Professional Documents
Culture Documents
You had your first encounter with partnerships as a type of business organization in
ACCT 1026, or in your FAR course in your very first semester here in the BS
Accountancy/BS Management Accounting Program. In that course, you were
introduced to the life of a partnership (Formation, Operations, Dissolution, Liquidation),
and how to account for each part of a partnership’s life.
You will discover that the rules you have learned in ACCT 1026 are derived from the
Civil Code, particularly Articles 1767 to 1867, which provides for the Law on
Partnership. It’s understandable that at this point, you might have a limited knowledge
about Partnerships, because the situations presented in ACCT 1026 were also limited.
In this course, as many scenarios as can be possibly covered (considering the time
we have) related to Partnerships will be taken up.
Therefore, although limited, you already possess knowledge on Partnerships. That
little knowledge will now be the foundation upon which we will build further knowledge
on Partnerships. It would be of a great advantage if you would be able to recall basic
principles in obligations and contracts in as much as partnership is a contract and
parties including the partnership obligations are govern by contract law.
In this semester also, particularly in TAXN 1016, you will learn about how partnerships
are taxed. Therefore, it is important that Article 1767 must be learned by heart, as this
will be the key to understanding Taxation for Partnerships.
This lesson will cover the General Provisions (Articles 1767 to 1783) of the
Partnership Law. Included in this would be discussions on the characteristics of a
partnership, its kinds, and many more.
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Brief Background:
The Law on Partnership did not come out of nowhere. The practice of partnership and
subsequent formulation of the law goes way back in ancient history. The earliest form
of conducting business was the single entrepreneur ownership plan whereby one
individual owned the business, had sole control of the same, reaped all the profits,
and suffered all the losses. Under this system, the growth of an individual business
was limited, owing especially to the limitation of capital and sometimes also to the
limitation of skill or knowledge. To permit combinations of capital, or capital and
experience, and to secure economy by eliminating some of the overhead costs of
individual enterprises, the partnership plan of business association was developed.
The partnership may be traced back to ancient history. (De Leon, 2013 The Law on
Partnerships and Private Corporations, citing T.S. Kerr, Business Law: Principles and
Cases, 2nd ed.)
The Law on Partnership found in the Civil Code of the Philippines (Art. 1767-1867) is
not something original to the Philippine Legal System. Our Laws on Partnership were
mostly taken, with or without modifications, from the old Civil Code which is Spanish
Law in origin and from two American statutes, namely: the Uniform Partnership Act
and the Uniform Limited Partnership Act. Thus, it has to be made clear that when we
study and understand our Law on Partnership, reference has to be made with these
Spanish as well as American laws.
Definition of Partnership
The definition of partnership (Article 1767) contains two paragraphs:
• 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.
These two paragraphs define the two types of partnerships: Ordinary Business
Partnerships (OBP), and General Professional Partnerships (GPP). These two types
differ on the purpose of forming a partnership.
The first paragraph describes Ordinary Business Partnerships (OBP). These
partnerships are formed to generate profits. Examples of Ordinary Business
Partnerships are as follows:
• Google: Sergey Brin and Larry Page took a small search engine over a
decade ago and turned it into the leading search engine in the entire world. Including
several billion dollars in sales, having a combined ownership of 16% of their company
gives them a total net worth of 46 Billion dollars.
• Twitter: Founded by Evan Williams, Biz Stone, and Jack Dorsey, Twitter is an
excellent example of successful business partnerships. In less than 3 years, these
individuals managed to grow Twitter from the sound a bird makes to an incredible
industry where over 63% of the brands in the world signing on to use it. From the
surface of the earth to the bottom of the oceans and even in orbit, Tweets are being
sent and received across the planet.
• Microsoft: Bill Gates and Paul Allen represent another powerful business
partnership that helped to revolutionize computing. With a wide range of products,
services, and patents, Microsoft is one of the most valuable companies in the world.
• Apple: Steve Job and Steve Wozniak worked together to bring the Apple line
of products to consumers around the world. Starting small and going through a
number of challenging hurtles, both Steve’s are examples of what can be
accomplished with a bold and innovate idea.
• Hewlett-Packard (HP): Bill Hewlett and Dave Packard helped lend their name
to this iconic company. Following the tradition of being founded in a small garage,
Hewlett Packard has since expanded and now produces hardware and software for
agencies and individuals alike.
• McDonald’s: Started by Richard and Maurice McDonald in 1940, McDonald’s
was first a barbeque stand. Later transitioning to hamburgers in 1948, McDonald’s
has seen exploded onto a global stage.
• Ben & Jerry’s: Ben Cohen and Jerry Greenfield managed to make annual
sales of greater than 4 million dollars after less than 5 years in operation. Since 1978,
Ben & Jerry’s has grown incredibly to include an annual profit of $326 million in 2000.
With a strong emphasis on charitable giving and moral business operations, Ben &
Jerry continue to pioneer both flavor types and ethical business practices.
• Warner Brothers: Founded in Culver City California by Sam, Jack, Albert, and
Harry Warner, the Warner Brothers company took some time to find its niche. Starting
with direct distribution of media, the brothers soon switched to production when they
found how much more lucrative it was. Now they are linked with some of the most
iconic movies of our time.
The second paragraph describes a General Professional Partnership (GPP). Notice
that the word “profit” is not found in the second paragraph. This is because in this type
of partnership, the primary reason for forming the partnership is the exercise of
a common profession. Profits will only be incidental.
Our profession, CPA, is one that usually forms GPPs to practice the profession. Some
notable examples are:
• SyCip, Gorres, Velayo, and company (SGV & Co.): The largest accounting
firm in the Philippines is founded in 1946 by Washington SyCip, Alfredo Velayo, and
Vicente Jose, and merged with Henry, Hunter, Bayne and company (which was sold
to Arsenio Reyes and Ramon Gorres) in the 1950s. It now employs 3,000
professionals, mostly CPAs, and is the only ISO 9002-certified professional services
firm in the country.
• Punongbayan and Araullo (P&A Grant Thornton): Benjamin Punongbayan
was a senior partner at SGV & Co. when he left the firm in 1988 to form P&A with
Jose Araullo, a banker. The clientele of P&A Grant Thornton consists of privately
owned enterprises, listed companies, and public sector organizations. These
organizations go to the well-known firm for its “global scale, quality, industry insight,
and deep technical expertise.”
The legal profession is another profession that forms partnerships to exercise their
profession. Notable examples are ACCRA Law, Divina Law, Quisumbing Torres,
and SyCip Salazar Hernandez and Gatmaitan.
This distinction between OBPs and GPPs will be important in your study of how
Partnerships are taxed, which you will learn in your TAXN 1016 course.
Characteristics of Partnership
From the definition of partnership as provided by Article 1767, we can extract the
characteristics of partnerships which are basically also found in contracts, which are:
• Consensual – You have learned about contracts in your first law course
(LAWS 1013), and you have also learned that a contract is a meeting of minds of the
contracting parties. A partnership, aside from being a type of business organization, is
also a contract. A partnership is perfected by mere consent. This is because of the
principle of delectus personae (literally, “choice of the person”) or delectus
personarum (plural) wherein each partner is entitled to exercise their choice and
preference of partners.
• Principal – Principal contracts, as you have learned last school year, are
those that can stand by itself, without dependence on other contracts for validity or
existence.
• Bilateral – Bilateral contracts are those wherein all parties are required to give
or do something. A partner will contribute money, property or industry, and in return,
he expects to receive the share of profits from partnership operations. Also, the
persons entering the partnership have rights and obligations that are reciprocal to
each other.
• Nominate – Nominate contracts are those that have a name. This contract
has a name, “Partnership”.
• Preparatory – Preparatory contracts are those that used as a means of
entering another contract. If a partnership is hired to audit the financial statements of
another company, that is another contract (an audit engagement) which the
partnership would not have been able to enter into without forming a partnership first.
• Onerous – The contract of partnership is an onerous one because the parties
have to give up something, which is generally the money, property, or industry that
they will contribute.
Essential requisites of partnership
• There must be a valid contract. For the contract of partnership to be valid,
the essential elements of a contract (consent, object, and cause) must be present.
• There must be a mutual contribution of money property, or industry to a
common fund. There is no limit on the monetary contribution; the property to be
contributed may be tangible (may be real or personal) or intangible. Industry may be
physical or intellectual.
• It must have a lawful object or purpose. As you already know, a contract
must have the essential elements present for it to be valid. If any one of these
essential elements is missing, the contract is void. The object of the contract of
partnership must be lawful. Otherwise, it is void.
• The partnership must be established for the common benefit or interest
of the partners. The purpose of an OBP is for the generation of profit, and the
partnership must be established for that purpose, and all partners must share in the
profit generated. Any stipulation that excludes a partner from profit sharing is void. For
GPPs, the primary purpose is the exercise of a common profession. A lawyer,
physician, CPA, and engineer cannot together form a GPP, because only one of them
will be able to practice his profession, which is in his interest, but not of the other
three.
Kinds of partnership
Kinds of partners
a. As to liability
1. General – liable even beyond his contributions to the partnership (i.e.
separate properties)
2. Limited – liable only up to the extent of his capital contributions
b. As to contribution
1. Capitalist – one who contributes money and/or property only
2. Industrialist – one who contributes industry only
3. Capitalist-industrialist – one who contributes money and/or property,
and industry
c. Others
1. Managing – one who manages the affairs of the partnership
2. Liquidating – one who takes charge of liquidating the partnership
3. Nominal – not actually a partner, but may be liable as such to third
persons
4. Ostensible – known to the public as a partner because he allowed his
name to be used as part of the partnership name.
5. Secret – actually a partner, but that fact is hidden to the public
6. Silent – also an actual partner, but does not participate in the
management of the business (only receives his share in the profits and losses)
7. Dormant – does not participate in the management of the business,
and his being a partner is also hidden from public knowledge.
.
2. To maintain the trust and confidence given unto him by his partners (fiduciary duty)
As mentioned in Lesson #1, a partnership is built on trust, and therefore each partner
must observe the utmost good faith, fairness, and integrity in his dealings with the
other partners. Each partner cannot:
.
1.
a. directly or indirectly use partnership assets for his own benefit;
b. carry on a business of the partnership for his private
advantage;
c. take any profit secretly;
d. obtain for himself anything that he should have obtained for the
partnership (e.g. business opportunity)
e. carry on another business in competition with the partnership;
he cannot avail himself of knowledge or information which may be properly regarded
as the property of the partnership
Obligation of managing partners who collects debt from person who also
owed the partnership (in cases where there are at least 2 debts, one where
the collecting partner is creditor and the other, where the partnership is the
creditor; where both debts are demandable; and where the partner who
collects is authorized to manage and actually manages the partnership)
•
o
• Apply sum collected to 2 credits in proportion to their amounts
• If he received it for the account of partnership, the whole sum
shall be applied to partnership credit
Article 1767
Obligations arise from: law, contracts, quasi contract, quasi delicts and acts or
omission punished by law. (article 1157)
Article 1159 – obligations arising from contracts have the force of law between
the contracting parties and should be complied with in good faith.
1. How created
P- VOLUNTARY agreement of parties
C – created by the state in the form of special charter or by a general
enabling law
3. Liability to stranger
p- may be liable with their private property beyond their contribution to
the firm
c- liable only for the payment of their subscribed capital stock
4. Transferability of interest
p- even if a partner transfers his interest to another, the transferee does
not become a partner unless all other partners consent
c- a transfer of interest makes the transferee a stockholder even without
the consent of the others
6. Mismanagement
P - a partner can sue a partner who mismanages
C – a stockholder cannot sue a member of the board of directors who
mismanages; the action must be in the name of the corporation
7. Nationality
P - a partnership is a national of the country it was created
C – national of the country under whose laws it was incorporated
9. Dissolution
P – death, retirement, insolvency, civil interdiction, or insanity of a
partner dissolves the firm
C – such causes do not dissolves a corporation
Article 1768
Article 1772
Q: now then suppose this requirement has not been complied with, is the
partnership still a juridical person, assuming that all other requisites are
present? Yes, by the express provision of Art 1768
1. Its juridical personality is separate and distinct from that of each of the
parners;
2. The partnership can, in general
i. Acquire and possess property of all kinds (CC Art 46)
ii. Incur obligations (CC Art 46)
iii. Bring civil and criminal actions (CC Art 46)
iv. Can be adjudged insolvent even if the individual members be each
financially solvent
v. Unless he is personally sued, a partner has nor right to make a
separate appearance in court. If the a partnership being sued is
already represented.
Article 1769
Partnership by ESTOPPEL
Article 1770
Must be within the commerce of man, possible, and not contrary to law, morals,
good custom and public order and public policy. Otherwise, the partnership is
VOID AB INITIO.
a. If the firm is also guilty of a crime, the RPC governs both the criminal
liability and the forfeiture of the proceeds of the crime and the instrument
or tools with which it was committed;
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b. The partners forfeit the proceeds or profits, but NOT their contributions,
provided no criminal prosecution has been instituted.
c. The partnership has no legal personality
Article 1771
Formalities needed
Exception:
Real properties or real rights are contributed, regardless of the value -
a PUBLIC INSTRUMENT is needed. Moreover, there must be an INVENTORY
of the immovables. The INVENTORY must be signed by the parties and
attached to the public instrument.
Note: without the public instrument, the partnership is VOID.
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.
Note: without such inventory, the contract is VOID.
If real property has been contributed, the oral partnership would be void; and
therefore not one of the parties can compel the others to execute the public
instrument.
Question:
If two persons agree to form a partnership in the future, does the partnership
immediately arise from the moment of said agreement?
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Ans. No, mere agreement to form a partnership does not of itself create a
partnership. The partnership is created till after the fulfillment of the conditions.
The SC ruled that even if there was a prior agreement to form in the future
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 TO DO and not TO GIVE. This is
therefore very personal (acto personalisimo) in which the courts may not
compel compliance, as it is an act of violence to do so.
ARTICLE 1772
PURPOSE OF REGISTRATION
a. Is to set a condition for the issuance of licenses to engage in business or
trade
b. For tax purposes
ARTICLE 1773
a. Public instrument
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b. Inventory – must be made, signed by the parties and attached to the
public instrument (Art 1773)
Transfer of the land must be recorded insofar as third persons are concerned.
ARTICLE 1774
ALIEN PARTNERS
If the partnership has aliens, it cannot own lands, whether public or
private, or whether agricultural or commercial, except:
- Thru hereditary succession
- When 60% of the capital is owned by the Filipinos
LIMITATIONS ON ACQUISITION
A partnership, even if entirely of Filipino capital may not:
- Acquire, lease or hold public agricultural lands in excess of 1, 024
hectares
- Lease public lands adopted to grazing in excess of 2,000 hectares
ARTICLE 1775
2. Although not a juridical entity, it may be sued by third persons under the
“common name” it uses; otherwise said innocent third parties may be
prejudiced.
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4. Therefore, insofar as third parties are concerned, the partners can be
considered as members of the partnership; but as between themselves or
as third persons are prejudiced, only the rules on co-ownership must
apply. The same rule applies in case of partnership by estoppel.
ARTICLE 1776
CLASSIFICATION OF PARTNERSHIP
2. According to OBJECT
b. Particular – here the object are determinate things, their use or fruits;
a specific undertaking or the exercise of profession or occupation
3. According to LIABILITY
a. Limited partnership
- One partner is a general partner and
- The rest are limited partners
- Limited partners are not being personally liable for the obligations of
the partnership
- liable only to the extent of his contribution
- known as special partner
- he does not participate in the management of the business
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Capitalist partner
- who contributes money or property to a common fund
Industrial partner
- contributes personal service
b. General partnership
– where all partners are general partners
- whose liability to third persons extends to his property
- liable to the extent of his individual properties, after the assets of the
partnership have been exhausted
- he may be capitalist or industrial partner
-liable pro rata AND subsidiarily
4. According to LEGALITY
a. Lawful or illegal
5. According to DURATION
a. For specific period or until the purpose is accomplished
b. Partners at will
i. No period, express or implied is given, so the duration depends
on the will of the partners
ii. If the period has expired, but the partnership continued, without
liquidation, by the partners who habitually acted as such during
the term.
Andres de Jesus vs. Nicanor Padilla and Roman De Jesus, CA L-12191-R, April
19, 1955
If upon the death of the wife, the husband continues to manage the formerly
conjugal properties now owned by him and the common children, and said
children allow their father to manage the property, without even causing their
rights to the property to be recorded in the Office of the registry of deeds, a
partnership de facto has been created. It is presumed that all the acts
performed by the father were for the benefit of all the partners.
1. PERSONAL PROPERTY
b. P3,000 or more –
i. Must be in public instrument; and
ii. Registered in the SEC
Note: even if it is not complied with, the partnership is still valid and
possesses a distinct personality (Arts. 1772, 1786 CC). the requirement is
mere for a licensing purposes.
ARTICLE 1778
ARTICLE 1779-1780
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FUTURE PROPERTY
b. Same as (a) except that in the contract, it was stipulated that all
properties subsequently acquired would belong to the partnership.
ANSWER: 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 cannot be stipulated upon (art 1780). The fruits of the
inherited land will go to the firm because said lands may be considered as
properties subsequently acquired, and there is no prohibition to stipulate
on fruits, even the fruits be those of properties acquired later on by the
inheritance, legacy or donation.
PROBLEMS: PROFITS
ANSWER: as a ruled, 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 acquired 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.
ARTICLE 1781
a. This article applies only when a universal partnership has been entered
into.
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b. Reason for this article: Less obligation is imposed in the universal
partnership of profits because their real and personal properties are
retained by them in NAKED OWNERSHIP.
c. If however, universal partnership of all present properties is
desired, REFORMATION is the proper remedy. (art 1359, CC)
ARTICLE 1782
EXCEPT: while spouses cannot enter into a universal partnership, they can
enter into a particular partnership or be members thereof (Commission of
Internal Revenue v. William J. Suter and Court of Appeals, L-25532,
February 28, 1969)
c. Those guilty of the same criminal offense, if the partnership was entered
into in consideration of the same. (Art 739, CC)
EFFECT OF VIOLATION
The partnership violating this article is null and void. No legal personality was
ever acquired.
ARTICLE 1783
PARTICULAR PARTNERSHIP
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EXAMPLES
To construct a building; to buy and sell a real property; to practice the law
profession. Here, it is as if the members are industrial partners.
DOCTRINES
If two individuals form a particular partnership for a deal in realty, it does not
necessarily follow that all deals are for the benefit of the partnership. In the
absence of agreement, each particular deal results in a particular partnership. If
one of them, on his own account, and using his own funds, should make
transactions in the same business, it is his own undertaking. (Lyons vs.
Rosenstock, 56 Phil. 632)
OBLIGATIONS OF A PARTNER
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CHAPTER 2
OBLIGATIONS OF THE PARTNERS
ARTICLE 1784
ARTICLE 1785
DURATION OF A PARTNERSHIP
PARTNERSHIP AT WILL
Kinds:
1. When there is no term, express or implied
2. When it is continued by the habitual manager – although the period has
ended or the purpose has been accomplished. (note: this is prima facie
evidence of the firm’s continuation)
Note: it is called “at will” because its continued existence depends upon the will
of the partners or even on the will of any of them.
ARTICLE 1786
DUTY TO CONTRIBUTE
DUTY TO WARRANT
1. “warranty in case of eviction” refers to specific and determinate things
already contributed.
2. There is eviction, whenever by a final judgement 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. (Art. 1548, CC) the partner
shall answer for the eviction even though nothing has been said in the
contract. (note: partner’s liability for warranty in case of eviction is
generally waivable and may be renounced by the partnerhsip)
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QUESTION:
If a partner fails to contribute within the stipulated time what was promised,
may the partnership contract be rescinded?
Answer: as a general rule, NO. Rescission is not the proper remedy; the remedy
should be to collect what is owing as well as damages. However, if the
defaulting partner is already dead – rescission may prosper. (Pabalan vs. Velez,
Phil. 29)
ARTICLE 1787
Proof is needed to determine how much goods or money had been contributed.
RISK OF LOSS
After the goods have been contributed, the partnership bear the risks of
subsequent changes in their value.
ARTICLE 1788
COVERAGE OF LIABILITY
ARTICLE 1789
CLASSIFICATION OF PARTNERS
4. MISCELLANEOUS
a. Secret
b. Dormant
c. Nominal
1. Capitalist partner
a. One who furnishes capital
b. Not exempted from losses
c. Can engage in other business provided there is NO COMPETITION
between the partner and his business (Art. 1808, CC)
2. Industrial partner
a. One who furnishes industry or labor
b. Exempted from losses as between the partner
c. Cannot engage in any other business without the express consent of
the other partners, otherwise:
i. He can be EXCLUDED from the firm (PLUS DAMAGES)
ii. OR the benefits he obtains from the other business can be
availed of by the other partners (PLUS DAMAGES) (Art 1789, CC)
3. Capitalist-industrial partner – one who contributes both capital and
industry
4. General partner – who is liable beyond the extent of his contribution
5. Limited partner – liable only to the extent of his contribution
Note: an industrial partner can only be a general partner, never a limited
partner. (Art. 1845)
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6. Managing
7. Silent
8. Liquidating
9. Ostensible
10. Secret
11. Dormant
12. Nominal
1. As to the CONTRIBUTIONS
a. Capitalist partner contributes money or property
b. Industrial partner contributes his industry (mental or physical)
3. As to PROFITS
a. Capitalist partner shares in the profits according to the agreement; if
none, pro rata to his contribution (Art 1797,CC)
b. Industrial partner receives a just and equitable share (Art 1797)
4. As to LOSSES
a. Capitalist partner
i. Liable based on the stipulation as to losses
ii. If none, the agreement as to profits
iii. If none, pro rata to the contribution
b. Industrial partner – exempted as to losses (as between partners); but
he is liable to strangers WITHOUT prejudice to the reimbursement
from the capitalist partners.
ARTICLE 1790
TO WHOM APPLICABLE
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Applied only to capitalist partners
ARTICLE 1791
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.
ARTICLE 1792
EXAMPLE
1. If P gives a receipt for the firm, it is the firm’s credit that has been
collected.
2. If P gives a receipt for his own credit only, P500,000 will be given to him;
other P500,000 to the firm.
Exception: X may decided that he is paying only P’s credit in accordance with
his right of “application of payment” (Article 1262, CC). this is alright; BUT only
if the personal credit of P is more onerous to X. (Art 1792)
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ARTICLE 1793
EXAMPLE:
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 considering that P had only given a receipt for his share
only?
Answer: yes. Equity demands proportionate share in the benefits and losses.
QUERY: does Article 1793 apply even if the collecting was done AFTER the
dissolution of the partnership?
ARTICLE 1794
DUTIES
1. The partner has the DUTY to secure benefits for the partnership; on the
other hand, he has the DUTY also not to be at fault.
2. Since both are duties, compensation should not take place, the partner
being the debtor
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ARTICLE 1795
RISK OF LOSS
ARTICLE 1796
ARTICLE 1797
ARTICLE 1798
ARTICLE 1799
PROBLEM
A, B, 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. Thus, the net profit for the two years of
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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.
1. Is the stipulation valid? Why?
2. How much will A get: 1/3 of P3 Million or 1/3 of P1.5 Million?
Answer:
1. The stipulation is valid, for even the law itself exempts the industrial
partner from losses. His share in the profits is presumably fair.
2. 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 will not share in the losses, this only
means that he will not also share in the net losses.
ARTICLE 1800
b. 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 he acts in bad faith – he cannot, the controlling interest
should have remove him.
1. Power to act may be removed at any time with or without just cause
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2. Extent of power: as long as he remains manager, he can perform all
acts of ADMINISTRATION
ARTICLE 1801
SPECIFIC RULES
ARTICLE 1802
1. UNANIMITY is required.
2. Suppose one of the managers is absent or incapacitated, is unanimity still
required?
ANS: YES, for absence or incapacity is no excuse. EXCEPTION –
when there is imminent danger of grave or irreparable injury to the
partnership.
ARTICLE 1803
ARTICLE 1804
ASSOCIATE OF PARTNER
reason:
a. MUTUAL TRUST is the basis of partnership
b. Change in the membership is a modification or novation of the contract
1. Any partner
2. Legal representative of a dead partner
3. Legal representative of any partner under legal disability
ARTICLE 1807
The fiduciary relations between the partners are relationship of trust and
confidence which must not be abused or used to personal advantage.
ARTICLE 1808
BUSINESS PROHIBITION
INDUSTRIAL PARTNER- prohibited form engaging “in business for himself” (any
business)
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CAPITALIST PARTNER – 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 object 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.
EFFECT OF VIOLATION
1. The violator shall bring to the partnership all the profits illegaly
obtained;
2. But he shall personally bear all the losses;
3. Although not mentioned in the law, the partner may be ousted from
the firm on the ground of loss of trust and confidence.
ARTICLE 1810
EXAMPLE: A and B contributed a car for the partnership. – the two cars
are specific partnership property.
2. Interest in the partnership – the partner’s share of the profits and losses
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3. right to participate in the management
ARTICLE 1811
The law says, “a partner is co-owner with his partners of specific partnership
property.” What does this mean?
ANSWER: simply that they are CO-OWNERS. However, the rules of co-
ownership does not necessarily apply; the rules on “co-ownership in
partnership” are applicable.
1. in general, he has an equal right with his partners to possess the car but on
for PARTNERSHIP PURPOSE
2. he cannot assign his right in the car (except: if all the other partners assign
their rights in the same property)
CASE
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ANSWER: the firm creditors, for the mortgage in specific partnership 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)
ARTICLE 1812
ARTCILE 1813
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RIGHTS OF THE ASSIGNEE
Does Article 1813 cover also a case when the partner merely mortgages his
interest in the profits?
Answer: yes, but here said interest is not alienated; it is merely given as a
security, and therefore the rules on securities for loans, can properly apply.
ARTICLE 1814
Note: while a partner’s interest in the partnership (his share in the profits or
surplus) may be CHARGED OR LEVIED upon, his interest in a specific firm
property cannot as a rule be attached.
The law say “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.
NOTE:
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2. Separate or individual creditors have preference is separate or individual
properties (not those included in the firm)
RECEIVERSHIP
1. When the charging order is applied for and granted, the court MAY
(discretionary) at the same time or later appoint a receiver of the
partner’s share in the profits
ARTICLE 1815
X and Y, partners under the name “X and Co.”. Later, the name was changed to
“X and Y.” will the partnership under the new name retain all the rights it hadn
under the old name?
ANS. Yes, the change of name is not important. The members remain the
same.
ARTICLE 1816
INDUSTRIAL PARTNER
- while industrial partner is EXEMPTED by law from losses (as between the
partners), he is NOT exempted from liability (insofar as third persons are
concerned)
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- this means that a 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
NOT solidarily) only after the assets of the partnership have been exhausted.
- even if 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.
A partner who withdraws is not liable for liabilities contracted after he has
withdrawn, for then he is no longer a partner.
ANS. PROPORTIONATE for the law says “pro rata” (Art. 1815)
ANS. First, the assets of the firm (P5 Million) must be exhausted, then X, Y and
Z will be liable PRO RATA in a proportion of 50-30-20
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PARTNER ACTINF IN HIS OWN NAME
ARTICLE 1817
ANS: YES under article 1817. ARTICLE 1799, a stipulation which excludes one
or more capitalist partners from any share in the profits or losses is VOID.
HOW CAN THE TWO ARTICLES BE RECONCILED? It would seem that the only is
to harmonize the two article, is this: it is permissible to stipulate
among them that a capitalist partner will be EXEMPTED from liability
in excess of the original contributions BUT will NOT BE EXEMPTED
insofar as his capital is concerned.
ILLUSTRATION:
ANS: to get the P 3 Million and to get still P 2 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 P 2 Million from B and C (P1 Million each) for a liability as among them,
he is exempted (Art 1817) but he cannot recover his original capital of P 1
Million. (Art 1799)
ARTICLE 1818
3. “do any other act which would make it impossible to carry on” – this is
evidently prejudicial
4. “confess a judgment” – if done before a case is file, NULL AND VOID but
if done later, the firm would be jeopardized
5. “compromise” – this is an act of ownership and may be said to be
equivalent to alienation (which may not be justified)
7. “renounce a claim” – why should a partner renounce a claim that does not
belong to him but to the partnership?
ARTICLE 1819
A, B and C are partners of the firm name “Edimus”. A parcel of land registered
under the name of “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 owner?
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”)
b. Suppose X had in turn sold it to Y for value and Y did not know of A’s
actual lack of authority. Thus, in this case, the firm cannot get back the
property. Y is a BUYER GOOD FAITH and FOR VALUE
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EXAMPLE PAR. NO. 2
A,B,C and D of the firm “Edimus” engaged in the buying and selling of land. A
parcel of land registered in the name of “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. Of course,
the buyer may ask for REFORMATION of the contract, so that the seller’s name
would appear as “Edimus”. If the contract be thus reformed, it is clear that the
buyer has also been given the TITLE.
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”
it refers to “all interest which the partnership had, EXCEPT TITLE” that is, the
beneficial interest like USE, FRUITS but not the naked ownership.
A,B,C and D were partners in the real estate firm of “Edimus”. Although a 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 of the firms business. So the firm
cannot get back the land, for TITLE thereto has been conveyed to X.
Supposes, A and B had not been authorized by the firm to sell the land, would
your answer remain the same?
ANS: It depends
1. If X had been in GOOD FAITH, that is, he had no knowledge of the lack of
authority, the answer would be the same.
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2. If X had been in BAD FAITH, the firm can get back the property unless X
in turn had sold the same property to Y who is in good faith.
A,B, C and D were partners in he 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
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?
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.”
ARTICLE 1820
1. Admissions made BEFORE dissolution are binding only when the partner
has AUTHORITY to act on the PARTICULAR MATTER
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Note: admission by a FORMER PARTNER made AFTER he has retired from the
partnership, is NOT evidence against the firm.
ARTICLE 1821
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, moreover, A,B and C as well as the firm itself, are liable in solidum.
Note that the innocent partner are civilly personally liable, without prejudice to
their right to recover form the guilty partner.
ARTICLE 1823
The difference between par 1 and par 2 is that the FORMER the
misappropriation is made by the receiving partner; while the LATTER, the
culprit may be any partner. In both cases, partners are liable solidarily.
ARTICLE 1824
SOLIDARY OBLIGATIONS
ARTICLE 1825
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HOW THE PROBLEM MAY ARISE
A person may:
ARTICLE 1826
YES,
The liability of the new partner will extend only to his share is the partnership
property, not to his own individual property.
Does the admission of a new partner dissolves the old firm and create a new
one?
ANS: yes, reason: 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, they are also considered
as of the NEW FIRM.
ARTICLE 1827
CHAPTER 3
DISSOLUTION AND WINDING UP
EXAMPLES
a. The paying of previous obligations
b. Collecting of assets previously demandable
TERMINATION - is the point in time AFTER all the partnership affairs have
been wound up.
EFFECT OF OBLIGATIONS
ARTICLE 1830
PARAGRAPH,
A. Here the contract is the law between the parties. If the firm however still
continues after said period, it becomes a partnership at WILL
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
justiciable cause. With his withdrawal, the number is decreased, hence, the
dissolution.
If the business or object had been unlawful from the very beginning, the firm
never had any juridical personality.
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CAUSE NO. 4 – loss
Reason: the firm is dissolved because the partner has NOT given his
contribution.
Note: if lost after delivery, the firm bears the loss and the partnership
remains, since after all he has given his contribution.
Note: the rule does not apply to generic things, for GENUS NEVER
PERISH
Partial – when the surviving partners continue the business among themselves
Total – when the survivors proceed to the liquidation of partnership’s assets
GOQUIOLAY V SYCIP
L-11840, December 10, 1963
FACTS:
In thee articles of 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 he
deceased partner shall be represented by his heirs or assigns in said co-
partnership”. One of he partners subsequently died, and this was before the
expiration of the partnership life.
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ISSUED:
HELD:
The insolvency need not be judicially declared; it is enough that the assets be
less than the liabilities
Reason: the business of the firm requires SOLVENCY or ability to meet the
financial demands of creditors.
Ans: NO.
ARTICLE 1831
Article 1832, merely states a GENERAL RULE, that when the firm is dissolved, a
partner can no longer bind the partnership.
When a firm is dissolved, does this mean that the contracts and obligations
previously entered into, whether the firm is the creditor or debtor, automatically
ceased?
ANS: No, otherwise the result would be unfair. The firm is allowed to collect
previously acquired credits; it is bound to pay also its debts. A dissolved
partnership still has personality for te winding up of its affairs.
ARTICLE 1833
AID
A – act
I – insolvency
D – death
Examples:
ANS: yes. If the firm’s assets are not enough, X can still go after the
individual assets A, B, and C. after all have paid X, can A and C still
recover from B, the partner who acted despite his knowledge of the firm’s
dissolution?
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2. If in the preceding problem, X knew of the dissolution, the firm cannot be
held liable. Neither A or C be liable. Only B and X are liable.
ARTICLE 1834
ARTICLE 1835
ARTICLE 1836
Extrajudicial winding up
NOTE: where the MANAGING PARTNER of the partnership has the necessary
authority to liquidate its affiars under its articles of co-partnership, he may sell
the partnership properties even AFTER the life of the partnership has already
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expired since he is MANAGER, is empowered to wind up the business affairs of
the partnership.
Judicially winding up
ARTICLE 1837
NOTE also that innocent partners may continue the business (but this time,
there is really a NEW PARTNERSHIP). They can even use the firm name,
moreover, they can ask new members to join, but the rights of guilty partners
are safeguarded by:
a. BOND approved by the court
b. PAYMENT of interest at the time of dissolution MINUS damages.
ARTICLE 1838
Although the law uses the term “rescind”, the proper technical term is
“annulled” in view of the “fraud or misrepresentation” – vitiates the consent
THREE RIGHTS
1. Right to LIEN or RETENTION
2. Right to SUBROGATION
3. Right to INDEMNIFICATION
Page 45 of 52
ARTICLE 1839
This speaks of the methods of settling the accounts of the partnership, that is
to say – its LIQUIDATION
ARTICLE 1840
Reason: so that said creditors will not lose their preferential rights aas creditors
to the partnership property.
CHAPTER 4
LIMITED PARTNERSHIP
a. Signing under oath of the required certificate (with all the enumerated
items)
b. The filing for record of the Certificate in the Office of the SEC
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NON-FULFILLMENT OF THE REQUISITES
The law requires the firm name to have the word “Limited ”. If the provision is
violated, the name CANNOT be considered the firm name of a limited
partnership.
ARTICLE 1845
ARTICLE 1846
ARTICLE 1847
ARTICLE 1848
ARTICLE 1849
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.
ARTICLE 1850
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.
ARTICLE 1851
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ARTICLE 1852
ARTICLE 1853
GENERAL-LIMITED PARTNER
Rights:
Generally, his rights are those of general partner(hence, third parties can go
against his individual properties)
Exception, regarding his contribution (like the right to have it returned on the
proper occasions) he would be considered a limited partner, with the rights of a
limited partner, insofar as the other partners are concerned.
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ARTICLE 1854
ARTICLE 1855
1. Note that preference can be given to some limited partners over the other
limited partners
2. However, preference must be “stated in the certificate”
ARTICLE 1858
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ANS. YES, A should pay now, B on December 1, 2004
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 claims before the return while Y claim arose after the return.
ANS. I distinguish
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.
ARTICLE 1859
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ANS. Yes (Par 1, Art. 1859)
Does the assignee of the interest of the limited partner become necessarily a
substitute partner?
ANS. No
1. In some case, he becomes one
2. In other, he remains a mere assignee.
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 substituted
limited partner. Is B now a substituted limited partner?
ANS: Not yet. He has to wait until the certificate is appropriately amended.
ANS: Yes, 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. (par 6, art 1859, CC)
ARTICLE 1862
Example:
ANS: no, the law says that the interest may be redeemed with the separate
property of any general partner, but cannot be redeemed with partnership
property.
ARTICLE 1863-1864
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