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1.

2.
1837

3.

Two Aspects of Causes of Dissolution


1.

Partnership contract NOT violated (death, arrival of a


term etc)

To have the partnership property applied to


discharge the liabilities of the partnership
To have the surplus, if any, applied to pay in
cash the net amount owing to the respective
partners

*When dissolution is caused by expulsion of a partner


bona fide, such partner may be discharged from all
partnership liabilities either by payment or by agreement
between him, partnership creditors and other partners.
He shall have the right only to receive in cash the net
amount due him.
2.

1839LIQUIDATION
*applies only if there is a contrary agreement
Assets of Partnership

Rights

Right of lien or retention


Right to subrogation in place of partnership creditors
after payment of partnership liabilities
Right of indemnification by the guilty partner

Partnership contract is violated


a. Rights of partner
WHO HAS NOT
CAUSED THE DISSOLUTION
WRONGFULLY
i. To have the partnership property applied
for the payment of its liabilities and to
receive in cash his share of the surplus
ii. To be indemnified for damages caused
by the partner guilty of wrongful
dissolution
iii. To continue the business in the same
name during the agreed term of the
partnership
iv. To possess partnership property should
they decided to continue the business
1. Bond approved by court
2. Payment of guilty partners interest at
time of dissolution minus the
damages
b. RIGHTS OF A APRTNER WHO HAS
WRONGFULLY CAUSED THE
DISSOLUTION
i. If the business is not continued by others
1. To have the partnership property
applied to discharge the liabilities
2. To receive in cash his share of the
surplus less damages caused by his
wrongfull dissolution
ii. If the business is continued
1. to have the value of his interest less
any damage caused by dissolution to
his co-partners, ascertained and paid
in cash or secured by bond approved
by court
2. To be released from all existing and
future liabilities of partnership

No share in the good willconsequence of bad faith of


guilty partner. Sale of goodwill only applies to commercial
partnerships not professional partnership.
1838right of partnership to rescind or annul
contract of partnership (because of fraud or
misprepresentation

1.
2.

Partnership property (including goodwill)


The contributions of partners, which are made to pay
off liabilities (1797)

Order of application of assets


1.
2.
3.
4.

Those owing to partnership creditors


To partners other than capital and profits given
by partners or advances for business expenses
To partners the return of their capital
If any assets remain, profits to partners in
proportion in which profits are to be shared

Right of a partner where assets are insufficient


partners must contribute. Who may enforce?
1.
2.

GR: any assignee for the benefit of the creditor; or


any person appointed by the court (receiver)
Any partner or his legal representative (to the extent
of the amount which he has paid in excess of the
share of the liability)

Liability of the deceased partners individual property


liable for those liabilities the partnership incurred while he
was a partner.
Preference with respect to assetssupposed both the
partnership property and individual properties of partners are
in the possession of the court for distribution?
1.
2.

Regarding partnership property, partnership creditors


have preference
Regarding individual properties of partners, the
individual creditors are preferred.

If partner is insolvent, how will individual properties be


distributed?
1.
2.
3.

First, give to the individual or separate creditors.


Then to partnership creditors
Then those owing to the other partners by way of
contribution

1840Dissolution by change of membership


1.
2.
3.
4.
5.
6.
7.

When a new partner is admitted


When a partner retires
When a partner dies
When a partner withdraws
When a partner is expelled from the firm
When the other partners assign their rights to the
sole remaining partner
When all the partners assign their rights in
partnership property to third persons.

*It dissolves the partnership and creates a new one.


(change in contract)

*The remaining partners may elect to continue business


without interruption by simply taking over the business.

1.
2.

Rights of creditors of dissolved partnership that is


continuedthe creditors of dissolved partnership are also
creditors of persons or partnership continuing the business.
Ex. A new partners investment will be equally available to
both creditors of the old and creditors of the new firm. The
liability shall be satisfied out of partnership property only.
Ex.2 When a retiring or deceased partner has sold his interest
in the partnership without final settlement with creditors, such
creditors have an equitable lien on the consideration paid to
the retiring or deceased partner by the purchaser thereof.

3.

Characteristics
1.
2.
3.

4.
1841Rights of retiring, or estate of deceased when
business is continued
1.

2.

to have the value of the interest of the retiring


partner or deceased partner in the partnership
ascertained as of the date of dissolution
to receive thereafter, as an ordinary creditor, an
amount equal to the value of his share in the
dissolved partnership with interest, or, at his option,
in lieu of interest, the profits attributable to the use
of his right.
With consent of the estate to continueit becomes a
new partner
Without consentno liability except for the debts
incurred during partners lifetime

Secure capital from others for ones business and still


retain control
Share in profits of business without risk of personal
liability (on the part of the limited partner)
Associate as partners with those having business skill

5.

Formed by compliance with statutory requirements


One or more general partners control the business
and are personally liable to creditors
One or more limited partners contribute to the
capital and share in the profits but do not participate
in the management and are not personally liable for
partnership obligations beyond the amount of their
capital contributions.
The limited partners may ask for the return of their
capital contributions under the conditions prescribed
by law.
The partnership debts are paid out of common fund
and individual properties of the general partners.

Differences

Liability
partnership
obligations
Management

for

GR: equal right in


the management

Contribution

Money,
property
or industry
Depends on the
agreement
but
generally at time
of constitution

1842When right to account accrues


1.
2.

After dissolution in the absence of an agreement to


contrary
Prescription begins upon dissolution of partnership
when the final accounting is done.

General
General partner is
personally liable

Legal standing

Persons liable to render an account


1.
2.
3.

Winding up partner
Surviving partner
Person or partnership continuing the business

Assignability
interest

of

Doctrine: A partners share cannot be returned without first


dissolving and liquidating the partnership, for the return is
dependent on the discharge of creditors, whose claims enjoy
preference over those of the partners.

May
not
be
assigned as to
make the assignee
a
new
partner
without consent of
the others

Exception: No liquidation is necessary when there is already


a settlement or an agreement as to what he shall receive.
Prohibition

1843LIMITED PARTNERSHIP
Limited only in respect of the nature and scope of the
business to be carried on
Composed of one or more general partners and one or more
limited partners
The limited partners are usually the investors
Purpose:

Cause
dissolution

of

Prohibited
from
engaging in the
same business if
he is a capitalist
partner or in any
business if he is
industrial partner
Retirement, death,
insanity
or
insolvency of a
general
partner
dissolves the firm

Limited
Liability
extends
only
to capital
contribution
No right to share
in
the
management;
otherwise he is
liable as general
partner
Cash or property
only
MUST
be
paid
before
the
formation of the
limited partnership
Not a proper party
to proceedings by
or as against the
partnership,
unless he is also a
general partner
Interest is freely
assignable, with
the
assignee
acquiring all the
rights
of
the
limited partner
subject
to
qualifications
(1859)
No
such
prohibition
because he is a
mere contributor
to the partnership

It does not have


the same effect,
for his executor or
administrator shall
the rights of a
limited partner for

Form

May
be
constituted in any
form

Composition

General partners
only; must operate
under any firm
name
Effect is a new
partnership
is
created

Admission
of
additional partners

Dissolution
Winding up

the purpose of
selling his estate
After compliance
with
the
requirements set
forth by law
Must
have
a
limited

Requisites for liability:


1.

2.

3.
Amendment only
is necessary in
addition of limited
partners

and

Statutory penalty only: damages


1848Effect of taking part in the control of the
business
1.

1844Formalities
1.

2.

The certificate or articles of limited partnership must


be signed and sworn to (under oath), with all the
enumerated items.
Must be filed for record in SEC, to give actual or
constructive notice to potential creditors or persons
dealing with the partnership to acquaint them with
the liability of the partners and to avoid fraud and
misrepresentation.

LP cannot be constituted orally.


Substantial compliance in good faith sufficient.
Effect where there is no substantial compliance: firm is
general partnership ONLY to third persons; but the firm is
limited as between partners as they are bound to their
agreement which remains unimpaired.
Presumption of general partnership: A partnership
transacting business is prima facie a general partnership and
those who seek to avail themselves of the protection of laws
permitting the creation of limited partnerships must show due
compliance with such laws.
A partnership cannot be a limited partner.

He knew the statement to be false at the time he


signed the certificate or subsequently, but having
sufficient time to cancel or amend it or file a petition
for its cancellation or amendment, he failed to do so;
The person seeking to enforce liability has relied
upon the false statement in transacting business with
the partnership.
The person suffered as a result of reliance upon such
a false statement.

2.

Acts which do not constitute taking part in the control


of the business
a. Mere dealing with a customer
b. Mere consultation on one occasion with the
general partners
Acts taking part of control of business
a. Selection of who will be the managing
partners
b. Supervision over a superintendendent of the
business

Instances of active participation of the limited partner


1.
2.
3.
4.

the board of directors chosen by the limited partners


An appointee of the limited partner becomes the
directing manager of the firm
The limited partner purchases the entire property of
the partnership, taking title in himself.
He makes or is a party to a contract with creditors of
an insolvent firm with respect to the disposal of the
firms assets in payment of the firms debts.

1849Admission of additional limited partners

There should be a proper amendment of certificate,


comply with 1865.
Non-compliance with amendment does not dissolve
the limited partnership.

1850Rights,
partner
1845Limited Partners contribution
Only money or property but not services otherwise he will be
considered an industrial and general partner, in which case,
he shall not be exempted from personal liability.
A partner may be general and limited at the same time
provided this fact shall be stated in the certificate, but
a limited partner cannot be an industrial partner
without being a general partner.
1846effect where surname of ltd partner appears in
partnership name
He is liable as general partner to partnership creditors who do
not have actual knowledge of such status, without the rights
of general partner.
1847False statement

powers

and

liabilities

of

general

GR: He may bind the partnership by any act of administration


but he has no power to do the acts enumerated without the
written consent or at least ratification of all the limited
partners.
These are acts of strict dominion
No (1)the acts are in violation of the agreement of the
partners as contained in the certificate
No (2) to (4)the acts are prejudicial to the interests of the
limited partners
No (5) and (6)the rule is based on the fiduciary nature of
the partnership relation
No (7)any of the events
dissolution of partnership

mentioned

results

in

the

1851Rights of limited partner


1.
2.

It must be stated in the certificate. This preference may


involve:

He has lesser rights than a general partner.


He cannot bind the firm by a contract

1852Contributor who erroneously believes he has


become a limited partner
Ex. When his name appears in the certificate as general
partner or he is not designated as a limited partner
1.

2.
3.

On ascertaining the mistake, he promptly renounces


his interest in the profits of the business or other
compensation by way of income
His surname does not appear in the partnership
name
He does not participate in the management of the
business.

1.

The return of contributions


Compensation
Other matters

1856Compensation
contribution
1.

2.

of

limited

partner

return

of

For 1856 to apply, partnership assets must be in


excess of partnership liabilities to 3 rd persons, not
liabilities to partners.
In determining the liabilities of the partnership, the
liabilities to the limited partners for their
contributions and to general partners, whether for
contributions or not, are not included.

1857Requisites for return of contribution of limited


partner

OR

1.
2.
3.

Even if no such renouncing is made, partnership


creditors are not prejudiced
An heir of a deceased general partner becomes a limited
partner for his own protection because he would normally
prefer to avoid any liability in excess of the value of the
estate inherited so as not to jeopardize personal assets.
An heir has the right to elect to become general partner.
But it may be waived and they cannot be compelled to
become general partners against their wishes.

1853One person, both general and limited

Rights: those of general partner


Exception: regarding his contribution, he would be
considered a limited partner, with rights of a limited
partner, insofar as the other partners are concerned.

1854Loan and other


limited partnerships

business

transactions

with

Allowable transactions
1.
2.
3.

Granting loans to partnership


Transacting other business with it
Receiving a pro rata share of the partnership assets
with general creditors is he is not also a general
partner

Prohibited Transactions
1.
2.

Receiving or holding as collateral security any


partnership property
Receive any payment, conveyance, or release from
liability if it will prejudice the right of third persons.

*any violation give rise to presumption that it has been made


to defraud partnership creditors.
*1854 does not prohibit absolutely taking as collateral
security by a limited partner of any partnership property. No
(1) and (2) of 1854 are modified by the requirement of
sufficient assets to discharge the obligation of the partnership
when any payment or conveyance is made or release is given
to the limited partner by or when he receives security from,
the partnership.
1855Preferred limited partners

1.

2.
3.

All liabilities of the partnership have been paid or if


they have not yet been paid, the assets of the
partnership are sufficient to pay such liabilities.
The consent of all the members has been obtained
except when the return may be rightfully demanded
The certificate is cancelled or so amended as to set
forth the withdrawal or reduction of the contribution.

1st par: Conditions that must exist before contributions


by a limited partner can be returned to him
2nd par: deals with TIME when such contributions can be
returned
When return of contribution is a matter of right (2nd par)
The limited partner may demand, as a matter of right, the
return of his contribution provided the conditions in par.1 Nos
1 and 3 have been complied with1.
2.
3.

On the dissolution of the partnership; or


Upon the arrival of the date specified in the
certificate for the return
After the expiration of the 6 months notice in writing
given by him to the other partners if no time is fixed
in the certificate for the return of the contribution or
for the dissolution of the partnership.

Right of limited partner to cash


contribution; Exceptions (3rd par)
1.
2.

in

return

for

When there is stipulation to the contrary in the


certificate
Where all the partners consent to the return other
than in the form of cash.

When limited partner may have partnership dissolved


(4th par)
1.
2.

When his demand for the return of his contribution is


denied although he has a right to such return;
When his contribution is not paid although he is
entitled to its return because the other liabilities of
the partnership have not been paid or the
partnership property is insufficient for their payment.

The limited partner must first ask the other partners to have
the partnership dissolved; if they refuse, he can seek the
dissolution of the partnership by judicial decree.

*PROFITS are given priority OVER CAPITAL. In general


partnership, the claims of the general partners in
respect of capital enjoy preference over those in
respect of profits.

1858LIABILITIES OF A LIMITED PARTNER


1.
2.

3.

To partnership, not to the creditors


To partnership creditors and other partners
a. When he contributes services
b. When he allows his surname to appear
c. When he fails to have a false statement
corrected
d. When he takes part of control
e. When he receives partnership property as
collateral security, payment or conveyance
or release in fraud of partnership creditors
f.
When there is failure to comply with legal
requirements
To separate creditors

Share of limited partners in partnership assets: In the


absence of any statement, limited partners share in respect to
their claims for capital and profits in proportion to the
respective amounts of such claims. Provided that proportional
sharing takes place where the partnership assets are
insufficient to pay such claims.
The claims of limited partners rate over the general
partners claim.
1864When certificate shall be cancelled or amended
1.

Liability for unpaid contribution (par 1)


Liability as trustee (par 2)
Requisites for waiver of compromise of liabilities
1.
2.

All the other partners must agree


Innocent third party creditors must not be prejudiced.
They are innocent when their claim for extension of
credit was before the cancellation or amendment of
the certificate.

1859Assignment of a Limited Partners interest


When assignee
partner
1.
2.
3.

may

become

substituted

limited

All the members must consent to the assignee


The certificate must be amended
The amended certificate must be registered.

1860-1863

2.

The certificate shall be cancelled (signed by all


members), not merely amended:
a. When the partnership is dissolved other
than by reason of expiration of the term
b. When all the limited partners cease to be
such. (if there are no more limited partners)
In all other cases, only an amendment is required.

1866-Requirements for amendment and cancellation of


certificate
Amendment
1.
2.

3.

must be in writing
signed and sworn to by all the members including
the new ones and the assigning limited partner in
case of substitution
certificate must be filed for record in SEC

Cancellation
1.
2.
3.

must also be in writing


signed by all the members
filed with SEC. If the cancellation is ordered by the
court, certified copy of such order shall be filed with
the Commission.

Causes of dissolutionsame way as an ordinary


partnership (retirement, death, insolvency, civil interdiction,
insanity, when limited partner ceased to be such, expiration of
term, mutual consent before expiration of term)

1866-Limited partner is a mere contributor

Notice of dissolutionwhen it is due to expiration, notice is


not necessary. When it is by the express will of the partners,
the certificate shall be cancelled and dissolution should have
a notice.

When limited partner a proper party

1863-Priority in the distribution of partnership assets


(see codal)

GR: He is not a proper party to proceedings unless he is also


a general partner.

1.

2.

where the object is to enforce his individual rights


against the partnership and to recover damages for
violation of such right.
Where he is to enforce his liability to the partnership