to the issuance of stocks for a consideration less than its par or issued value:
(b) consents to the issuance of stocks for the consideration other than cash, valued in
excess of its fair value; or
(c) having knowledge of the insufficient consideration, does not file written objection with
the corporate secretary, shall be liable to the corporation or its creditors, solidarily with
the stockholder concerned for the difference between the value receive at the time of
issuance of the stock and the par or issued value of the same.
Payment of Balance of Subscription

Subject to the provisions of the subscription contract, the board of directors may, at any
time, declare due and payable to the corporation unpaid subscription and may collect the
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same or such percentage thereof, in either case, with accrued interest, if any, as it may
deem necessary.
Delinquency Sale
The board of directors may, by resolution, order the sale of delinquent stock and shall
specifically state the amount due on each subscription plus all accrued interest, and the
date, time and place of the sale which shall not be less than thirty (30) days nor more
than sixty (60) days from the date the stock become delinquent.
Notice of the sale, with a copy of the resolution, shall be sent to every delinquent
stockholder either personally, by registered mail, or through other means provided in the
bylaws. The same shall be published once a week for two (2) consecutive weeks in
newspaper of general circulation in the province or city where the principal office of the
corporation is located.
When Sale May be Questioned.

No action to recover delinquent stock sold can be sustained upon the ground of
irregularity or defect in the notice of sale, or in the sale itself of the delinquent stock, unless
the party seeking to maintain such action first pays or tenders to the party holding the
sum for which the same was sold with interest from the date of sale at the legal rate. No
such action shall be maintained unless a complaint is filed within six (6) months from the
date of sale.
Court Action to Recover Unpaid Subscription.
Nothing in this Code shall prevent the corporation from collecting through court action,
the amount due on any unpaid subscription, with accrued interest, costs and expenses.
Effect of Delinquency.
No delinquent stock shall be voted for, be entitled to vote, or be represented at any
stockholder's meeting, nor shall the holder thereof be entitled to any of the rights of a
stockholder except the right to dividends in accordance with the provisions of this Code,
until and unless payment is made by the holder of such delinquent stock for the amount
due on the distribution with accrued interest, and the costs and expenses of
advertisement, if any.
Rights of Unpaid Shares, Nondelinquent

Holders of subscribed shares not fully paid which are not delinquent shall have all the
rights of a stockholder.
CORPORATE BOOKS AND RECORDS

(a) The articles of incorporation and bylaws of the corporation and all their amendments;
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(b) The current ownership structure and voting rights of the corporation, including lists of
stockholders or members group structures, intra-group relations, ownership data, and
beneficial ownership.
(c) The names and addresses of all the members of the board of directors or trustees and
the executive officers;
(d) A record of all business transactions;
(e) A record of the resolutions of the board of directors or trustees and of the stockholders
or members;
(f) Copies of the latest reportorial requirements submitted to the Commission; and
(g) The minutes of all meetings of stockholders or members, or of the board of directors
or trustees.
Right to Financial Statements.
A corporation shall furnish a stockholder or member, within ten (10) days from receipt of
their written request, its most recent financial statement, in the form and substance of the
financial reporting required by the Commission.
At the regular meeting of stockholders or members, the board of directors or trustees shall
present to such stockholders or members a financial report of the operations of the
corporation for the preceding year, which shall include financial statements, duly signed
and certified in accordance with this Code, and the rules the Commission may prescribe.
However, if the total assets or total liabilities of the corporation are less than Six hundred
thousand pesos (₱600,000.00), or such other amount as may be determined appropriate
by the Department of Finance, the financial statements may be certified under oath by
the treasurer and the president.
APPRAISAL RIGHT
SEC. 80. When the Right of Appraisal May Be Exercised. – Any stockholder of a
corporation shall have the right to dissent and demand payment of the fair value of the
shares in the following instances:
(a) In case an amendment to the articles of incorporation has the effect of changing or
restricting the rights of any stockholder or class of shares, or of authorizing preferences
in any respect superior to those of outstanding shares of any class, or of extending or
shortening the term of corporate existence;
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(b) In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all
or substantially all of the corporate property and assets as provided in this Code;
(c) In case of merger or consolidation; and
(d) In case of investment of corporate funds for any purpose other than the primary
purpose of the corporation.
SEC. 81. How Right is Exercised.

By making a written demand on the corporation for the payment of the fair value of shares
held within thirty (30) days from the date on which the vote was taken.
If the proposed corporate action is implemented, the corporation shall pay the
stockholder, upon surrender of the certificate or certificates of stock representing the
stockholder’s shares, the fair value thereof as of the day before the vote was taken,
excluding any appreciation or depreciation in anticipation of such corporate action.
NON-STOCK CORPORATION
A nonstock corporation is one where no part of its income is distributable as dividends
to its members, trustees, or officers:
Provided, That any profit which a non-stock corporation may obtain incidental 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.
SEC. 87. Purposes. – Non-stock corporations may be formed or organized for charitable,
religious, educational, professional, cultural, fraternal, literary, scientific, social, civic
service, or similar purposes, like trade, industry, agricultural and like chambers, or any
combination thereof, subject to the special provisions of this Title governing particular
classes of non-stock corporations.
MEMBERS
SEC. 88. Right to Vote. – The right of the members of any class or classes to vote may
be limited, broadened, or denied to the extent specified in the articles of incorporation or
the bylaws. Unless so limited, broadened, or denied, each member, regardless of class,
shall be entitled to one (1) vote.
Unless otherwise provided in the articles of incorporation or the bylaws, a member may
vote by proxy, in accordance with the provisions of this Code. The bylaws may likewise
authorize voting through remote communication and/or in absentia.
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SEC. 89. Non-transferability of Membership.

Membership in a nonstock corporation and all rights arising therefrom are personal and
non- transferable, unless the articles of incorporation or the by-laws otherwise provide.
Membership shall be terminated in the manner and for the causes provided in the articles
of incorporation or the by-laws
SEC. 93. Rules of Distribution.

The assets of a nonstock corporation undergoing the process of dissolution for reasons
other than those set forth in Section 139 of this Code, shall be applied and distributed as
follows:
(a) All liabilities and obligations of the corporation shall be paid, satisfied and discharged,
or adequate provision shall be made therefor;
(b) Assets held by the corporation upon a condition requiring return, transfer or
conveyance, and which condition occurs by reason of the dissolution, shall be returned,
transferred or conveyed in accordance with such requirements;
(c) Assets received and held by the corporation subject to limitations permitting their use
only for charitable, religious, benevolent, educational or similar purposes, but not held
upon a condition requiring return, transfer or conveyance by reason of the dissolution,
shall be transferred or conveyed to one (1) or more corporations, societies or
organizations engaged in activities in the Philippines substantially similar to those of the
dissolving corporation according to a plan of distribution adopted pursuant to this Chapter;
(d) Assets other than those mentioned in the preceding paragraphs, if any, shall be
distributed in accordance with the provisions of the articles of incorporation or the bylaws,
to the extent that the articles of incorporation or the bylaws, determine the distributive
rights of members, or any class or classes of members, or provide for distribution; and
(e) In any other case, assets may be distributed to such persons, societies, organizations
or corporations, whether or not organized for profit, as may be specified in a plan of
distribution adopted pursuant to this Chapter.
ONE PERSON CORPORATION
SEC. 116. One Person Corporation. –

A One Person Corporation is a corporation with a single stockholder:
Only a natural person, trust, or an estate may form a One Person Corporation.
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Banks and quasi-banks, pre-need, trust, insurance, public and publicly-listed companies,
and non-chartered GOCC may not incorporate as One Person Corporations:
Natural person who is licensed to exercise a profession may not organize as a One
Person Corporation for the purpose of exercising such profession
A One Person Corporation shall not be required to have a minimum authorized capital
stock except as otherwise provided by special law.
A One Person Corporation shall file articles of incorporation in accordance with the
requirements under Section 14 of this Code. It shall likewise substantially contain the
following:
(a) If the single stockholder is a trust or an estate, the name, nationality, and residence of
the trustee, administrator, executor, guardian, conservator, custodian,
b) Name, nationality, residence of the nominee and alternate nominee, and the extent,
coverage and limitation of the authority.
The One Person Corporation is not required to submit and file corporate by-laws.
A One Person Corporation shall indicate the letters “OPC” either below or at the end of
its corporate name. The single stockholder shall be the sole director and president of the
One Person Corporation.
Within fifteen (15) days from the issuance of its certificate of incorporation, the One
Person Corporation shall:
appoint a treasurer,
corporate secretary, and
other officers as it may deem necessary, and
notify the Commission thereof within five (5) days from appointment.
The single stockholder may not be appointed as the corporate secretary.
A single stockholder who is likewise the self- appointed treasurer of the corporation, shall
give a bond to the Commission in such a sum as may be required:
Provided, That, the said stockholder/treasurer shall undertake in writing to faithfully

administer the One Person Corporation’s funds to be received as treasurer, and to
disburse and invest the same according to the articles of incorporation as approved by
the Commission. The bond shall be renewed every two (2) years or as often as may be
required.
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SEC. 123. Special Functions of the Corporate Secretary. – In addition to the functions
designated by the One Person Corporation, the corporate secretary shall:
(a) Be responsible for maintaining the minute’s book and/or records of the corporation;
(b) Notify the nominee or alternate nominee of the death or incapacity of the single
stockholder, which notice shall be given no later than five (5) days from such occurrence;
(c) Notify the Commission of the death of the single stockholder within five (5) days from
such occurrence and stating in such notice the names, residence addresses, and contact
details of all known legal heirs; and
(d) Call the nominee or alternate nominee and the known legal heirs to a meeting and
advise the legal heirs with regard to, among others, the election of a new director,
amendment of the articles of incorporation, and other ancillary and/or consequential
matters.
The single stockholder shall designate a nominee and an alternate nominee who shall, in
the event of the single stockholder’s death or incapacity, take the place of the single
stockholder as director and shall manage the corporation’s affairs.
The articles of incorporation shall state the names, residence addresses and contact
details of the nominee and alternate nominee, as well as the extent and limitations of their
authority in managing the affairs of the One Person Corporation.
The written consent of the nominee and alternate nominee shall be attached to the
application for incorporation. Such consent may be withdrawn in writing any time before
the death or incapacity of the single stockholder
The single stockholder shall designate a nominee and an alternate nominee who shall, in
the event of the single stockholder’s death or incapacity, take the place of the single
stockholder as director and shall manage the corporation’s affairs.
The articles of incorporation shall state the names, residence addresses and contact
details of the nominee and alternate nominee, as well as the extent and limitations of their
authority in managing the affairs of the One Person Corporation.
The written consent of the nominee and alternate nominee shall be attached to the
application for incorporation. Such consent may be withdrawn in writing any time before
the death or incapacity of the single stockholder
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The alternate nominee shall sit as director and manage the One Person Corporation in
case of the nominee’s inability, incapacity, death, or refusal to discharge the functions as
director and manager of the corporation, and only for the same term and under the same
conditions applicable to the nominee.
The single stockholder may, at any time, change its nominee and alternate nominee by
submitting to the Commission the names of the new nominees and their corresponding
written consent. For this purpose, the articles of incorporation need not be amended.
A One Person Corporation shall maintain a minute’s book which shall contain all actions,
decisions, and resolutions taken by the One Person Corporation.
SEC. 128. Records in Lieu of Meetings. – When action is needed on any matter, it shall
be sufficient to prepare a written resolution, signed and dated by the single stockholder,
and recorded in the minute’s book of the One Person Corporation.
The date of recording in the minute’s book shall be deemed to be the date of the meeting
for all purposes under this Code.
SEC. 129. Reportorial Requirements. – The One Person Corporation shall submit the
following within such period as the Commission may prescribe:
(a) Annual financial statements audited by an independent certified public accountant:
Provided, That if the total assets or total liabilities of the corporation are less than Six
Hundred Thousand Pesos (P600,000.00), the financial statements shall be certified under
oath by the corporation’s treasurer and president.
(b) A report containing explanations or comments by the president on every qualification,

reservation, or adverse remark or disclaimer made by the auditor in the latter’s report;
(c) A disclosure of all self-dealings and related party transactions entered into between
the One Person Corporation and the single stockholder; and d) Other reports as the
Commission may require.
The fiscal year of a One Person Corporation shall be that set forth in its articles of
incorporation or, in the absence thereof, the calendar year. The Commission may place
the corporation under delinquent status should the corporation fail to submit the
reportorial requirements three (3) times, consecutively or intermittently, within a period of
five (5) years.
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SEC. 130. Liability of Single Shareholder. – A sole shareholder claiming limited liability
has the burden of affirmatively showing that the corporation was adequately financed.
Where the single stockholder cannot prove that the property of the One Person
Corporation is independent of the stockholder’s personal property, the stockholder shall
be jointly and severally liable for the debts and other liabilities of the One Person
Corporation. The principles of piercing the corporate veil applies with equal force to One
Person Corporations as with other corporations.
SEC. 131. Conversion from an Ordinary Corporation to a One Person Corporation.

When a single stockholder acquires all the stocks of an ordinary stock corporation, the
latter may apply for conversion into a One Person Corporation, subject to the submission
of such documents as the Commission may require. If the application for conversion is
approved, the Commission shall issue certificate of filing of amended articles of
incorporation reflecting the conversion.
The One Person Corporation converted from an ordinary stock corporation shall succeed
the latter and be legally responsible for all the latter’s outstanding liabilities as of the date
of conversion.
In case of death of the single stockholder, the nominee or alternate nominee shall transfer
the shares to the duly designated legal heir or estate within seven (7) days from receipt
of either an affidavit of heirship or self- adjudication executed by a sole heir, or any other
legal document declaring the legal heirs of the single stockholder and notify the
Commission of the transfer.
Within sixty (60) days from the transfer of the shares, the legal heirs shall notify the
Commission of their decision to either wind up and dissolve the One Person Corporation
or convert it into an ordinary stock corporation.
DISSOLUTION
SEC. 133. Methods of Dissolution. – A corporation formed or organized under the
provisions of this Code may be dissolved voluntarily or involuntarily.
Dissolution signifies the extinguishment of its franchise to be a corporation and the

termination of its corporate existence. It may vme voluntary or involuntary.
Effected by amending the Articles of Incorporation to shorten the corporate term.
SEC. 134. Voluntary Dissolution Where No Creditors are Affected. –

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If dissolution of a corporation does not prejudice the rights of any creditor having a claim
against it, the dissolution may be effected by majority vote of the board of directors or
trustees, and by a resolution adopted by the affirmative vote of the stockholders owning
at least majority of the outstanding capital stock or majority of the members of a meeting
to be held upon the call of the directors or trustees.
SEC. 135. Voluntary Dissolution Where Creditors Are Affected; Procedure and
Contents of Petition. –
The petition shall be signed by a majority of the corporation’s board of directors or
trustees,
verified by its president or secretary or one of its directors or trustees, and shall set forth
all claims and demands against it,
(2/3) votes of the outstanding capital stock or at least two-thirds (2/3) of the members at
a meeting of its stockholders or members called for that purpose.
The dissolution shall take effect only upon the issuance by the Commission of a certificate
of dissolution.
SEC. 136. Dissolution by Shortening Corporate Term. – A voluntary dissolution may

be effected by amending the articles of incorporation to shorten the corporate term
pursuant to the provisions of this Code.
A copy of the amended articles of incorporation shall be submitted to the Commission in

accordance with this Code.
In the case of expiration of corporate term, dissolution shall automatically take effect on
the day following the last day of the corporate term stated in the articles of incorporation,
without the need for the issuance by the Commission of a certificate of dissolution.
SEC. 137. Withdrawal of Request and Petition for Dissolution.
A withdrawal of the request for dissolution shall be made in writing, duly verified by any
incorporator, director, trustee, shareholder, or member and signed by the same number
of incorporators, directors, trustees, shareholders, or members necessary to request for
dissolution as set forth in the foregoing sections.
SEC. 138. Involuntary Dissolution.

A corporation may be dissolved by the Commission motu proprio or upon filing of a
verified complaint by any interested party.
The following may be grounds for dissolution of the corporation:
(a)Non-use of corporate charter
(b)Continuous in operation
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(c)Upon receipt of a lawful court order dissolving the corporation;

(d)Upon finding by final judgment that the corporation procured its incorporation through
fraud;
(e)Upon finding by final judgment that the corporation:
(1) Was created for the purpose of committing, concealing or aiding the commission of
securities violations, smuggling, tax evasion, money laundering, or graft and corrupt
practices;
(2) Committed or aided in the commission of securities violations, smuggling, tax evasion,
money laundering, or graft and corrupt practices, and its stockholders knew; and
(3) Repeatedly and knowingly tolerated the commission of graft and corrupt practices or
other fraudulent or illegal acts by its directors, trustees, officers, or employees.
If the corporation is ordered dissolved by final judgment pursuant to the grounds set forth
in subparagraph (e) hereof, its assets, after payment of its liabilities, shall, upon petition
of the Commission with the appropriate court, be forfeited in favor of the national
government. Such forfeiture shall be without prejudice to the rights of innocent
stockholders and employees for services rendered, and to the application of other penalty
or sanction under this Code or other laws.
The Commission shall give reasonable notice to, and coordinate with, the appropriate
regulatory agency prior to the involuntary dissolution of companies under their special
regulatory jurisdiction.
SEC. 139. Corporate Liquidation. –

Except for banks, which shall be covered by “New Central Bank Act,”, and the Philippine
Deposit Insurance Corporation Charter, as amended,
1. every corporation whose charter expires pursuant to its articles of incorporation,
2. is annulled by forfeiture, or
3. whose corporate existence is terminated in any other manner,
shall nevertheless remain as a body corporate for three (3) years after the effective
date of dissolution, for the purpose of prosecuting and defending suits by or against
it and enabling it to settle and close its
affairs, dispose of and convey its property, and distribute its assets, but not for the
purpose of continuing the business for which it was established.
Those responsible for keeping and maintaining corporate records, to comply with
Sections 45, 73, 92,128, 177 and other pertinent rules and provisions of this Code on
inspection and reproduction of records shall be punished with a fine ranging from Ten
thousand pesos (P10,000.00) to Two hundred thousand pesos (P200,000.00), at the
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discretion of the court, taking into consideration the seriousness of the violation and its
implications.
When the violation of this provision is injurious or detrimental to the public, the penalty is
a fine ranging from Twenty thousand pesos (P20,000.00) to Four hundred thousand
pesos (P400,000.00).The penalties imposed under this section shall be without prejudice
to the Commission’s
exercise of its contempt powers under Section 157 hereof.
SEC. 162. Willful Certification of Incomplete, Inaccurate, False, or Misleading

Statements or Reports; Penalties. – Any person who willfully certifies a report required
under this Code, knowing that the same contains incomplete, inaccurate, false, or
misleading information or statements, shall be punished with a fine ranging from Twenty
thousand pesos (P20,000.00) to Two hundred thousand pesos (P200,000.00). When the
wrongful certification is injurious or detrimental to the public, the auditor or the responsible
person may also be punished with a fine ranging from Forty thousand pesos (P40,000.00)
to Four hundred thousand pesos (P400,000.00).
SEC. 163. Independent Auditor Collusion; Penalties. – An independent auditor who,

in
collusion with the corporation’s directors or representatives, certifies the corporation’s
financial statements despite its incompleteness or inaccuracy, its failure to give a fair and
accurate presentation of the corporation’s condition, or despite containing false or
misleading statements, shall be punished with a fine ranging from Eighty thousand pesos
(P80,000.00) to Five hundred thousand pesos (P500,000.00). When the statement or
report certified is fraudulent, or has the effect of causing injury to the general public, the
auditor or responsible officer may be punished with a fine ranging from One hundred
thousand pesos (P100,000.00) to Six hundred thousand
pesos (P600,000.00).
SEC. 164. Obtaining Corporate Registration Through Fraud; Penalties. – Those

responsible for the formation of a corporation through fraud, or who assisted directly or
indirectly therein, shall be punished with a fine ranging from Two hundred thousand pesos
(P200,000.00) to Two million pesos (P2,000,000.00). When the violation of this provision
is injurious or detrimental to the public, the penalty is a fine ranging from Four hundred
thousand pesos (P400,000.00) to Five million pesos (P5,000,000.00).
SEC. 165. Fraudulent Conduct of Business; Penalties. – A corporation that conducts

its business through fraud shall be punished with a fine ranging from Two hundred
thousand pesos (P200,000.00) to Two million pesos (P2,000,000.00). When the violation
of this provision is injurious or detrimental to the public, the penalty is a fine ranging from
Four hundred thousand pesos (P400,000.00) to Five million pesos (P5,000,000.00).
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SEC. 166. Acting as Intermediaries for Graft and Corrupt Practices; Penalties. – A
corporation used for fraud, or for committing or concealing graft and corrupt practices as
defined under pertinent statutes, shall be liable for a fine ranging from One hundred
thousand pesos (P100,000.00) to Five million pesos (P5,000,000.00).
When there is a finding that any of its directors, officers, employees, agents, or
representatives are engaged in graft and corrupt practices, the corporation’s failure to
install:
(a) safeguards for the transparent and lawful delivery of services; and (b) policies,
code of ethics, and procedures against graft and corruption shall be prima facie evidence
of corporate liability under this section.
SEC. 167. Engaging Intermediaries for Graft and Corrupt Practices; Penalties. – A
corporation that appoints an intermediary who engages in graft and corrupt practices for
the corporation’s benefit or interest shall be punished with a fine ranging from One
hundred thousand pesos (P100,000.00) to One million pesos (P1,000,000.00).
SEC. 168. Tolerating Graft and Corrupt Practices; Penalties. – A director, trustee, or
officer who knowingly fails to sanction, report, or file the appropriate action with proper
agencies, allows or tolerates the graft and corrupt practices or fraudulent acts committed
by a corporation’s directors, trustees, officers, or employees shall be punished with a fine
ranging from Five hundred thousand pesos (P500,000.00) to One million pesos
(P1,000,000.00).
SEC. 169. Retaliation Against Whistleblowers. – A whistleblower refers to any person

who provides truthful information relating to the commission or possible commission of
any offense or violation under this Code. Any person who, knowingly and with intent to
retaliate, commits acts detrimental to a whistleblower such as interfering with the lawful
employment or livelihood of the whistleblower, shall, at the discretion of the court, be
punished with a fine ranging from One hundred thousand pesos (P100,000.00) to One
million pesos (P1,000,000.00).
SEC. 170. Other Violations of the Code; Separate Liability. – Violations of any of the
other provisions of this Code or its amendments not otherwise specifically penalized
therein shall be punished by a fine of not less than Ten thousand pesos (P10,000.00) but
not more than One million pesos (P1,000,000.00). If the violation is committed by a
corporation, the same may, after notice and hearing, be dissolved in appropriate
proceedings before the Commission: Provided, That such dissolution shall not preclude
the institution of appropriate action against the director, trustee, or officer of the
corporation responsible for said violation: Provided, further, That nothing in this section
shall be construed to repeal the other causes for dissolution of a corporation provided in
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this Code.
Liability for any of the foregoing offenses shall be separate from any other administrative,
civil, or criminal liability under this Code and other laws.
SEC. 171. Liability of Directors, Trustees, Officers, or Other Employees. – If the

offender is a corporation, the penalty may, at the discretion of the court, be imposed upon
such corporation and/or upon its directors, trustees, stockholders, members, officers, or
employees responsible for the violation or indispensable to its commission.
SEC. 172. Liability of Aiders and Abettors and Other Secondary Liability. – Anyone
who shall aid, abet, counsel, command, induce, or cause any violation of this Code, or
any rule, regulation, or order of the Commission shall be punished with a fine not
exceeding that imposed on the principal offenders, at the discretion of the court, after
taking into account their participation in the offense.
TITLE XVII
MISCELLANEOUS PROVISIONS
SEC. 173. Outstanding Capital Stock Defined. – The term “outstanding capital stock”,
as used in this Code, shall mean the total shares of stock issued under binding
subscription contracts to subscribers or stockholders, whether fully or partially paid,
except treasury shares.
SEC. 174. Designation of Governing Boards. – The provisions of specific provisions of

this Code to the contrary notwithstanding, nonstock or special corporations may, through
their articles of incorporation or their bylaws, designate their governing boards by any
name other than as board of trustees.
SEC. 175. Collection and Use of Registration, Incorporation and Other Fees. – For
a more effective implementation of this Code, the Commission is hereby authorized to
collect, retain, and use fees, fines, and other charges pursuant to this Code and its rules
and regulations. The amount collected shall be deposited and maintained in a separate
account which shall form a fund for its modernization and to augment its operational
expenses such as, but not limited to, capital outlay, increase in compensation and
benefits comparable with prevailing rates in the private sector, reasonable employee
allowance, employee health care services, and other insurance, employee career
advancement and professionalization, legal assistance, seminars, and other professional
fees.
SEC. 176. Stock Ownership in Corporations. – Pursuant to the duties specified by

Article XIV of the Constitution, the National Economic and Development Authority (NEDA)
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shall, from time to time, determine if the corporate vehicle has been used by any
corporation, business, or industry to frustrate the provisions of this Code or applicable
laws, and shall submit to Congress, whenever deemed necessary, a report of its findings,
including recommendations for their prevention or correction.
The Congress of the Philippines may set maximum limits for stock ownership of
individuals or groups of individuals related to each other by consanguinity, affinity, or by
close business interests, in corporations declared to be vested with public interest
pursuant to the provisions of this section, or whenever necessary to prevent anti-
competitive practices as provided in Republic
Act No. 10667, otherwise known as the “Philippine Competition Act”, or to implement
national economic policies designed to promote general welfare and economic
development, as declared in laws, rules, and regulations. In recommending to the
Congress which corporations, businesses and industries will be declared as vested with
public interest, and in formulating proposals for limitations on stock ownership, the NEDA
shall consider the type and nature of the industry, size of the enterprise, economies of
scale, geographic location, extent of Filipino ownership, labor intensity of the activity,
export potential, as well as other factors which are germane to the realization and
promotion of business and industry.
SEC. 177. Reportorial Requirements of Corporations. – Except as otherwise provided

in this Code or in the rules issued by the Commission, every corporation, domestic or
foreign, doing business in the Philippines shall submit to the Commission:
(a) Annual financial statements audited by an independent certified public accountant:
Provided, That if the total assets or total liabilities of the corporation are less than Six
hundred thousand pesos (P600,000.00), the financial statements shall be certified under
oath by the corporation’s treasurer or chief financial officer; and
(b) A general information sheet.
Corporations vested with public interest must also submit the following:
(1) A director or trustee compensation report; and
(2) A director or trustee appraisal or performance report and the standards or criteria used
to assess each director or trustee.
The reportorial requirements shall be submitted annually and within such period as may
be prescribed by the Commission.
The Commission may place the corporation under delinquent status in case of failure to
submit the reportorial requirements three (3) times, consecutively or intermittently, within
a period of five (5) years. The Commission shall give reasonable notice to and coordinate
with the appropriate regulatory agency prior to placing under delinquent status companies
under their special regulatory jurisdiction.
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Any person required to file a report with the Commission may redact confidential
information from such required report: Provided, That such confidential information shall
be filed in a supplemental report prominently labelled “confidential”, together with a
request for confidential treatment of the report and the specific grounds for the grant
thereof.
SEC. 178. Visitorial Power and Confidential Nature of Examination Results. – The
Commission shall exercise visitorial powers over all corporations, which powers shall
include the examination and inspection of records, regulation and supervision of activities,
enforcement of compliance, and imposition of sanctions in accordance with this Code.
Should the corporation, without justifiable cause, refuse or obstruct the Commission’s
exercise of its visitorial powers, the Commission may revoke its certificate of
incorporation, without prejudice to the imposition of other penalties and sanctions under
this Code.
All interrogatories propounded by the Commission and the answers thereto, as well as
the results of any examination made by the Commission or by any other official authorized
by law to make an examination of the operations, books, and records of any corporation,
shall be kept strictly confidential, except when the law requires the same to be made
public, when necessary for the Commission to take action to protect the public or to issue
orders in the exercise of its powers under this Code, or where such interrogatories,
answers or results are necessary to be presented as evidence before any court.
SEC. 179. Powers, Functions, and Jurisdiction of the Commission. – The

Commission shall have the power and authority to:
(a) Exercise supervision and jurisdiction over all corporations and persons acting on their
behalf, except as otherwise provided under this Code;
(b) Pursuant to Presidential Decree No. 902-A, retain jurisdiction over pending cases
involving intra-corporate disputes submitted for final resolution. The Commission shall
retain jurisdiction over pending suspension of payment/rehabilitation cases filed as of 30
June 2000 until finally disposed;
(c) Impose sanctions for the violation of this Code, its implementing rules and orders of
the Commission;
(d) Promote corporate governance and the protection of minority investors, though,
among others, the issuance of rules and regulations consistent with international best
practices;
(e) Issue opinions to clarify the application of laws, rules, and regulations;
(f) Issue cease and desist orders ex parte to prevent imminent fraud or injury to the public;
(g) Hold corporations in direct and indirect contempt;
(h) Issue subpoena duces tecum and summon witnesses to appear in proceedings before
the Commission;
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(i) In appropriate cases, order the examination, search and seizure of documents, papers,
files and records, and books of accounts of any entity or person under investigation as
may be necessary for the proper disposition of the cases, subject to the provisions of
existing laws;
(j) Suspend or revoke the certificate of incorporation after proper notice and hearing;
(k) Dissolve or impose sanctions on corporations, upon final court order, for committing,
aiding in the commission of, or in any manner furthering securities violations, smuggling,
tax evasion, money laundering, graft and corrupt practices, or other fraudulent or illegal
acts;
(l) Issue writs of execution and attachment to enforce payment of fees, administrative
fines, and other dues collectible under this Code;
(m) Prescribe the number of independent directors and the minimum criteria in
determining the independence of a director;
(n) Impose or recommend new modes by which a stockholder, member, director, or
trustee may attend meetings or cast their votes, as technology may allow, taking into
account the company’s scale, number of shareholders or members, structure, and other
factors consistent with the basic right of corporate suffrage;
(o) Formulate and enforce standards, guidelines, policies, rules and regulations to carry
out the provisions of this Code; and
(p) Exercise such other powers provided by law or those which may be necessary or
incidental to carrying out the powers expressly granted to the Commission.
In imposing penalties and additional monitoring and supervision requirements, the
Commission shall take into consideration the size, nature of the business, and capacity
of the corporation.
No court below the Court of Appeals shall have jurisdiction to issue a restraining order,
preliminary injunction, or preliminary mandatory injunction in any case, dispute, or
controversy that directly or indirectly interferes with the exercise of the powers, duties and
responsibilities of the Commission that falls exclusively within its jurisdiction.
SEC. 180. Development and Implementation of Electronic Filing and Monitoring

System.
– The Commission shall develop and implement an electronic filing and monitoring
system. The Commission shall promulgate rules to facilitate and expedite, among others,
corporate name reservation and registration, incorporation, submission of reports,
notices, and documents required under this Code, and sharing of pertinent information
with other government agencies.
SEC. 181. Arbitration for Corporations. – An arbitration agreement may be provided in

the articles of incorporation or bylaws of an unlisted corporation. When such an
agreement is in place, disputes between the corporation, its stockholders or members,
which arise from the implementation of the articles of incorporation or bylaws, or from
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intra-corporate relations, shall be referred to arbitration. A dispute shall be non-arbitrable

when it involves criminal offenses and interests of third parties.
The arbitration agreement shall be binding on the corporation, its directors, trustees,
officers, and executives or managers.
To be enforceable, the arbitration agreement should indicate the number of arbitrators

and the procedure for their appointment. The power to appoint the arbitrators forming the
arbitral tribunal shall be granted to a designated independent third party. Should the third
party fail to appoint the arbitrators in the manner and within the period specified in the
arbitration agreement, the parties may request the Commission to appoint the arbitrators.
In any case, arbitrators must be accredited or must belong to organizations accredited for
the purpose of arbitration. The arbitral tribunal shall have the power to rule on its own
jurisdiction and on questions relating to the validity of the arbitration agreement. When an
intra-corporate dispute is filed with a Regional Trial Court, the court shall dismiss the case
before the termination of the pretrial conference, if it determines that an arbitration
agreement is written in the corporation’s articles of incorporation, bylaws, or in a separate
agreement.
The arbitral tribunal shall have the power to grant interim measures necessary to ensure
enforcement of the award, prevent a miscarriage of justice, or otherwise protect the rights
of the parties.
A final arbitral award under this section shall be executory after the lapse of fifteen (15)
days from receipt thereof by the parties and shall be stayed only by the filing of a bond or
the issuance by the appellate court of an injunctive writ.
The Commission shall formulate the rules and regulations, which shall govern arbitration
under this section, subject to existing laws on arbitration.
SEC. 182. Jurisdiction Over Party-List Organizations. – The powers, authorities, and
responsibilities of the Commission involving party-list organizations are transferred to the
Commission on Elections (COMELEC). Within six (6) months after the effectivity of this
Act, the monitoring, supervision, and regulation of such corporations shall be deemed
automatically transferred to the COMELEC.
For this purpose, the COMELEC, in coordination with the Commission, shall promulgate
the corresponding implementing rules for the transfer of jurisdiction over the above
mentioned corporations.
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SEC. 183. Applicability of the Code. – Nothing in this law shall be construed as
amending existing provisions of special laws governing the registration, regulation,
monitoring and supervision of special corporations such as banks, non-bank financial
institutions and insurance companies.
Notwithstanding any provision to the contrary, regulators such as the Bangko Sentral ng
Pilipinas and the Insurance Commission shall exercise primary authority over special
corporations such as banks, non-bank financial institutions, and insurance companies
under their supervision and regulation.
SEC. 184. Effect of Amendment or Repeal of This Code, or the Dissolution of a

Corporation. – No right or remedy in favor of or against any corporation, its stockholders,
members, directors, trustees, or officers, nor any liability incurred by any such
corporation, stockholders, members, directors, trustees, or officers, shall be removed or
impaired either by the subsequent dissolution of said corporation or by any subsequent
amendment or repeal of this Code or of any part thereof.
SEC. 185. Applicability to Existing Corporation. – A corporation lawfully existing and

doing business in the Philippines affected by the new requirements of this Code shall be
given a period of not more than two (2) years from the effectivity of this Act within which
to comply.
SEC. 186. Separability Clause. – If any provision of this Act is declared invalid or
unconstitutional, other provisions hereof which are not affected thereby shall continue to
be in full force and effect.
SEC. 187. Repealing clause. – Batas Pambansa Blg. 68, otherwise known as “The
Corporation Code of the Philippines”, is hereby repealed. Any law, presidential decree or
issuance, executive order, letter of instruction, administrative order, rule or regulation
contrary to or inconsistent with any provision of this Act is hereby repealed or modified
accordingly.
SEC. 188. Effectivity. – This Act shall take effect upon completion of its publication in
the Official Gazette or in at least two (2) newspapers of general circulation.
This Act which is a consolidation of Senate Bill No. 1280 and House Bill No. 8374 by the
Senate and House of Representatives on November 28, 2018. Published in Manila
Bulletin and Business Mirror on February 23, 2019.
Self-Help: You can also refer to the following sources to help you further
understand the lesson.
1. The Law on Partnership and Private Corporations (2016)
Hector S. De Leon
Hector M. De Leon, Jr.
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Let’s Check
After reading all the legal terms, principles, and concepts on Corporation, let us check
your understanding of these. In the space provided, write the term/s being asked in the
following statements:
Exercise 1
Fill-In-The-Blanks
Enter the missing words in the supplied boxes, then click the grading button to compare
your responses with the suggested answers.
1. The total amount of shares that a corporation's charter authorizes it to sell is

called___________ shares.
2. The amount that must be paid to call and retire a preferred share is called
the_____________ price.
3. (CALLABLE, CONVERTIBLE, or CUMULATIVE) is the type of preferred share for

which the issuing corporation, at its option, may retire by paying a specified amount to the
preferred shareholders plus any dividends in arrears?
4. (CALLABLE, CONVERTIBLE, or CUMULATIVE) is the type of preferred share that

gives holders the option of exchanging their preferred shares into common shares at a
specified rate?
5. (CALLABLE, CONVERTIBLE, or CUMULATIVE) is the type of preferred shares for

which undeclared dividends accumulate until they are paid?
6. The general term referring to a corporation's shares used in obtaining its capital (owner
financing) is__________ stock.
7. ____________ shares are the shares of a corporation that have only one class of
shares.
8. An unpaid dividend on cumulative preferred shares is called a dividend

in____________ .
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9. Financial is the achievement of an increased return on common shares by paying

dividends on preferred shares or interest on debt at a rate that is less than the rate of
return earned with the assets invested in the corporation by the preferred shareholders
or creditors__________.
10. (NONCUMULATIVE or NONPARTICIPATING) is the type of preferred stock for

which the right to receive dividends is lost for any year that the dividends are not
declared?
11. The costs of bringing a corporation into existence is called as____________.
12. Preferred shares with a feature that allows preferred shareholders to share with
common shareholders in any dividends paid in excess of the percent stated on the
preferred share are called preferred shares is called as_______________.
13. An arbitrary value assigned to a share of stock by the corporation is

called________ value.
14. The right of common shareholders to protect their proportionate ownership in a

corporation by having the first opportunity to buy additional common shares issued by the
corporation is called a_______________ right.
15. A shareholder who does not attend a shareholder's meeting can exercise voting rights
at the meeting through the issuance of a_________________ .
16. The equity of a corporation, also called corporate capital, is called__________ equity.
17. The three dates associated with a cash dividend are the date of declaration, the date
of record, and the date of________________ .
18. A ______________ Corporation is the ordinary business corporation created and

operated for the purpose of making profit which may be distributed in the form of
dividends.
19. ________ Share is one with the specific money value fixed in the articles of
incorporation and appearing in the stock for each share of stock of the same issue.
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/Exercise II-True/False Quiz
1. Stocks may be resold by the corporation at any price the board of directors see fit
to accept, even at less that par, having once been legally issued as fully paid,
provided such price is reasonable under the circumstances
2. It is a well settled rule that when a de facto corporation actually exists, its existence
as a corporation cannot be collaterally attached or questioned by the State or the
private individuals.
3. No voting trust agreement shall be entered into for a period exceeding five (5)
years.
4. A “proxy” designates the formal written authority given by the owner or holder of
the stock, who has a right to vote it, or by a member as principal, to another person,
as agent, to exercise the voting rights of the former.
5. Stocks shall not be issued for a consideration less than the par or issued price
thereof;
6. An ultra vires act simply means an act within the conferred powers of a corporation
or the purposes for which it is created.
7. By-Laws is defined as the rules of action adopted by the corporation for its internal
regulations and for the government of its officers and of its stockholders or
members and cannot be repealed.
8. Regular meetings of Stockholders or members may be held anytime as may be
determined and scheduled.
9. Shares of stocks are considered real property of the owner who has an absolute
and inherent right to sell and transfer the same at will.
10. Appraisal right of a stockholder refers to his right to demand payment of any value
of his sharees, after approving a proposed corporate action involving a
fundamental change in the charter or articles of incorporation.
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Let’s Analyze
Problem 1
Stockholders; Appraisal Right (2007)
No.VII. In a stockholders meeting, S dissented from the corporate act converting preferred
voting shares to non-voting shares. Thereafter, S submitted his certificates of stock for
notation that his shares are dissenting. The next day, S transferred his shares are
dissenting. The next day, S transferred his shares to T to whom new certificates were
issued. Now, T demands from the corporation the payment of the value of his shares.
(10%)
(A) What is the meaning of a stockholder’s appraisal right?
(B) Can T exercise the right of appraisal? Reason briefly?
Trust Fund Doctrine (2007)

No.VI. Discuss the trust fund doctrine. (5%)
Problem 2
Dividends; Declaration of Dividends (2008)
No.XIV. Ace Cruz subscribed to 100,000 shares of stock of JP Development Corporation,
which ahs a par value of P1 per share. He paid P25,000 and promised to pay the balance
before December 31, 2008. JP Development Corporation declared a cash dividend on
October 15, 2008, payable on December 1, 2008
(A) For how many shares is Ace Cruz entitled to be paid cash dividends? Explain. (2%)
(B) On December 1, 2008, can Ace Cruz compel JP Development Corporation to issue
to him the stock certificate corresponding to the P25,000 paid by him? (2%)
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Problem 3
Piercing the Corporate Veil (2008)
No.X. Nelson owned and controlled Sonnel Construction Company. Acting for the
company, Nelson contracted the construction of a building. Without first installing a
protective net atop the sidewalks adjoining the construction site, the company proceeded
with the construction work. One day a heavy piece of lumber fell from the building. It
smashed a taxicab which at that time had gone offroad and onto the sidewalk in order to
avoid traffic. The taxicab passenger died as a result.
(A) Assume that the company had no more account and property in its name. As
counsel for the heirs of the victim, whom will you sue for damages, and what theory
will you adopt? (3%)
(B) If you were the counsel for Sonnel Construction, how would you defend your client?
What would be your theory? (2%
(C) Could the heirs hold the taxicab owner and driver liable? Explain. (2%)
Problem 4
BOD; Conflict of Interest; Ratification (2008)
No.XII. Pedro was 70% of the subscribed capital stock of a company which owns an office
building. Paolo and Juan own the remaining stock equally between them. Paolo also owns
a security agency, a janitorial company and a catering business. In behalf of the office
building company, Paolo engaged his companies to render their services to the office
building. Are the service contracts valid? Explain. (4%)
Problem 5
Formation; Enactment of a Law (2008)
No.XI. (A) Since February 8, 1935, the legislature has not passed even a single law
creating a private corporation. What provision of the Constitution precludes the passage
of such a law? (3%)
B) May the composition of the board of directors of the National Power Corporation (NPC)
be validly reduced to three (3)? Explain your answer fully. (2%)
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Problem 6
Derivative Suit; Jurisdiction (2009)
No.II. Atlantis Realty Corporation (ARC), a local firm engaged in real estate development,
plans to sell one of its prime assets—a three-hectare land valued at about P100-million.
For this purpose, the board of directors of ARC unanimously passed a resolution
approving the sale of the property for P75-million to Shangrila Real Estate Ventures
(SREV) a rival realty firm. The resolution also called for a special stockholders meeting at
which the proposed sale would be up for ratification. Atty. Edric, a stockholder who owns
only one (1) share in ARC, wants to stop the sale. He then commences a derivative suit
for and in behalf of the corporation, to enjoin the board of directors and the stockholders
from approving the sale.
(A) Can Atty. Edric, who owns only one share in the company, initiate a derivative suit?
Why or why not? (2%)
(B) If such a suit is commenced, would it constitute an intra-corporate dispute? If so, why
and where would such a suit be filed? If not, why not? (2%)
(C) Will the suit prosper? Why or why not? (3%)
Problem 7
Dividends; Declaration of Dividends (2009)
No.XVI. On September 15, 2007, XYZ Corporation issued to Paterno eight hundred
preferred shares with the ff. terms: ―The Preferred Shares shall have the ff. rights,
preferences, qualifications, and limitations, to wit: (1) The right to receive a quarterly
dividend of One per Centum cumulative and participating; (2) These shares may be
redeemed, by drawing of lots, at any time after two years from date of issue, at the option
of the Corporation; xxx Today, Paterno sues XYZ Corporation for specific performance,
for the payment of dividends on, and to compel the redemption of , the preferred shares,
under the terms and conditions provided in the stock certificates. Will the suit prosper?
Explain. (3%)
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Problem 8
Stock and Transfer Book (2009)
No.XVIII. (C) What is a stock and transfer book? (1%)
Problem 9
Stockholders; Contractual Relationship; Quorum (2009)
No.XVIII. Triple a Corporation (Triple A) was incorporated in 1960, with 500 founders’
shares and 78 common shares as its initial capital stock subscription. However, Triple A
registered its stock and transfer book only in 1978, and recorded merely 33 common
shares as the corporation’s issued and outstanding shares. (A) In 1982, Juancho, the sole
heir of one of the original incorporators filed a petition with the Securities and Exchange
Commission (SEC) for the registration of his property rights over 120 founder’s shares
and 12 common shares. The petition was supported by a copy of the Articles of
Incorporation indicating the incorporator’s initial capital stock subscription. Will the petition
be granted? Why or why not? (3%)
(B) On May 6, 1992, a special stockholders’ meeting was held. At this meeting, what
would have constituted a quorum? Explain. (3%)
Problem 10
Ultra Vires Acts (2009)
When is there an ultra vires act on the part of (a) the corporation; (b) the board of
directors; and (c) the corporate officers? (3%)
(A) the corporation;
(B) the board of directors;
(C) the corporate officers
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Problem 11
Corporation; Sole Proprietorship (2010)
No.IX. Your client Dianne approaches you for legal advice on putting up a medium-sized
restaurant business that will specialize in a novel type of cuisine. As Dianne feels that the
business is a little risky, she wonders whether she should use a corporation as the
business vehicle, or just run it as a single proprietorship. She already has an existing
corporation that is producing meat products profitably and is also considering the
alternative of simply setting up the restaurant as a branch office of the existing
corporation.
(A) Briefly explain to your client what you see as the legal advantages and disadvantages
of using a separate corporation, a single proprietorship, or a branch of an existing
corporation for the proposed restaurant business. (3%)
(B) If you advise your client to use a corporation, what officer positions must the
corporation at least have?(2%)
(C) What particular qualifications, if any, are these officers legally required to possess
under the Corporation Code? (2%)
Problem 12
BOD; Qualifications (2012)
No.VI. X is a Filipino immigrant residing in Sacramento, California. Y is a Filipino residing
in Quezon City, Philippines. Z is a resident alien residing in Makati City. GGG Corporation
is a domestic corporation - 40% owned by foreigners and 60% owned by Filipinos, with T
as authorized representative. CCC Corporation is a foreign corporation registered with
the Philippine Securities and Exchange Commission. KKK Corporation is a domestic
corporation (100%) Filipino owned. S is a Filipino, 16 years of age, arid the daughter of
Y.
(A) Who can be incorporators? Who can be subscribers? (2%)
(B) What are the differences between an incorporator and a subscriber, if there are any?
(2%)
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(C) Who are qualified to become members of the board of directors of the corporation?
(2%)
(D) Who are qualified to act as Treasurer of the company? (2%)
(E) Who can be appointed Corporate Secretary? (2%)
Problem 13
Corporation; Dissolution (2012)
No.X. AAA Corporation is a bank. The operations of AAA Corporation as a bank was not
doing well. So, to avert any bank run, AAA Corporation, with the approval of the Monetary
Board, sold all its assets and liabilities to BBB Banking Corporation which includes all
deposit accounts. In effect then, BBB Corporation will service all deposits of all depositors
of AAA Corporation.
(A) Will the sale of all assets and liabilities of AAA Corporation to BBB Banking
Corporation automatically dissolve or terminate the corporate existence of AAA
Corporation? Explain your answer. (5%)
(B) What are the legal requirements in order that a corporation may be dissolved? (5%)
Problem 14
Liabilities; BOD; Corporate Acts (2012)
No.IX. A, B, C, D, E are all duly elected members of the Board of Directors of XYZ
Corporation. F, the general manager, entered into a supply contract with an American
firm. The contract was duly approved by the Board of Directors. However, with the
knowledge and consent of F, no deliveries were made to the American firm. As a result
of the non- delivery of the promised supplies, the American firm incurred damages. The
American firm would like to file a suit for damages. Can the American firm sue:?
(A) The corporation? (2%)
(B) F, the general manager, personally, because the non-delivery was with his
knowledge and consent? (2%)
(C) Explain the rules on liabilities of a corporation for the act of its corporate officers
and the liabilities of the corporate officers and Board of Directors of a corporation acting
in behalf of the corporation. (4%)
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(D) Problem 15
Derivative Suit; Expiration of Term (2013)
No.VIII. In the November 2010 stockholders meeting of Greenville Corporation, eight (8)
directors were elected to the board. The directors assumed their posts in January 2011.
Since no stockholders meeting was held in November 2011, the eight directors served in
a holdover capacity and thus continued discharging their powers. In June 2012, two (2)
of Greenville Corporation’s directors - Director A and Director B – resigned from the board.
Relying on Section 29 of the Corporation Code, the remaining six (6) directors elected
two (2) new directors to fill in the vacancy caused by the resignation of Directors A and
B. Stockholder X questioned the election of the new directors, initially, through a letter-
complaint addressed to the board, and later (when his letter-complaint went unheeded),
through a derivative suit filed with the court. He claimed that he vacancy in the board
should be filled up by the vote of the stockholders of Greenville Corporation. Greenville
Corporation’s directors defended the legality of their action, claiming as well that
Stockholder X’s derivative suit was improper. Rule on the issues raised. (8%)
Problem 16
Stockholders; Preferred Shares (2013)
No.X. Bell Philippines, Inc. (BelPhil) is a public utility company, duly incorporated and
registered with the Securities and Exchange Commission. Its authorized capital stock
consists of voting common shares and non-voting preferred shares, with equal par values
of P100.00/share. Currently, the issued and outstanding capital stock of BelPhil consists
only of common shares shared between Bayani Cruz, a Filipino with 60% of the issued
common shares, and Bernard Fleet, a Canadian, with 40%. To secure additional working
fund, BelPhil issued preferred shares to Bernard Fleet equivalent to the currently
outstanding common shares. A suit was filed questioning the corporate action on the
ground that the foreign equity holdings in the company would now exceed the 40% foreign
equity limit allowed under the Constitution the for public utilities. Rule on the legality of
Bernard Fleet’s current holdings. (8%)
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In a Nutshell
ACTIVITY 1
After learning the legal principles and concepts of Corporation, reading the articles found
in the Self-Help, and using other resources, what do you think are the advantages and
disadvantages of Corporation? (200 words)
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
ACTIVITY 2
Do a thorough research and discuss the legality of the existence and expiration of the
franchise of ABS-CBN Corporation. Site your sources of information. (200 words)
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
Q&A LIST
1. 6.
2. 7.
3. 8.
4. 9.
5. 10.
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KEYWORDS INDEX
Corporation Foreign Corporations Subscrption
Private Corporations Quorom Watered Stock
Board of Directors Winding up Delinquency Sale
Trustees Articles of Incorporation Derivative Suit
Stock Corporation One Person Corporation Financial Statements
Capital Stock Par Value and No Par Merger
Value
Pre – Emptive Right Ultra Vires Acts Non-Stock Corporation
Dividends Voting Trust Agreement Appraisal Right
Stockholders Proxy Educational Corporation
Meetings Certificate of Stock Involuntary Dissolution
Course Schedule
This section calendars all the activities and exercises, including readings and lectures, as
well as time for making assignments and doing other requirements.

Exercise 1 BlackBoard LMS
Let’s Analyze – Problems BlackBoard LMS
1-4
Problems 5-8 BlackBoard LMS
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Activity 1 BlackBoard LMS

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Big Picture
Week 7-8 : Unit Learning Outcomes (ULO): At the end of the unit, you are expected to
F. Explain the nature and characteristics of Cooperatives and their organization.

G. Describe and contrast the different categories of Cooperatives
H. Explain the legal basis on the existence and dissolution of Cooperatives
I. Analyze the legal basis in declaring shares, capital build up and investment of
capital in Cooperatives
Big Picture in Focus: ULOa. Identify the nature and characteristics of Cooperatives.
Metalanguage
Below are the essential terms that you are going to encounter in the pursuit of ULOa:
Identify the nature and characteristics of Cooperatives. Again, you are advised to frequently refer
to these definitions to help you understand the succeeding topics. I would like to highly
recommend that you refresh your knowledge about ULOa and ULOb to understand further ULOa.
“(1) Member includes a person either natural or juridical who adhering to the principles set forth
in this Code and in the Articles of Cooperative, has been admitted by the cooperative as member;
"(2) General Assembly shall mean the full membership of the cooperative duly assembled for
the purpose of exercising all the rights and performing all the obligations pertaining to
cooperatives, as provided by this Code, its articles of cooperation and bylaws: Provided, That for
cooperatives with numerous and dispersed membership, the general assembly may be composed
of delegates elected by each sector, chapter or district of the cooperative in accordance with the
rules and regulations of the Cooperative Development Authority;
"(3) Board of Directors shall mean that body entrusted with the management of the affairs of the
cooperative under its articles of cooperation and bylaws;
"(4) Committee shall refer to anybody entrusted with specific functions and responsibilities under
the bylaws or resolution of the general assembly or the board of directors;
"(5) Articles of Cooperation means the articles of cooperation registered under this Code and
includes a registered amendment thereof;
"(6) Bylaws means the bylaws registered under this Code and includes any registered
amendment thereof;
"(7) Registration means the operative act granting juridical personality to a proposed cooperative
and is evidenced by a certificate of registration;
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"(8) Cooperative Development Authority refers to the government agency in charge of the
registration and regulation of cooperatives as such hereinafter referred to s the Authority;
"(9) Universally Accepted Principles means that body of cooperative principles adhered to
worldwide by cooperatives;
"(10) Representative Assembly means the full membership of a body of representatives elected
by each of the sectors, chapter or district o the cooperative duly assembled for the purpose of
exercising such powers lawfully delegated unto them by the general assembly in accordance with
its bylaws;
"(11) Officers of the Cooperative shall include the members of the board of directors, members
of the different committee created by the general assembly, general manager or chief executive
officer, secretary, treasurer and members holding other positions as may be provided for in their
bylaws;
"(12) Social Audit is a procedure wherein the cooperative assesses its social impact and ethical
performance vis-a-vis its stated mission, vision, goals and code of social responsibility for
cooperatives to be established by the Authority in consultation with the cooperative sector. It
enables the cooperative to develop a process whereby it can account for its social performance
and evaluate its impact in the community and be accountable for its decisions and actions to its
regular members;
"(13) Performance Audit shall refer to an audit on the efficiency and effectiveness of the
cooperative as a whole; its management and officers; and its various responsibility centers as
basis for improving individual team or overall performance and for objectively informing the
general membership on such performance;
"(14) A Single-Line or Single-Purpose Cooperative shall include cooperative undertaking

activities which are related to its main line of business or purpose;
"(15) Service Cooperatives are those which provide any type of service to its members, including
but not limited to, transport, information and communication, insurance, housing, electric, health
services, education, banking, and savings and credit;
"(16) Subsidiary Cooperative refers to any organization all or majority of whose membership or
shareholders come from a cooperative, organized for any other purpose different from that of, and
receives technical, managerial and financial assistance from, a cooperative, in accordance with
the rules and regulations of the Authority;" and
"(17) Federation of Cooperatives refers to three or more primary cooperatives, doing the same
line of business, organized at the municipal, provincial, city, special metropolitan political
subdivision, or economic zones created by law, registered with the Authority to undertake
business activities in support of its member-cooperatives."
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Essential Knowledge
PRINCIPLE OF COOPERATIVES:
"(1) Voluntary and Open Membership - Cooperatives are voluntary organizations, open to all
persons able to use their services and willing to accept the responsibilities of membership, without
gender, social, racial, cultural, political or religious discrimination.
"(2) Democrative Member Control - Cooperatives are democratic organizations that are
controlled by their members who actively participate in setting their policies and making decisions.
Men and women serving as elected representatives, directors or officers are accountable to the
membership. In primary cooperatives, members have equal voting rights of one-member, one-
vote. Cooperatives at other levels are organized in the same democratic manner.
"(3) Member Economic Participation - Members contribute equitably to, and democratically
control, the capital of their cooperatives. At least part of that capital is the common property of the
cooperative. They shall receive limited compensation or limited interest, if any, on capital
subscribed and paid as a condition of membership. Members allocate surpluses for any or all of
the following purposes: developing the cooperative by setting up reserves, part of which should
at least be indivisible; benefitting members in proportion to their partonage of the cooperative's
bubsiness; and, supporting other activities approved by the membership.
"(4) Autonomy and Independence - Cooperatives are autonomous, self-help organizations

controlled by their members. If they enter into aggreements with other organizations, including
government, or raise capital from external sources, they shall do so on terms that ensure
democratic control of their members and maintain their cooperative autonomy.
"(5) Education, Training and Information - Cooperatives shall provide education and training
for their members, elected and appointed representatives, managers, and employees, so that
they can contribute effectively and efficiently to the development of their cooperatives.
"(6) Cooperation Among Cooperatives - Cooperatives serve their members most effectively
and strengthen the cooperative movement by working together through local, national, regional
and international structures.
“(7) Concern for Community - Cooperatives work for the sustainable development of their
communities through policies approved by their members.
PURPOSES OF COOPERATIVES:
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A cooperative may be organized and registered for any or all of the following purposes:
"(1) To encourage thrift and savings mobilization among the members;
"(2) To generate funds and extend credit to the members for productive and provident purposes;
"(3) To encourage among members systematic production and marketing;
"(4) To provide goods and services and other requirements to the members;
"(5) To develop expertise and skills among its members;
"(6) To acquire lands and provide housing benefits for the members;
"(7) To insure against losses of the members;
"(8) To promote and advance the economic, social and educational status of the members;
"(9) To establish, own, lease or operate cooperative banks, cooperative wholesale and retail
complexes, insurance and agricultural/industrial processing enterprises, and public markets;
"(10) To coordinate and facilitate the activities of cooperatives;
"(11) To advocate for the cause of the cooperative movements;
"(12) To ensure the viability of cooperatives through the utilization of new technologies;
"(13) To encourage and promote self-help or self-employment as an engine for economic

growth and poverty alleviation; and
"(14) To undertake any and all other activities for the effective and efficient implementation of
the provisions of this Code.
POWERS AND CAPACITIES OF COOPERATIVES.
"(1) To the exclusive use of its registered name, to sue and be sued;
"(2) Of succession;
"(3) To amend its articles of cooperation in accordance with the provisions of this Code;
"(4) To adopt bylaws not contrary to law, morals or public policy, and to amend and repeal the
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same in accordance with this Code;
"(5) To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage, and
otherwise deal with such real and personal property as the transaction of the lawful affairs of the
cooperative may reasonably and necessarily require, subject to the limitations prescribed by law
and the Constitution;
"(6) To enter into division, merger or consolidation, as provided in this Code;
"(7) To form subsidiary cooperatives and join federations or unions, as provided in this Code;
"(8) To avail of loans, be entitled to credit and to accept and receive grants, donations and
assistance from foreign and domestic sources, subject to the conditions of said loans, credits,
grants, donations or assistance that will not undermine the autonomy of the cooperative. The
Authority, upon written request, shall provide necessary assistance in the documentary
requirements for the loans, credit, grants, donations and other financial support;
"(9) To avail of preferential rights granted to cooperatives under Republic Act No. 7160,
otherwise known as the Local Government Code, and other laws, particularly those in the grant
of franchises to establish, construct, operate and maintain ferries, wharves, markets or
slaughterhouses and to lease public utilities, including access to extension and on-site research
services and facilities related to agriculture and fishery activities;
"(10) To organize and operate schools in accordance with Republic Act No. 9155, Governance
of Basic Education Act of 2001 and other pertinent laws; and
"(11) To exercise such other powers granted by this Code or necessary to carry out its purpose
or purposes as stated in its Articles of cooperation.
TYPES AND CATEGORIES OF COOPERATIVES:
"(a) Credit Cooperative is one that promotes and undertakes savings and lending services
among its members. It generates a common pool of funds in order to provide financial assistance
to its members for productive and provident purposes;
"(b) Consumers Cooperative is one of the primary purpose of which is to procure and distribute
commodities to members and non-members;
"(c) Producers Cooperative is one that undertakes joint production whether agricultural or
industrial. It is formed and operated by its members to undertake the production and processing
of raw materials or goods produced by its members into finished or processed products for sale
by the cooperative to its members and non-members. Any end product or its derivative arising
from the raw materials produced by its members, sold in the name and for the account of the
cooperative, shall be deemed a product of the cooperative and its members;
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"(d) Marketing Cooperative is one which engages in the supply of production inputs to members
and markets their products;
"(e) Service Cooperative is one which engages in medical and dental care, hospitalization,
transportation, insurance, housing, labor, electric light and power, communication, professional
and other services;
"(f) Multipurpose Cooperative is one which combines two (2) or more of the business activities
of these different types of cooperatives;
"(g) Advocacy Cooperative is a primary cooperative which promotes and advocates

cooperativism among its members and the public through socially-oriented projects, education
and training, research and communication, and other similar activities to reach out to its intended
beneficiaries;
"(h) Agrarian Reform Cooperative is one organized by marginal farmers majority of which are
agrarian reform beneficiaries for the purpose of developing an appropriate system of land tenure,
land development, land consolidation or land management in areas covered by agrarian reform;
"(i) Cooperative Bank is one organized for the primary purpose of providing a wide range of
financial services to cooperatives and their members;
"(j) Dairy Cooperative is one whose members are engaged in the production of fresh milk which
may be processed and/or marketed as dairy products;
"(k) Education Cooperative is one organized for the primary purpose of owning and operating
licensed educational institutions notwithstanding the provisions of Republic Act No. 9155,
otherwise known as the Governance of Basic Education Act of 2001;
"(l) Electric Cooperative is one organized for the primary purposed of undertaking power
generations, utilizing renewable energy sources, including hybrid systems, acquisition and
operation of sub transmission or distribution to its household members;
"(m) Financial Service Cooperative is one organized for the primary purpose of engaging in
savings and credit services and other financial services;
"(n) Fishermen Cooperative is one organized by marginalized fishermen in localities whose

products are marketed either as fresh or processed products;
"(o) Health Services Cooperative is one organized for the primary purpose of providing medical,
dental and other health services;
"(p) Housing Cooperative is one organized to assist or provide access to housing for the benefit
of its regular members who actively participate in the savings program for housing. It is co-owned
and controlled by its members;
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"(q) Insurance Cooperative is one engaged in the business of insuring life and poverty of
cooperatives and their members;
"(r) Transport Cooperative is one which includes land and sea transportation, limited to small
vessels, as defined or classified under the Philippine maritime laws, organized under the
provisions of this Code;
"(s) Water Service Cooperative is one organized to own, operate and manage waters systems
for the provision and distribution of potable water for its members and their households;
"(t) Workers Cooperative is one organized by workers, including the self-employed, who are at
same time the members and owners of the enterprise. Its principal purpose is to provide
employment and business opportunities to its members and manage it in accordance with
cooperative principles; and
"(u) Other types of cooperative as may be determined by the Authority.
CATEGORIES OF COOPERATIVE BASED ON MEMBERSHIP

AND TERRITORIAL CONSIDERATIONS:
"(a) In terms of membership, cooperative shall be categorized into:
"(i) Primary The members of which are natural persons;
"(ii) Secondary The members of which are primaries; and
"(iii) Tertiary The members of which are secondary cooperatives; and
"(b) In terms of territory, cooperatives shall be categorized according to areas of

operations which may or may not coincide with the political subdivisions of the country.
TAX TREATMENT OF COOPERATIVES:

"ART. 60. Tax Treatment of Cooperative. - Duly registered cooperatives under this Code
which do not transact any business with non-members or the general public shall not be
subject to any taxes and fees imposed under the internal revenue laws and other tax laws.
Cooperatives not falling under this article shall be governed by the succeeding section.
"ART.61. Tax and Other Exemptions. Cooperatives transacting business with both members
and non-members shall not be subjected to tax on their transactions with members. In
relation to this, the transactions of members with the cooperative shall not be subject to any taxes
and fees, including not limited to final taxes on members' deposits and documentary tax.
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Notwithstanding the provisions of any law or regulation to the contrary, such cooperatives dealing
with nonmembers shall enjoy the following tax exemptions:
"(1) Cooperatives with accumulated reserves and undivided net savings of not more than
Ten million pesos (P10,000,000.00) shall be exempt from all national, city, provincial,
municipal or barangay taxes of whatever name and nature. Such cooperatives shall be
exempt from customs duties, advance sales or compensating taxes on their importation
of machineries, equipment and spare parts used by them and which are not available
locally a certified by the department of trade and industry (DTI). All tax free importations shall
not be sold nor the beneficial ownership thereof be transferred to any person until after five (5)
years, otherwise, the cooperative and the transferee or assignee shall be solidarity liable to pay
twice the amount of the imposed tax and / or duties.
"(2) Cooperatives with accumulated reserves and divided net savings of more than Ten
million pesos (P10,000,000.00) shall fee the following taxes at the full rate:
"(a) Income Tax - On the amount allocated for interest on capitals: Provided, That the same tax
is not consequently imposed on interest individually received by members: Provided, further, That
cooperatives regardless of classification, are exempt income tax from the date of registration with
the Authority;
"(b) Value-Added Tax On transactions with non-members: Provided, however, That

cooperatives duly registered with the Authority; are exempt from the payment of value-added tax;
subject to Sec. 109, sub-sections L, M and N of Republic Act No. 9337, the National Internal
Revenue Code, as amended: Provided, That the exempt transaction under Sec. 109 (L) shall
include sales made by cooperatives duly registered with the Authority organized and operated by
its member to undertake the production and processing of raw materials or of goods produced by
its members into finished or process products for sale by the cooperative to its members and non-
members: Provided, further, That any processed product or its derivative arising from the raw
materials produced by its members, sold in the name and for the account of the cooperative:
Provided , finally, That at least twenty-five per centum (25%) of the net income of the cooperatives
is returned to the members in the form of interest and/or patronage refunds;
"(c) All other taxes unless otherwise provided herein; and

"(d) Donations to charitable, research and educational institutions and reinvestment to
socioeconomic projects within the area of operation of the cooperative may be tax deductible.
"(3) All cooperatives, regardless of the amount of accumulated reserves and undivided net
savings shall be exempt from payment of local taxes and taxes on transactions with banks
and insurance companies: Provided, That all sales or services rendered for non-members shall
be subject to the applicable percentage taxes sales made by producers, marketing or service
cooperatives: Provided further, That nothing in this article shall preclude the examination of the
books of accounts or other accounting records of the cooperative by duly authorized internal
revenue officers for internal revenue tax purposes only, after previous authorization by the
Authority.
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"(4) In areas where there are no available notaries public, the judge, exercising his ex officio
capacity as notary public, shall render service, free of charge, to any person or group of persons
requiring the administration of oath or the acknowledgment of articles of cooperation and
instruments of loan from cooperatives not exceeding Five Hundred Thousand Pesos
(P500,000.00).
"(5) Any register of deeds shall accept for registration, free of charge, any instrument relative to a
loan made under this Code which does not exceed Two Hundred Fifty Thousand Pesos
(P250,000.00) or the deeds of title of any property acquired by the cooperative or any paper or
document drawn in connection with any action brought by the cooperative or with any court
judgment rendered in its favor or any instrument relative to a bond of any accountable officer of a
cooperative for the faithful performance of his duties and obligations.
"(6) Cooperatives shall be exempt from the payment of all court and sheriff's fees payable
to the Philippine Government for and in connection with all actions brought under this Code, or
where such actions is brought by the Authority before the court, to enforce the payment of
obligations contracted in favor of the cooperative.
"(7) All cooperatives shall be exempt from putting up a bond for bringing an appeal against the
decision of an inferior court or for seeking to set aside any third party claim: Provided, That a
certification of the Authority showing that the net assets of the cooperative are in excess of the
amount of the bond required by the court in similar cases shall be accepted by the court as a
sufficient bond.
"(8) Any security issued by cooperatives shall be exempt from the provisions of the
Securities Act provided such security shall not be speculative.
MEMBERSHIP OF COOPERATIVES:
1. A regular member is one who has complied with all the membership requirements and entitled
to all the rights and privileges of membership.
2. An associate member is one who has no right to vote nor be voted upon and shall be entitled
only to such rights and privileges as the bylaws may provide: Provided, That an associate who
meets the minimum requirements of regular membership, continues to patronize the cooperative
for two (2) years, and signifies his/her intention to remain a member shall be considered a regular
member.
"A cooperative organized by minors shall be considered a laboratory cooperative and must
be affiliated with a registered cooperative. A laboratory cooperative shall be governed by
special guidelines to be promulgated by the Authority.
PRIVILEGES OF COOPERATIVES
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"(1) Cooperatives shall enjoy the privilege of depositing their sealed cash boxes or containers,
documents or any valuable papers in the safes of the municipal or city treasurers and other
government offices free of charge, and the custodian of such articles shall issue a receipt
acknowledging the articles received duly witnessed by another person;
"(2) Cooperatives organized among government employees, notwithstanding any law or

regulation to the contrary, shall enjoy the free use of any available space in their agency,
whether owned or rented by the Government;
"(3) Cooperatives rendering special types of services and facilities such as cold storage, ice plant,
electricity, transportation, and similar services and facilities shall secure a franchise therefore, and
such cooperatives shall open their membership to all persons qualified in their areas of operation;
"(4) In areas where appropriate cooperatives exist, the preferential right to supply government
institutions and agencies rice, corn and other grains, fish and other marine products, meat,
eggs, milk, vegetables, tobacco and other agricultural commodities produced by their
members shall be granted to the cooperatives concerned;
"(5) Preferential treatment in the allocation of fertilizers, including seeds and other
agricultural inputs and implements, and in rice distribution shall be granted to
cooperatives by the appropriate government agencies;
"(6) Preferential and equitable treatment in the allocation or control of bottomries of

commercial shipping vessels in connection with the shipment of goods and products of
cooperatives;
"(7) Cooperatives and their federations, such as farm and fishery producers and suppliers, market
vendors and such other cooperatives, which have for their primary purpose the production and/or
the marketing of products from agriculture, fisheries and small entrepreneurial industries and
federations thereof, shall have preferential rights in the management of public markets and/or
lease of public market facilities, stalls or spaces: Provided, That these rights shall only be utilized
exclusively by cooperatives: Provided, further, That no cooperative forming a joint venture,
partnership or any other similar arrangement with a non-cooperative entity can utilize these rights;
"(8) Cooperatives engaged in credit services and/or federations shall be entitled to loans
credit lines, rediscounting of their loan notes, and other eligible papers with the
Development Bank of the Philippines, the Land Bank of the Philippines and other financial
institutions except the Bangko Sentral ng Pilipinas (BSP);
"The Philippine Deposit Insurance Corporation (PDIC) and other government agencies,
government-owned and controlled corporations and government financial institutions shall
provide technical assistance to registered national federations and unions of cooperatives
which have significant engagement in savings and credit operations in order for these
federations and unions to establish and/or strengthen their own autonomous cooperative
deposit insurance systems;
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"(9) A public transport service cooperative may be entitled to financing support for the
acquisition and/or maintenance of land and sea transport equipment, facilities and parts
through the program of the government financial institutions. It shall have the preferential
right to the management and operation of public terminals and ports whether land or sea
transport where the cooperative operates and on securing a franchise for active or
potential routes for the public transport;
"(10) Cooperatives transacting business with the Government of the Philippines or any of its
political subdivisions or any of its agencies or instrumentalities, including government-owned and
controlled corporations shall be exempt from prequalification bidding requirements
notwithstanding the provisions of Republic Act No.9184, otherwise known as, the
Government Procurement Act;
"(11) Cooperative shall enjoy the privilege of being represented by the provincial or city
fiscal or the Office of the Solicitor General, free of charge, except when the adverse party
is the Republic of the Philippines;
"(12) Cooperatives organized by faculty members and employees of educational

institutions shall have the preferential right in the management of the canteen and other
services related to the operation of the educational institution where they are employed:
Provided, That such services are operated within the premises of the said educational institution;
and
"(13) The appropriate housing agencies and government financial institutions shall create a
special window for financing housing projects undertaken by cooperatives, with interest
rates and terms equal to, or better than those given for socialized housing projects. This
financing shall be in the form of blanket loans or long-term wholesale loans to qualified
cooperatives, without need for individual processing.
"The Authority, in consultation with the appropriate government agencies and concerned
cooperative sector, shall issue rules and regulations on all matters concerning housing
cooperatives."
ORDER OF DISTRIBUTION OF NET SURPLUS OF COOPERATIVES:
"(1) An amount for the reserve fund which shall be at least ten per centum (10%) of net
surplus: Provided, That, in the first five (5) years of operation after registration, this amount
shall not be less than fifty per centum (50%) of the net surplus:
"(2) An amount for the education and training fund, shall not be more than ten per centum
(10%) of the net surplus. The bylaws may provide that certain fees or a portion thereof be
credited to such fund. The fund shall provide for the training, development and similar
other cooperative activities geared towards the growth of the cooperative movement:
"(3) An amount for the community development fund, which shall not be less than three
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per centum (3%) of the net surplus. The community development fund shall be used for
projects or activities that will benefit the community where the cooperative operates.
"(4) An optional fund, a land and building, and any other necessary fund the total of which
shall not exceed seven per centum (7%).
"(5) The remaining net surplus shall be made available to the members in the form of
interest on share capital not to exceed the normal rate of return our investments and
patronage refunds: Provided, That any amount remaining after the allowable interest and
the patronage refund have been deducted shall be credited to the reserve fund.
Big Picture
Week 9: Unit Learning Outcomes (ULO): At the end of the unit, you are expected to
A. Explain the nature and characteristics of FOREIGN CORPORATIONS and their

organization.
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B. Discuss and contrast the different categories of Foreign Corporations.

C. Explain the legal basis on the existence and dissolution of Foreign Corporations.
D. Analyze the legal basis in declaring shares, capital build up and investment of
capital in Cooperatives
Big Picture in Focus: ULOa. Identify the nature and characteristics of Foreign Corporations
Metalanguage
Below are the essential terms that you are going to encounter in the pursuit of ULOa:
Identify the nature and characteristics of Foreign Corporations. Again, you are advised to
frequently refer to these definitions to help you understand the succeeding topics. You may also
refer to SIM Week 4-6 on the discussion of Corporations. I would like to highly recommend that
you refresh your knowledge about ULOa and ULOb to understand further ULOa.
1. Foreign Corporation - one formed, organized or existing under laws other than those of the
Philippines’ and whose laws allow Filipino citizens and corporations to do business in its own
country or State. It shall have the right to transact business in the Philippines after obtaining
a license for that purpose in accordance with this Code and a certificate of authority from the
appropriate government agency.
2. License to Transact Business in the Philippines - License to transact business in the

Philippines is issued to the applicant corporation for the purpose or purposes specified in such
license. Upon issuance of the license, such foreign corporation may commence to transact
business in the Philippines and continue to do so for as long as it retains its authority to act as
a corporation under the laws of the country or State of its incorporation, unless such license
is sooner surrendered, revoked, suspended, or annulled in accordance with this Code or other
special laws.
3. A resident agent may be either an individual residing in the Philippines or a domestic

corporation lawfully transacting business in the Philippines.
4. Amended License – A foreign corporation authorized to transact business in the Philippines

shall obtain an amended license in the event it changes its corporate name, or desires to
pursue other or additional purposes in the Philippines.
FULL TEXT OF REPUBLIC ACT NO. 7042

(As amended by RA 8179)
AN ACT TO PROMOTE FOREIGN INVESTMENTS, PRESCRIBE THE PROCEDURES FOR

REGISTERING ENTERPRISES DOING BUSINESS IN THE PHILIPPINES, AND FOR OTHER
PURPOSES
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BE IT ENACTED BY THE SENATE AND HOUSE OF REPRESENTATIVES OF THE

PHILIPPINES IN CONGRESS ASSEMBLED:
SECTION 1. Title. – This Act shall be known as the “Foreign Investments Act of 1991”.
SEC. 2. Declaration of Policy. – It is the policy of the State to attract, promote and welcome
productive investments from foreign individuals, partnerships, corporations, and governments,
including their political subdivisions, in activities which significantly contribute to national
industrialization and socio-economic development to the extent that foreign investment is allowed
in such activity by the Constitution and relevant laws. Foreign investments shall be encouraged
in enterprises that significantly expand livelihood and employment opportunities for Filipinos;
enhance economic value of farm products; promote the welfare of Filipino consumers; expand
the scope, quality and volume of exports and their access to foreign markets; and/or transfer
relevant technologies in agriculture, industry and support services. Foreign investments shall be
welcome as a supplement to Filipino capital and technology in those enterprises serving mainly
the domestic market.
As a general rule, there are no restrictions on extent of foreign ownership of export enterprises.
In domestic market enterprises, foreigners can invest as much as one hundred percent (100%)
equity except in areas included in the negative list. Foreign owned firms catering mainly to the
domestic market shall be encouraged to undertake measures that will gradually increase Filipino
participation in their businesses by taking in Filipino partners, electing Filipinos to the board of
directors, implementing transfer of technology to Filipinos, generating more employment for the
economy and enhancing skills of Filipino workers.
SEC. 3. Definitions. – As used in this Act:

a) the term “Philippine National” shall mean a citizen of the Philippines or a domestic
partnership or association wholly owned by citizens of the Philippines; or a corporation
organized under the laws of the Philippines of which at least sixty percent (60%) of the
capital stock outstanding and entitled to vote is owned and held by citizens of the
Philippines or a corporation organized abroad and registered as doing business in the

Philippine under the Corporation Code of which one hundred percent (100%) of the capital
stock outstanding and entitled to vote is wholly owned by Filipinos or a trustee of funds for
pension or other employee retirement or separation benefits, where the trustee is a Philippine
national and at least sixty percent (60%) of the fund will accrue to the benefit of Philippine
nationals: Provided, That where a corporation and its non-Filipino stockholders own stocks in
a Securities and Exchange Commission (SEC) registered enterprise, at least sixty percent
(60%) of the capital stock outstanding and entitled to vote of each of both corporations must
be owned and held by citizens of the Philippines and at least sixty percent (60%) of the
members of the Board of Directors of each of both corporations must be citizens of the
Philippines, in order that the corporation shall be considered a Philippine national; (as
amended by R.A. 8179).
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b) the term “investment” shall mean equity participation in any enterprise organized or existing
under the laws of the Philippines;
c) the term “foreign investment” shall mean an equity investment made by a non-Philippine
national in the form of foreign exchange and/or other assets actually transferred to the Philippines
and duly registered with the Central Bank which shall assess and appraise the value of such
assets other than foreign exchange;
d) the phrase “doing business” shall include soliciting orders, service contracts, opening offices,
whether called “liaison” offices or branches; appointing representatives or distributors domiciled
in the Philippines or who in any calendar year stay in the country for a period or periods totaling
one hundred eighty (180) days or more; participating in the management, supervision or control
of any domestic business, firm, entity or corporation in the Philippines; and any other act or acts
that imply a continuity of commercial dealings or arrangements, and contemplate to that extent
the performance of acts or works, or the exercise of some of the functions normally incident to,
and in progressive prosecution of, commercial gain or of the purpose and object of the business
organization: Provided, however, That the phrase “doing business” shall not be deemed to include
mere investment as a shareholder by a foreign entity in domestic corporations duly registered to
do business, and/or the exercise of rights as such investor; nor having a nominee director or
officer to represent its interests in such corporation; nor appointing a representative or distributor
domiciled in the Philippines which transacts business in its own name and for its own account;
e) the term “export enterprise” shall mean an enterprise wherein a manufacturer, processor or
service (including tourism) enterprise exports sixty percent (60%) or more of its output, or wherein
a trader purchases products domestically and exports sixty percent (60%) or more of such
purchases;
f) the term “domestic market enterprise” shall mean an enterprise which products goods for sale,
or renders services to the domestic market entirely or if exporting a portion of its output fails to
consistency export at least sixty percent (60%) thereof; and
g) the term “Foreign Investments Negative List” or “Negative List” shall mean a list of areas of
economic activity whose foreign ownership is limited to a maximum of forty percent (40%) of the
equity capital of the enterprises engaged therein.
SEC. 4. Scope. – This Act shall not apply to banking and other financial institutions which are
governed and regulated by the General Banking Act and other laws under the supervision of the
Central Bank.
SEC. 5. Registration of Investments of Non-Philippine Nationals. – Without need of prior approval,

a non-Philippine national, as that term is defined in Section 3 a), and not otherwise disqualified
by law may, upon registration with the Securities and Exchange Commission (SEC), or with the
Bureau of Trade Regulation and Consumer Protection (BTRCP) of the Department of Trade and
Industry in the case of single proprietorships, do business as defined in Section 3 d) of this Act or
invest in a domestic enterprise up to one hundred percent (100%) of its capital, unless
participation of non-Philippine nationals in the enterprise is prohibited or limited to a smaller
percentage by existing law and/or under the provisions of this Act. The SEC or BTRCP, as the
case may be, shall not impose any limitations on the extent of foreign ownership in an enterprise
additional to those provided in this Act: Provided, however, That any enterprise seeking to avail
of incentives under the Omnibus Investment Code of 1987 must apply for registration with the
Board of Investments (BOI), which shall process such application for registration in accordance
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with the criteria for evaluation prescribed in said Code: Provided, finally, That a non-Philippine
national intending to engage in the same line of business as an existing joint venture, in which he
or his majority shareholder is a substantial partner, must disclose the fact and the names and
addresses of the partners in the existing joint venture in his application for registration with SEC.
During the transitory period as provided in Section 15 hereof, SEC shall disallow registration of
the applying non-Philippine national if the existing joint venture
enterprise, particularly the Filipino partners therein, can reasonably prove they are capable to
make the investment needed for the domestic market activities to be undertaken by the competing
applicant. Upon effectivity of this Act, SEC shall effect registration of any enterprise applying under
this Act within fifteen (15) days upon submission of completed requirements.
SEC. 6. Foreign Investment in Export Enterprises. – Foreign investment in export enterprises

whose products and services do not fall within Lists A and B of the Foreign Investment Negative
List provided under Section 8 hereof is allowed up to one hundred percent (100%) ownership.
Export enterprises which are non-Philippine nationals shall register with BOI and submit the
reports that may be required to ensure continuing compliance of the export enterprise with its
export requirement. BOI shall advise SEC or BTRCP, as the case may be, of any export enterprise
that fails to meet the export ratio requirement. The SEC or BTRCP shall thereupon order the non-
complying export enterprise to reduce its sales to the domestic market to not more than forty
percent (40%) of its total production; failure to comply with such SEC or BTRCP order, without
justifiable reason, shall subject the enterprise to cancellation of SEC or BTRCP registration,
and/or the penalties provided in Section 14 hereof.
SEC. 7. Foreign Investment in Domestic Market Enterprises. Non-Philippine nationals may own
up to one hundred percent (100%) of domestic market enterprises unless foreign ownership
therein is prohibited or limited by the Constitution existing law or the Foreign Investment Negative
List under Section 8 hereof. (As amended by R.A. 8179)
SEC. 8. List of Investment Areas Reserved to Philippine Nationals (Foreign Investment Negative
List). – The Foreign Investment Negative List shall have two (2) components lists; A, and B.
a) List A shall enumerate the areas of activities reserved to Philippine nationals by mandate of
the Constitution and specific laws.
b) List B shall contain the areas of activities and enterprises regulated pursuant to law:
1) which are defense-related activities, requiring prior clearance and authorization from
Department of National Defense (DND) to engage in such activity, such as the manufacture,
repair, storage and/or distribution of firearms, ammunition, lethal weapons, military ordinance,
explosives, pyrotechnics and similar materials; unless such manufacturing or repair activity is
specifically authorized, with a substantial export component, to a non-Philippine national by the
Secretary of National Defense; or
2) which have implications on public health and morals, such as the manufacture and distribution
of dangerous drugs; all forms of gambling; nightclubs, bars, beerhouses, dance halls; sauna and
steam bathhouses and massage clinics.
“Small and medium-sized domestic market enterprises, with paid-in equity capital less than the
equivalent two hundred thousand US dollars (US$200,000) are reserved to Philippine nationals,
provided that if: (1) they involve advanced technology as determined by the Department of
Science and Technology or (2) they employ at least fifty (50) direct employees, then a minimum
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paid-in capital of one hundred thousand US dollars (US$100,000.00) shall be allowed to non-
Philippine nationals.
Amendments to List B may be made upon recommendation of the Secretary of National Defense,
or the Secretary of Health, or the Secretary of Education, Culture and Sports, endorsed by the
NEDA, approved by the President, and promulgated by a Presidential Proclamation.
“Transitory Foreign Investment Negative List” established in Sec. 15 hereof shall be replaced at
the end of the transitory period by the first Regular Negative List to be formulated and
recommended by NEDA, following the process and criteria provided in Sections 8 of this Act. The
first Regular Negative List shall be published not later than sixty (60) days before the end of the
transitory period provided in said section, and shall become immediately effective at the end of
the transitory period. Subsequent Foreign Investment Negative Lists shall become effective fifteen
(15) days after publication in a newspaper of general circulation in the Philippines: Provided,
however, That each Foreign Investment Negative List shall be prospective in operation and shall
in no way affect foreign investment existing on the date of its publication.
“Amendments to List B after promulgation and publication of the first Regular Foreign Investment
Negative List at the end of the transitory period shall not be made more often than once every two
(2) years”. (As amended by R.A. 8179)
SEC. 9. Investment Rights of Former Natural-born Filipinos. – For the purpose of this Act, former
natural born citizens of the Philippines shall have the same investment rights of a Philippine citizen
in Cooperatives under Republic Act No. 6938, Rural Banks under Republic Act
No. 7353, Thrift Banks and Private Development Banks under Republic Act No. 7906, and
Financing Companies under Republic Act No. 5980. These rights shall not extend to activities
reserved by the Constitution, including (1) the exercise of profession; (2) in defense related
activities under Section 8 (b) hereof. Unless specifically authorized by the Secretary of National
Defense; and, (3) activities covered by Republic Act No. 1180 (Retail Trade Act). Republic Act
No. 5187 (Security Agency Act), Republic Act No. 7076 (Small Scale Mining Act), Republic Act
No. 3018. As amended (Rice and Corn Industry Act). And P.D. 449 (Cockpits Operation and
Management)”. (As amended by R.A. 8179)
SEC. 10. Other Rights of Natural Born Citizen Pursuant to the Provisions of Article XII, Section 8
of the Constitution. – Any natural born citizen who has lost his Philippine citizenship and who has
the legal capacity to enter into a contract under Philippine laws may be a transferee of a private
land up to a maximum area of five thousand (5,000) square meters in the case of urban land or
three (3) hectares in the case of rural land to be used by him for business or other purposes. In
the case of married couples, one of them may avail of the privilege herein granted: Provided, That
if both shall avail of the same, the total area acquired shall not exceed the maximum herein fixed.
In the case the transferee already owns urban or rural land for business or other purposes, he
shall still be entitled to be a transferee of additional urban or rural land for business or other
purposes which when added to those already owned by him shall not exceed the maximum areas
herein authorized.
A transferee under this Act may acquire not more than two (2) lots which should be situated in
different municipalities or cities anywhere in the Philippines: Provided, That the total land area
thereof shall not exceed five thousand (5,000) square meters in the case of urban land or three
(3) hectares in the case of rural land for use by him for business or other purposes. A transferee
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who has already acquired urban land shall be disqualified from acquiring rural land and vice
versa”. (As amended by R.A. 8179)
SEC. 11. Compliance with Environmental Standards. – All industrial enterprises regardless of
nationality of ownership shall comply with existing rules and regulations to protect and conserve
the environment and meet applicable environmental standards.
SEC. 12. Consistent Government Action. – No agency, instrumentality or political subdivision of

the Government
shall take any action in conflict with or which will nullify the provisions of this Act, or any certificate
or authority granted hereunder.
SEC. 13. Implementing Rules and Regulations. – NEDA, in consultation with BOI, SEC and other
government agencies concerned, shall issue the rules and regulations to implement this Act within
one hundred and twenty (120) days after its effectivity. A copy of such rules and regulations shall
be furnished the Congress of the Republic of the Philippines.
SEC. 14. Administrative Sanctions. – A person who violates any provision of this Act or of the
terms and conditions of registration or of the rules and regulations issued pursuant thereto, or
aids or abets in any manner any violation shall be subject to a fine not exceeding one hundred
thousand pesos (P100,000).
If the offense is committed by a juridical entity, it shall be subject to a fine in an amount not
exceeding ½ of 1% of total paid-in capital but not more than five million pesos (P5,000,000). The
president and/or officials responsible therefor shall also be subject to a fine not exceeding two
hundred thousand pesos (P200,000.00)
In addition to the foregoing, any person, firm or juridical entity involved shall be subject to forfeiture
of all benefits granted under this Act.
SEC shall have the power to impose administrative sanctions as provided herein for any violation
of this Act or its implementing rules and regulations.
SEC. 15. Transitory Provisions. – Prior to effectivity of the implementing rules and regulations of
this Act, the provisions of Book II of Executive Order 226 and its implementing rules and
regulations shall remain in force.
During the initial transitory period of thirty-six (36) months after issuance of the Rules and
Regulations to implement this Act, the Transitory Foreign Investment Negative List shall consist
of the following:
A. List A:
1. All areas of investment in which foreign ownership is limited by mandate of Constitution and
specific laws.
B. List B:
1. Manufacture, repair, storage and/or distribution of firearms, ammunition, lethal weapons,
military
ordnance, explosives, pyrotechnics and similar materials required by law to be licensed by and
under the continuing regulation of the Department of National Defense; unless such
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manufacturing or repair activity is specifically authorized, with substantial export component, to a

non-Philippine national by the Secretary of National Defense;
2. Manufacture and distribution of dangerous drugs; all forms of gambling; nightclubs, bars,
beerhouses, dance halls; sauna and steam bathhouses, massage clinics and other like activities
regulated by law because of risks they may pose to public health and morals;
3. “Small and medium-sized domestic market enterprises with paid-in equity capital less than the
equivalent of Two-hundred thousand US dollars (US$200,000.00), reserved to Philippine
nationals: Provided, That if: (1) they involve advanced technology as determined by the
Department of Science and Technology or (2) they employ at least fifty (50) direct employee, then
a minimum paid-in capital of One hundred thousand US dollars (US$100,000.00) shall be allowed
to non-Philippine nationals.
SEC. 16. Repealing Clause. – Articles forty-four (44) to fifty-six (56) of Book II of Executive Order
No. 226 are hereby repealed.
All other laws or parts of laws inconsistent with the provisions of this Act are hereby repealed or
modified accordingly.
SEC. 17. Separability Clause. – If any part or section of this Act is declared unconstitutional for
any reason whatsoever, such declaration shall not in any way affect the other parts or sections of
this Act.
SEC. 18. Effectivitiy. – This Act take effect from fifteen (15) days after approval and publication in
two (2) newspapers of general circulation in the Philippines.
Approved,
SGD. JOSE DE VENECIA, JR.,

SPEAKER OF THE HOUSE OF REPRESENTATIVES
SGD. NEPTALI A. GONZALES

PRESIDENT OF THE SENATE
FULL TEXT OF REPUBLIC ACT No. 10881
An Act Amending Investment Restrictions in Specific Laws Governing Adjustment

Companies, Lending Companies, Financing Companies and Investment Houses Cited in
the Foreign Investment Negative List and for Other Purposes
Be it enacted by the Senate and House of Representatives of the Philippine Congress Assembled:
Section 1. Declaration of Policy. - It is the policy of the State to attract and promote investments
from foreign individuals, partnerships, corporations and governments, including their political
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subdivisions, in activities that significantly contribute to industrialization, socioeconomic

development and sustainable inclusive growth.
Given the country’s development objectives and the need to increase investments to achieve
these, amending the limitations on foreign investments or participation in certain activities listed
in the Foreign Investment Negative List as provided for in specific laws, becomes necessary.
Section 2. Definition of Investment. - As used in this Act, investment shall refer to equity
participation in any enterprise organized or existing under the laws of the Philippines and duly
recorded in the Stock Transfer Book, or its equivalent, of the enterprise.
Section 3. Lifting of Nationality Requirements. - The nationality requirements for adjustment

companies as provided in Presidential Decree No. 612, investment houses as provided in
Presidential Decree No. 129, lending companies as provided in Republic Act No. 9474 and
financing companies as provided in Republic Act No. 8556 are hereby repealed, subject to the
provisions of this Act and the Constitution.
Section 4. Adjustment Companies. - Section 332 of Presidential Decree No. 612, otherwise
known as "The Insurance Code", as amended by Republic Act No. 10607, is hereby amended to
read as follows:
"Sec. 332. No person, partnership, association, or corporation shall act as an adjuster, as herein
earlier defined, unless authorized so to act by virtue of a license issued or renewed by the
Commissioner pursuant to the provisions of this Code."
Section 5. Lending Companies. - Section 6 of Republic Act No. 9474, otherwise known as the
"Lending Company Regulation Act of 2007", is hereby amended to read as follows:
"Sec. 6. Citizenship Requirements. - A lending company may be owned up to one hundred

percent (100%) by foreign nationals: Provided, However, That where the loan is secured by land,
a lending company, more than forty percent (46%) of whose capital is owned by foreign nationals,
may bid and take part in any sale of such land as a consequence of such mortgage, avail of
enforcement proceedings, take possession, and transfer their rights to qualified Philippine
nationals for a period not exceeding five (5) years from actual possession: Provided, further, That
title to said land shall not be transferred to such lending companies: Provided, finally, That
investments of a lending company shall be in accordance with the provisions of the Constitution."
Section 6. Financing Companies. - Section 6 of Republic Act o. 8556, otherwise known as the
"Financing Company Act of 1998", is hereby amended to read as follows:
"Sec. 6. Form of Organization and Capital Requirements. - Financing companies shall be

organized in the form of stock corporations, may be owned up to one hundred percent (100%) by
foreign nationals, and shall have a paid-up capital of not less than ten million pesos
(₱10,000,000.00) in case the financing company is located in Metro Manila and other first class
cities, five million pesos (₱5,000,000.00) in other classes of cities and two million five hundred
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thousand pesos (₱2,500,000.00) in municipalities: Provided, That the Securities and Exchange
Commission may adjust said minimum paid-up levels as it deems warranted by its prudential
oversight requirements and consistent with the objectives of this Act: Provided, However, That
financing companies duly existing and in operation before the effectivity of this Act shall comply
with the minimum capital requirement within one (1) year from the date of the said effectivity;
and Provided, further, That where land is concerned, the financing company shall comply with the
constitutional provision on foreign ownership of land."
Section 7. Investment Houses. - Section 5 of Presidential Decree No. 129, as amended by

Republic Act No. 8366, otherwise known as "The Investment Houses Law", is hereby amended
to read as follows:
"Sec. 5. Citizenship Requirements. - An Investment House may be owned up to one hundred

percent (100%) by foreign nationals.1âwphi1 Foreign nationals may become members of the
board of directors to the extent of the foreign participation in the equity of said enterprise."
Section 8. Regulatory Powers of the Bangko Sentral ng Pilipinas. - Nothing in this Act shall
preclude the Bangko Sentral Ng Pilipinas from exercising its powers and authorities over financing
companies, lending companies and investment houses pursuant to existing laws.
Section 9. Separability Clause. - If any of the provisions of this Act is declared invalid, the other
provisions not affected thereby shall remain in full force and effect.
Section 10. Repealing Clause. - All statutory laws, orders, issuances, rules and regulations
and/or parts thereof which are inconsistent with the provisions of this Act are hereby repealed or
modified accordingly.
Section 11. Effectivity. - This Act shall take effect fifteen (15) days after its publication in the
Official Gazette or in a newspaper of general circulation.
Approved,
FRANKLIN M. DRILON
President of the Senate
FELICIANO BELMONTE, JR.
Speaker of the House of Representatives
This Act which is a consolidation of Senate Bill No. 3023 and House Bill No. 6395 was finally
passed by the Senate and the House of Representatives on February 3, 2016 and May 23, 2016,
respectively.
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OSCAR G. YABES
Secretary of the Senate
MARILYN B. BARUA-YAP
Secretary General
House of Representatives
Approved: July 17, 2016 (Sgd.) BENIGNO S. AQUINO, III

President of the Philippines
Self-Help:
You can also refer to the following sources to help you further understand the lesson.
1. The Law on Partnership and Private Corporations (2016)

Hector S. De Leon
Hector M. De Leon, Jr.
2. https://www.cda.gov.ph/resources/issuances/philippine-cooperative-code-of-2008/republic-
act-9520
3. Official website of Securites and Exchange Commission. www.sec.gov.ph
4. Official Website of Cooperative Development Authority. www.cda.gov.ph
5. National Internal Revenue Code (NIRC) of the Philippines.
6. https://www.cda.gov.ph/resources/issuances/philippine-cooperative-code-of-2008/republic-
act-9520
7. Republic Act 7042 Foreign Investments Act
8. Republic Act 10881 Foreign Investments Liberalization Act
9. Public Service Act
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Let’s Check
After reading all the legal terms, principles, and concepts on Cooperative and Foreign
Corporations, let us check your understanding of these. In the space provided, write the term/s
being asked in the following statements:
Exercise 1 - Fill-In-The-Blanks:
1. ___________________ is one whose members are engaged in the production of fresh milk
which may be processed and/or marketed as dairy products;
2. One or more ________________authorized to transact business in the Philippines may merge

or consolidate with any domestic corporation or corporations if permitted under Philippine laws
and by the law of its incorporation
3. A _____________________ shall be allowed to foreclosure lands mortgaged to its subject to

the provisions of Republic Act No. 6657, otherwise known as Comprehensive Agrarian Reform
Law of 1988.
4. No member of primary cooperative other than cooperative itself shall own or hold more than
_______ per centum (%) of the share capital of the cooperative.
5. Any officer or employee of the __________________ shall be disqualified to be elected or

appointed to any position in a cooperative.
6. In the case of primary cooperatives, regular meetings of the board of directors shall be held at
least ______________________.
7. Within ___________ days after the issuance of the license to transact business in the
Philippines, the licensee, except foreign banking or insurance corporations, shall deposit with the
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Commission for the benefit of present and future creditors of the licensee in the Philippines,
securities satisfactory to the Commission.
8. A foreign corporation authorized to transact business in the Philippines shall obtain

an________________________ in the event it changes its corporate name, or desires to pursue
other or additional purposes in the Philippines, by submitting an application with the Commission,
favorably endorsed by the appropriate government agency in the proper cases.
9. No two (2) or more persons with relationships up to the ______________ civil degree of
consanguinity or affinity nor shall any person engaged in a business similar to that of the
cooperative nor who in any other manner has interests in conflict with the cooperative shall
serve as an appointive officer.
10. If a cooperative has not commenced business and its operation within _________ years after
the issuance of its certificate of registration or has not carried on its business for __________
consecutive years, the Authority shall send a formal notice to the said cooperative to show cause
as to its failure to operate.
Exercise II-True/False Quiz
1. A financial service cooperative is a financial organization owned and operated by its

members and authorized to provide the functions of credit cooperatives and other
cooperatives, including multipurpose cooperatives, that provide savings and credit to their
members.
2. “Cooperative means any person or of persons or organizations, unless duly registered as
a cooperative under this Code except as provided for under Article 130.
3. That an individual resident agent must be of good moral character and of sound financial
standing.
4. Every director, officer, and employee handling funds, securities or property on behalf of
any cooperative shall be covered by a surety bond to be issued for a duly registered
insurance or bonding company for the faithful performance of their respective duties and
obligations.
5. A member shall have the right to examine the records required to be kept by the
cooperative under Article 52 of this Code during reasonable hours on business days.
6. All complaints for the removal of any elected officer shall be filed with the Board Secretary.
7. Cooperatives registered under this Code may derive their capital from any or all of the
Member's share capital only.
8. Cooperatives are autonomous, self-help organizations but are uncontrolled by their
members.
9. Net surplus shall include an optional fund, a land and building, and any other necessary
fund the total of which shall not exceed ten per centum (10%).
10. An amount for the reserve fund which shall be at least twelve per centum (12%) of net
surplus.
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Let’s Analyze
Problem 1.
Discuss and Present the Order of Distribution of the Net Surplus of a Cooperative.
Problem 2.
Discuss the applicable imposable tax on Cooperatives on the following:
a. Purchase of property as main office of the cooperative.
b. Importation of machineries and equipment locally available
c. Donation to charitable institutions
d. Income Tax that should be imposed on Cooperatives.
Problem 3
Research, define and discuss the following terms. Give examples of each:
a. Resident Foreign Corporation.
b. Non – Resident Foreign Corporation
c. Philippine Branch of Foreign Corporation
d. Philippine Regional Operating Headquarters
e. Philippine Representative Office
f. Foreign Investment
g. Foreign Investment Negative List
Problem 4
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What are the requirements for Foreign Corporations to be able to legally engage business under
the Philippine Laws. What business are not allowed to be operated by Foreign Corporations.
Problem 5
Give the allowed ownership share and management of the foreign corporations on the following
businesses:
1. Mass Media
2. Finance and Banking Companies
3. Insurance and Lending Companies
4. Transportation and Communication Companies
5. Practice of Profession
In a Nutshell
ACTIVITY 1
After learning the legal principles and concepts of Cooperatives, reading the articles found in the
Self-Help, and using other resources, what do you think are the advantages and disadvantages
of establishing a Cooperative? State resources. (200 words)
ACTIVITY 2
After learning the legal principles and concepts of Foreign Corporations, reading the articles found
in the Self-Help, and using other resources, give the different kinds of Foreign Corporations
allowed to operate under the Philippine Laws and their percentage of ownership. Cite examples
and state resources. (200 words)
Q&A LIST
6. 11.
7. 12.
8. 13.
9. 14.
10. 15.
KEYWORDS INDEX
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Cooperative Foreign Corporations General Assembly
Capital Build Up Quorom Financial Services Cooperative
Share Amended License Electric Cooperative
Regular Members License to Transact Books of Cooperatives
Associate Members Resident Agents Election of Officers
Audit Residence Preferential Treatment
Net Surplus 60% Ownership Tax on Cooperatives
Dissolution Merger Articles of Incorporation
Agrarian Reform Cooperative Consolidation Investments
Cooperative Banks Insurance Foreign Investment Negative
Cooperative List
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Course Schedule
This section calendars all the activities and exercises, including readings and lectures, as well as
time for making assignments and doing other requirements.

Problems 5 BlackBoard LMS
Online Code of Conduct

1. Students are expected to abide by and honor code of conduct, and thus everyone and all
are exhorted to exercise self-management and self-regulation.
2. All students are guided by professional conduct as learners in attending On-Line Blended
Delivery (OBD) course. Any breach and violation shall be dealt with properly under existing
guidelines, specifically in Section 7 (Student Discipline) in the Student Handbook.
3. Professional conduct refers to the embodiment and exercise of the University’s Core
Values, specifically in the adherence to intellectual honesty and integrity; academic
excellence by giving due diligence in virtual class participation in all lectures and activities,
as well as fidelity in doing and submitting performance tasks and assignments; personal
discipline in complying with all deadlines; and observance of data privacy.
4. Plagiarism is a serious intellectual crime and shall be dealt with accordingly. The University
shall institute monitoring mechanisms online to detect and penalize plagiarism.
5. Students shall independently and honestly take examinations and do assignments, unless
collaboration is clearly required or permitted. Students shall not resort to dishonesty to
improve the result of their assessments (e.g. examinations, assignments).
6. Students shall not allow anyone else to access their personal LMS account. Students shall
not post or share their answers, assignment or examinations to others to further academic
fraudulence online.
7. Students are expected to exercise proper decorum in all online classes and shall submit
all assignments on time. Late submission will not be allowed.
8. By enrolling in OBD course, students agree and abide by all the provisions of the Online
Code of Conduct, as well as all the requirements and protocols in handling online courses.
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Course prepared by:
ATTY. ALNESSA THEA V. REPOLLO – UY, REB

Course Facilitator
Course reviewed by:
MARY GRACE S. SOMBILON, MSA, CPA

Program Head – BSA, BSMA
DEVZON U. PORRAS, MSA, CPA

Program Head – BSAT, BSAIS, BSIA
Approved by:
LORD EDDIE AGUILAR

Dean – College of Accounting Education
190

Physically Distanced But Academically Engaged Self-Instructional Manual (SIM) For Self-Directed Learning (SDL)

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Physically Distanced But Academically Engaged Self-Instructional Manual (SIM) For Self-Directed Learning (SDL)

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UNIVERSITY OF MINDANAO

College of Accounting Education

Program: BSA, BSIA, BSMA, BSAIS

Physically Distanced but Academically Engaged

Course/Subject: ACC 225 – Business Laws and Regulations

Name of Author: ATTY. ALNESSA THEA R. UY

THIS SIM/SDL MANUAL IS A DRAFT VERSION ONLY; NOT FOR REPRODUCTION

Course Outline Policy 2-6

Course Information 7-8

Big Picture Unit Learning Outcome (BP ULO)a: 8-10

Essential Knowledge: Partnership 8-67

Full Text: The Law on Partnership 67-95

Exercise 1: Identification 95-96

Exercise 2: True or False 97

Lets Analyze: Problems 1 & 2 98

Lets Analyze: Problems 3 to 5 99

Lets Analyze: Problem 6 100

In a Nutshell: Activity 1 100

In a Nutshell: Activity 4 102

In A Nutshell: Activity 5 103

Question and Answer List 103

Keywords Index 103

Course Schedules 104

Online Code of Conduct 104-105

Course Outline: LAW 201 – Partnership and Corporation Law

Course Coordinator: Alnessa Thea R. Uy

Areas of Concern Details

assessment tasks (exams) since this course is

Assessment Task Submission Submission of assessment tasks shall be on 3rd, 5th,

If the assessment task is done in real time through

Since this course is included in the CPA Licensure

Turnitin Submission To ensure honesty and authenticity, all assessment

Please note that academic dishonesty such as

submitted and to ensure that all the group members

Re-marking of Assessment You should request in writing addressed to the

Student Communication You are required to create a umindanao email

You can also meet the course coordinator in person

For students who have not created their student

Contact Details of the Dean Lord Eddie I. Aguilar, CPA, MBA

Contact Details of the Program Mary Grace S. Sombilon, MSA, CPA

for inquiries, you can email

Well-Being Welfare Support Ronadora E. Deala

GSTC Facebook Page:

Course Information – see/download course syllabus in the Black Board LMS

a. Assess the Nature, Elements, Characteristics, kinds of Partnership,

Partnership: An unincorporated association of two or more persons to pursue a business

Partnership liquidation: The dissolution of a business partner-ship by (1) selling non-

First, we have to define what partnership is.

It is also a status and a fiduciary relation subsisting between persons carrying on a

Requisites for Existence of Partnership

(a) there was an intention to create a partnership

Characteristics of the Contract

A. The contract is consensual, because it is perfected by mere consent, although such

B. There must be contribution to a common fund

For critical thinking: True or False?

a. A promissory note evidencing collectible may be contributed to a common

C. The object must be a lawful one.

D. There must be an intention of dividing the profit among the partners

Partnership’ Distinguished from ‘Business Trusts’

Partnership’ Distinguished from ‘Agency’

In a contract of agency, "a person binds himself to render some service or

Out of the above given principles, sprung the creation an acceptance of

Partnership’ Distinguished from a ‘Joint Adventure’ (or JOINT ACCOUNTS)