D. Limited partnership

1. IN GENERAL

⦁ A limited partnership is one formed by two or more persons under the provisions of the following article, having as members one or more general partners and one or more limited partners. The limited partners as such shall not be bound by the obligations of the partnership. (Article 1843, Civil Code)

a. Registration

Two or more persons desiring to form a limited partnership shall:
1) Sign and swear to a certificate, which shall state –
a) The name of the partnership, adding thereto the word “Limited”;
b) The character of the business;
c) The location of the principal place of business;
d) The name and place of residence of each member, general and limited partners being respectively designated;
e) The term for which the partnership is to exist;
f) The amount of cash and a description of and the agreed value of the other property contributed by each limited partner;
g) The additional contributions, if any, to be made by each limited partner and the times at which or events on the happening of which they shall be made;
h) The time, if agreed upon, when the contribution of each limited partner is to be returned;Q
i) The share of the profits or the other compensation by way of income which each limited partner shall receive by reason of his contribution;
j) The right, if given, of a limited partner to substitute an assignee as contributor in his place, and the terms and conditions of the substitution;
k) The right, if given, of the partners to admit additional limited partners;
l) The right, if given, of one or more of the limited partners to priority over other limited partners, as to contributions or as to compensation by way of income, and the nature of such priority;
m) The right, if given, of the remaining general partner or partners to continue the business on the death, retirement, civil interdiction, insanity or insolvency of a general partner; and
n) The right, if given, of a limited partner to demand and receive property other than cash in return for his contribution.
2) File for record the certificate in the Office of the Securities and Exchange Commission. (Article 1844, Ibid.)

When a limited partnership is formed – substantial compliance required. A limited partnership is formed if there has been substantial compliance in good faith with the foregoing requirements. (Paragraph 2, Article 1844, Ibid.)

Contribution of limited partner cannot be services.The contributions of a limited partner may be cash or property, but not services. (Article 1845, Ibid.)

Surname. –

General Rule: The surname of a limited partner shall not appear in the partnership name.
Exceptions: … unless:
1) It is also the surname of a general partner, or
2) Prior to the time when the limited partner became such, the business has been carried on under a name in which his surname appeared.

Effect if limited partner’s name appears in partnership name. A limited partner whose surname appears in a partnership name contrary to the provisions of the first paragraph is liable as a general partner to partnership creditors who extend credit to the partnership without actual knowledge that he is not a general partner. (Article 1846, Ibid.)

Effect if certificate has false statement. –

If the certificate contains a false statement, one who suffers loss by reliance on such statement may hold liable any party to the certificate who 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 provided in Article 1865. (Article 1847, Ibid.)

Effect if limited partner controls business. A limited partner shall not become liable as a general partner unless, in addition to the exercise of his rights and powers as a limited partner, he takes part in the control of the business. (Article 1848, Ibid.)

Additional limited partners. After the formation of a lifted partnership, additional limited partners may be admitted upon filing an amendment to the original certificate in accordance with the requirements of Article 1865. (Article 1849, Ibid.)

2. GENERAL PARTNER

Simultaneously a general partner and a limited partner. A person may be a general partner and a limited partner in the same partnership at the same time, provided that this fact shall be stated in the certificate provided for in Article 1844. (Article 1853, Ibid.)

A person who is a general, and also at the same time a limited partner, shall have all the rights and powers and be subject to all the restrictions of a general partner; except that, in respect to his contribution, he shall have the rights against the other members which he would have had if he were not also a general partner. (Paragraph 2, Article 1853, Ibid.)

a. Rights and powers

General 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.
Exception: However, without the written consent or ratification of the specific act by all the limited partners, a general partner or all of the general partners have no authority to:
1) Do any act in contravention of the certificate;
2) Do any act which would make it impossible to carry on the ordinary business of the partnership;
3) Confess a judgment against the partnership;
4) Possess partnership property, or assign their rights in specific partnership property, for other than a partnership purpose;
5) Admit a person as a general partner;
6) Admit a person as a limited partner, unless the right so to do is given in the certificate;
7) Continue the business with 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. (Article 1850, Ibid.)

3. LIMITED PARTNER

a. Rights and powers

A limited partner shall have the same rights as a general partner to:
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; and
3) Have dissolution and winding up by decree of court.

Share of profits or other compensation. A limited partner shall 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 Articles 1856 and 1857. (Article 1851, Ibid.)

Mistaken belief as a limited partner. Without prejudice to the provisions of Article 1848, a person who has contributed to the capital of a business conducted by a person or partnership erroneously believing that he has become a limited partner in a limited partnership, is not, by reason of his exercise of the rights of a limited partner, a general partner with the person or in the partnership carrying on the business, or bound by the obligations of such person or partnership, provided that on ascertaining the mistake he promptly renounces his interest in the profits of the business, or other compensation by way of income. (Article 1852, Ibid.)

Loan and other transactions/business with the partnership. A limited partner also may loan money to and transact other business with the partnership, and, 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. (Article 1854, Ibid.)

No limited partner shall in respect to any such claim:
1) Receive or hold as collateral security and 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.
The receiving of collateral security, or payment, conveyance, or release in violation of the foregoing provisions is a fraud on the creditors of the partnership. (Paragraph 2, Article 1854, Ibid.)

Several limited partners; Priority over other limited partners. Where 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. If such an agreement is made it shall be stated in the certificate, and in the absence of such a statement all the limited partners shall stand upon equal footing. (Article 1855, Ibid.)

Profits or compensation – conditions. A limited partner may receive from the partnership the share of the profits or the compensation by way of income stipulated for in the certificate; provided that after such payment is made, whether from property of the partnership or that of a general partner, the partnership assets are in excess of all liabilities of the partnership except liabilities to limited partners on account of their contributions and to general partners. (Article 1856, Ibid.)

b. Contributions

A limited partner shall not receive from a general partner or out of partnership property any part of his contributions 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 cancelled or so amended as to set forth the withdrawal or reduction. (Article 1857, Ibid.)
Subject to the provisions of the first paragraph, 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 six months’ notice in writing to all other members, if no time is specified in the certificate, either for the return of the contribution or for the dissolution of the partnership. (Paragraph 2, Article 1857, Ibid.)

⦁ In the absence of any statement in the certificate to the contrary or the consent of all members, a limited partner, irrespective of the nature of his contribution, has only the right to demand and receive cash in return for his contribution. (Paragraph 3, Article 1857, Ibid.)

c. Dissolution

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, No. 1, and the limited partner would otherwise be entitled to the return of his contribution. (Paragraph 4, Article 1857, Ibid.)

d. When a trustee for the partnership

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; and
2) Money or other property wrongfully paid or conveyed to him on account of his contribution. (Paragraph 2, Article 1858, Ibid.)

e. When liable to the partnership

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 any unpaid contribution which he agreed in the certificate to make in the future at the time and on the conditions stated in the certificate. (Article 1858, Ibid.)

Waiver or compromise of liability

Consent of all members. The liabilities of a limited partner as set forth in this article can be waived or compromised only by the consent of all members; but a waiver or compromise shall not affect the right of a creditor of a partnership who extended credit or whose claim arose after the filing and before a cancellation or amendment of the certificate, to enforce such liabilities. (Paragraph 3, Article 1858, Ibid.)

Extent of liability despite receipt of capital. When a contributor has rightfully received the return in whole or in part of the capital of his contribution, he is nevertheless liable to the partnership for any sum, not in excess of such return with interest, necessary to discharge its liabilities to all creditors who extended credit or whose claims arose before such return. (Paragraph 4, Article 1858, Ibid.)

f. Assignability

Assignable. A limited partner’s interest is assignable. (Article 1859, Ibid.)

Substituted limited partner. A substituted limited partner is a person admitted to all the rights of a limited partner who has died or has assigned his interest in a partnership. (Paragraph 2, Article 1859, Ibid.)

Assignee who is not a substituted limited partner. An assignee, who does not become a substituted limited partner, has no right to require any information or account of the partnership transactions or to inspect the partnership books; he is only entitled to receive the share of the profits or other compensation by way of income, or the return of his contribution, to which his assignor would otherwise be entitled. (Paragraph 3, Article 1859, Ibid.)

When an assignee has a right to become a substituted limited partner. An assignee shall have the right to become a substituted limited partner if all the members consent thereto or if the assignor, being thereunto empowered by the certificate, gives the assignee that right. (Paragraph 4, Article 1859, Ibid.)

An assignee becomes a substituted limited partner when the certificate is appropriately amended in accordance with Article 1865. (Paragraph 5, Article 1859, Ibid.)

Rights of substituted limited partner. The substituted limited partner has all the rights and powers, ⦁ and is subject to all the restrictions and liabilities of his assignor, except those liabilities of which he was ignorant at the time he became a limited partner and which could not be ascertained from the certificate. (Paragraph 6, Article 1859, Ibid.)

Effects of substitution of assignee as a limited partner. The substitution of the assignee as a limited partner does not release the assignor from liability to the partnership under Articles 1847 and 1848. (Article 1859, Ibid.)

Remedies of a creditor against limited partner

Court application. On due application to a court of competent jurisdiction by any creditor of a limited partner, the court may charge the interest of the indebted limited partner with payment of the unsatisfied amount of such claim, and may appoint a receiver, and make all other orders, directions and inquiries which the circumstances of the case may require. (Article 1862, Ibid.)

Interest. The interest may be redeemed with the separate property of any general partner, but may not be redeemed with partnership property. (Paragraph 2, Article 1862, Ibid.)

Non-exclusive remedy. The remedies conferred by the first paragraph shall not be deemed exclusive of others which may exist. (Paragraph 3, Article 1862, Ibid.)

4. DISSOLUTION

The retirement, death, insolvency, insanity or civil interdiction of a general partner dissolves the partnership, unless the business is continued by the remaining general partners:
1) Under a right so to do stated in the certificate, or
2) With the consent of all members. (Article 1860, Ibid.)

Death of limited partner

Executor/Administrator of a deceased limited partner. On the death of a limited partner his executor or administrator shall have all the rights of a limited partner for the purpose of setting his estate, and such power as the deceased had to constitute his assignee a substituted limited partner. (Article 1861, Ibid.)

Estate’s liability. The estate of a deceased limited partner shall be liable for all his liabilities as a limited partner. (Paragraph 2, Article 1861, Ibid.)

Preference of accounts

In setting accounts after dissolution the liabilities of the partnership shall be entitled to payment in the following order:
1) Those to creditors, in the order of priority as provided by law, except those to limited partners on account of their contributions, and to general partners;
2) Those to limited partners in respect to their share of the profits and other compensation by way of income on their contributions;
3) Those to limited partners in respect to the capital of their contributions;
4) Those to general partners other than for capital and profits;
5) Those to general partners in respect to profits;
6) Those to general partners in respect to capital(Article 1863, Ibid.).

Share in the partnership assets. Subject to any statement in the certificate or to subsequent agreement, limited partners share in the partnership assets in respect to their claims for capital, and in respect to their claims for profits or for compensation by way of income on their contribution respectively, in proportion to the respective amounts of such claims. (Paragraph 2, Article 1863, Ibid.)

Cancellation of certificate

Dissolution or cessation of all limited partners. The certificate shall be cancelled when the partnership is dissolved or all limited partners cease to be such. (Article 1864, Ibid.)

Amendment of certificate: A certificate shall be amended when:
1) There is a change in the name of the partnership or in the amount or character of the contribution of any limited partner;
2) A person is substituted as a limited partner;
3) An additional limited partner is admitted;
4) A person is admitted as a general partner;
5) A general partner retires, dies, becomes insolvent or insane, or is sentenced to civil interdiction and the business is continued under Article 1860;
6) There is a change in the character of the business of the partnership;
7) There is a false or erroneous statement in the certificate;
8) There is a change in the time as stated in the certificate for the dissolution of the partnership or for the return of a contribution;
9) A time is fixed for the dissolution of the partnership, or the return of a contribution, no time having been specified in the certificate, or
10) The members desire to make a change in any other statement in the certificate in order that it shall accurately represent the agreement among them. (Paragraph 2, Article 1864, Ibid.)
Writing to amend a certificate: The writing to amend a certificate shall:
1) Conform to the requirements of Article 1844 as far as necessary to set forth clearly the change in the certificate which it is desired to make; and
2) Be signed and sworn to by all members, and an amendment substituting a limited partner or adding a limited or general partner shall be signed also by the member to be substituted or added, and when a limited partner is to be substituted, the amendment shall also be signed by the assigning limited partner. (Article 1865, Ibid.)

Signed by all members. The writing to cancel a certificate shall be signed by all members. (Paragraph 2, Article 1865, Ibid.)

Court petition. A person desiring the cancellation or amendment of a certificate, if any person designated in the first and second paragraphs as a person who must execute the writing refuses to do so, may petition the court to order a cancellation or amendment thereof. (Paragraph 3, Article 1865, Ibid.)

If the court finds that the petitioner has a right to have the writing executed by a person who refuses to do so, it shall order the Office of the Securities and Exchange Commission where the certificate is recorded, to record the cancellation or amendment of the certificate; and when the certificate is to be amended, the court shall also cause to be filed for record in said office a certified copy of its decree setting forth the amendment. (Paragraph 4, Article 1865, Ibid.)

When deemed amended or cancelled: A certificate is amended or cancelled when there is filed for record in the Office of the Securities and Exchange Commission, where the certificate is recorded:
1) A writing in accordance with the provisions of the first or second paragraph; or
2) A certified copy of the order of the court in accordance with the provisions of the fourth paragraph;
3) After the certificate is duly amended in accordance with this article, the amended certified shall thereafter be for all purposes the certificate provided for in this Chapter. (Paragraph 5, Article 1865, Ibid.)

Contributor. A contributor, unless he is a general partner, is not a proper party to proceedings by or against a partnership, except where the object is to enforce a limited partner’s right against or liability to the partnership. (Article 1866, Ibid.)

Disclaimer: All information herein is for educational and general information only intended for those preparing for the bar exam. These should not be taken as professional legal advice or opinion. Please consult a competent lawyer to address your specific concerns. Any statements or opinions of the author are solely his own and do not reflect that of any organization he may be connected.

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