Reviewer PARTNERSHIP Cristhian Rey Bagadiong Botor Chapter 4 Limited Partnership Article 1843 Limited Partnership Defined Q: What

is limited partnership? A: Limited partnership is one 1. formed by two or more 2. under the provisions of Article 1844 of the New Civil Code 3. having as members one or more general partners and one or more limited p artners Q: Are limited partners bound by the obligations of the partnership? A: The limited partners as such shall not be bound by the obligations of the par tnership Article 1844 Requisites in the Formation of Limited Partnership Q: What are the requisites in forming a limited partnership? A: The requisites in forming a limited partnership are the following: 1. The signing under oath of the required certificate; and 2. The filing for record of the certificate in the Office of the SEC Note: One of the requisites in forming a limited partnership is the signing unde r oath of the required certificate which shall state the 1. Name of the partnership, adding thereto the word Limited 2. The character of the business 3. The location of the principal place of business 4. The name and place of residence of each member, general and limited part ners being respectively designated 5. The term for which the partnership is to exist 6. The amount of cash and a description of and the agreed value of the othe r property contributed by each limited partner 7. The additional contributions, if any 8. The share of profits which each limited partners shall receive by reason of his contribution 9. The rights specially given to limited partners or to some of them, and t o the general partners (See: j to n. Article 1844) Note: A limited partnership is formed if there has been substantial compliance i n GF with the foregoing requirements Q: What if these requisites are not fulfilled? A: If these requisites are not fulfilled, it is not considered a limited partner ship but a general partnership Reason: A firm transacting business as a partnership is presumed to be a general partnership Note: The contribution of each limited partnership must be stated. Q: What if only the aggregate contribution is stated? A: If the aggregate sum given by two or more limited partners is given, the law has not been complied with (therefore, no limited partnership)

Note: The law requires the firm name to have the word Limited. Q: What if the term Limited is omitted in the firm name? A: If the term Limited is omitted in the firm name, the name cannot be considered the firm name of a limited partnership Article 1845 What the Limited Partner Can Contribute Q: What can a limited partner contribute? A: The contributions of a limited partner may be cash or other property, but not services (Therefore, industrial partner cannot be a limited partner) Q: An industrial partner cannot be a limited partner. But can an industrial part ner be a general partner? A: Yes. Article 1845 speaks only of a limited partner Article 1846 Non-Inclusion of Name of the Limited Partner Note Rule: The surname of a limited partner shall not appear in the partnership name Note Exceptions: 1. If the surname of a limited partner is also the surname of a general par tner 2. If prior to the time when the limited partner became such, the business had been carried on under a name in which his surname appeared Q: What will be the effect if the rule is violated? A: A limited partner violating this article shall be liable as a general partner to innocent third parties, without however the rights of a general partner Article 1847 Liability for a False Statement in the Certificate of Limited Partnership Q: What if the certificate contains a false statement and by reliance on such st atement, one suffers loss. May he hold liable a party to the certificate? A: Yes, provided that the party to the certificate knew the statement to be fals e: 1. At the time he signed the certificate; or 2. Subsequently, but within a sufficient time before the statement was reli ed upon to enable him to cancel or amend the certificate or to file a petition f or its cancellation or amendment as approved in Article 1865 (Requisites for Ame nding or Cancelling the Certificate of Limited Partnership) Note: The person who suffers loss because of a false statement in the certificat e can sue for damages. Article 1848 Effect of Limited Partners Taking Part in the Control of the Business Note Rule: A limited partner shall not become liable as a general partner Note Exception: 1. If he takes part in the control of the business Acts which do not constitute taking part in the course of business 1. Mere dealing with customer

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Mere consultation on one occasion with the general partners

Acts which constitutes taking part in the course of business 1. Selection of who will be the managing partners 2. Supervision over a superintendent of the business of the firm Article 1849 Admission of Additional Limited Partners Q: May additional limited partners be admitted after the formation of a limited partnership? A: Yes, additional limited partners may be admitted upon filing an amendment to the original certificate in accordance with the requirements of Article 1865 Note: The firm may still admit new limited partners provided there is proper ame ndment to the certificate Q: Say additional limited partners are taken in without proper amendment of cert ificate with the SEC, will the failure to properly amend the certificate result in the dissolution of the limited partnership? A: No. Failure to properly amend the certificate with the SEC does not result in the dissolution of the limited partnership. Article 1950 Rights of a General Partners Note Rule: A general partner shall have all the rights and powers and be subject to all the restrictions and liabilities of a partner in a partnership without l imited partners. Note Exceptions: 1. Without the written consent or ratification of the specific act by all l imited partners, a general partner or all of the general partners have no author ity to: a. Do any act in contravention of the certificate b. Do any act which would make it impossible to carry on the ordinary busin ess of the partnership c. Confess a judgment against the partnership d. Possess partnership property, or assign their rights in specific partner ship property, for other than partnership purpose e. Admit a person as a general partner f. Admit a person as a limited partner; unless the right so to do is given in the certificate g. Continue the business with the partnership property on the death, retire ment, insanity, civil interdiction or insolvency of a general partner, unless th e right so to do is given in the certificate Reason: In a sense the acts are acts of strict dominion or ownership, and are no t generally essential for the routine or ordinary conduct of the firms business Q: If a general partner in a limited partnership goes abroad, his capacity to bi nd the firm is governed by what law? A: If a general partner in a limited partnership goes abroad his capacity to bin d the firm is governed by the law of the place where the limited partnership was formed Article 1851 Rights of a Limited Partner Q: What are the rights of a general partner?

A: The rights of a general partner are the following: 1. Have the partnership books kept at the principal place of business of th e partnership, and at a reasonable hour to inspect and copy any of them 2. Have on demand true and full information of all things affecting the par tnership; and a formal account of partnership affairs whenever circumstances ren der it just and reasonable 3. Have dissolution and winding up by decree of court 4. Have the right to receive a share of the profits or other compensation b y way of income and to the return of his contribution as provided in Article 185 6 and 1857 Note However: That a limited partner cannot bind the firm by contract Article 1852 Contributor Who Erroneously Believes He Has Become a Limited Partner Q: What if a contributor who erroneously believes that he has become a limited p artner exercise the rights of a limited partner, should he be considered as liab le as a general partner? A: No. If a contributor erroneously believes that he has become a limited partne r and thereupon exercises the rights of a limited partner, he should not general ly be considered as liable as a general partner. Note However: That a contributor who erroneously believes that he has become a l imited partner can still be liable as a general partner 1. UNLESS on ascertaining the mistake he promptly renounces his interest in the profits of the business or other compensation by way of income; or 2. UNLESS even if no such renouncing is made, partnership creditors are NO T prejudiced Article 1853 General Limited Partner Q: May a person be a general and a limited partner at the same time (General Lim ited Partner)? A: Yes, provided same is stated in the certificate Note Rule: General Limited Partners rights are those of a general partner, hence, third parties can go against his individual properties Note Exception: Regarding his contribution he would be considered a limited part ner, with the rights of a limited partner, insofar as the other partners are con cerned Article 1854 Right of a Limited Partner to Lend Money and Transact Other Business with the Fi rm Q: May a limited partner loan money to and transact other business with the part nership? A: Yes. A limited partner also may loan money to and transact other business wit h the partnership Q: May a limited partner receive on account of resulting claims against the part nership, with general creditors, a pro rata share of the assets? A: Yes. Unless he is also a general partner, receive on account of resulting cla ims against the partnership, with general creditors, a pro rata share of the ass ets Note Restrictions: No limited partner shall in respect to any such claim:

1. Receive or hold as collateral security any partnership property or 2. Receive from a general partner or the partnership any payment conveyance , or release from liability, if at the time the assets of the partnership are no t sufficient to discharge partnership liabilities to persons not claiming as gen eral or limited partners Note: The receiving of collateral security or payment, conveyance, or release in violations of the foregoing provisions is a fraud on the creditors of the partn ership Note Also: That while the limited partner is prohibited to receive or hold as co llateral security any partnership property, still he is NOT prohibited to purcha se partnership assets which are used to satisfy partnership obligations towards third parties Article 1855 Preference to Some Limited Partners as to the Return of Their Contributions Q: Can it be agreed upon by the members that one or more of the limited partners shall have a priority over other limited partners as to the return of their con tributions, as to their compensation by way of income, or as to any other matter ? A: Yes. When there are several limited partners the members may agree that one o r more of the limited partners shall have a priority over other limited partners as to the return of their contributions, as to their compensation by way of inc ome, or as to any other matter. Note: That preference can be given to some limited partners over the other limit ed partners Note However: That the preference must be stated in the certificate Q: What is the nature of the preference? A: Preference may refer to: 1. the return of contributions 2. compensation 3. other matters Article 1856 Profit or Compensation of Limited Partners Note Provision: That limited partners may receive from the partnership the share of the profits or the compensation by way of income stipulated for in the certi ficate Note Condition: For the provision to apply, partnership assets must be in excess of partnership liabilities to 3rd persons, not liabilities to partners Note: Excess must be sufficient to continue the regular transaction of the busin ess Article 1857 Return of Contributions Q: What are the conditions that must exist before contributions (or part thereof ) by a limited partner can be returned to him? A: (Par. 1, 1857) A limited partner shall not receive from a general partner or out of partnership property any part of his contribution until: 1. All liabilities of the partnership, except liabilities to general partne rs and to limited partners on account of their contributions, have been paid or

there remains property of the partnership sufficient to pay them; 2. The consent of all members is had, unless the return of the contribution may be rightfully demanded under the provisions of the second paragraph; and, 3. The certificate is canceled or so amended as to set forth the withdrawal reduction Note Very Important: That a limited partner may rightfully withdraw Q: When such contributions can be returned? A: Provided that the conditions are complied with, a limited partner may rightfu lly demand the return of his contribution: 1. On the dissolution of a partnership; or 2. When the date specified in the certificate for its return has arrived; o r 3. After he has given a months notice in writing to all other members, if no t time is specified in the certificate, either for the return of the contributio n or for the dissolution of the partnership Note Rule: That as a rule, even if a limited partner has contributed property, h e has the right to demand and receive cash in return Note: That if paragraph 1 is violated, previous creditors can sue, but they must allege and prove the non-existence of the conditions Q: May a limited partner have the partnership dissolved and its affairs wound up ? A: Yes. A limited partner may have the partnership dissolved and its affairs wou nd up when: 1. He rightfully but unsuccessfully demands the return of his contribution, or 2. The other liabilities of the partnership have not been paid, or the part nership property is insufficient for their payment as required by the first para graph, and the limited partner would otherwise be entitled to the return of his contribution Q: Suppose a limited partner withdraws rightfully his contribution (all conditio ns being fulfilled, particularly the complete solvency of the firm as of the ti me of the withdrawal) and the certificate is amended properly, would he still be liable to previous creditors if later on the firm becomes insolvent? A: Yes. It is unfair for him to keep the cash and leave the creditors with nothi ng. His contribution (even if already returned to him) is to be treated as a tru st fund for the discharge of liabilities. Moreover, the sum should include the i nterest presumably earned. (See 1858) Note However: that future creditor cannot make use of the principle enunciated i n the above cited case in view of the amended certificate, EXCEPT of course if t he money had been wrongfully returned to the limited partner (See 1858) Article 1858 Liabilities of a Limited Partner Q: What are the liabilities of a limited partner? A: A limited partner is liable to the partnership: 1. For the difference between his contribution as actually made and that st ated in the certificate as having been made; and, 2. For the unpaid contribution which he agreed in the certificate to make i n the future at the time and on the conditions stated in the certificate Q: Are these liabilities waivable? A: Yes, but two conditions must be followed:

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All the other partners must agree Innocent third party creditors must not be prejudiced.

Q: When are third party creditors innocent? A: They are innocent when their claim for extension of credit was before the can cellation or amendment of the certificate Note: That a limited partner holds as trustee for the partnership: 1. Specific property stated in the certificate as contributed by him, but w hich was not contributed or which has been wrongfully returned 2. Money or other property wrongfully paid or conveyed to him on account of his contribution Problem: A, a limited partner, received the return of his contribution on the da te stated in the certificate. It was discovered that the remaining assets were i nsufficient to pay two creditors, X and Y. Xs claim arose BEFORE the return; Ys cl aim arose AFTER the return. Should A be compelled to give back what he had recei ved? Answer: I distinguish: 1. Xs claim should be satisfied out of what has been returned to A because h is claim arose BEFORE the return. If there is a balance, it should be returned t o A. If there is a deficit, A is not liable for this because he is only a limite d partner. 2. Ys claim does not have to be satisfied from what has been returned to A b ecause his claim arose AFTER the return. Ys claim should be directed against the general partners.