Atty. Aris S.

Manguera Ateneo de Manila University School of Law

PHILIPPINE LAW ON PARTNERSHIP IN A NUTSHELL1

A. B. C. D. PARTNERSHIP ELEMENTS OF PARTNERSHIP CHARACTERISTICS OF PARTNERSHIP WEAKNESSES OF A PARTNERSHIP FORM IMPLICATIONS OF DELECTUS PERSONARUM MEANING OF MUTUAL AGENCY PARTNERS UNLIMITED LIABILITY KINDS OF PARTNERS MAY SPOUSES VALIDLY ENTER INTO A PARTNESHIP RELATION? RIGHTS OF PARTNERS OBLIGATIONS OF THE PARTNERSHIP TO THIRD PARTIES DUTIES AND OBLIGATIONS OF PARTNERS OBLIGATIONS OF NON-PARTNERS DIFFERENCE OF A PARTNERSHIP FROM A CORPORATION DISSOLUTION, WINDING-UP, TERMINATION LIMITED PARTNERSHIP CAN TWO CORPORATIONS FORM A PARTNERSHIP?

E.
F. G. H. I. J. K. L. M. N. O. P.

Q.

A. Partnership Three Levels of Existence 1. As a contract Partnership is a contract whereby two or more persons bind themselves to contribute money, property or service to a common fund, with the intention of dividing the profits among themselves. (Article 1767) 2. As a juridical person The partnership has a juridical personality separate and distinct from that of each of the partners,.. (1768) 3. As a Business enterprise A partnership is a business venture (Partnership is an organization for production of income to which each partner contributes one or both of the ingredients of income, which are capital or service.)

B.

Elements of Partnership (1767, 1770, 1771, 1784)

1.
(1769)

Consent: Meeting of the minds between two or more persons to form a partnership

2.

Subject Matter: Creation of Common Fund (with the intention of dividing profits (losses) among themselves.(1767) 3. Consideration: The contribution of cash, property or service to business venture. (1786, 1787, 1789, 1790, 1830(4)) C. Characteristics of Partnership

1.

Essentially contractual in nature (Arts. 1771, 1767, 1768,1784, ,1785 except 1772, 1773 and 1843 ) 2. Separate juridical personality 3. Delectus Personarum (Arts. 1804, 1813) 4. Mutual Agency (Art.1803, 1818) 5. Personal liability of partners for partnership debts. (1816,1817)

D.
1

Weaknesses of a Partnership Form

Based on Dean Cesar Villanuevas Outline.

Atty. Aris S. Manguera Ateneo de Manila University School of Law

1. Partners are co-owners of the partnership properties and enjoy personal possession (Art. 1811) 2. Partners may individually dispose of real property of the partnership even when in partnership name. (Art. 1819) 3. Dissolution of the partnership can come about by the change in the relationship of the partners, such as when a partner chooses to cease being part of the partnership. (Arts. 1828, 1830(1)(b)) Expulsion of partner dissolves the partnership (Art. 1830(1)(d)) By the loss of the thing promised to be contributed to the partnership (Art. 1830(4)

Death2, insolvency or civil interdiction of a partner dissolves the partnership (Art 1830(5)(6)(7) Petition by partner will dissolve the partnership when a partner has been declared insane; or the partner has become incapable of performing his part of the partnership contract; a partner has been found guilty of such conduct as tends to affect prejudicially the partnership business; partner willfully or persistently commits a breach of partnership agreement; the partnership business can only be carried at a loss; other equitable reasons (Art 1831) E. Implications of Delectus Personarum 1. The assignment of a partner of his share does not make assignee a partner. 2. The existence of the partnership is closely tied-up to the particular contractual relationship of the partners. F. Meaning of Mutual Agency

1.

In the absence of contractual stipulation, all partners shall be considered agents and whatever any one of them may do alone shall bind the partnership. (Arts. 1803(1), 1818) 2. Partners can dispose of partnership property even when in partnership name. (Art. 1819) 3. An admission or representation made by any partner concerning partnership affairs is evidence against the partnership. (Art. 1820) 4. Notice to any partner of any matter relating to partnership affairs is notice to the partnership. (Art. 1821) 5. Wrongful act or omission of any partner acting for partnership affairs makes the partnership liable. (Art. 1822) 6. Partnership bound to make good losses for acts or misapplications of partners. (Art. 1823) G. Partners Unlimited Liability

1.

All partners are liable pro rata with all their properties and after partnership assets have been exhausted, for all partnership debts. (Art. 1816) 2. Any stipulation against personal liability of partners for partnership debts is void, except as among them. (Art. 1817) 3. All partners are liable solidary with the partnership for everything chargeable to the partnership when caused by the wrongful act or omission of any partner acting in the ordinary
2

The death of a partner, as a general rule, dissolves the partnership by operation of law, except of the articles of partnership stipulate for the continuance of the partnership relations upon the death of any of the partners. (SEC Opinion, April 28, 1995) If the remaining partners of the dissolved partnership intended for all legal intents and purposes, to continue the partnership business even after the death of a partner, there is continuity of personality of the partnership as there exist a partnership at will. (SEC Opinion, August 5, 1997)

Atty. Aris S. Manguera Ateneo de Manila University School of Law

course of business of the partnership or with authority form the other partners and for partners act or misapplication of properties. (Art. 1824) 4. A newly admitted partner into an existing partnership is liable for all the obligations of the partnership arising before his admission but out of partnership property shares. (Art. 1826) 5. Partnership creditors are preferred to those of each of the partners as regards the partnership property. (Art. 1827) 6. Upon dissolution of the partnership, the partners shall contribute the amounts necessary to satisfy the partnership liabilities. (Art 1839(4)(7)) H. Kinds of Partners As to Object3 1. Universal Partnership is one where the contract of partnership encompasses either all the present properties of the partners or to all of the profits. (1777) 2. Particular Partnership has for its object determinate things, their use or fruits, or a specific undertaking, or the exercise of a vocation. (1783) As to Duration 1. Partnership with fixed term 2. Partnership for a Particular Undertaking 3. Partnership at Will As to Liability 1. General partners, or those who can be held liable for partnership obligations even to the extent of their private property. 2. Limited partners, or those who cannot be held liable for partnership obligations. As to Contribution 1. Capitalist partners, or those who contribute money or property to the common fund. 2. Industrial partners, or those who contribute only their skill or industry to the common fund. As to Management 1. Managing partners, or those who manage or administer partnership affairs. 2. Silent partners, or those who have no voice in the management of partnership affairs. As to Third Persons 1. Ostensible partners, or those publicly known as such 2. Secret partners, or those whose connection with the partnership is not known. They are also known as dormant partners. 3. Partners by estoppel, or those who represent themselves, or consent to another or others representing them to anyone as partners either in an existing partnership or in one fictitious or apparent. They are also known as de facto partners. I. May Spouses Validly Enter into a Partnership Relation? 1.

2.
3.

Spouses Cannot Enter into a universal Partnership (1782) Spouses are not disqualified from becoming partners in a limited partnership, provided both of them are limited partners or at least one of them is a limited partner. (Villanueva 566, See CIR v. Suter) Spouses are not qualified to enter into other forms of partnership for gain as a separate property arrangement apart from the property regime prevailing in their marriage bec.: a. Every from of partnership (except universal) effectively makes partners donors to one another. A partnership arrangement between spouses would thereby be an indirect violation of the provisions of Article 87 of the Family Code.(See also Art 1490 NCC)

Persons who are disqualified from donating to one another cannot enter into a universal partnership of any sort. (See exception CIR v. Suter, 27 SCRA 152 (1969)

Atty. Aris S. Manguera Ateneo de Manila University School of Law

b.

There is a clear implication under the Family Code that the property regime must govern spouses must be in accordance with the provisions of said Code, and cannot be subject of regular partnership rules under the New Civil Code.

J.

Rights of Partners (1810) 1. Rights in specific partnership property (co-ownership power) (1811) 2. His interest in the property (equity interest) (1812, 1813 3. Right to participate in the management (Management power) (1803, 1818, 1829, 1820, 1821, 1822, 1823, 18241800,1801,1802;Immmovables: 1774, 1803)) 4. Right to Participate in Profits (1797, 1798, 1799) 5. Right to be reimbursed for expenses incurred on behalf of the partnership (1796) 6. Right to Inspect (1805) 7. Right to demand true and full information (1806) 8. Right to demand accounting (1809) 9. Right to dissolve the partnership Obligations of the Partnership to Third Parties (1768, 1815, 1818, 1796) Duties and Obligations of Partners 1. Obligation to contribute common fund (1786, 1790; Sum of Money: 1788; Property: 1786, 1795; Godds:1787; Real Property: 1771, 1772, 1773; Industry 1789, 1797; Additional Contribution: 1791)

K.
L.

Fiduciary Duties of Partners: 1. Duty of Diligence (1794, 1800) 2. Duty of Loyalty (1792, 3. Duty to Account (1806, 1807) (Specific Fiduciary Duty of Industrial Partner: 1789) (Specific Duty of Loyalty of Capitalist Partners: 1808) M. Obligations of Non-Partners A non-partner may become liable for partner debts and obligation is when there is estoppel or when the public is made to believe that one person is a partner when in fact he is not. (1815, 1825) N. Difference Between a Partnership and Private Corporation With regard to Creation A partnership is created by voluntary agreement of the partners, whereas a corporation is always created by some express legislative authority either in the form of a special law or genera law. With regard to liability of members Partners are usually liable to partnership creditors not only to the extent of their capital contribution to the firm but even with their own private property, whereas the stockholders of a corporation, after they have paid for their shares, are not subject to any further liability, unless otherwise provided by law. With regard to effect of transfer of interest Because of the rule of delectus personarum, the third person to whom a partner has transferred his interest in the partnership does not become a partner without the consent of all the other partners, whereas the third person to whom a stockholder has transferred his shares becomes automatically a stockholder even without the consent of the other stockholders. With regard to effect of death of bankruptcy of members The death of bankruptcy of a partner usually causes the dissolution of the firm, whereas the death of bankruptcy of a stockholder does result in such dissolution.

Atty. Aris S. Manguera Ateneo de Manila University School of Law

With regard to effect of acts of members As a general rule, the partners are the agents of the partnership; hence, acts of the partners done for the account of the partnership are binding not only on the partnership but also on the partners. On the other hand, whatever acts of stockholders might execute for the account of the corporation, either individually or collectively, are not binding on the corporation. O. Dissolution, Winding-up and Termination Dissolution refers to the change in relation of the partners caused by any partner ceasing to be associated in the carrying on as distinguished from the winding up of business. (Pertains to partnership as a contract) (1830; Legal Effects: 1832-1838) Termination defines the time when all matters pertaining to the business enterprise have been completed. It is the point in time after all the partnership affairs have been wound up. (Pertains essentially to partnership as business enterprise) Winding-up is the process which is commenced by the dissolution of the contract of partnership between and among the partners, and is conducted upon the termination of complete liquidation of the partnership business enterprise. (Procedure and Rules: 1839) P. Limited Partnership A limited partnership may be formed by executing the articles of partnership providing for a general partner and limited partners, and the limited partners shall not be bound personally for the obligations of the partnership. (Art. 1843), provided the following conditions are met: 1. Register with the SEC the articles of limited partnership 2. The limited partner cannot choose to contribute service. (Art 1845) 3. The surname of the limited partners shall not appear in the partnership name. (Art. 1846) 4. The limited partner shall not take part in the management of the partnership. (Art. 1848) 5. Upon dissolution, the right of the limited partners to receive partnership property is conditioned upon full payment of partnership creditors. (Art. 1863) Q. Can Two Corporations Form a Partnership? A: No. This is because in partnership, other partners can bind the partnership under the principle of mutual agency which violate the principle of centralized management of a corporation under Section 23 of the Corp. Code which provides that only the Board of Directors can bind the corporation.