Law on Partnership and Corporation (BL 102)

LAW ON PARTNERSHIPSummer 2015

NATURE OF PARTNERSHIP

WHAT IS PARTNERSHIP?

1. It is a CONTRACT whereby two or more persons

(a) bind themselves to CONTRIBUTE money, property, or industry to a COMMON FUND

(b) with the intention of dividing the PROFITS among themselves or in order to EXERCISE a PROFESSION 2. It is also a STATUS and a FIDUCIARY RELATION subsisting between persons carrying on a business in common with a view on profit.

Fiduciary relation is defined as where one person places complete confidence in another in regard to a particular transaction or ones general affairs or business. It encompasses the idea of faith and confidence and is generally established only when the confidence given by one person is actually accepted by the other person. Mere respect for another individuals judgment or general trust in his or her character is ordinarily insufficient for the creation of a fiduciary relationship.

CHARACTERISTIC ELEMENTS OF THE CONTRACT OF PARTNERSHIP

1. Consensual because it is perfected by mere consent, that is, upon the express or implied agreement of two or more persons.

2. Nominate because it has a special name or designation in our law.

3. Bilateral because it is entered into by two or more persons and the rights and obligations arising therefrom are always reciprocal (meaning owed to each other).

4. Onerous because each of the parties aspires to procure for himself a benefit through the giving of something.

5. Commutative because the undertaking of each of the partner is considered as the equivalent of that of the others.

6. Principal because it does not depend for its existence or validity upon some other contract.

7. Preparatory because it is entered into as a means to an end, i.e. to engage in business for the realization of profits with the view of dividing them among the contracting parties.

ESSENTIAL FEATURES OF PARTNERSHIP CONTRACT1. There must be a valid contract

2. The parties must have the legal capacity to enter into the contract.

Before there can be a valid contract of partnership, it is essential that the contracting parties have the necessary legal capacity to enter into the contract. As a general rule, any person may be a partner who is capable under the law of entering into contractual relations. Consequently, any person who cannot legally give consent to a contract cannot be partner. Hence, the following cannot give their consent to a contract of partnership:

2.1 Unemancipated minors

The age of majority commences upon the attainment of the age of 18 years (R.A. 6809); a person below such age is a minor, and has a limited capacity to act. The unemancipated minor cannot enter into contracts (article 1327, par. 1, Civil Code); but he may be estopped from disavowing his contract if he has misled the other party as to his age.

2.2 Insane or demented persons

Insanity includes the various forms of mental disease, either inherited or acquired, in which there is a perversion of the mentality, as when the person is suffering from illusions, hallucinations, or delusions, unnatural exaltation or depression, or insane ideas of persecution or power. Various phases of insanity are known as dementia praecox, paranoia, schizophrenia, mania, melancholia, etc. It is a manifestation, in language or conduct, of disease or defect of the brain, or a more or less permanently diseased or disordered condition of the mentality, functional or organic, characterized by perversion, inhibition, or disordered function of the sensory or of the intellective faculties, or by impaired or disordered volition (Sec. 1089, Revised Administrative Code).

2.3 Deaf-mute who do not know how to write

2.4 Persons who suffering from civil interdiction

Civil interdiction is an accessory penalty imposed upon persons who aresentenced to a principal penalty not lower than reclusion temporal (article 41, Revised Penal Code), which is a penalty ranging from twelve years and one day to twenty years.

Article 34 of the Revised Penal Code provides: Civil interdiction shall deprive the offender during the time of his sentence of the rights of parental authority, or guardianship, either as to the person or property of any ward, of marital authority, of the right to manage his property, and of the right to dispose of such property by any act or any conveyanceinter vivos.

2.5 Incompetents who are under guardianship.

The Rules of Court defines incompetent as including

a) persons suffering from the penalty of civil interdiction b) hospitalized lepers, c) prodigals or spendthrift

A spendthrift or prodigal is a person who, by excessive drinking, gambling, idleness or debauchery of any kind shall so spend, waste or lessen his estate as to expose himself or his family to want or suffering.

d) deaf and dumb who are unable to read and write, e) those who are of unsound mind, even though they have lucid intervals, and f) persons not being of unsound mind, but by reason of age, disease, weak mind, and other similar causes, cannot, without outside aid, take care of themselves and manage their property, becoming thereby an easy prey for deceit and exploitation.

3. There must be contribution of money, property or industry to a common fund.

3.1 Money The term is to be understood as referring to currency which is legal tender in the Philippines. It must be pointed out that checks, drafts, promissory notes payable to order, and other mercantile documents are not money but only representatives of money. Consequently, there is no contribution of money until they have been cashed.

3.2 Property The property contributed may be real or personal, tangible or intangible. Hence, credit such as promissory note or other evidence of obligation or even a mere goodwill may be contributed as it is considered property.

3.3 Industry In the absence of money or property, or in concurrence with these two, the law permits the contribution of industry. The word industry means the work or service of the party associated, which may be either personal manual efforts or intellectual, and for which he receives a share in the profits (not merely salary) of the business.

4. The object or purpose must be a lawful one. In other words, it should not be contrary to law, morals, good customs, public order or public policy. It must be within the commerce of man.

Instances when partnership is unlawful:

a) A partnership formed to furnish apartment houses which would be used for prostitution.

b) A partnership formed to create illegal monopolies.

c) A partnership for gambling purposes or distribution of illegal drugs.

IF a partnership has SEVERAL PURPOSES, one of which is UNLAWFUL, the partnership can still validly exist so long as the illegal purpose can be separated from the legal purposes

One of the causes for the dissolution of a partnership is any event which makes it unlawful for the business of the partnership to be carried on

When an UNLAWFUL PARTNERSHIP is dissolved by a judicial decree, the PROFITS shall be CONFISCATED in FAVOR of the STATE

5. There must be an intention of dividing the profit among the partners.

6. There must be the affectio societatis. This is desire to formulate an ACTIVE UNION, with people among whom there exist a mutual CONFIDENCE and TRUSTS.

It is a very important constitutive element of partnership: more or less capturing the fact that partners enter into a partnership in good faith with a will to associate and a commitment that is consequential.

7. A new personality that of the firm must arise, distinct from the separate personality of each of the members.

Thus being the case the PARTNERSHIP BEING A JURIDICAL ENTITY; in the partnership Aquino and Abunda there are three persons:

a) Aquino,b) Abunda,c) and the firm Aquino and Abunda

Art. 37.(first sentence, Juridical capacity, definition, nature, how lost)Juridical capacity, which is the fitness to be the subject of legal relations,

Juridical capacity is synonymous to legal capacity and to personality. These terms are, therefore, used interchangeably in the law. They all refer to the aptitude for the holding and enjoyment of rights. On the other hand, capacity to act refers to the aptitude for the exercise of rights, and is often referred to merely as capacity. In this

sense, it is broadly defined as the ability, power, qualification, or competency of persons, natural or artificial, for the performance of civil acts depending on their state or condition (status) as defined or fixed by law (1 Tolentino 156, citing 1 Bouviers Law Dictionary 416). In the words of the Code, while juridical capacity is the fitness of man to be the subject of legal relations, capacity to act is the power to do acts with legal effect.

RULES ON CAPACITY TO BECOME A PARTNER

1. In general, a person capacitated to enter into contractual relations may become a partner.

2. UNEMANCIPATED MINOR CANNOT become a partner UNLESS his parent or guardian consents. Without such consent, the partnership contract is voidable.

3. MARRIED WOMAN, cannot contribute conjugal funds as her contribution to the partnership

3.1 UNLESS she is permitted to do so by her husband, or

3.2 UNLESS she is the administrator of the conjugal partnership, in which the COURT must give its consent authority.

4. A partnership being a juridical person by itself can form another partnership either

4.1 with private individuals, or

4.2 with other partnerships there being no prohibition on this matter under Philippine law.

5. A corporation cannot become a partner on grounds of public policy

CONSEQUENCES OF THE PARTNERSHIP BEING A JURIDICAL ENTITY

1. Its juridical personality is SEPARATE and DISTINCT from that of each partner

2. The partnership CAN in GENERAL:

2.1 Acquire and possess property of all kinds

2.2 Incur obligations

2.3 Bring civil and criminal actions

2.4 Can be adjudged insolvent* even if the individual members be each financially solvent

*Unable to satisfy creditors or discharge liabilities, either because liabilities exceed assets or because of inability to pay debts as they mature.

3. Unless he is personally sued, a partner has no right to make a separate appearance in court, if the partnership being sued is already represented

LIMITATIONS ON ALIEN PARTNERSHIP

1) If 60% capital is not owned by Filipinos the firm cannot acquire by purchase or otherwise AGRICULTURAL Philippine lands

2) Foreign partnership may lease lands provided the period does not exceed 99 years

3) Foreign partnership may be MORTGAGEES of land period of 5 years, renewable for another 5 years they cannot purchase it in a foreclosure sale

REQUISITES FOR EXISTENCE OF PARTNERSHIP

1. INTENTION to create a partnership

2. COMMON FUND obtained from contributions

3. JOINT INTERESTS in the PROFITS

RULES TO DETERMINE THE EXISTENCE OF A PARTNERSHIP

1. Persons who are not partners to each other are not partners as to third persons EXCEPTION: PARTNERSHIP BY ESTOPPEL

2. CO-OWNERSHIP of a property does not itself establish a partnership, even though the co-owners share in the profits derived from the incident of joint ownership

3. SHARING OF GROSS RETURNS ALONE does not indicate a partnership whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived

4. The receipt of the share in the profits is a strong presumptive evidence of partnership HOWEVER, no such inference will be drawn if such profits were received in payment -

A) as a DEBT by installments or otherwiseB) as WAGES of an employeeC) as RENT to a landlordD) as an ANNUITY to a widow or representative of a deceased partnerE) as INTEREST on a LOAN, though the amount of payment vary with the profits of the businessF) as the CONSIDERATION for the sale of a GOOD WILL of a business or other property or otherwise

Creditors are not partners, for their only interest in the sharing of profits is the receipt or payment of their credits. In a partnership, the partners are supposed to trust and have confidence in all the partners

RULES IN THE FORMATION OF A PARTNERSHIP

A partnership may be constituted in any form.

EXCEPTION: PUBLIC INSTRUMENT is required if -

1. IMMOVABLE PROPERTY is contributed and a necessity for inventory of the immovable.

For EFFECTIVITY of the partnership contract insofar as innocent third persons are concerned the same must be REGISTERED if REAL PROPERTIES are INVOLVED.

IF REAL PROPERTIES have been contributed, REGARDLESS of the VALUE, a public instrument is needed for the attainment of legal personality

2. REAL RIGHTS are contributed

When there are conditions to be fulfilled or when a certain period is to lapse, the partnership is not created till after the fulfillment of the conditions or the arrival of the term and this is true even if one of the parties has already advanced his agreed share of the capital.

REQUIREMENTS IF CAPITAL IS P3,000 OR MORE

1. PUBLIC INSTRUMENT

2. RECORDED AT THE SECURITIES AND EXCHANGE COMMISSION

FAILURE TO COMPLY shall not affect the liability of the partnership and its members to third persons

RULES IF ARTICLES ARE KEPT SECRET AMONG THE MEMBERS

1. NOT a partnership NOT a LEGAL PERSON

2. It may be sued by third person under the common name it uses

3. It cannot sue as such and cannot be ordinarily be a party to a civil action

4. Any one of the members may contract in his own name with third persons 5.

EFFECT OF CERTAIN TRANSACTIONS

1. Contracts entered into by a partner in his own name may be sued upon still by him in his individual capacity, notwithstanding the absence of a partnership.

2. When two or more individuals, having a common interests in a business bring a court action, it should be presumed that they prosecute the same in their individual capacity as co-owners and not in behalf of a partnership which does not exist in legal contemplation

CLASSIFICATION OF PARTNERSHIPS

A. ACCORDING TO MANNER OF CREATION

1. Orally constituted

2. Constituted in a private instrument

3. Constituted in a public instrument

4. Registered in the Office of the Securities and Exchange Commission

B. ACCORDING TO OBJECT

1. Universal

1.1 With all present property

The contribution of the partners consists of:

a) All the properties actually belonging to the parties.

b) The profits acquired with said properties.

1.2 With all profits (the individual properties here continue to be owned by the partners, but the usufruct* thereof passes to the firm.)

*Therighttouseandderiveprofitfromapieceofpropertybelongingtoanother,providedthepropertyitselfremains undiminishedanduninjuredinanyway.

a) Only the usufruct of the properties of the partners becomes COMMON PROPERTY (owned by them and the partnership). The individual properties here continue to be owned by the partners.

b) All profits acquired by the industry or work of the partners become common property (regardless of whether or not said profits were obtained through the usufruct contributed.)

2. Particular

Here the object is determinate things, their use or fruits; a specific undertaking, or the exercise of a profession or occupation.

Examples: To construct a building; to buy and sell real estate; to practice the law profession. Here in a sense, it is as if all the members are industrial partners.

C. ACCORDING TO LIABILITY

1. Limited Partnership that where at least one partner is a general partner, and the rest are limited partners. A limited partner is one whose liability is limited only up to the extent of his contribution.

2. General Partnership is one where all the partners are general partners; that is, they are liable even with respect to their individual properties, after the assets of the partnership have been exhausted.

D. ACCORDING TO LEGALITY OF EXISTENCE

1. De jure partnership one which has complied with all the legal requirements for its establishment.

2. De facto partnership one which has failed to comply with all the legal requirements for its establishment.

E. ACCORDING TO DURATION

1. Partnership with a fixed term or one in which the term for which the partnership is to exist is fixed or agreed upon or one formed for a particular undertaking; and upon the expiration of the term or completion of the particular enterprise, the partnership is dissolved, unless continued by the partners.

2. Partnership at Will

2.1 One in which no time is specified and is not formed for a particular undertaking or venture and which may be terminated anytime by mutual agreement of the partners, or by the will of any one partner alone.

2.2 One for a fixed term or particular undertaking which is continued by the partners after the termination of such term or particular undertaking without express agreement.

F. ACCORDING TO REPRESENTATION TO OTHERS

1. Ordinary or real partnership one which actually exists among the partners and also as to third persons.

2. Partnership by estoppel - one which in reality is not a partnership, but is considered a partnership only in relation to those who, by their conduct or admission, are precluded to deny or disprove its existence.Example:

Suppose A, B, and C are not really partners, but A told X that he (A), B, and C are partners. X believing the representation made by A and consented to by B, extend credit to A.

As against A and B, a partnership by estoppel has been constituted. But as against C, there is no partnership and X cannot hold him liable as a partner.

When the debt matures, X is entitled to collect only from A and B who are liable as partners although not actually partners.

G. ACCORDING TO PUBLICITY

1. Secret partnership one wherein the existence of certain persons as partners is not avowed or made known to the public by any of the partners.

2. Open or notorious partnership one whose existence is avowed or made known to the public by the members of the firm.

H. ACCORDING TO PURPOSE

1. Commercial or trading partnership one formed for the transaction of business.

2. Professional or non-trading partnership one formed for the exercise of a profession.

OBLIGATIONS OF PARTNERS

A. OBLIGATIONS OF THE PARTNERS AMONG THEMSELVES

1. OBLIGATIONS WITH RESPECT TO CONTRIBUTION OF PROPERTY:

1.1. To contribute at the beginning of the partnership or at the stipulated time the money, property or industry which he may have promised to contribute.

1.2. To answer for eviction in case the partnership is deprived of the determinate property contributed.

1.3. To answer to the partnership for the fruits of the property the contribution of which he delayed, from the date they should have been contributed up to the time of actual delivery.

1.4. To preserve said property with the diligence of a good father of a family pending delivery to partnership.

1.5. To indemnify partnership for any damage caused to it by the retention of the same or by the delay in its contribution.

2. OBLIGATIONS WITH RESPECT TO CONTRIBUTION OF MONEY AND MONEY CONVERTED TO PERSONAL USE

2.1. To contribute on the date fixed the amount he has undertaken to contribute to the partnership.

2.2. To reimburse any amount he may have taken from the partnership coffers and converted to his own use.

2.3. To pay for the agreed or legal interest, if he fails to pay his contribution on time or in case he takes any amount from the common fund and converts it to his own use.

2.4. To indemnify the partnership for the damages caused to it by delay in the contribution or conversion of any sum for his personal benefits

3. OBLIGATIONS WITH RESPECT TO CONTRIBUTION TO PARTNERSHIP CAPITAL

3.1. Partners must contribute equal shares to the capital of the partnership unless there is stipulation to contrary.

3.2. Partners (capitalist) must contribute additional capital In case of imminent loss to the business of the partnership and there is no stipulation otherwise; refusal to do so shall create an obligation on his part to sell his interest to the other partners

4. OBLIGATION OF MANAGING PARTNERS WHO COLLECTS DEBT FROM PERSON WHO ALSO OWED THE PARTNERSHIP

4.1. Apply sum collected to 2 credits in proportion to their amounts

4.2. If he received it for the account of partnership, the whole sum shall be applied to partnership credit.

5. OBLIGATION OF PARTNER WHO RECEIVES SHARE OF PARTNERSHIP CREDIT

5.1. Obliged to bring to the partnership capital what he has received even though he may have given receipt for his share only

6. OTHER RIGHTS AND OBLIGATIONS OF PARTNERS:

6.1. Right to associate another person with him in his share without consent of other partners (sub-partnership)

6.2. Right to inspect and copy partnership books at any reasonable hour

6.3. Right to a formal account as to partnership affairs (even during existence of partnership):

a. If he is wrongfully excluded from partnership business or possession of its property by his co-partnersb. If right exists under the terms of any agreementc. As provided by art 1807d. Whenever other circumstances render it just and reasonable

6.4. Duty to render on demand true and full information affecting partnership to any partner or legal representative of any deceased partner or of any partner under legal disability

6.5. Duty to account to the partnership as fiduciary

B. PROPERTY RIGHTS OF A PARTNER

1. His rights in specific partnership property

2. His interest in the partnership

3. His right to participate in the management

Nature of partner's right in specific partnership property1. Equal right to possession

2. Right not assignable

3. Right limited to share of what remains after partnership debts have been paid

Nature of partner's right in the partnership

1. Share of profits and surplus

C. OBLIGATIONS OF PARTNERS WITH REGARD TO 3RD PERSONS

1. Every partnership shall operate under a firm name. Persons who include their names in the partnership name even if they are not members shall be liable as a partner

2. All partners shall be liable for contractual obligations of the partnership with their property, after all partnership assets have been exhausted 2.1. Pro rata 2.2. Subsidiary

3. Admission or representation made by any partner concerning partnership affairs within scope of his authority is evidence against the partnership

4. Notice to partner of any matter relating to partnership affairs operates as notice to partnership except in case of fraud: 4.1. Knowledge of partner acting in the particular matter acquired while a partner 4.2. Knowledge of the partner acting in the particular matter then present to his mind 4.3. Knowledge of any other partner who reasonably could and should have communicated it to the acting partner

5. Partners and the partnership are solidary liable to 3rd persons for the partner's tort or breach of trust

6. Liability of incoming partner is limited to: 6.1. His share in the partnership property for existing obligations 6.2. His separate property for subsequent obligations

7. Creditors of partnership preferred in partnership property & may attach partner's share in partnership assets

8. Every partner is an agent of the partnership

D. RESPONSIBILITY OF PARTNERSHIP TO PARTNERS

1. To refund the amounts disbursed by partner in behalf of the partnership + corresponding interest from the time the expenses are made (loans and advances made by a partner to the partnership aside from capital contribution)

2. To answer for obligations partner may have contracted in good faith in the interest of the partnership business

3. To answer for risks in consequence of its management

KINDS OF PARTNERS

CLASSIFICATION

A. FROM THE VIEWPOINT OF CONTRIBUTION

1. Capitalist 2. Industrial

B. FROM THE VIEWPOINT OF LIABILITY

1. General 2. Limited

C. FROM THE VIEWPOINT OF MANAGEMENT

1. Managing 2. Silent 3. Liquidating

D. MISCELLANEOUS CLASSIFICATION

1. Ostensible 2. Secret 3. Dormant 4. Nominal

DEFINITION

1. Capitalist Partner one who furnishes capital. ( He is not exempted from losses; he can engage in other business provided there is NO COMPETITION between the partner and his business.)

2. Industrial Partner one who furnishes industry or labor (He is exempted from losses as between the partner; he cannot engage in any other business without the express consent of the other partners, otherwise:

2.1 he can be EXCLUDED from the firm (PLUS DAMAGES);

2.2 OR the benefits he obtains from the other businesses can be availed of by the other partners (PLUS DAMAGES).

NOTE: The rule remains true whether or not there is COMPETITION.

REASON: All his industry is supposed to be given only to the partnership.

3. Capitalist-Industrial Partner one who contributes both capital and industry.

4. General Partner one who is liable beyond the extent of his contribution.

5. Limited Partner one who is liable only to the extent of his contribution.

NOTE: An industrial partner can only be a general partner, never a limited partner.

6. Managing Partner one who manages actively the firms affairs.

7. Silent Partner one who does not participate in the management (though he shares in the profits or losses).

8. Liquidating Partner one who liquidates or winds up the affairs of the firm after it has been dissolved.

9. Ostensible Partner one whose connection with the firm is public and open (that is, not hidden). Usually his name is included in the firm name.

10. Secret Partner one whose connection with the firm is concealed or kept a secret.

11. Dormant Partner one who is both a secret (hidden) and silent (not managing) partner.

12. Nominal Partner one who is not really a partner but who may become liable as such insofar as third persons are concerned (Example: a partner by estoppel).

DISTINCTION BETWEEN A CAPITALIST AND INDUSTRIAL PARTNER

A. AS TO CONTRIBUTION

1. The capitalist partner contributes money or property.

2. The industrial partner contributes his industry (mental or physical)

B. AS TO PROHIBITION TO ENGAGE IN OTHER BUSINESS

1. The capitalist partner cannot generally engage in the same or similar enterprise as that of his firm (the test is the possibility of unfair competition).

2. The industrial partner cannot engage in any business for himself

Reason: all his industry is supposed to be contributed to the firm

C. AS TO PROFITS

1. The capitalist partner shares in the profits according to the agreement thereon; if none, pro rata to his contribution.

2. The industrial partner receives a just and equitable share.

D. AS TO LOSSES

1. Capitalist

1.1 first, the stipulation as to losses

1.2 if none, the agreement as to profits

1.3 if none, pro rata to contribution

2. The industrial partner is exempted as to losses (as between the partners). But is limited to strangers, without prejudice to reimbursement from the capitalist partners.

DISSOLUTION AND WINDING UP

DISSOLUTION, WINDING UP and TERMINATION DEFINED

DISSOLUTION change in the relation of the partners caused by any partner ceasing to be associated in the carrying on of the business; partnership is not terminated but continues until the winding up of partnership affairs is completed.

WINDING UP process of settling the business or partnership affairs after dissolution.

TERMINATION that point when all partnership affairs are completely wound up and finally settled.It signifies theend of thepartnership life

EIGHT (8) CAUSES OF DISSOLUTION:

1. Without violationof theagreementbetween the partners

a. By termination of the definite term/particular undertaking specified in the agreement.b. By theexpress willof anypartner, who must act in good faith, when no definite term or particular undertaking is specified.c. By theexpress willof allthe partners who have not assigned their interest/charged them for their separate debts, either before or after the termination of any specified term or particular undertaking.d. By thebona fide expulsion ofanypartner from the business in accordance with power conferred by the agreement.

2. In contraventionof theagreement between the partners, where the circumstances do not permit a dissolution under any other provision of this article, by the express will of any partner at any time

3. By any eventwhich makes itunlawful for business to be carried on/for the members to carry it on for the partnership

The object of partnership must be a lawful one. In other words, it should not be contrary to law, morals, good customs, public order or public policy.

Instances when partnership is unlawful:

(A) A partnership formed to furnish apartment houses which would be used for prostitution.

(B) A partnership formed to create illegal monopolies.

(C) A partnership for gambling purposes or distribution of illegal drugs.

4. Loss of specificthing promisedby partner before its delivery

5. Deathofanypartner

6. Insolvencyofapartner/partnership

*Unable to satisfy creditors or discharge liabilities, either because liabilities exceed assets or because of inability to pay debts as they mature.

7. Civilinterdictionofanypartner

Civil interdiction is an accessory penalty imposed upon persons who aresentenced to a principal penalty not lower than reclusion temporal (article 41, Revised Penal Code), which is a penalty ranging from twelve years and one day to twenty years.

Article 34 of the Revised Penal Code provides: Civil interdiction shall deprive the offender during the time of his sentence of the rights of parental authority, or guardianship, either as to the person or property of any ward, of marital authority, of the right to manage his property, and of the right to dispose of such property by any act or any conveyanceinter vivos.

8. DecreeofcourtunderArticle1831 of the Law on Partnership

2 GROUNDS FOR DISSOLUTION BY DECREE OF COURT (Art. 1831, LAW ON PARTNERSHIP)

1. On application by or for a partner, the court shall decree a dissolution whenever:

1.1. Partner declared insane in any judicial proceeding or shown to be of unsound mind

Insanity includes the various forms of mental disease, either inherited or acquired, in which there is a perversion of the mentality, as when the person is suffering from illusions, hallucinations, or delusions, unnatural exaltation or depression, or insane ideas of persecution or power. Various phases of insanity are known as dementia praecox, paranoia, schizophrenia, mania, melancholia, etc. It is a manifestation, in language or conduct, of disease or defect of the brain, or a more or less permanently diseased or disordered condition of the mentality, functional or organic, characterized by perversion, inhibition, or disordered function of the sensory or of the intellective faculties, or by impaired or disordered volition (Sec. 1089, Revised Administrative Code).

1.2 Incapacity ofpartner toperform hispart of the partnership contractESSENTIAL FEATURES OF PARTNERSHIP CONTRACTa. There must be a valid contract

b. The parties must have the legal capacity to enter into the contract.

Before there can be a valid contract of partnership, it is essential that the contracting parties have the necessary legal capacity to enter into the contract. As a general rule, any person may be a partner who is capable under the law of entering into contractual relations. Consequently, any person who cannot legally give consent to a contract cannot be partner. Hence, the following cannot give their consent to a contract of partnership:

b.1 Unemancipated minors

The age of majority commences upon the attainment of the age of 18 years (R.A. 6809); a person below such age is a minor, and has a limited capacity to act. The unemancipated minor cannot enter into contracts (article 1327, par. 1, Civil Code); but he may be estopped from disavowing his contract if he has misled the other party as to his age.

b.2 Insane or demented persons

Insanity includes the various forms of mental disease, either inherited or acquired, in which there is a perversion of the mentality, as when the person is suffering from illusions, hallucinations, or delusions,

unnatural exaltation or depression, or insane ideas of persecution or power. Various phases of insanity are known as dementia praecox, paranoia, schizophrenia, mania, melancholia, etc. It is a manifestation, in language or conduct, of disease or defect of the brain, or a more or less permanently diseased or disordered condition of the mentality, functional or organic, characterized by perversion, inhibition, or disordered function of the sensory or of the intellective faculties, or by impaired or disordered volition (Sec. 1089, Revised Administrative Code).

b.3 Deaf-mute who do not know how to write

b.4 Persons who suffering from civil interdiction

Civil interdiction is an accessory penalty imposed upon persons who aresentenced to a principal penalty not lower than reclusion temporal (article 41, Revised Penal Code), which is a penalty ranging from twelve years and one day to twenty years.

Article 34 of the Revised Penal Code provides: Civil interdiction shall deprive the offender during the time of his sentence of the rights of parental authority, or guardianship, either as to the person or property of any ward, of marital authority, of the right to manage his property, and of the right to dispose of such property by any act or any conveyanceinter vivos.

b.5 Incompetents who are under guardianship.

The Rules of Court defines incompetent as including

a) persons suffering from the penalty of civil interdiction b) hospitalized lepers, c) prodigals or spendthrift

A spendthrift or prodigal is a person who, by excessive drinking, gambling, idleness or debauchery of any kind shall so spend, waste or lessen his estate as to expose himself or his family to want or suffering.

d) deaf and dumb who are unable to read and write, e) those who are of unsound mind, even though they have lucid intervals, and f) persons not being of unsound mind, but by reason of age, disease, weak mind, and other similar causes, cannot, without outside aid, take care of themselves and manage their property, becoming thereby an easy prey for deceit and exploitation.

1.3 Partner guilty of conduct prejudicial to business of partnership

1.4 Wilfull or persistentbreach ofpartnership agreement or conduct which makes it reasonably impracticable to carry on partnership with him

1.5 Business canonly becarriedon ata loss

1.6 Othercircumstanceswhichrender dissolution equitable

2. On application by purchaser ofpartner's interest:

2.1 After termination of specified term/particular undertaking

2.2 Anytime if partnership at will when interest was assigned/charging order issued

EFFECTS OF DISSOLUTION

A. AUTHORITY OF PARTNER TO BIND PARTNERSHIP

GENERAL RULE:Authority of partners to bind partnership is terminated

Exception:1.Winduppartnershipaffairs2.Complete transactionsnotfinishedQUALIFICATIONS:1. Withrespecttopartnersa. Authority ofpartnerstobind partnership by new contract is immediately terminated when dissolution is not due to ACT, DEATH or INSOLVENCY (ADI) of a partner (art 1833);

b. If dueto ADI,partners areliable as if partnership not dissolved, when the following concur:b.1 IfcauseisACT ofpartner,acting partner must have knowledge of such dissolutionb.2 IfcauseisDEATHorINSOLVENCY, acting partner must have knowledge/notice.2. With respect to persons not partners (Art.1834) a.Partner continues tobind partnership even after dissolution in the following cases: a.1 Transactionsinconnectionto winding up partnership affairs/completing transactions unfinished a.2 Transactionswhichwouldbind partnership if not dissolved, when the other party/obligee:

Situation1i. Hadextendedcreditto partnership prior to dissolution &ii. Hadno knowledge/notice of dissolution, or

Situation2i.Didnotextendcreditto partnershipii.Hadknownpartnership prior to dissolutioniii.Hadno knowledge/notice of dissolution/fact of dissolution not advertised in a newspaper of general circulation in the place where partnership is regularly carried on

b. Partner cannot bind the partnership anymore after dissolution: b.1 Wheredissolutionisdueto unlawfulness to carry on with business (except: winding up of partnership affairs)b.2 Where partner hasbecome insolvent b.3 Where partner unauthorized towindup partnership affairs, except by transaction with one who:

Situation1i.Hadextendedcreditto partnership prior to dissolution &ii.Had noknowledge/noticeof dissolution, or

Situation2i.Didnotextendcreditto partnership prior to dissolutionii.Hadknownpartnershipprior to dissolutioniii.Hadnoknowledge/noticeof dissolution/fact of dissolution not advertised in a newspaper of general circulation in the place where partnership is regularly carried on

B.DISCHARGEOFLIABILITY

Dissolution does not discharge existing liability of partner, except by agreement between: Partner and himself Person/partnership continuing the business Partnership creditors

RIGHTS OF PARTNER WHERE DISSOLUTION NOT IN CONTRAVENTION OF AGREEMENT:

1. Apply partnership property to discharge liabilities of partnership2.Apply surplus,if anyto payin cash the net amount owed to partners

RIGHTS OF PARTNER WHERE DISSOLUTION IN CONTRAVENTION OF AGREEMENT:

1. Partner who did not cause dissolution wrongfully:a.Applypartnershippropertyto discharge liabilities of partnershipb.Apply surplus,if anyto payin cash the net amount owed to partnersc.Indemnity fordamagescaused by partner guilty of wrongful dissolutiond.Continue businessin samename during agreed term e.Possespartnershippropertyif business is continued

2. Partnerwhowronglycauseddissolution:a.Ifbusinessnotcontinuedbyothers-apply partnership property to discharge liabilities of partnership & receive in cash his share of surplus less damages caused by his wrongful dissolution b.If business continuedby others-have the value of his interest at time of dissolution ascertained and paid in cash/secured by bond & be released from all existing/future partnership liabilities

RIGHTS OF INJURED PARTNER WHEREPARTNERSHIP CONTRACT IS RESCINDED ON GROUND OF FRAUD or MISREPRESENTATION BY ONE PARTY:

1. Right to lien on surplus of partnership property after satisfying partnership liabilities2.Right tosubrogation inplace ofcreditors after payment of partnership liabilities3.Right of indemnificationby guilty partner against all partnership debts & liabilities

C. SETTLEMENT OF ACCOUNTS BETWEEN PARTNERSASSETS OF THE PARTNERSHIP:

1.Partnershipproperty(includinggoodwill)2.Contributionsofthepartners

ORDER OF APPLICATION OF ASSETS (PREFERENCE OF CREDIT):

1. Partnership creditors2. Partners as creditors3. Partners as investors return of capital contribution 4. Partners as investors share of profits if any

D. WHEN BUSINESS OF DISSOLVED PARTNERSHIP IS CONTINUED:

1. Creditors of oldpartnership arealso creditors of the new partnership which continues the business of the old one w/o liquidation of the partnership affairs

2. Creditors have an equitable lien on the consideration paid to the retiring /deceased partner by the purchaser when retiring/deceased partner sold his interest w/o final settlement with creditors

3. Rights ifretiring/estateof deceasedpartner:a.To havethe valueof hisinterest ascertained as of the date of dissolution b.To receive as ordinary creditor the value of his share in the dissolved partnership with interest or profits attributable to use of his right, at his option

PERSONS AUTHORIZED TO WIND UP

1.Partnersdesignatedbytheagreement2.In absenceof agreement, allpartners who have not wrongfully dissolved the partnership3.Legalrepresentativeoflastsurvivingpartner

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