1837

Two Aspects of Causes of Dissolution

1. Partnership contract NOT violated (death, arrival of a term etc)

Rights

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. Partnership contract is violateda. Rights of partner WHO HAS NOT

CAUSED THE DISSOLUTION WRONGFULLYi. 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 court2. 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 others1. To have the partnership property

applied to discharge the liabilities2. 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 will — consequence of bad faith of guilty partner. Sale of goodwill only applies to commercial partnerships not professional partnership.

1838—right of partnership to rescind or “annul” contract of partnership (because of fraud or misprepresentation

1. Right of lien or retention2. Right to subrogation in place of partnership creditors

after payment of partnership liabilities3. Right of indemnification by the guilty partner

1839—LIQUIDATION

*applies only if there is a contrary agreement

Assets of Partnership

1. Partnership property (including goodwill)2. The contributions of partners, which are made to pay

off liabilities (1797)

Order of application of assets

1. Those owing to partnership creditors2. To partners other than capital and profits given

by partners or advances for business expenses3. To partners the return of their capital4. 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. GR: any assignee for the benefit of the creditor; or any person appointed by the court (receiver)

2. 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 partner’s individual property—liable for those liabilities the partnership incurred while he was a partner.

Preference with respect to assets—supposed both the partnership property and individual properties of partners are in the possession of the court for distribution?

1. Regarding partnership property, partnership creditors have preference

2. Regarding individual properties of partners, the individual creditors are preferred.

If partner is insolvent, how will individual properties be distributed?

1. First, give to the individual or separate creditors.2. Then to partnership creditors3. Then those owing to the other partners by way of

contribution

1840—Dissolution by change of membership

1. When a new partner is admitted2. When a partner retires3. When a partner dies 4. When a partner withdraws5. When a partner is expelled from the firm6. When the other partners assign their rights to the

sole remaining partner

7. 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.

Rights of creditors of dissolved partnership that is continued—the creditors of dissolved partnership are also creditors of persons or partnership continuing the business.

Ex. A new partner’s 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.

1841—Rights of retiring, or estate of deceased when business is continued

1. to have the value of the interest of the retiring partner or deceased partner in the partnership ascertained as of the date of dissolution

2. 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 continue—it becomes a new partner

Without consent—no liability except for the debts incurred during partner’s lifetime

1842—When right to account accrues

1. After dissolution in the absence of an agreement to contrary

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

Persons liable to render an account

1. Winding up partner2. Surviving partner3. Person or partnership continuing the business

Doctrine: A partner’s 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.

Exception: No liquidation is necessary when there is already a settlement or an agreement as to what he shall receive.

1843—LIMITED 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:

1. Secure capital from others for one’s business and still retain control

2. Share in profits of business without risk of personal liability (on the part of the limited partner)

3. Associate as partners with those having business skill

Characteristics

1. Formed by compliance with statutory requirements2. One or more general partners control the business

and are personally liable to creditors3. 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.

4. The limited partners may ask for the return of their capital contributions under the conditions prescribed by law.

5. The partnership debts are paid out of common fund and individual properties of the general partners.

Differences

General LimitedLiability for partnership obligations

General partner is personally liable

Liability extends only to capital contribution

Management GR: equal right in the management

No right to share in the management; otherwise he is liable as general partner

Contribution Money, property or industry

Cash or property only

Depends on the agreement but generally at time of constitution

MUST be paid before the formation of the limited partnership

Legal standing Not a proper party to proceedings by or as against the partnership, unless he is also a general partner

Assignability of interest

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

Interest is freely assignable, with the assignee acquiring all the rights of the limited partner subject to qualifications (1859)

Prohibition Prohibited from engaging in the same business if he is a capitalist partner or in any business if he is industrial partner

No such prohibition because he is a mere contributor to the partnership

Cause of dissolution

Retirement, death, insanity or insolvency of a

It does not have the same effect, for his executor or

general partner dissolves the firm

administrator shall the rights of a limited partner for the purpose of selling his estate

Form May be constituted in any form

After compliance with the requirements set forth by law

Composition General partners only; must operate under any firm name

Must have a “limited”

Admission of additional partners

Effect is a new partnership is created

Amendment only is necessary in addition of limited partners

Dissolution and Winding up

1844—Formalities

1. The certificate or articles of limited partnership must be signed and sworn to (under oath), with all the enumerated items.

2. 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.

1845—Limited Partner’s 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.

1846—effect 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.

1847—False statement

Requisites for liability:

1. 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;

2. The person seeking to enforce liability has relied upon the false statement in transacting business with the partnership.

3. The person suffered as a result of reliance upon such a false statement.

Statutory penalty only: damages

1848—Effect of taking part in the control of the business

1. Acts which do not constitute taking part in the control of the business

a. Mere dealing with a customerb. Mere consultation on one occasion with the

general partners2. 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. the board of directors chosen by the limited partners2. An appointee of the limited partner becomes the

directing manager of the firm3. The limited partner purchases the entire property of

the partnership, taking title in himself.4. He makes or is a party to a contract with creditors of

an insolvent firm with respect to the disposal of the firm’s assets in payment of the firm’s debts.

1849—Admission 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.

1850—Rights, powers and liabilities of a general partner

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 mentioned results in the dissolution of partnership

1851—Rights of limited partner

1. He has lesser rights than a general partner.2. He cannot bind the firm by a contract

1852—Contributor 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. On ascertaining the mistake, he promptly renounces his interest in the profits of the business or other compensation by way of income

2. His surname does not appear in the partnership name

3. He does not participate in the management of the business.

OR

1. 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.

1853—One 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.

1854—Loan and other business transactions with limited partnerships

Allowable transactions

1. Granting loans to partnership2. Transacting other business with it3. Receiving a pro rata share of the partnership assets

with general creditors is he is not also a general partner

Prohibited Transactions

1. Receiving or holding as collateral security any partnership property

2. 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.

1855—Preferred limited partners

It must be stated in the certificate. This preference may involve:

1. The return of contributions2. Compensation3. Other matters

1856—Compensation of limited partner “return of contribution”

1. For 1856 to apply, partnership assets must be in excess of partnership liabilities to 3rd persons, not liabilities to partners.

2. 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.

1857—Requisites for return of contribution of limited partner

1. 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.

2. The consent of all the members has been obtained except when the return may be rightfully demanded

3. 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 with-

1. On the dissolution of the partnership; or2. Upon the arrival of the date specified in the

certificate for the return3. 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 in return for contribution; Exceptions (3rd par)

1. When there is stipulation to the contrary in the certificate

2. 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. When his demand for the return of his contribution is denied although he has a right to such return;

2. 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.

1858—LIABILITIES OF A LIMITED PARTNER

1. To partnership, not to the creditors2. To partnership creditors and other partners

a. When he contributes servicesb. When he allows his surname to appearc. When he fails to have a false statement

correctedd. When he takes part of controle. 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

3. To separate creditors

Liability for unpaid contribution (par 1)

Liability as trustee (par 2)

Requisites for waiver of compromise of liabilities

1. All the other partners must agree2. 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.

1859—Assignment of a Limited Partner’s interest

When assignee may become substituted limited partner

1. All the members must consent to the assignee2. The certificate must be amended3. The amended certificate must be registered.

1860-1863

Causes of dissolution—same 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)

Notice of dissolution—when 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.

1863-Priority in the distribution of partnership assets ( see codal)

*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.

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.

1864—When certificate shall be cancelled or amended

1. 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)

2. In all other cases, only an amendment is required.

1866-Requirements for amendment and cancellation of certificate

Amendment

1. must be in writing2. signed and sworn to by all the members including

the new ones and the assigning limited partner in case of substitution

3. certificate must be filed for record in SEC

Cancellation

1. must also be in writing2. signed by all the members3. filed with SEC. If the cancellation is ordered by the

court, certified copy of such order shall be filed with the Commission.

1866-Limited partner is a mere contributor

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

When limited partner a proper party

1. where the object is to enforce his individual rights against the partnership and to recover damages for violation of such right.

2. Where he is to enforce his liability to the partnership