Reviewer PARTNERSHIP1 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 partners 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 partnership 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 under 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 partners 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 other
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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 to the general partners (See: j to n. Article 1844) Note: A limited partnership is formed if there has been substantial compliance in 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 partnership 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 Contribute Partner Can

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 partner be a general partner? A: Yes. Article 1845 speaks only of a limited partner Article 1846 Non-Inclusion of Name of the Limited Partner

Source: Civil Code of the Philippines Annotated, Fourteenth Edition, 2000, Book V, Justice Edgardo L. Paras

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 partner 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 statement, 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 false: 1. At the time he signed the certificate; or 2. Subsequently, but within a sufficient time before the statement was relied upon to enable him to cancel or amend the certificate or to file a petition for its cancellation or amendment as approved in Article 1865 (Requisites for Amending or Cancelling the Certificate of Limited Partnership) Note: The person who suffers loss because of a false statement in the certificate 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 2. 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 Partners Additional Limited

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 amendment to the certificate Q: Say additional limited partners are taken in without proper amendment of certificate 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 limited partners. Note Exceptions: 1. Without the written consent or ratification of the specific act by all limited partners, a general partner or all of the general partners have no authority to: a. Do any act in contravention of the certificate b. Do any act which would make it impossible to carry on the ordinary business of the partnership c. Confess a judgment against the partnership d. Possess partnership property, or assign their

rights in specific partnership 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, retirement, insanity, civil interdiction or insolvency of a general partner, unless the right so to do is given in the certificate Reason: In a sense the acts are acts of strict dominion or ownership, and are not generally essential for the routine or ordinary conduct of the firms business Q: If a general partner in a limited partnership goes abroad, his capacity to bind the firm is governed by what law? A: If a general partner in a limited partnership goes abroad his capacity to bind 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 the 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 partnership; and a formal account of partnership affairs whenever circumstances render 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 by way of income and to the return of his contribution as provided in Article 1856 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 partner exercise the rights of a limited partner, should he be considered as liable as a general partner? A: No. If a contributor erroneously believes that he has become a limited partner and thereupon exercises the rights of a limited partner, he should not generally be considered as liable as a general partner. Note However: That a contributor who erroneously believes that he has become a limited 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 NOT prejudiced Article 1853 General Limited Partner Q: May a person be a general and a limited partner at the same time (General Limited 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 partner, with the rights of a limited partner, insofar as the other partners are concerned Article 1854 Right of a Limited Partner to Lend Money and Transact Other Business with the Firm Q: May a limited partner loan money to and transact other business with the partnership? A: Yes. A limited partner also may loan money to and transact other business with the partnership Q: May a limited partner receive on account of resulting claims against the partnership, with general creditors, a pro rata share of the assets?

A: Yes. Unless he is also a general partner, receive on account of resulting claims against the partnership, with general creditors, a pro rata share of the assets 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 not sufficient to discharge partnership liabilities to persons not claiming as general 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 partnership Note Also: That while the limited partner is prohibited to receive or hold as collateral security any partnership property, still he is NOT prohibited to purchase 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 contributions, 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 or 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 income, or as to any other matter. Note: That preference can be given to some limited partners over the other limited 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 Partners of Limited

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 certificate 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 business 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 partners 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 rightfully 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; or

3. After he has given a months notice in writing to all other members, if not time is specified in the certificate, either for the return of the contribution or for the dissolution of the partnership Note Rule: That as a rule, even if a limited partner has contributed property, he 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 nonexistence 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 wound 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 partnership property is insufficient for their payment as required by the first paragraph, and the limited partner would otherwise be entitled to the return of his contribution Q: Suppose a limited partner withdraws rightfully his contribution (all conditions being fulfilled, particularly the complete solvency of the firm as of the time 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 nothing. His contribution (even if already returned to him) is to be treated as a trust fund for the discharge of liabilities. Moreover, the sum should include the interest presumably earned. (See 1858) Note However: that future creditor cannot make use of the principle enunciated in the above cited case in view of the amended certificate, EXCEPT of course if the 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 stated in the certificate as having been made; and, 2. For the unpaid contribution which he agreed in the certificate to make in 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: 1. All the other partners must agree 2. 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 cancellation 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 which 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 date stated in the certificate. It was discovered that the remaining assets were insufficient to pay two creditors, X and Y. Xs claim arose BEFORE the return; Ys claim arose AFTER the return. Should A be compelled to give back what he had received? Answer: I distinguish: 1. Xs claim should be satisfied out of what has been returned to A because his claim arose BEFORE the return. If there is a balance, it should be returned to A. If there is a deficit, A is not liable for this because he is only a limited partner. 2. Ys claim does not have to be satisfied from what has been returned to A because his claim arose AFTER the return. Ys claim should be directed against the general partners.