PARTNERSHIP AND

CORPORATION
Compiled by:
ATTY. BANSALAN B. METILLA
B.S.Crim./Ll.B.
DEFINITION OF PARTNERSHIP

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.
Two or more persons may also form a partnership for the
exercise of a profession. (Art. 1767, Civil Code)
(Note: While strictly speaking the exercise of profession is not a
business undertaking nor an enterprise for profit – the law considers
the joint pursuit thereof, for mutual help, as a partnership.)
CHARACTERITICS OF PARTNERSHIP

1. It is a consensual contract, being perfected by mere consent

of the partners.
2. It is a nominate contract because it has a specific name under
the law.
3. It is a preparatory contract, because the partnership will have
to enter into other contracts in the course of its business transactions.
 4. It is a bilateral or multilateral contract because it is entered
into between two or more persons.
5. It is a principal contract because its existence does not
depend on another contract.
6. It is onerous because certain contributions have to be made.
7. The partners must have legal capacity to enter into a
contract.
8. There must be mutual contribution of money, property or
industry to a common fund.
9. The purpose is to obtain profits and divide it among the
partners.
 10. It has a juridical or legal personality, separate and distinct
from the legal personality of the partners.
11. The articles of co-partnership must not be kept secret.
Notes:
1. The industry contributed may be intellectual or physical.
2. A “professional partnership”, one formed for the exercise of
the partners’ profession, has no legal personality.
ILLUSTRATIVE CASES

1. Brothers A, B, and C contributed P50,000 each and bought a car for

the use of their children in going to school and back home.
Question: Did they form a partnership?
Answer: No. What they formed was a contract of co-ownership. They are
therefore co-owners of the car. Although each contributed money, there was
no intention to use the car for business purposes, hence no profits could be
derived from it.
2. Former classmates A, B, and C, all CPAs. Contributed P10,000 each
and put up ABC Accounting & Auditing Firm. It was their agreement that
whatever income the office would receive from clients, would be equally
divided among them, after deducting the office’s overhead expenses.
Question: Is there a partnership organized by A, B, & C?
Answer: Yes, a professional partnership. However, it has no legal personality.
• 3. Where two persons jointly borrowed money from their father
which, together with their own personal funds, was used by them in
buying real properties for lease to third parties, such investment
consisting of series of transactions and the management thereof
being under one person for more than 10 years, the legal entity
created by them is a partnership. (Evangelista vs. Coll. of Int. Rev., L-
9996, Oct. 15, 1957)
HISTORICAL BACKGROUND

Before the new Civil Code became effective on August 30, 1950,
there were two kinds of partnership in the Philippines, namely, the civil
partnership, and the commercial or mercantile partnership (Art. 1665,
old Civil Code; Art. 116, par. 1, Code of Commerce). While the first was
engaged in civil purposes, the latter’s object was to deal in mercantile
transactions (Prautch, Scholes and Co. v. Hernandez, 1 Phil. 705 Feb.
10, 1903). While the civil partnership was governed by the old Civil
Code, the Code of Commerce controlled the mercantile variety.
With the advent of the new Civil Code, the provisions of the
Code of Commerce relating to mercantile partnerships, and the
provisions of the old Civil Code concerning civil partnership have been
repealed (Art. 2270, No. 2) The new Civil Code now governs all
transactions of all partnerships, whether the object be civil or
mercantile.
EFFECTS OF HAVING LEGAL PERSONALITY

1. It can sue and be sued.

2. It can enter into contracts
3. It can acquire and own property in its own name.
4. It can incur obligation.
Queries:
1. May a partnership be a partner in another
partnership?
Ans.: Yes, It has juridical personality to enter into
contracts.
2. May a partnership be formed for a charitable
purpose?
Ans.: No, It is an association organized for business
purpose.
DISTINCTIONS BETWEEN PARTNERSHIP AND
CORPORATION
1. In the manner of creation:
Partnership – by mere agreement of the partners.
Corporation - by operation of law.
2. Duration of existence:
Partnership – no time limit, except the agreement of the
partners, but not beyond 99 years.
Corporation – maximum of 50 years, may be reduced, or
renewed for another 50 years.
3. Number of founders:
Partnership – two or more persons, no limit.
Corporation – not less than 5, but not more than 15 persons.
4. Management:
Partnership – by the appointed partner; if none, every partner is
an agent.
Corporation – by the Board of Directors.
5. Commencement of legal personality:
Partnership – as stipulated in the contract, if none, at the time of
the execution/making of the articles of partnership.
Corporation – from the time it is issued a certificate of
incorporation/registration by the Securities and Exchange Commission
(SEC).
6. Nationality:
Partnership – a national of the country it was created.
Corporation – a national of the country under whose laws it was
incorporated.
7. Extent of liability:
Partnership – every partner is liable for the unpaid debt of the
firm upon its dissolution, except, limited partner.
Corporation – stock holders are not liable for the unpaid debt of
the firm, but only for the payment of their subscribed capital stock.
8. As to transfer of interest:
Partnership – even if a partner transfers all his interest to
another, the transferee does not become a partner, unless all other
partners consent. This is based on the principle of delectus
personarum (principle of mutual trust and confidence).
Corporation – a transferee of shares makes the transferee a
stockholder even without the consent of the others.
9. As to death of a member:
Partnership – death of any partner in a general partnership
dissolves the firm.
Corporation – death of the President or Chairman of the Board
does not dissolve the firm.
(Note: Death of a limited partner does not dissolve the partnership
unless he is the only limited partner.)
10. Ability to bind the firm:
Partnership – generally, partners acting on behalf of the
partnership are agents thereof: consequently they can bind both the
firm and the partners.
Corporation – generally, the stockholders cannot bind the
corporation since they are not agents thereof.
11. Mismanagement:
Partnership – a partner can sue a partner who mismanages.
Corporation – a stockholder cannot sue a member of the board
of directors who mismanages: the action must be in the name of the
corporation
12. Dissolution:
Partnership –death, retirement, insolvency, civil interdiction, or
insanity of a partner dissolves the firm.
Corporation – such causes do not dissolve a corporation.
RULES IN DETERMINING WHETHER
A PARTNERSHIP EXISTS
1. Except as provided by article 1825 (partner/partnership by
estoppel), persons who are not partners as to each other are not
partners as to third persons;
2. Co-ownership or co-possession does not 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
vary with the profits of the business;
e. As the considerations for the sale of a goodwill of a
business or other property by installments or otherwise. (Art.
1769, Civil Code).
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; and
c. there was a joint interest in the profits (Fernandez v.
De la Rosa, 1 Phil.689)
THEREFORE: Mere co-ownership or co-possession (even with profit-
sharing), or mere sharing of GROSS return (even with joint ownership
of the properties involved), do not establish partnership.
Example: D, to carry on a business, borrowed money from C It was
agreed that D would return the money in installments out of the
profits in the business. 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 (Pastor vs. Gaspar, 2 Phil. 592)
FORM OF CONTRACT OF PARTNERSHIP

The rule is that: A contract of partnership may be made in any

form or manner, except if specific form is required by law for its
validity or enforceability, thus:
1. It may be made orally or in a private instrument – if the total
contribution of money or other personal property is less than P3,000;
2. It shall be made in public instrument – if its capital or money
or other personal property is P3,000 or more, and shall be recorded in
the SEC. Non-compliance of this requirement, however, does not
make the contract void, and shall not affect the liability of the partners
and the firm to third persons. (Art. 1772, Civil Code).
 3. It must be made in public instrument – if immovable
property or real rights are contributed (regardless of value), and an
inventory of said property, signed by the parties, attached to it. Non-
compliance of this requirement renders the contract VOID. (Art. 1773,
Civil Code).
 4. If limited partnership, it must be registered as such with the
SEC (understood to be in a public instrument) otherwise it is deemed
by law to be a general partnership (Art. 1843, 1844, Civil Code).
Illustrative Cases:
1. A, B, & C are partners, contributing P5,000 each. The
contract is oral, Is the partnership valid? Yes.
Supposing A contributed a parcel of land valued at P5,000,
instead of money, and the partnership contract is oral, is it valid? No,
because immovable property is contributed.
 2. X and Y each contributing P3,000, formed a partnership. No
formal agreement and no public instrument was executed. Later, the
partnership acquired a parcel of land where they constructed a
warehouse. Is there a valid partnership? Yes, because the acquisition
of the land took place after the formation of the partnership out of the
profits. It was not contributed.
 3. A, B, C, & D, each contributing P20,000 formed a partnership.
It was agreed that A and B are general partners, while C and D are
limited partners. The contract of partnership was made in public
instrument, but no registration with the SEC was ever attempted by
them.
Later on, the firm was dissolved by reason of bankruptcy, with
its liabilities amounting to P80,000.
Question: Who among the four partners should pay the firm’s
obligations?
Answer: All of them, because all the partners are considered general,
since the firm is not registered with the SEC. Had it been registered,
only general partners A & B are liable.
CLASSIFICATION OF PARTNERSHIP

1. According to object:
a. Universal Partnership –
1) Universal Partnership of All Present Property –
partners contribute all the property belonging to them to a common
fund.
2) Universal Partnership of All Profits -- partners
contribute all that they may acquire by their work or industry
during the existence of the partnership. Any property belonging
to them at the time of the execution of the contract belongs to
them, but the usufruct (use and enjoyment) of such
property passed to the partnership. (Art. 1776, C.C.)
Examples:
A, B, and C formed a universal partnership of all present
property. At the time of its formation, each owned the following
property, to wit: A – only car; B – only commercial building;
and C – only piece of land
The car, commercial building and the land are contributed
to the common fund, and are now owned by the partnership,
including their profits or fruits.
Question: Supposing C inherited another land from his
deceased mother after the creation of the partnership, to whom
shall it belong?
Answer: To C, because property subsequently acquired by
inheritance or donation cannot be included, even if there is an
agreement to that effect, except the fruits thereof (Art. 1179,
C.C.)
 If in the same preceding example, the partnership created by the
partners was a universal partnership of all profits, all the property are
still exclusively owned by the each partner respectively. Only the fruits
of the property, as well as whatever property acquired by the partners
through industry during the existence of the contract, are contributed
to the common fund.
Query: Can a husband and wife enter into a contract of partnership?
No, if universal partnership, because this had the effect of
donation, and they are prohibited from giving donation to each other
(Art. 133, 1783, C.C.)
Yes, if particular partnership, like constructing a specific building,
or professional partnership, but not to govern their property relations,
since the same is governed by Absolute Community of Property, if
there is no marriage settlement.
 b. Particular Partnership – has for its object specific things,
their use or fruits, or a specific undertaking. (Art. 1783, Civil Code).
Example: Buy and sell of farm products; construction of a
particular building; exercise of profession.
2. According to Duration:
a. Partnership at Will – no term or period is fixed; or a period is
fixed but after the period has expired, the firm continued without
liquidation.
b. Partnership with a Fixed Term/Period or Undertaking.
3. According to Liability:
a. General – is one which is composed of partners
who are all general.
b. Limited – is one composed of at least one
general partner, and the rest, limited.
4. According to Representation to Others:
a. Ordinary partnership.
b. Partnership de facto – created by operation of
law.
b. Partnership by estoppel – is one which is not
really a partnership but is considered one in relation to
those who cannot deny its existence by reason of
preclusion.
PARTNERSHIP DE FACTO

If upon the death of the wife, the husband continues to manage

the former conjugal properties now owned by him and the common
children, and said children allow their father to so manage the
property, without even causing their rights to the property to be
recorded in the Office of the Register of Deeds or in the Assessor’s
Office, a partnership de facto has been created. It is therefore to be
presumed that all the acts performed by the father, as managing
partner, were for the benefit of all the partners (Andres de Jesus, et al.
v. Nicanor Padilla and Roman de Jesus, C.A. L-21191-R, April 19, 1955)
PARTNERSHIP BY ESTOPPEL

When two or more persons attempt to create a partnership but

fail to comply with the legal formalities essential for juridical
personality, the law considers them as partners and the association is a
partnership insofar as it is favorable to third persons, by reason of the
equitable principle of estoppel (MacDonald, et al v. Nat. City Bank of
New York, 99 Phil. 156)
Example:
A, B, and C, as partners, contributed immovable property each.
Not constituting their contract in public instrument, it was never
registered with the SEC. In so far as their creditors are concerned, they
are now estopped/precluded from denying the existence of their
partnership.
 KINDS OF PARTNERS
1. According to Contribution:
a. Capitalist – one who contributes capital (money or other
property).
b. Industrial – one who contributes industry or labor.
c. Capitalist-Industrial – one who contributes money or
property and industry or labor.
2. According to liability:
a. General – one who is liable to pay the firm’s liability
(debt) upon its dissolution, out of his own personal property or
beyond his contribution.
b. Limited – one who is liable only to the extent of his
contribution.
c. General-Limited – one who is liable as general but has the
right of a limited partner.
3. According to Management:
a. Managing – one who manages the affairs of the firm.
b. Silent – one who does not participate in the management.
c. Liquidating – one who liquidates or winds up the affairs of the
firm after it has been dissolved.
4. Miscellaneous:
a. Ostensible – one whose connection with the firm is public
and open. Usually his name is included in the firm’s name.
b. Secret – one whose connection with he firm is concealed or
kept secret.
c. Dormant – one who is both a secret and silent partner.
d. Nominal – one who is not really a partner but who may
become liable as such insofar as third persons are concerned. Ex: a
partner by estoppel
SOME RULES

1. The liability of an industrial partner is always that of a general

partner. (Art. 1816, C.C.)
2. A person may be a general partner and a limited partner in
the same partnership at the same time, provided this fact is stated in
the “CERTIFICATE” of a limited partnership (Art. 1853).
3. The contribution of a limited partner may be cash or other
property but not services, hence he is always a capitalist partner (Art.
1845).
 4. All limited partners, as a rule, are silent partners, since they
have no right to actively participate in the management of the firm
(Art. 1848).
5. All capitalist partners shall contribute equal shares to the
capital of the partnership, except if there is an agreement to the
contrary (Art. 1790).
6. A capitalist partner will be obliged to sell his interest to the
other partner(s), when in case of imminent loss of the business of the
partnership, he refuses to give additional contribution (Art. 1791)
DISTINCTIONS BETWEEN A CAPITALIST AND
AN INDUSTRIAL PARTNER
1. As to Contribution:
Capitalist – money or property
Industrial – industry or services only
2. As to Prohibition to Engage in Other Business:
Capitalist – cannot engage in the same or similar business of the
firm unless permitted by all partners.
Industrial – cannot engage in any kind of business unless
permitted to do so. Reason: all his industry is supposed to be
contributed to the firm (Art. 1789)
3. As to Share in profits:
Capitalist – his share is according to agreement; if none, pro rata
(in proportion) to his contribution (Art. 1797).
Industrial – just and equitable share (Art. 1797)
(Note: In actual practice, the share of the industrial partner is usually
fixed and agreed upon.)
5. As to share in Losses:
Capitalist – his share is based on agreement; if none, on
agreement as to profits; if none, in proportion to contribution.
Industrial – exempted as to losses between partners, but is liable
to strangers, but with right to be reimbursed from the capitalist
partners (Art. 1816)
 X, Y, and Z are partners. X and Y contributed
P3,000 each while Z contributed his services only. After
payment of partnership debts, what remains of the
partnership assets is P5,000, while loss in favor of
creditor B is P8,000.
Questions:
1. What are the rights of creditor B? Answer: He
can exhaust the remaining capital of P5,000, and claim
the balance from the partners.
2. What are the obligations of the partners?
Answer: All partners, including industrial partner Z,
must equally share in the loss at P1,000 each, there
being no agreement as to losses. However, industrial
partner Z can seek reimbursement in the sum of P500
each from X and Y.
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. However, 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.
(Note: An agreement excluding one or more partners from any share
in the profits or losses is VOID (Art. 1799). This is because partnership
is for common benefit.
In spite of the above rule, there is one exception, and this is the
case of an industrial partner whom the law itself excludes from losses.
Hence, the stipulation exempting the industrial partner from losses is
naturally valid. Conversely, an agreement that even the industrial
partner shall be liable for losses is permissible.)
OBLIGATIONS OF A PARTNER

Some of the obligations of the partner are:

1. To give his contributions (Arts. 1786, 1788).
2. Not to engage in unfair competition with the firm (Art. 1808).
3. To pay damages due to his fault (Art. 1788).
4. To hold in trust of the firm unauthorized personal profit (Art.
1807).
5. To credit to the firm payment made to him by a debtor who
owed him and the firm (Art. 1792).
ILLUSTRATIVE CASES

No. 3 (to pay damages. . .)

Partner D promised to give his contribution of P10,000 on a
specific date. However, he was able to give his contribution only two
(2) months after the specified date.
Result: Since he became a debtor of the firm from the date he
failed to give his contribution, he is also liable for interest and
damages, due to his fault.
4. (to hold in trust . . .)
Partner B, with partnership funds in his hand, bought a parcel of
land in the name of his girlfriend, without the knowledge of all other
partners, and subsequently sold the same land to a person at a profit
of P50,000.
Result: All other partners should share in his profit of P50,000.
4. (to credit to the firm. . ._)
X, a managing partner, is W’s creditor to the amount of P20,000.
W also owes the partnership P20,000. Then X collects P20,000 from
W.
Effect: If X gives a receipt for the firm, it is the firm’s credit that
has been collected. If X gives a receipt for his own credit, only P10,000
will be his, and the other P10,000, to the firm.
RIGHTS OF A PARTNER

Some of the rights of a partner are:

1. Property rights which are:
a. Right in a specific partnership property (Art.
1810).
b. Right to receive his share in profits and surplus
(Art. 1812).
c. Right to participate in the management, except
limited partner (Art. 1810).
 2. Right to associate with another person in his share (Art.
1804).
3. Right to inspect and copy partnership books (Art. 1805).
4. Right to demand a formal account (Art. 1809)
5. Right to ask for dissolution of the firm at the proper time (At.
1830)
ILLUSTRATIVE EXAMPLES

1. Right in specific property . . .

A and B each contributed a car for the partnership. The two cars
are specific partnership property. A and B therefore, are co-owners of
the two cars, and can possess or use the cars but only for partnership
purposes. But they cannot transfer their rights in the cars to third
persons, except if the other partner assigns his rights in the same
property.
2. Right to associate with another person. . .
For a partner to have an associate in his share, consent of the
other partners is not required.
But for the associate to become a partner, all must consent.
3. Right to inspect and copy . . .
A partner has the right to obtain true and full information of the
partnership affairs, so he can inspect and copy the firm’s book at any
reasonable hour (business hour).
However, this right is not available to the partners in a
partnership pending dissolution nor in one already dissolved.
4. Right to demand formal account . . .
As a rule, no formal accounting is demandable till after
dissolution. This is because partners have access to the books
(Art. 1805)
However, any partner has the right to a formal account as to
partnership affairs when:
a. He is wrongfully excluded from the partnership
business or possession of its property by his co-
partners;
b. The right exists under the terms of any
agreement; and
c. Other circumstances render it just and
reasonable.
MODES OF APPOINTING A MANAGER

The manager of the partnership is appointed through the votes

of the partners, in either of the two methods, to wit:
1. Appointed in the Articles of Partnership -- In such case his
power is irrevocable without just cause or lawful cause. The votes of
the partners representing the controlling interest shall be necessary
for revocation of his power. To remove him without cause or for an
unjust cause there must be unanimity of votes, including his own vote.
2. Appointed in another instrument (document) – in such case
his power may be revoked at any time, with or without just cause, by
the partners representing the controlling interest.
JOINT MANAGEMENT

Joint management arises when two or more partners are

appointed managers with an agreement that one cannot act without
the consent of the others. The approval of all the managers is
necessary for the validity of one’s act, except when there is imminent
danger of grave injury to the partnership (Art. 1802).
SOLIDARY MANAGEMENT

Solidary management takes place when two or more partners

are appointed managers without specification of their respective
duties, or without an agreement that one shall not act without the
consent of all others. Each one may separately execute all acts of
administration. But if one 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
(Art. 1801).
RULES TO BE OBSERVED WHEN NO
MANAGER IS APPOINTED
1. Every partner is considered an agent of the partnership;
2. If the act of one is opposed by others, the majority should
prevail (Art. 1803).
Illustrative Case:
A, B, and C formed a partnership under the following terms and
conditions, to wit:
1. A and B would supply the entire capital;
2. C would contribute his accounting and management
expertise, and be the manager for the first two years without
compensation.
3. C would not be liable for losses.
Questions:
1. Could A alone, opposed by C and B have C removed as
manager?
2. Could C be also held liable for the debts of the firm not
satisfied with the assets of the partnership?
Answers:
1. No. To remove C as manager, the vote of the partner(s)
representing the controlling interest is required. A, does not have
controlling interest.
2. Yes. Industrial partners are not exempted from losses to third
persons. However, after paying his share in the losses, C can seek
reimbursement from A and B.
OBLIGATIONS OF THE PARTNERS WITH
REGARD TO THIRD PERSONS
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
(Art. 1815).
(Note: Strangers (those not members of the partnership) who include
their names in the firm are liable as partners because of estoppel, but
do not have the rights of partners for after all, they had not entered
into any partnership contract. The purpose of the law is to protect
customers from being mislead as to whom they are dealing with.)
ILLUSTRATIVE CASE

Facts: The plaintiff sued a partnership of five (5) general partners

for payment of a promissory note. Later, the plaintiff filed a motion to
dismiss the case against one of the partners. The motion was granted.
If the defendants lose the case, how much will each of the four
remaining defendants pay – 1/5 or ¼ of the debt?
DISSOLUTION OF PARTNERSHIP

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 the partners cease (stop) to carry on the
business together.
When a partnership is dissolved, it does not necessarily mean
that its juridical personality is terminated. While generally it loses its
legal personality to continue its business after it is dissolved, it retains
its juridical personality for purposes of winding up its affairs.
 Winding-up is the process of settling the business affairs of the
partnership after dissolution like getting in its assets, paying of
previous obligations, and apportioning the amount of profit and loss.
Oftentimes, this process is called LIQUIDATION.
Termination is the point in time after all the partnership affairs
have been wound up.
CAUSES FOR DISSOLUTION
(Article 1830)
1. Without violation of the agreement between the partners,
such as:
a. Termination of its period or specific undertaking;
b. Express will of a partner who must act in good
faith, even if objected to by the others, in case of partnership at
will;
c. Express will of all partners, even in case of
partnership with a fixed period, and before the period expires;
d. Expulsion in good faith of a partner.
 2. Business has become unlawful;
3. Loss of the specific thing promised to be contributed;
4. Death of any partner;
5. In violation of the agreement between the partners, like
withdrawal of a partner even before the expiration of the period;
6. Insolvency (bankcruptcy) of any partner or of the partnership;
7. Civil interdiction of any partner;
8. Court decree (decision).
DISCUSSION ON THE CAUSES

2. (business has become unlawful…)

If the business or its object later on becomes unlawful, it is
understood that the firm will not be allowed to carry on, since the
contract has become void. On the other hand, if the business or its
object had been against the law from the very beginning, the
partnership never had any juridical personality.
 3. (loss of the thing . . .)
The thing promised to be contributed must be specific, and is
lost before it could be delivered to the partnership by the partner
concerned.
4. (death of any partner . . .)
The dead partner must be general partner, whether capitalist or
industrial partner. Death of a limited partner dissolves the limited
partnership if there is only one limited partner in the firm.
 5. (withdrawal of a partner . . . )
A partner may expressly withdraw even before the expiration of
the firm’s period, with or without valid reason, for no law compels
one to remain in the firm. But, if a partner withdraws without
justifiable cause, he is liable for damages for breach of contract.
 6. (insolvency . . .)
The bankruptcy of any partner or of the partnership need not be
declared by the Court. It is sufficient that any partner’s assets or that
of the firm may be less than the liabilities.
The law requires the partners or the partnership to be solvent
(with enough assets) purposely to meet the financial demands of the
creditors.
 7. (civil interdiction . . .)
Civil interdiction is an accessory penalty imposed on a convict
(person found guilty of committing a crime) when the crime
committed is punishable from 12 years and 1 day to 40 years (Art. 41,
Revised Penal Code).
It deprives the convict of his civil rights of parental authority,
marital authority, guardianship and management of his property.
In a sense, he is civilly dead, since he is prohibited from entering
into a civil contract involving property, and partnership involves
contribution of property.
 8. (Court decree . . .)
The Court may order the dissolution of the partnership on
application (petition) by or for a partner, on the following grounds (Art.
1831):
a. insanity of a partner;
b. Incapability of a partner to perform his part, as
when he enters into a government service which prohibits him from
participating in the firm; or when he has been abroad for a long
time;
c. Prejudicial conduct of a partner or persistent breach of
agreement. Ex: When the managers fail to hold regular meetings,
or fail to give proper financial reports.
 d. a partner has been guilty of unfair
competition;
e. The business can only be carried on at a loss;
f. Other circumstances rendering dissolution
equitable.
Query: Are the other partners and the partnership bound by
the act of one partner after the firm is dissolved?
Answer: Yes, under the following circumstances:
a. If the partner acting is without knowledge of the
dissolution, the partners and the partnership are liable;
b. If the partner acting is with knowledge of the
dissolution, and his act is not connected with the “winding-
up”, the partnership and the partners are liable, but the
innocent partners can seek reimbursement against the guilty
partner (Art. 1833).
)
ILLUSTRATIVE CASES

1. A, B, and C formed a partnership on June 25, 2015. on June

30, 2015 partner C died. The following day, B, not knowing that C had
died, contracted an obligation to X for and in behalf of the partnership
amounting to P60,000.
Questions: 1. Can X go after the assets of the firm. Answer: Yes
2. Can X go after the personal property of not only B, but also
A, the transaction being in good faith. Answer: Yes.
 2. A, B, and C formed a partnership on June 25, 2015. Five days
after, C died. Partner A knew
This fact, being a neighbor of C, and yet he (A) entered into a new
transaction with X.
Questions: Can creditor X go after the assets of the firm? Answer: Yes.
Supposing, the assets of the firm cannot satisfy X’s credit, can X
go after all the partners? Answer: Yes,. But innocent partner B can
proceed against A for reimbursement.
Notes:
1. If the partner acting is without knowledge of the dissolution,
but the third person (creditor) knows it, no partner is liable to pay, not
even the firm (Art. 1834).
2. Dissolution does not of itself extinguish the existing liability
of any partner (Art. 1835)
LIQUIDATION OF ASSETS
(General Partnership)
Upon dissolution of the partnership, its assets are
liquidated in the following order of preference, thus:
1st – payment owing to outside creditors.
2nd – payment owing to partners as creditors.
3rd – return of partners capital.
4th – distribution of profits to partners.
Illustrative Case:
1. A, B, and C formed ABC Partnership contributing the
following: A – P30,000; B – P20,000; & C – P10,000. Upon
dissolution, the firm is indebted to the following:
Rudy – P60,000
Buddy – P30,000
C - P20,000 (partner in ABC partnership)
 Its gross capital (assets) upon dissolution is P290,000.
Liquidate the firm’s assets observing the order of preference
step by step.
Answer: In partnership liquidation, the following is the order of
preference:
Gross assets . . . . . P290,000
1st – Pay the creditors
Rudy – P60,000
Buddy - 30,000 90,000
P200,000
2nd - Pay partner creditor C - - - - - 20,000
P180,000
 3rd – Return of partners’ capital
A – P30,000
B -- 20,000
C -- 10,000 60,000
120,000
4th – Partners’ profits
A – P60,000
B -- 40,000
C -- 20,000 120,000
Note: Since the partnership contract does not specify how profits should be
shared, hence the profits are distributed to A, B, and C in proportion to their
capital contributions.
 2. A, B, and C formed ABC partnership engaging in retailing of
San Miguel beer. Each contributed P20,000. As mutually agreed,
profits and losses would be shared as follows: A – 40%; B - 30%; C-30%.
After three months, the firm became bankrupt, because the
partners, being consummate beer-drinkers, could not stand the sight
of an idle “frozen bottle” of beer. So, upon its dissolution, its capital
amounted to only P30,000, and is indebted to the following:
Rudy – P60,000
Buddy – 30,000
C - 20,000 (partner)
Liquidate the partnership assets step by step.
Answer: The partnership having suffered losses, the
following is the order of preference, thus:
Gross Assets . . . . .P30,000
1st – Pay outside creditors
Rudy – P20,000
Buddy - 10,000_ ____ 30,000_
-0-
Steps 2nd, 3rd, and 4th are no longer applicable. To
pay the remaining indebtedness of P80,000, the
partners must contribute, out of their personal money
or property, thus:
 A – 40% x P80,000 = P32,000
B - 30% x 80,000 = 24,000
C – 30% x 80,000 = P24,000
Indebtedness from C = 20,000 4,000__
P60,000
Note: Partner C will give additional contribution of only P4,000 since
he has a claim against the firm in the sum of P20,000.
LIMITED PARTNERSHIP

A limited partnership is one formed by two or more persons,

having as members one or more general partners and one or more
limited partners.
The limited partners as such shall not be bound by the
obligations of the partnership (Art. 1843).
FORM OF LIMITED
PARTNERSHIP CONTRACT
It must be made in writing (public document). This is commonly
referred to as a “CERTIFICATE” where all of the partners shall sign
under oath.
The said certificate is required to be filed with the Securities and
Exchange Commission (SEC).
Non-compliance with the above requirements makes the firm a
general partnership.
CONTENTS OF THE CERTIFICATE
OF LIMITED PARTNERSHIP
The ‘CERTIFICATE” contains, among others:
a. the name of the partnership, to which must be added the
word “limited” or its abbreviation, “LTD”;
b. character of business;
c. location of principal place of business;
d. names of general and limited partners;
e. specific term for its existence.
CIRCUMSTANCES WHERE A LIMITED PARTNER
WILL BE LIABLE AS GENERAL
1. If the limited partnership as formed is not registered with the
SEC, as such (Art. 1844).
2. If a limited partner takes part in the control or management
of the business (Art. 1848).
3. If his surname appears in the name of the partnership, except
if it is also the surname of a general partner.
4. If he contributes his services to the capital of the firm.
Note: 1. A limited partner who is held liable as a general partner does
not however get the rights of the latter.
2. Participating in the selection (voting) of the managing
partners is held by law as “taking part in the control of the business.”
RIGHTS AND OBLIGATIONS
OF THE PARTNERS
The obligations and rights of the partners in a limited
partnership are basically the same as in a general partnership,
as earlier discussed.
However, general or limited partners may exercise some
rights not available in the general partnership, if the same are
given and indicated in the “CERTIFICATE”.
Examples:
1. The right, if given, of the remaining general partner
or partners to continue the business even upon death,
retirement, civil interdiction or insolvency of a general
partner.
2. The right, if given, of a limited partner to demand and
receive property other than cash in return for his contribution
(Art. 1844).
LIABILITY OF LIMITED PARTNERS

It has earlier been discussed that the limited partners cannot be

held liable to pay the debts of the firm upon its dissolution, on the
presumption that they have fully given their promised contribution.
Illustrative Case:
A, B, C, and D formed a limited partnership, duly registered with
the SEC. As mutually agreed, A and B were general partners, while C
and D were limited partners.
The firm was dissolved upon the death of A, with liability to
creditor X amounting to P100,000, whereas the firm’s assets was
valued at only P40,000. although all partners had fully contributed
P30,000 each.
Question: Who should pay X the amount of P60,000.
Answer: Since C and D are limited partners, they have no obligation to
pay X. A and B would therefore be held equally liable. However, by
reason of A’s death, X should file his claim against A in the latter’s
estate. B is not liable for the share of A, since the obligation of the
partners is joint and not solidary.
DISSOLUTION OF LIMITED PARTNERSHIP

A limited partnership is dissolved for causes enumerated

hereunder (Art. 1860):
a. Death
b. Retirement
c. Insanity
d. Civil Interdiction
e. Insolvency
Note: The above-enumerated causes for dissolution are applicable
only to general partners.
LIQUIDATION OF LIMITED PARTNERSHIP

Upon its dissolution, the firm’s assets will be liquidated in the

order of preference:
1st -- Payment owing to outside creditors;
2nd– Giving of limited partners’ share in profits;
3rd – Returning of limited partners’ capital;
4th – Payment owing to general partners;
5th – Giving of general partners’ shares in profits;
6th – Returning of general partners’ capital
contribution.
ILUSTRATIVE CASE

A, B and C formed ABC Partnership, Ltd., contributing P20,000

each. A and B are general partners, while C is a limited partner. The
gross capital upon dissolution is P300,000 and the liabilities to
creditors are as follows:
X – P60,000 C – P20,000 (limited partner)
W -- 30,000 A -- 10,000 (general partner)
Therefore:
Gross Assets . . . . . . . . . . . . . . . . P300,000
1st – Pay outside creditors/limited partner:
X – P60,000
W-- 30,000
C -- 20,000 110,000
190,000
 Gross assets . . . . . 190,000
2nd – Profit of limited partner C . . . 40,000
P150,000
3rd – Capital of limited partner C . . . 20,000
P130,000
4th – Payment to general partner A. . 10,000
P120,000
 P120,000
5th – Profit of general partners
A – P40,000
B - 40,000 80,000
P40,000
6th – Capital of general partners:
A – P20,000
B -- 20,000 40,000
-0-
Note: if the firm upon dissolution is not solvent, a limited partner who is
also a creditor of the firm does not enjoy the same preference as an
outside creditor.
ILUSTRATIVE CASE

A, B and C formed a limited partnership, contributing P20,000

each. Upon its dissolution, the gross assets of the firm is only P90,000,
and its liabilities to creditors are as follows;
X – P60,000
W – 30,000
C -- 20,000 (limited partner)
Hence: Gross Assets . . . . . . . P90,000
1st – Pay outside creditors
X– P60,000
W-- 30,000 90,000
-0-
TITLE TWO
CORPORATION LAW
Prefatory Statements:
The New Corporation Code of the Philippines took effect on May
1, 1980.
It governs the formation and organization of a “private
corporation”, defines its powers, fixes the duties of its officers and
declares or provides for the rights and liabilities of shareholders or
members, as the case may be.
Two General Classes of Corporation:
1. Public Corporations – are those organized by the state to
perform functions to govern portion of its territory. Ex: City of Davao;
Province of Davao del Sur, Municipality of Sta. Cruz, etc. In. political
law, they are commonly referred to as “municipal corporations.”
 2. Private Corporations – are those organized by private persons
or by the State or both for private ends, aims, benefits or purpose. Ex:
University of Mindanao; Franklin Baker Co. of the Phils., etc.
Distinctions between the two:
1. As to organizers:
Public Corp. --the State
Private Corp. – private persons or the State
or both
2. As to functions:
Public Corp.– governmental functions
Private Corp. – private functions, generally profit-
making
GOVERNMENT OWNED OR CONTROLLED
CORPORATIONS
The main or principal source of income of the government/state
is taxation. It may however, abandon its sovereign capacity and thus
venture into commercial transactions or business to augment its
income. Now, if the state puts up a corporation to engage in business,
then the corporation formed is classified as “PRIVATE’ , thereby
divesting itself of its sovereign character, so as to render the
corporation subject to the rules of law governing private corporation.
(PNB vs. Pabalan, 83 SCRA 595)
Examples of PRIVATE CORPORATIONS owned or controlled by the
government:
a. GSIS c. NAPOCOR
b. PNR d. LRT
QUASI-PUBLIC CORPORATIONS

Quasi-public corporations are in reality private corporations

organized by private persons, but performing pubic functions.
Examples:
a. PLDT c. PAL
b. MERALCO d. BAYANTEL
Note: The ministerial public function of the government is to provide
basic services to the people such as water, transportation,
communication, education, and many others.`
CHAPTER 1 – NATURE OF PRIVATE
CORPORATION
Corporation (private) defined:
A corporation is an artificial being created by operation of law,
having the right of succession and the powers, attributes and
properties expressly provided or authorized by law or incident to its
existence, (Sec. 2, Corp. Code
SOME ADVANTAGES OF A CORPORATION

1. Death of a stockholder will not dissolve the corporation

because of its power of succession.
2. Management is centralized on the Board of Directors.
3. Easier to raise capital.
4. Easier to attract stockholders because of their limited liability
5. Easy to transfer stocks to other persons.
SOME DISADVANTAGES OF A CORPORATION

1. It entails a high cost of formation and operation.

2. It is subject to heavier taxation than other forms of business
organizations.
3. Stockholders have little voice in the conduct of the business.
SIMILARITIES BETWEEN A CORPORATION
AND A PARTNERSHIP
1. Both have juridical personality, distinct and separate from
that of the individuals composing them.
2. Both act through agents.
3. Both are composed of an aggragate of individuals.
DOCTRINE OF “SEPARATE ENTITY” OR
“DISTINCT PERSONALITY”
A corporation has a legal personality separate and distinct from
the personality of the persons composing it.
A corporation is not in fact and in reality a person, but the law
treats it as though it were a person by process of fiction (Tayong vs.
Benguet Consolidated, Inc., 26 SCRA 243)
As consequences of its separate entity, the corporate property is
owned by the corporation as a distinct legal fiction, and the
stockholders have only an indirect interest in its assets and business.
ILUSTRATIVE CASE

X, a creditor, filed a case (civil suit) against ABC Corp. This suit is
only against the corporation as a separate entity and not against the
stockholders.
On one hand, if the suit was filed against stockholder A, it is not
also a case against the corporation, Under this principle, the
corporation and its stockholder, cannot be treated as one and the
same person .
DOCTRINE OF “PIERCING THE VEIL OF
CORPORATE ENTITY
It is the disregard for valid reason, of the legal fiction that a
corporation has a separate and distinct legal personality from the
person composing it. Under this doctrine therefore, the corporation
and the persons composing it will be treated as one and identical
person.
Applicability:
1. When the corporation is used as a shield for tax evasion.
2. When the corporation is used to perpetuate fraud.
3. When the corporation is used to evade obligation.
ILUSTRATIVE CASE

After the driver in a vehicular accident was convicted and

sentenced to pay fine and damages to the victim, the owner of the
vehicle formed a corporation with himself, wife and five children as
incorporators. He then sold the vehicle to the corporation.
Question: Can the victim go after the corporation?
Answer: Yes, this is a clear case of avoiding obligations.
KINDS OF PRIVATE CORPORATION

1. Stock or Non –stock

2. Aggregate or Sole
a. Aggregate – one with incorporators of not less than five but
not more than fifteen
b. Sole – a religious corporation, one associated with the clergy;
there is only one incorporator
3. Civil or Eleemosynary:
a. Civil – one organized for profits
b. Eleemosynary – one which is organized for charitable purposes.
4. Domestic or Foreign
a. Domestic – a corporation organized according to Philippine laws.
b. Foreign – a corporation formed , organized, or existing under any law
other than in the Philippines, and granted license to do or transact business in
the Philippines.
5. De Jure, De Facto, or By Estoppel
a. De Jure Corporation – a corporation formed with all the requirements of
law.
 De Facto Corporation – A corporation defectively formed from a
bonafide attempt to incorporate under existing laws, and which
exercises corporate powers. (Sec. 20, N.C.C.)
Corporation by Estoppel – is a group of persons which holds
itself out as a corporation and enters into contract with third persons
on the strength of such appearance, and which can not be permitted
in an action under said contract.
OTHER KINDS OF PRIVATE CORPORATION

1. Close Corporation - a stock corporation which is limited to

selected persons; stockholders shall not exceed twenty (20) persons
2. Open Corporation – one which is open to any person.
3. Parent or Holding Corporation – one which is related to
another corporation such that it has power, either directly or indirectly,
to elect the majority of the directors of such corporation.
COMPONENTS OF A PRIVATE CORPORATION

1. Incorporators – they are natural persons who are the

founders of the corporation, and a signatories to the articles
of incorporation. Majority of them must be residents of the
Philippines.
2. Corporators – all persons who compose the
corporation, whether stockholders (for stock corporation) or
members (for non –stock corporation).
3. Promoters – are persons who bring about or cause to
bring about the formation and organization of a corporation.
4. Stockholders - are owners of the shares of stock in a
stock corporation.
5. Subscribers – are persons who have agreed to take
and pay for original and unissued shares of stock.
SOME RULES

1. All incorporators are corporators, but not all corporators are

incorporators.
2. A corporation can be a corporator but never an incorporator
in another corporation, as a general rule. (Except: Rep. Act 720 – Rural
Bank Law- allows a juridical person to become an incorporator)
3. A partnership can be a corporator (stockholder) in a
corporation, but a corporation cannot be a partner in a partnership.
Queries:
1. May a corporation be a subscriber in another corporation?
Answer: Yes, if subscription is after the corporation’s incorporation, but
not if made before.
2. Can a married woman be an incorporator of a corporation?
Answer: Yes, with the consent of her husband if it involves conjugal or
absolute community property. Husband’s consent is not necessary if it
involves her exclusive property.
3. Are all incorporators required to be Filipino citizens?
Answer: No, aliens can be incorporators, except in all-Filipino
corporations.
4. Is an incorporator necessarily a subscriber/stockholder in a stock
corporation?
Answer: Yes, the law expressly states that each incorporator shall own
at least one share of the capital stock.
FORMATION OF A CORPORATION

Any number of persons not less than five (5) but not more than
fifteen (15), all of legal age and a majority of whom are residents of the
Philippines, my form a private corporation for any legal purpose or
purposes (Sec. 10, NCC).
Steps in the Creation:
1. Promotion
2. Incorporation
3. Organization and commencement of business operation.
INCORPORATION

Incorporation is that state of having the corporation registered

or incorporated with the Securities and Exchange Commission.
The corporation has to file with the SEC its Articles of
Incorporation, together with the payment of the filing and publication
fee.
If found complete with all the requirements, the SEC will issue to
the corporation its “CERTIFICATE OF INCORPORATION “ or
“FRANCHISE”.
CONTENTS OF THE ARTICLES OF
INCORPORATION
1. The name of the corporation.
2. Purpose or purposes.
3. Principal place of business.
4. Terms of existence (corporate life).
5. Names, residences and nationalities of incorporators.
6. Number of Directors or Trustees to be elected (not less than 5,
not more than 15).
7. Names, nationalities and residences of persons who shall act as
Directors or Trustees until the first regular directors/trustees are elected
and qualified.
 8. If a stock corporation:
a. amount of capital stock
b. number of shares capital stock is divided into.
c. actual subscriptions, names, residences of the
subscribers
d. initial paid-up capital
9. If stock is of no par value, the Articles need only to state such
fact and the number of shares said capital is divided into.
10. If it be a non-stock corporation, the amount of its capital,
the names, nationalities and residences of the contributors and the
amount contributed.
DISTINCTION BETWEEN ARTICLES OF
INCORPORATION AND BY-LAWS
1. Articles of Incorporation are adopted before incorporation
while By-Laws are adopted within one month after incorporation;
2. Articles of Incorporation are adopted by the incorporators as
Charter of the corporation, while By-Laws are adopted by the
corporators for their internal government and that of the corporation;
CHAPTER 2
OFFICERS OF THE CORPORATION
Pursuant to the New Corporation Code of the Philippines, every
corporation must have, as its statutory officers, the following:
1. Board of Directors/Trustees
2. President
3. Treasurer
4. Secretary
However, if granted or provided on its By-Laws, a corporation
may have other corporate officers, including an “executive committee”
of at least three (3) directors (Sec. 35, NCC)
THE BOARD OF DIRECTORS

The Board of Directors are elected at large by the qualified

stockholders or members, as the case may be, and who hold office for
one (1) year until their successors are elected and qualified.
Every director in a stock corporation, must own at least one (1)
share of stock, and should he cease to be an owner, he shall cease to
be a director.
The Board of Directors exercises the corporate powers of the
corporation. It is the corporation’s governing body (Sec. 23, NCC).
THE PRESIDENT

He must be a director and his

functions generally involve the
implementation of board resolutions and
policies.
He usually represents the corporation
and acts for and in behalf of the
corporation.
THE TREASURER

He or she may or may not be a

director of the corporation. His/her
principal function involves the custody of
the funds and other properties of the
corporation.
THE SECRETARY

The secretary need not be a director of the corporation but must

be a resident and a citizen of the Philippines.
His functions include the keeping of records and other
communications of the corporation, preparing and sending notices of
board and stockholders and general membership meetings, and taking
down the minutes of meetings.
Note: Any two or more positions may be held concurrently by the
same person, except that no one shall act as president and secretary
or as president and treasurer at the same time.
ELECTION OF OFFICERS

The By-Laws of ABC Corporation provides for the election of 15

directors, and out of which shall be elected: President, Vice-President,
Auditor, Treasurer, and Secretary.
So all the qualified stockholders or members of the corporation
are called to vote for 15 directors among the candidates for the same
position.
The President, the Vice-President, the Auditor, the Treasurer and
the Secretary will be elected by and from the fifteen (15) directors duly
elected by the owners of the majority of the corporation’s outstanding
capital stock, or majority of the members of a non-stock corporation,
as the case may be.
KINDS OF VOTING FOR
BOARD OF DIRECTORS
In a stock corporation, a stockholder may cast his votes under
any of the three methods:
1. straight voting – here a stockholder may vote his number of
shares for as many persons as there are directors to be elected.
2. cumulative voting for one candidate – here a stockholder
cumulates all his shares and gives one candidate as many votes as the
number of directors to be elected, multiplied by the number of his
shares shall equal.
3. cumulative voting by distribution – here the stockholder
distributes his shares among as many candidates he sees fit.
NOTE: 1. Each share of stock is entitled to one vote.
2. The total number of votes cast by a stockholder shall not
exceed the number of shares he owns multiplied by the whole number
of directors to be elected.
ILLUSTRATIVE EXAMPLES
OF VOTING METHODS
Corporation X has to elect its 9 directors out of 15 candidates.
Stockholder A has 100 shares of stock.
1. Straight voting – A, chooses 9 candidates and gives each 100
votes.
2. Cumulative voting for one – A, my vote for only 1 candidate
and gives him 900 votes (100 shares x 9 directors).
3. Cumulative voting by distribution – A, may vote for only 4
candidates, thus; W- 300 votes; X – 300 votes; Y – 200 votes, Z – 100
votes.
REMOVAL OF DIRECTOR

A director of a corporation may be removed with or without

cause at a meeting called for that purpose by a vote of stockholders
representing at least two-thirds (2/3) of the outstanding capital stock,
or by at least two-thirds (2/3) vote of the members, in case of a non-
stock corporation. (Sec. 28, NCC)
Query: Can the board remove a director or trustee?
Answer: No, because the directorship is a title given by the
stockholders/members, so only the latter can remove a
director/trustee.
REQUESITES TO BE COMPLIED WITH IN
REMOVING A DIRECTOR/TRUSTEE
1. Removal must take place at a meeting called for that purpose.
2. Notice must be given to the stockholders purposely for that
removal.
3. Removal must be by a vote of 2/3 of the outstanding capital
stock or members.
FILLING UP OF VACANCY
IN THE BOARD
A vacancy in the Board of Directors/Trustees is filled up by the:
1. Stockholders/members – if the vacancy is caused by removal
or expiration of the director’s term.
2. Remaining directors – for any cause such as death,
Resignation or disqualification, as long as the remaining
directors/trustees constitute a quorum. If not, such vacancy will be
filled-up by the stockholders/members
ILLUSTRATIVE CASES

1. Five (5) of the nine (9) directors of ABC Corporation were

among the ill-fated passengers of a plane that crash-landed on Mt.
Apo, on its way back from Manila.
Who should fill up the five (5) vacancies in the Board?
Answer: The stockholders should vote for the five’s replacement. The
remaining four (4) directors do not constitute a quorum anymore.
2. Two (2) of the nine (9) directors were removed from office.
The vacancies can only be filled up by the stockholders/members.
Queries:
1. Are the directors or trustees allowed to vote or attend by
proxy at board meetings?
Answer: No. They must be personally present in the board
meeting.
2. Do the directors receive compensation/salary?
Answer: They do not receive compensation, but only
reasonable per diem, in the absence of any provision in the by-laws
fixing their compensation.
However, should the stockholders representing at least a
majority of the outstanding capital stock, grant them compensation,
such total yearly compensation of the directors shall not exceed then
(10) percent of the net income before income tax of the corporation
during the preceding year. (Sec. 30, NCC).
 3. Can the directors bind the corporation by
individual action?
Answer: No. Before the act of the directors produces
effect against the corporation, it must have been taken
collectively, after deliberate discussion and exchanges of
views.
Illustrative Case:
C, the manager of M corporation, was promised of an
increase in salary. To facilitate the payment of the
promised increase, he prepared a board resolution and had
it signed individually by a majority of the directors.
The treasurer of the corporation refused to pay his
increase in salary stating that the board resolution is not
valid. Is the treasurer correct?
 Answer: Yes. The authority of the board must be as a whole,
and they can bind the corporation only by acting together as a board
and not individually.
Three-fold Duties of Directors:
1. They must be obedient.
2. They must be diligent.
3. They must be loyal.
ILLUSTRATIVE CASE

The Board of Directors of SMC, with the approval of the

stockholders, amended its by-laws, by disqualifying any stockholder
from being elected as director of SMC if he is a stockholder or director
in a competitor corporation. Mr. G, with sufficient shares in SMC, but
majority owner of Rubina, SMC’s competitor in food products,
questioned before the SEC the amendment as being illegal. Is Mr. G
correct?
 Answer: No. The amendment is valid because directorship in a
corporation is a position involving trust and confidence. One cannot
serve two masters at the same time. (Gokongwei vs. San Miguel
Corporation).
POWERS OF THE CORPORATION

Express Powers. - Are those expressly authorized by law (Corporation

Law), or those provided in the corporate charter (Articles of
Incorporation), or by special law.
Example: Those enumerated in Sec. 36 of the New Corporation
Code.
Incidental Powers. – Are those powers which are incidental or
inherent in all corporations as legal entities.
Implied Powers. – Are those which can be fairly inferred from its
express powers. Simply stated, they are those which are essential or
necessary to the exercise of its express powers.
Powers Classified as both Express and Incidental:
1. Power of succession
2. Power to sue and be sued
3. Power to make by-laws
4. Power to have common seal
Some Implied Powers:
1. Acts in the usual course of business.
2. Acts to protect debts owing to the corporation.
3. Embarking on a different business.
4. Acts to aid its employees.
5. Acts to increase its business.
General Rule:
The act or decision of the Board is a corporate act if approved by
at least a majority of the directors, constituting a quorum.
However, most of the decision of the majority of the directors
require approval or ratification by the outstanding capital stock, in case
of a stock corporation, or 2/3 of its members, in case of a non-stock
corporation.
This is true in case of any amendment to articles of
incorporation or by-laws as the case may be.
SOME LIMITATIONS OF
CORPORATE POWERS:
1. A corporation engaged in transportation cannot engage in
any other business alien to transportation.
2. Private corporations or associations cannot possess or hold
alienable (disposable) lands of public domain (land owned by the
state) except by lease, for a period not exceeding 25 years, renewable
for not more than 25 years, and not to exceed one thousand hectares
in area.
3. Corporations engaged in agriculture are prohibited from
having any other interest in any other cooperation organized for the
purpose of engaging in agriculture.
4. A corporation, not a realty corporation, can acquire or own
real estate only up to the extent that the purpose for which the
corporation was formed may permit; and up to the extent that the
lawful business of the corporation may require. It cannot engage in
the buying and selling of public lands.
 5. Private corporations engaged in Retail Trade, Rural Banking
must be 100% Filipino owned.
6. Private corporations engaged in Public Utility, Development
of Exploitation of Natural Resources, or Coastal Trade, must be at least
60% Filipino owned.
7. For corporations engaged in pawnshop business, at least 70%
of its capital must be owned by Filipino citizens.
ULTRA VIRES ACT OF A CORPORATION

It is an act done by a corporation which is outside of its express,

implied or accidental powers.
It is not necessarily an illegal act, but an illegal act of a
corporation is always an ultra vires act.
Distinctions between ultra vires act and illegal act:
1. Ultra vires act is not necessarily an illegal act; while an illegal
act is one which goes against the law, morals, good custom, public
policy or public order.
2. Ultra vires act may be ratified by approval; while an illegal act
cannot be ratified.
3. Ultra vires act, if fully or partially executed can bind the
parties; an illegal act can never be binding.
STOCK CORPORATION

It is a private corporation which has capital stock divided into shares,

and is authorized to distribute profits to the holders of such shares.
Capital structure of a stock corporation.
1. Capital Stock – is the amount stated in the Articles of Incorporation
of a corporation, divided into shares of stock, and made available for
subscription.
Authorized Capital Stock – if shares have par value.
Stated Capital – if share have no par value.
2. Capital – is the actual property of estate of a corporation, whether
in property or money, including surplus and undivided profits.
3. Share of Stock – is the unit of a capital stock representing the
proportionate interest of its owner in the management, dividends, and assets
on liquidation of the corporation.
Distinction Between Par Value and No Par Value Shares:
Par Value – the value per share of stock is fixed in the Articles of
Incorporation, and will remain the same, until an amendment is
effected or made.
No Par Value – the value per share of stock is not fixed in the
Articles of Incorporation. Its value is fixed by the corporation only at
the time the share is issued for a consideration, which value, shall
however, be not less than P5.00 per share. The issue value varies,
depending upon the decision of the Board of Directors.
Corporations Not Allowed to Issue No. Par Value Shares:
1. Banks
2. Insurance companies
3. Building and Loan Associations
4. Trust Companies
5. Public Utility companies
PRE-REQUISITES TO INCORPORATION

Subscribed Capital Stock – means the capital stock or portion of

it which has been issued or subscribed, and paid for, in whole or in
part. For purposes of incorporation, the law requires that the
corporation’s subscribed capital stock must be at least twenty-five
percent (25%) of its authorized capital stock (Sec. 14 NCC).
Paid-up Capital Stock – is the amount actually paid in money or
property on account of the subscribed capital stock. For purposes of
incorporation, a corporation’s paid-up capital stock shall not be less
than twenty-five percent (25%) of its subscribed capital stock. But in
no case must it (paid-up) be less than P5,000.00.
ILLUSTRATIVE CASES

1. Corporation Y filed its Articles of Incorporation with the SEC

indicating
Authorized Capital Stock – P500,000.00
Subscribed Capital Stock - 100,000.00
Paid-up Capital Stock - - - - 50,000.00
Question: On the basis of its capital structure above, can it be
incorporated?
Answer: No. Although its paid-up capital stock is more than 25% of its
subscribed capital stock, the latter is less than 25% of its authorized
capital stock.
 2. Supposing the corporation has:
Authorized Capital Stock – P40,000.00
Subscribed Capital Stock - 15,000.00
Paid-up Capital Stock - - - - 4,000.00
Question: May it be incorporated?
Answer: No. Its paid-up capital is less than P5,000.
Note: The capital stock of a corporation may be increased or decreased
at a stockholders’ meeting called for the purpose wherein stockholders
representing two tihrds (2/3) of the outstanding capital stock shall
favor such increase or decrease, after prior approval by a majority vote
of the Board of Directors (Sec. 38 NCC).
TRUST FUND DOCTRINE

A doctrine which considers the subscribed capital stock as a

trust fund for the payment of the debts of the corporation, and to
which creditors have the right to look for the satisfaction of their
credits.
Statutory Classes of Shares of Stock:
The Corporation Code enumerates the classes of shares of stock
the corporation may issue. However, it requires a corporation to have
a class or series of shares of stock which have complete voting rights
(Sec. 6,NCC) Thus, for easy understanding, the statutory classes of
shares of stock are classified as:
1. Voting Shares of Stock; and
2. Non-voting shares of Stock
Founders’ Share – is a special class of voting share which is issued to
incorporators or those who founded the corporation. Such
incorporators are given certain rights and privileges not enjoyed by
owners of other stocks, provided that where the exclusive right to vote
and be voted for in the election of directors is granted, it must be for a
limited period not to exceed five (5) years.
The Non-Voting Shares:
They are so called because the holders cannot vote and be voted
for in the election for the members of the Board of Directors, with the
presence of the Founder’s shares. These are: 1. Preferred shares;
2. Redeemable shares; 3. Treasury shares; and 4. Common
shares (if there are preferred shares)
Note: Even if the above-mentioned shares are called non-voting
shares, they can however be voted for, or their holders are entitled to
vote on the following corporate matters, except Treasury shares, too
wit:
1. Amendment of the Articles of Incorporation;
2. Adoption and amendment of by-laws;
3. Sale of other or substantially all of the corporate property;
4. Incurring or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation;
7. Investment of funds in another corporation or for a different
purpose;
8. Corporate dissolution.
Preferred Share – entitles the holder to certain preference, especially
in the distribution of assets on liquidation, over holders of common
shares. It is always a par value share.
Common Share - entitles the holder to an equal pro-rata division of
profits without any preference.
Redeemable Share – which is usually a preferred share, is one which is
redeemable at a fixed date at the option of either the corporation or
the stockholder.
Treasury Share – one which has been issued and fully paid for but
reacquired by the corporation and placed in the treasury, hence it does
not have the status of outstanding share (BIR vs. Manning et al., 66
SCRA 14)
 Other Shares:
Promotion Share – issued to promoters as compensation in promoting the
incorporation of a corporation.
Escrow Share – one deposited to a third person to be delivered to the
stockholder after his compliance with certain conditions, usually the payment
of the full subscription price.
Over-issued Share – one issued in excess of the authorized capital stock,
hence null and void.
Watered share – is a share of stock issued by the corporation either:
a. Gratuitously (freely);
b. For money or property less than its par value;
c. Services less that its par value; and
d. In the form of dividends when no surplus profits exists, (Sec. 65
NCC)
ISSUANCE OF SHARES OF STOCK

Shares of stock are deemed issued from the moment

subscription is accepted whether the subscriber has paid in part or in
full for his subscription.
Modes of Issue:
Shares of stock are issued to interested persons for them to be
stockholders in any of the following modes:
1. By subscription;
2. By sale or exchange;
3. In payment of obligations; or
4. By stock dividends
Distinctions Between Subscription and Sale/Purchase:
Subscription – usually takes place before incorporation and is generally
paid on installment or upon call. A subscriber becomes a stockholder
upon subscription even before full payment.
Sale/Purchase – takes place after incorporation and full payment is
necessary before the purchaser becomes a stockholder.
Consideration for Issuance:
It may be:
1. Actual cash paid to the corporation;
2. Property delivered to the corporation at fair value;
3. Labor or services actually rendered to the corporation;
4. Prior indebtedness of corporation;
5. Amounts transferred from unrestricted retained earnings to
stated capital; or
6. Outstanding shares exchanged for stocks in the event of
reclassification.
CERTIFICATE OF STOCK

It is a written acknowledgment by the corporation of the

stockholder’s interest in the corporation.
It is a personal property and may be mortgaged or pledged or
transferred to other parties.
When is it issued?
It is issued to the stockholder as soon as he has fully paid his
subscription or purchase.
Note: A subscriber is entitled to all the rights of a fully paid
stockholder for as long as he (subscriber) has not been declared
“DELINQUENT” by the corporation.
A subscriber is declared delinquent upon his failure to pay upon
call by the corporation.
ILLUSTRATIVE CASE

X subscribed to 700 shares of stock in a single subscription, but

paid only for 400 shares, for which he was issued fully paid certificate
for 400 shares.
Question: Is he entitled to vote the paid shares notwithstanding the
fact that he has not paid the remaining 300 shares?
Answer: Yes, the 400 shares can be voted. The 300 unpaid shares can
also be voted, since he has not yet been declared delinquent.
Effect of Unregistered Transfer of Shares:
1. Valid only between the transferor and the transferee;
2. Invalid as against the corporation and the creditors; and
3. Transferor has still the right to vote.
Facts: X, transferred his shares to B, by indorsing and delivering his
certificate of stock covering his shares to B. However, the transfer has
not yet been registered in the books of the corporation.
Question: 1. Who is entitled to dividends, if any?
2. Who is liable for X’s unpaid subscription, if any?
Answer: 1. X, the transfer being not registered is valid only between
the parties. But B’s right is to proceed against X.
2. X, because the transfer is not valid as against the corporation.
After X has paid the corporation , his right is to collect from B what he
has paid to the corporation
Remedies of a Corporation to ENFORCE Payment of Unpaid
Subscription:
1. Sell to highest bidder (extra judicial);
2. Filing of ordinary court action (collection case);
3. Forfeiture of dividends.
Who is the Highest Bidder?
He is the person offering at the auction (public) sale to pay the
full amount of unpaid subscription, the interest the expenses of
advertising and the cost of sale for the smallest number of shares of
fraction of a share (Sec. 68, NCC)
Problem: X subscribed to 20 shares of stock with a par value
of P100 per share, paying P500. Afterwards, he was declared
delinquent for non-payment of his balance, and his unpaid
shares were offered in a public auction to highest bidder. The
cost of sale and interest accruing amounted to P200.
In the sale, A, B and C bidded for the unpaid balance,
thus:
A – P1,400 for 5 shares
B – P1,500 for 5 shares
C – P1,600 for 5 shares
Question: Who is the highest bidder?
Answer: None, because no one offered to pay the interest
and expenses.
 In the present problem, if:
A – bidded P1,700 for 7 shares
B -- bidded P1,700 for 4 shares
C – bidded P1,700 for 2 shares
Question: Who is the highest bidder?
Answer: C, because he offered to pay the unpaid subscription, interest
and sale expense for the smallest number of shares.
RIGHTS OF STOCKHOLDERS AND
DISSOLUTION OF CORPORATION
Some of the important rights of stockholders are:
1. Voting right
2. Pre-emptive right
3. Appraisal right
4. Remedial right
5. Right to inspect books and records
6. Right to call for the voluntary dissolution of the corporation
7. Right to dividends

VOTING RIGHT:
The right of any holder of share of stock to vote is mandated by
law, except treasury shares.
 It is reiterated however, that if a corporation has Founder’s
shares, holders thereof may be given the exclusive right to vote and be
voted upon as members of the Board of Directors, for a period of not
more than five (5) years, to the exclusion of all other shareholders.
The rule is that every shareholder has the right to vote on the
following corporate matter/issues:
1. Election and removal of directors
2. Adoption and amendment of by-laws
3. Amendment to Articles of Incorporation
4. Merger and consolidation
5. Sale of all or substantially all of the corporation’s assets
The shareholders may vote either:
1. Directly
2. Indirectly through a representative by means of:
a. A proxy;
b. A trustee; or
c. An executor, administrator or receiver appointed by the court.
Proxy – is a person who is given a written authority by a stockholder to
vote for him at the stockholders’ meeting. Such authority cannot
exceed five (5) years.
Voting Trust Agreement – is an agreement between a group of
stockholders and a TRUSTEE, wherein for a period of five (5) years,
control over the group’s shares of stock is given to the trustee. Its
primary purpose is to control voting.
Very Important: Resolutions passed on approval by the majority of
Directors regarding any amendments to Articles of Incorporation or by-
laws, sale of all corporate assets, merger/consolidation among others,
need the approval or votes of the stockholders representing at least
2/3 of the outstanding capital stock of the corporation.
PRE-EMPTIVE RIGHT- is the right of stockholders at the time of the
increase of capital stock, in preference to other persons, and as
between themselves, to subscribe or purchase the unissued shares of
stock in proportion to the number of shares held by them respectively.
Illustrative Case:
Corporation Y has authorized capital stock of P500,000.00. Par
value per share is P200.00. As of today, it has subscribed capital stock
of P400,000.00, hence it still has 500 unissued shares of stock.
Question: Do the stockholders have pre-emptive right to purchase the
500 share in preference to outsiders?
Answer: No. The unissued 500 shares are not the result of an increase
in the corporation’s authorized capital stock.
RIGHT TO INSPECT THE BOOKS AND RECORDS: (Sec. 74, NCC)
A stock corporation must have the following books and records
which must be made available to the stockholders for inspection, to
wit:
1. Records of business transactions
2. Minutes of stockholders’ meeting
3. Minutes of Directors’ meeting
4. Stock and transfer book
5. Optional and subsidiary books
6. Books required by special law
7. Books for the names of stockholders
 Within ten (10) days from request of a stockholder, the
corporation shall furnish him a copy of its most recent financial
statements including a balance sheet as of the end of the last taxable
year, as well as a profit or loss statement (Sec. 75, NCC).
APPRAISAL RIGHT (Sec. 81 NCC):
Is a right granted to a dissenting stockholder to demand
payment of the fair value of his shares, who voted against the
following corporation actions:
1. In case of amendment to the Articles of Incorporation,
changing, restricting or enlarging stockholder’s rights;
 2. In case of amendment to the Articles of Incorporation
extending or shortening the corporate life;
3. In case of sale or other disposition of all or substantially all of
the corporate assets;
4. In case of merger or consolidation.
Upon demand, the stockholder’s rights are suspended, except
his right to receive the fair value of his shares. If, however, within 30
days after the award he has not been paid, all his rights shall be
restored to him.
Merger, Consolidation, holding Company, and Sales:
Are the modes of corporate combination or amalgamation.
Consolidation – is the process of combining two corporations, giving
rise to a new corporation, dissolving the two.
Example: A + B = C
Merger – is the process of combining two corporations, with one
corporation absorbing the other and remains in existence, while the
other is dissolved.
Example: A + B = A or B
Holding or Parent Corporation – is a corporation more than 50% of its
capital stock is owned, directly or indirectly, by not more than five
persons, and 80% or more of its gross income is derived from
investment or other passive income.
It normally acquires controlling interest in the stock of one
corporation. The corporation whose stock I acquired for the purpose
of control is called the subsidiary corporation.
Effect of Merger and Consolidation:
The surviving (in case of merger) or the new corporation (in
case of consolidation) shall possess all the rights and privileges of a
corporation organized under the law.
It shall absorb all the liabilities and obligations of each of the
constituent corporations.
REMEDIAL RIGHT:
This refers to the right of a stockholder to bring suit (action) in a
corporation.
Classes of Suits:
1. Individual suit – is one brought or filed to assert a right by a
stockholder against the corporation in his own name to redress
violation of is right.
2. Representative suit – is a suit brought by a stockholder in his
own behalf and in behalf of other stockholders similarly situated,
against the corporation, to redress a wrong committed against them.
This is otherwise known as “class suit”.
 3. Derivative suit – is one brought by a stockholder for and in
behalf of the corporation, against a third person to redress a wrong
committed against the corporation for which the directors refused to
take an action. This may also be filed in the name of the corporation
against a director.
Problem: Reliably informed that the properties of the corporation are
being wasted and fraudulently disposed of by the management, the
minority stockholders met and decided to file a suit.
Question: What proper suit should be filed by them?
Answer: Derivative suit.
RIGHT TO DIVIDENDS:
Dividend is defined as unrestricted retained earnings set apart
from the general mass of the funds of the corporation and distributed
among the stockholders in proportion to their shares or interest in the
corporation (Sec. 43, NCC).
Classes of Dividend:
1. Cash – payable in cash
2. Property – payable in form of property, such as warehouse
receipts, or shares of in another corporation.
3, Stock dividend – payable in the corporation’s own stock.
4. Composite dividend – payable partly in cash and partly in
stocks.
Distinctions Between Cash Dividends and Stock Dividends:
1. Declaration of cash dividends creates a debt of the
corporation to each of its stockholders, while no debt of the
corporation is created if it is a stock dividend.
2. Cash dividends do not increase the corporate capital, while in
stock dividends, the outstanding capital stock is increased.
3. Cash dividends, once declared and paid, become the absolute
property of the stockholders, hence cannot be reached by the
creditors of the corporation, while stock dividends, being still part of
corporate property, can still be reached by the creditors as satisfaction
for debts.
 4. Cash dividends are declared solely by the Board of Directors,
while in stock dividends, the declaration of the Board needs the
approval or vote of the stockholders representing at least 2/3 of the
outstanding capital stock.
5. As long as unrestricted retained earnings exist, cash dividends
can be declared, whereas even if unrestricted retained earnings exist,
no stock dividend can be validly declared, if the corporation ha no
more unissued shares of stock.
DISSOLUTION OF A CORPORATION

DISSOLUTION DEFINED:
It is the extinguishment of the franchise of a corporation and the
termination of its corporate existence.
Modes or Methods of Dissolution;
1. Voluntary dissolution
2. Involuntary dissolution
Voluntary Dissolution is either:
1. Where no creditors are affected (Sec. 118)
2. Where creditors are affected
3. By shortening corporate term.
Procedure for Voluntary Dissolution:
A. Where no creditors are affected:
1. Affirmative vote of majority of the Directors;
2. Call for meeting of stockholder and publication of notice of
the same once a week for three weeks;
3. Affirmative vote of stockholders representing 2/3 of
outstanding capital stock;
4. Submission to the SEC of certified copy of resolution signed
by the majority of directors and countersigned by the secretary
B. Where creditors are affected:
1. Call for meeting of stockholders for the specific purpose of
dissolving the corporation;
2. Affirmative vote of stockholders owning at least 2/3 of its
outstanding capital stock;
3. Filing of petition for dissolution with the SEC, petition signed
by the majority of the directors and verified by the President or
Secretary;
4. SEC issues an order setting the date of filing of objection to
dissolution, which should not be less than 30 days nor more than 60
days after entry of order;
 5. Publication of the SEC’s order in a newspaper, once a week
for three consecutive weeks;
6. Hearing of petition by the SEC;
7. Judgment by the SEC.
C. Shortening corporate term:
It is done by amending the Articles of Incorporation to shorten
corporate life, and submitting a copy of such amendment to the SEC;
when the shortened term expires, the corporation is deemed dissolved
without further proceedings (Sec. 120, NCC)
INVOLUNTARY DISSOLUTION:
A corporation may be involuntarily dissolved by the SEC upon filing with
the SEC of a verified complaint on grounds such as:
1. Violation of the New Corporation Code;
2. Failure to organize and commence business within two (2) years
from date of incorporation;
3. Inactivity for five (5) years.
Winding-up or Liquidation:
It means the winding up of the affairs of the corporation by getting in
its assets, settling with creditors and debtors, and apportioning the amount of
profit and loss.
This includes the filing of suites.
Winding-up period is good for three years after the corporation is
dissolved voluntarily or involuntarily.
Methods of Liquidation or Who may do the Liquidation:
1. By a receiver as appointed by the Court if the corporation is
under receivership.
2. By the corporation itself, through its Board of Directors;
3. By the Trustees to whom it conveyed all its assets upon
dissolution.
Order of Preference in Distribution of Assets upon Dissolution:
1st – Payment to outside creditors, then continuing with
common creditors (insiders);
2nd – Refund of par value stocks of preferred shareholders, if
any;
3rd – Refund of par value stocks of common shareholders.
4th – The excess assets are proportionately distributed to all
stockholders.
Note: Upon liquidation, any asset distributable to any creditor or
stockholder is unknown or cannot be found shall be escheated or
forfeited in favor of the city or municipality where such assets are
found.
Effects of Dissolution:
1. The corporate powers shall cease for the purpose for which it
was established.
2. The corporation continues for the purpose of winding-up fo a
period of three (3) years.
3. After three years, the corporation shall cease to exist for all
intents and purposes and as a rule it can no longer sue or be sued (Sec.
122 NCC).