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Limited Partnership 1

o General partner can secure capital from others for one’s business and still
E. LIMITED PARTNERSHIP retain control.
o There are at least three classes of contracts which can be made with
those from whom the capital is secured:
1. CONCEPT 1. Ordinary loan on interest.
2. Loan where the lender, in lieu of interest, takes a share in the profits
ART. 1843. A limited partnership is one formed by two or more persons under the
of the business.
provisions of the following article, having as members one or more general partners and
3. Cases in which the person advancing the capital secures, besides a
one or more limited partners. The limited partners as such shall not be bound by the
share in the profits, some measure of control over the business.
obligations of the partnership.
Characteristics of limited partnership.
Concept of limited partnership-- composed of two classes of partners. (1) formed by compliance with the statutory requirements (Art. 1844.);
o One or more general partners; and (2) One or more general partners control the business and are personally liable to
o One or more limited partners creditors (Arts. 1848, 1850.);
(3) One or more limited partners contribute to the capital and share in the profits
Limited liability as the key characteristic but do not participate in the management of the business and are not
- Main feature: limited partners NOT personally bound by obligations of the personally liable for partnership obligations beyond the amount of their capital
partnership. contributions (Arts. 1845, 1848, 1856.);
- Their liability to third persons is limited to a fixed amount , their capital (4) limited partners may ask for the return of their capital contributions under the
contributions or the amount they have invested in the partnership. conditions prescribed by law (Arts. 1844[h], 1857.); and
- Exception to the general rule that all partners, including industrial partners, are (5) partnership debts are paid out of common fund and the individual properties of
liable pro rata with all their property for partnership debts. (Art. 1816.) the general partners.
- Limited partner has the same type of liability as stockholder in a corporation.
General partners –much like a partner in an ordinary partnership. They are typically those
- Reason: encourage/enable persons with capital but not desiring to engage in a who know how to manage the business.
business to invest capital and become partners w/ people who have the skill in such Limited partners –usually those who put money for the business. (only investors)
business.
o Limited partners can share in profits and not be liable as general
partners; Can associate as partners with those having business skill
Limited Partnership 2

GENERAL PARTNER/PARTNERSHIP LIMITED PARTNER/PARTNERSHIP


personally liable for partnership obligations liability extends only to his capital contribution
When the manner of management has not been agreed upon, no share in the management
all of the general partners have an equal right in the - rights limited to those in Article 1851,
management of the business  liable to creditors as a general partner if he takes part in the
control of the business (Art. 1848.)
may contribute money, property, or industry must contribute cash or property
proper party to proceedings by or against a partnership not a proper party to proceedings by or against a partnership
-EXP:
unless he is also a general partner
 or where the object of the proceeding is to enforce a limited partner’s
right against, or liability to, the partnership

interest in the partnership may not be assigned as to make the partner’s interest is freely assignable, with the assignee acquiring all the
assignee a new partner without the consent of the other rights of the limited partner subject to certain qualifications
partners
(although he may associate a third person with him in his share)
name may appear in the firm name Must not
prohibited from engaging in a business which is of the kind of No prohibition
business in which the partnership is engaged, if he is a capitalist (since considered a mere contributor)
partner
or in any business for himself if he is an industrial partner
retirement, death, insanity, or insolvency of a general partner retirement, etc. of a limited partner does not have the same effect, for his
dissolves the partnership executor or administrator shall have the rights of a limited partner for the
purpose of selling his estate.
constituted in any form by contract or conduct of the parties limited partnership is created by the members after compliance with the
requirements set forth by law; it is composed only of general partners; it
must operate under a fi rm name which in the case of a limited partnership
must be followed by the word “Limited” (Art. 1844[1, a].); and its
dissolution and winding up are governed by different rules.

A limited partnership, unless prohibited by law, may carry on any business which could be carried on by a general partnership.
Limited Partnership 3

2. REQUIREMENTS FOR FORMATION 2 essential Requirements for formation of a limited partnership.


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(1) The certificate or articles of the limited partnership which states the matters
ART. 1844. Two or more persons desiring to form a limited partnership shall:
enumerated in the article, must be signed and sworn to; and
(1) Sign and swear to a certificate, which shall state:
(2) Such certificate must be filed for record in the Office of the Securities and
(a) The name of the partnership, adding thereto the word “Limited”;
Exchange Commission.
(b) The character of the business;
(c) The location of the principal place of business;
- No substantial compliance where certificate of partnership is NOT signed and
(d) The name and place of residence of each member, general and limited
sworn to; or when NOT filed with SEC; Or when not field within a reasonable time.
partners being respectively designated;
o Since no time is fixed by the law for the filing of the certificate for a
(e) The term for which the partnership is to exist;
limited partnership, a reasonable time is allowed depending on the
(f) The amount of cash and description of and the agreed value of the other
circumstances of the particular case.
property contributed by each limited partner;
o burden is on the one seeking to fix general liability to show failure to
(g) The additional contributions, if any, to be made by each limited partner and
comply with certificate requirements.
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
- Reason for filing of the certificate: give actual/constructive notice to potential
be returned;
creditors or persons dealing with the partnership so that they may not be
(i) The share of the profi ts or the other compensation by way of income which
defrauded or misled.
each limited partner shall receive by reason of his contribution;
Execution of the prescribed certificate.
(j) The right, if given, of a limited partner to substitute an assignee as contributor
- immaterial that the certificate purports to be one for the renewal or continuance
in his place, and the terms and conditions of the substitution;
of an existing limited partnership when it is in fact one for the formation of a new
(k) The right, if given, of the partners to admit additional limited partners;
limited partnership, as long as the essential requirements of the law have been
(l) The right, if given, of one or more of the limited partners to priority over other
satisfied.
limited partners, as to contributions or as to compensation by way of income,
- statements must be true at the time the certificate and other required papers are
and the nature of such priority;
filed with the SEC
(m) The right, if given, of the remaining general partner or partners to continue the
o otherwise, if false info perjurious “limited partner” becomes a general
business on the death, retirement, civil interdiction, insanity or insolvency of a
partner.
general partner; and
Substantial compliance in good faith sufficient.
(n) The right, if given, of a limited partner to demand and receive property other
- strict compliance not necessary.
than cash in return of his contribution.
(2) File for record the certificate in the Office of the Securities and Exchange
Effect of failure to fulfil statutory requirements:
Commission.
- As to liability to 3rd persons: liable as a general partner.
A limited partnership is formed if there has been substantial compliance in good faith with
- as between the parties, the limited liability remains.
the foregoing requirements.
Note: A limited partner treated as a general partner as far as third persons are concerned is
entitled to reimbursement from the general partner or partners for whatever obligations he
Limited partnership not created by mere voluntary agreement.
might have paid to partnership creditors beyond his capital contribution.
- As owner of a business can avoid personal liability for business debts only if this is
provided by statute so a limited partnership can be created only where permitted
Effect of False Statement in Certificate:
by statute.
- criminal liability for perjury
- limited partnership cannot be constituted orally; the document must contain the
- pay damages (under Art. 1847)
matters enumerated in said article.
o where knew statement was false at the time he signed the certificate OR
- Reason: so that public notice may be given to all who desire to know the essential
where person signing came to know of falsity after (w/in sufficient time
features of the partnership.
before statement was relied upon) but did not cancel/amend the
- Need substantial compliance in good faith with the requirements set forth in
certificate nor file a petition for its cancellation/amendment.
Article 1844. otherwise, the liability of the limited partners becomes the same as
o A person suffers loss by reliance on the statement.
that of general partners.
Limited Partnership 4

Example: when actual contribution is less than the amount stated in the certificate
(since reliance may cause loss to creditor; note: that no loss when actual contribution
is more)

Rule where partnership creditor guilty of estoppel.


- Where certificate is defective and shows on its face that the statutory
requirements have not been complied with, the court can on its own motion hold
that a limited partnership has not been formed.
- But if attaching creditors recognize and deal with a firm as a limited partnership,
they will be estopped from insisting that there is no such partnership, or that the
terms of the partnership were not sufficiently stated in the notice of its formation.

Presumption of general partnership.


- Prima facie presumption: a general partnership
- Burden is on those who seek to avail themselves of the protection of laws
permitting the creation of limited partnerships to show due compliance with such
laws

Construction of provisions on limited partnerships.


- GR: courts should adopt and enforce a reasonable construction
o w/c will not defeat one of the objects of the law and will not, take away
the protection of the law.
- Courts must consider substance rather than form in construing the law. BUT
should be construed to insure substantial compliance with all the statutory
provisions which are designed for the protection of persons dealing with the
partnership

Who may become limited partners.


- a partnership cannot become a limited partner.
- Statute says that the membership of a limited partnership consists of specified
“persons” (see Art. 1843.).
Limited Partnership 5

3. CONTRIBUTIONS A general partner in a limited partnership possesses all the rights, and powers and is
ART. 1845. The contributions of a limited partner may be cash or other property, but not subject to all the restrictions and liabilities of a partner in an ordinary/general
services. partnership.

- Generally has the right to control and conduct the business of the partnership
- otherwise, he shall be considered an industrial and general partner
(only one who can act in behalf of the partnership—this is considering his personal
- partner may be a general partner and a limited partner in the same partnership
liability for all debts)
at the same time, provided that this fact shall be stated in the certificate (Art. 1853.)
- Limited partners have no right to interfere in the management
- BUT a limited partner may NOT be an industrial partner without being a general
o If they do, gen partner has the right to dissolve.
partner
o in view of Article 1845 which requires that a limited partner must be a
Restrictions on authority--general partners cannot do certain acts without the written
capital contributor. It is not clear whether the rule still applies if the
consent or certification of the act by ALL the limited partners: (See: Art. 1850)
contribution of services is made after the formation of the limited
partnership.
Article 1850. A general partner shall have all the rights and powers and be subject to all
contributions type of partner
the restrictions and liabilities of a partner in a partnership without limited partners.
partner in addition to cash, also a general partner and a limited partner
However, without the written consent or ratification of the specific act by all the limited
contributes services at the same time
partners, a general partner or all of the general partners have no authority to:
services only General partner
capital only either a general or a limited partner, or (1) Do any act in contravention of the certificate;
both,
- depending upon the (2) Do any act which would make it impossible to carry on the ordinary business of the
agreement in the certificate. partnership;

(3) Confess a judgment against the partnership;


Note: check may be treated as an actual payment in cash where the limited partner has (4) Possess partnership property, or assign their rights in specific partnership property,
money actually in the bank to his credit, and he gives the general partner absolute and final for other than a partnership purpose;
control of the amount. So a certified check or a manager’s check satisfies the law.
(5) Admit a person as a general partner;
The contribution of each limited partner must be paid before the formation of the
(6) Admit a person as a limited partner, unless the right so to do is given in the certificate;
limited partnership (but additional contributions may be paid after)
(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.

- Violation: entitle the limited partners to damages.

Assignment for benefit of creditors:


4. RIGHTS, POWERS, AND LIABILITIES OF A GENERAL - Assignment for benefit of creditors of the general partner alone (w/o signature of
the special/limited partner) is forbidden by art. 1850(2) as it is an act which would
PARTNER vs. A LIMITED PARTNER make it impossible to carry on the business of the partnership.
Rights of General Partner:
Compensation
Limited Partnership 6

- General partner NOT entitled to compensation beyond his share of the profits 7. Assignment of interest
for his services 8. Right to judicial dissolution
o Unless: agreement to the contrary 9. Preference over general partners as to assets

Interests in assets and profits 1. Exemption from partnership obligations


- Each partner (general or limited) has interest in the assets and profits, including - Not personally bound
the physical office where partnership conducts business. - Restrictions:
- Entitled to the payment of the value of his interest upon dissolution, liquidation o Only if he acts in a manner consistent w/ his status as a limited partner
and adjustment of the partner’s equities (less damages recoverable by reason of (must not participate in management/control)
his negligence or misconduct). o AND complies w/ statutory requirements
o Must not allow his surname to be used in the partnershipname
Liabilities of General Partner:  Unless: general partner also has the same surname or
- May become individually liable for all the debts of partnership. partnership had been using the same surname even before he
o Since a general partner in a limited partnership possesses all the rights, and had become a limited partner.
powers and is subject to all the restrictions and liabilities of a partner in an o Also personally liable if he made a false statement in the certificate of
ordinary/general partnership. partnership, on the basis of which a person suffered loss. + that he knew
- Occupies a relationship of trust; so is accountable to the other parties as fiduciary. that it was false (or subsequently found out within a sufficient time before
o If fiduciary duty is violated: pay damages the statement was relied upon to enable him to cancel/amend or to file a
o Examples: petition for cancellation/amendment.)
 Limited partners entitled to recover damages if the general
partner allows funds w/c the former contributed to be used for 2. Access to partnership books
other purposes. o To same extent as general partner
 Or if general partners, w/o consent of limited partners, take from o Full and free access to info contained in books
partnership funds a fee as payment for services rendered. o Entitled to demand books be kept at principal place of business & to be
allowed, at a reasonable hr to inspect and copy any of them.
Effect of Retirement, Death, Etc:
- Dissolves partnership,
o Unless the business is continued by the remaining general partners
 Under a right to do stated in the certificate; or 3. Information on partnership affairs and formal accounting
 W/ consent of all members. o In the same manner and extent as a general partner
o Entitled to demand true and full information of all things affecting the
o But even w/ authority or consent, the certificate must be amended to partnership.
reflect the change o Entitled also to demand a formal account of partnership affairs—when such
 In accordance w/ Art.1864-65. is just and reasonable.
o In this way, he is better than a stockholder—latter has no right to an
accounting and must recourse to a derivative action on behalf and for the
benefit of the corporation.

Rights of Limited Partner


4. Transaction of business with partnership
- Only has such rights as the law and his contract afford.
o Allowed to loan money or to transact other business w/ partnership &
1. Exemption from partnership obligations
o When he deals with partnership, not as a limited partner, but in the same
2. Access to partnership books
manner as a person not a member, he is to be treated in the same was as a
3. Information on partnership affairs and formal accounting
general creditor.
4. Transaction of business with partnership
 Provided: not also a general partner.
5. Share of profits or compensation
 He also cannot:
6. Return of contribution
Limited Partnership 7

 Receive or hold as collateral security any partnership  If liabilities are earned after withdrawal—no liability
property  Provided, the certificate was amended to show the fact
 Or receive from a general partner/partnership any of withdrawal.
payment, conveyance, or release from liability if at the
time, the assets of partnership are not sufficient to cover 7. Assignment of interest
liabilities to other persons (not general or limited partners) o Freely assignable by him
o Assignee does not necessarily acquire all rights of the assigning partner.—
- If Violation: only entitled to receive share of the profits/other compensation by way of
o Receipt of such is ipso jure fraud on the part of the creditor of the income or the return of contribution (to w/c assignor would otherwise be
partnership. entitled)
o Rescission o Has the right to be a substituted limited partner upon amendment of
- Reason of prohibition: prevent illegal competition between limited partners and certiifcate—in accordance w/ Art. 1865.
creditors for partnership assets. o Substitution does not release assignor from liability to partnership.
o No danger of competition if there are sufficient assets.
8. Right to judicial dissolution
5. Share of profits or compensation o Same right as a general partner; same grounds
o Right to receive what has been stipulated in the certificate to be his share o Additionally, may ask for dissolution & winding up on grounds in last par of
of profits/other compensation by way of income Art. 1857.
o May sue firm for his share of profits
o BUT: after payment if made, partnership assets must be in excess of all A. PREFERRED LIMITED PARTNERS
liabilities of the partnership (other than those to limited partners and
general partners) ART. 1855. Where there are several limited partners, the members may agree that one or
o In the absence of stipulation, not entitled to compensation for services in more of the limited partners shall have a priority over other limited partnersas to the
closing up business after dissolution. 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
6. Return of contribution absence of such a statement all the limited partners shall stand upon equal footing.
o May withdraw it in full/in part from general partner or out of partnership
property
o Provided: GR: all the limited partners shall stand upon equal footing.
1. All liabilities of partnership (not including those to partners) have EXP: By agreement, preference may be given to some limited partners over other limited
been paid, or that there remains sufficient property to pay them partners as to:
2. Consent of all members (1) Return of their contributions;
3. Certificate is cancelled or amended (to show (2) Their compensation by way of income; or
withdrawal/reduction) (3) Any other matter.

o Need of Sufficient property so limited partner can withdraw B. COMPENSATION OF LIMITED PARTNER
contributions: (see: Art. 1858)
 If not:
 Insolvent partnership: he must return contribution (at ART. 1856. A limited partner may receive from the partnership the share of the profits or
the instance if partnership and creditors) the compensation by way of income stipulated for in the certificate; provided, that after
 subsequently became insufficient after withdrawal: must such payment is made, whether from the property of the partnership or that of a general
return only amount that made the properties partner, the partnership assets are in excess of all liabilities of the partnership except
insufficient. liabilities to limited partners on account of their contributions and to general partners.
o Plus interest (presumably earned)
Limited Partnership 8

(1) On dissolution; or
- In other words, third-party creditors have priority over the limited partner’s rights. (2) Upon date specified in the certificate for the return; or
- In determining the liabilities of the partnership, the liabilities to the limited (3) After the expiration of the 6 months’ notice in writing given by him to the
partners for their contributions and to general partners, whether for contributions other partners if no time is fixed in the certificate for the return of the
or not, are not included. contribution or for the dissolution of the partnership.
- Liabilities to limited partners other than on account of their contributions arising
from business transactions by them with the partnership, enjoy protection, subject Right of limited partner to cash in return for contribution.
to the preferential rights of partnership creditors. (see Art. 1854.) (3rd par) Even if a limited partner has contributed property, he has only the right to demand
and receive cash for his contribution. The exceptions are:
C. RETURN OF CONTRIBUTION (1) Contrary stipulation in the certificate; or
(2) all partners (general and limited) consent to the return other than in the form of
ART. 1857. A limited partner shall not receive from a general partner or out of cash.
partnership property any part of his contributions until:
(1) All liabilities of the partnership, except liabilities to general partners and to limited When limited partner may have partnership dissolved.
partners on account of their contributions, have been paid or there remains (4th par) Additional grounds for the dissolution of the partnership upon petition of a limited
property of the partnership sufficient to pay them; partner. (See Arts. 1851[3], 1831.)
(2) The consent of all members is had, unless the return of the contribution may be (1) When his demand for the return of his contribution is denied although he has a
rightfully demanded under the provisions of the second paragraph; and right to such return; or
(3) The certificate is cancelled or so amended as to set forth the withdrawal or (2) When his contribution is not paid although he is entitled to its return because the
reduction. other liabilities of the partnership have not been paid or the partnership property is
insufficient for their payment.
Subject to the provisions of the first paragraph, a limited partner may rightfully demand the
return of his contributions:  In other words, were it not for this first condition in the first paragraph of Article
(1) On the dissolution of a partnership, or 1857 which is not present, he would have been entitled to the return of his
(2) When the date specified in the certificate for its return has arrived, or contribution because of the presence of the second and third conditions.
(3) After he has given six months notice in writing to all other members, if no time is  The limited partner must first ask the other partners to have the partnership
specified in the certificate, either for the return of the contribution or for the dissolved; if they refuse, then he can seek the dissolution of the partnership by
dissolution of the partnership. judicial decree.

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.

A limited partner may have the partnership dissolved and its affairs wound up when:
D. LIABILITIES OF A LIMITED PARTNER
(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, ART. 1858. A limited partner is liable to the partnership:
and the limited partner would otherwise be entitled to the return of his (4) For the difference between his contribution as actually made and that stated in the
contribution. certificate as having been made, and
(5) 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.
When return of contribution a matter of right. A limited partner holds as trustee for the partnership:
When Consent of all is NOT required: Where the return of the contribution may be rightfully (1) Specific property stated in the certificate as contributed by him, but which was not
demanded by the limited partners; contributed or which has been wrongfully returned, and
- (2ND par) may demand the return, as a matter of right, provided the conditions in (2) Money or other property wrongfully paid or conveyed to him on account of his
paragraph 1, Nos. 1 and 3 have been complied with — contribution.
Limited Partnership 9

 He assisted in the winding up after dissolution


The liabilities of a limited partner as set forth in this article can be waived or compromised  Bringing of an action for dissolution because assets were being
only by the consent of all members; but a waiver or compromise shall not affect the right wasted by management
of a creditor of a partnership who extended credit or whose claim arose after the filing and  Dealing with the firm as a customer
before a cancellation or amendment of the certificate, to enforce such liabilities.  Consultation on one occasion w/ general partners as to the
affairs of the firm
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 (3) To separate creditors. —Can be subject to a charging order
return with interest, necessary to discharge its liabilities to all creditors who extended o As in a general partnership, the creditor of a limited partner may, in
credit or whose claims arose before such return. addition to other remedies allowed under existing laws, apply to the proper
court for a “charging order”
 Subjecting the interest in the partnership of the debtor partner
Liabilities of a limited partner. for the payment of his obligation. (Art. 1862.)
1. To partnership  Interest may be redeemed w/ separate prop of general partner,
2. To 3rd persons dealing with partnership & have claims against it but not w/ partnership property.
3. To his separate creditors  Limited partner can avail of statutory exemption (Art. 1862)

(1) To the partnership. —Liability is to the partnership & not to the creditors of the Liability as trustee
partnership (since they are not principals in the transaction of a partnership) - Limited partner is considered as trustee for the partnership for:
 BUT general partners cannot waive any liability of the limited partners to (1) Specific property stated in the certificate as contributed by him but which he had
the prejudice of such creditors. not contributed;
(2) To partnership creditors and other partners. (2) Specific property of the partnership which had been wrongfully returned to him;
Liable for partnership obligations when: (3) Money wrongfully paid or conveyed to him on account of his contribution; and
a. he contributes services instead of only money or property to the (4) Other property wrongfully paid or conveyed to him on account of his contribution.
partnership (Art. 1845.);
b. when he allows his surname to appear in the firm name (Art. 1846.);
c. when he fails to have a false statement in the certificate corrected,
knowing it to be false (Art. 1847); Requisites for waiver or compromise of liabilities.
d. when he takes part in the control of the business (Art. 1848.); (3rd par) The liabilities may be waived or compromised, provided:
e. when he receives partnership property as collateral security, payment, (1) The waiver or compromise is made with the consent of all the partners; and
conveyance, or release in fraud of partnership creditors (Art. 1854); (2) The waiver or compromise does not prejudice partnership creditors
f. and when there is failure to substantially comply with the legal a. Who extended credit or
requirements governing the formation of limited partnerships. (Art. b. Whose claims arose before the cancellation or amendment of the
1844, par. 2.) certificate

Note: limited partner is not prevented from giving advise or suggestions to the Liability for return of contribution lawfully received.
general partner as to the business; esp: in times of severe financial crisis. (4th par) limited partner is liable to the partnership for the return of contribution lawfully
o By having a material interest in the success of the business, the limited received by him to pay creditors who extended credit or whose claim arose before such
partner can interest himself in specific aspects of the business. return.
o The ff are NOT considered as “interfering in the business” so as to make - Liability cannot exceed the sum received by him with interest.
him liable personally:
 When he sells assets and distributes them to the creditors after
the general partners have abandoned the business
 He looked after the books and declared that he expected to
close the business to pay creditors, after general partner
became ill
Limited Partnership 10

5. Admission of additional limited partners (Art. 1849) The substitution of the assignee as a limited partner does not release the assignor from
Article 1849. After the formation of a lifted partnership, additional limited partners may liability to the partnership under articles 1847 and 1858.
be admitted upon filing an amendment to the original certificate in accordance with the
requirements of article 1865.
Rights of assignee of limited partner
 The law requires that there is proper amendment to the certificate which must be  His rights are similar to those of a person to whom a partner conveyed his whole
signed and sworn to by all of the partners, including the new limited partners, and interest in the partnership (Art. 1813)
filed in the Securities and exchange Commission pursuant to the requirements of  The assignee has the right to:
Art. 1865. o Receive the share of the profits or other compensation by way of
income; or
o The return of the contribution to which the assignor would otherwise be
6. Change in the relationship of limited partner entitled.
How relation of limited partners changed  The assignee has no right to:
1. Substitution of a person as a limited partner in place of an existing limited partner o Require any information or account of partnership transactions
(Art. 1859) o Inspect the partnership books
2. Withdrawal, death, insolvency, insanity, or civil interdiction of a limited partner  The assignee acquires all the rights of the limited partner only when he becomes a
(Art. 1860) substituted limited partner
3. Addition of new limited partners (Art. 1849)
Note: The abovementioned does not necessarily dissolve the partnership. When assignee may become substituted limited partner
 Substituted Limited Partner – person authorized to all the rights of a limited partner
a. Assignee of limited partner (Art. 1859) who has died or has assigned his interest in a partnership.
 Requisites for substitution (CAR):
Article 1859. A limited partner's interest is assignable. a. All the members must consent to the assignee becoming a substituted
limited partner or the limited partner, being empowered by the
A substituted limited partner is a person admitted to all the rights of a limited partner certificate, must give the assignee the right to become a limited partner;
who has died or has assigned his interest in a partnership. b. The certificate must be amended in accordance with Art. 1865
c. The certificate as amended must be registered in the Securities and
An assignee, who does not become a substituted limited partner, has no right to require Exchange Commission
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 Liability of substituted partner
way of income, or the return of his contribution, to which his assignor would otherwise  The substituted limited partner is liable for all the liabilities of his assignor except
be entitled. only those of which he was (1) ignorant at the time he became a limited partner
and (2) which could not be ascertained from the certificate.
An assignee shall have the right to become a substituted limited partner if all the  The assignor is liable:
members consent thereto or if the assignor, being thereunto empowered by the o For damage by reliance on a false statement in the certificate; and
certificate, gives the assignee that right. o To creditors who extended credit or whose claims arose before the
substitution
An assignee becomes a substituted limited partner when the certificate is appropriately
amended in accordance with article 1865. b. Retirement, death of limited partner, etc. (Arts. 1860, 1861)

The substituted limited partner has all the rights and powers, and is subject to all the Article 1860. The retirement, death, insolvency, insanity or civil interdiction of a general
restrictions and liabilities of his assignor, except those liabilities of which he was ignorant partner dissolves the partnership, unless the business is continued by the remaining general
at the time he became a limited partner and which could not be ascertained from the partners:
certificate.
Limited Partnership 11

(1) Under a right so to do stated in the certificate, or amount of the judgment debt may be redeemed with partnership property with the consent
of all the partners whose interests are not so charge (Art. 1814, par. 2 (1))
(2) With the consent of all members.
NOTE: The limited partners’ right under the exemption laws is also preserved under this
article since his interest in the partnership is actually his property (as compared to general
partners whose interest in the partnership is their share of the profits and surplus; see Art.
Effect of retirement, death, etc. of a General Partner v. Limited Partner 1812)
 General Partner – dissolves the partnership
 Limited partner – does not dissolve the partnership 7. Transactions of a limited partnership (Art. 1854)
o Exception: there is only one limited partner (see Art. 1843)
Article 1854. A limited partner also may loan money to and transact other business with
Note: If the business is continued by the remaining partners under the rights given in the
the partnership, and, unless he is also a general partner, receive on account of resulting
certificate or with the consent of all the members, the limited partnership is not dissolved
claims against the partnership, with general creditors, a pro rata share of the assets. No
but the certificate must be amended to reflect the change in order that the limited partners
limited partner shall in respect to any such claim:
may avail the protection granted by law. (Lowe v. Arizona Power & Light Co)
(1) Receive or hold as collateral security any partnership property, or
Article 1861. 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
(2) Receive from a general partner or the partnership any payment, conveyance, or release
the deceased had to constitute his assignee a substituted limited partner.
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 estate of a deceased limited partner shall be liable for all his liabilities as a limited
partner.
The receiving of collateral security, or payment, conveyance, or release in violation of the
Right of executor on death of a limited partner
foregoing provisions is a fraud on the creditors of the partnership.
 On the death of a limited partner, his executor or administrator shall acquire:
o All the rights for purposes of settling the affairs of the limited partner
o The right to constitute the deceased’s assignee as substituted limited a. Allowable transactions
partner (ONLY IF the deceased partner was empowered to do so in the A limited partner (who is not also a general partner), being merely a contributor to the
certificate) partnership without the right to participate in its management, is not prohibited from:
a. Granting loans to the partnership;
c. Right of creditors of limited partner (Art. 1862) b. Transacting other business with it; and
c. Receiving a pro rata share of the partnership assets with general creditors if he is
not also a general partner
Article 1862. 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
b. Prohibited Transactions
The limited partner, in respect of any such claim, is prohibited from:
all other orders, directions and inquiries which the circumstances of the case may require.
a. Receiving or holding as collateral security any partnership property; or
b. Receiving any payment, conveyance, or release from liability if it will prejudice the
The interest may be redeemed with the separate property of any general partner, but may
right of third persons
not be redeemed with partnership property.
Notes
The remedies conferred by the first paragraph shall not be deemed exclusive of others
 Any violation of the prohibition will give rise to the presumption that it has been
which may exist.
made to defraud partnership creditors.
 Art. 1854 does not prohibit absolutely the taking as collateral security by a limited
Nothing in this Chapter shall be held to deprive a limited partner of his statutory partner of any partnership property. Nos. (1) and (2) of Art. 1854 are modified by
exemption. 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
NOTE: The interest of the debtor partner charged with the payment of the unsatisfied by, or when the receives security from, the partnership.
Limited Partnership 12

 When he rightfully but unsuccessfully demands the return of his


Preferential rights of third persons contribution, OR
 In transacting business with the partnership as a non-member, the limited partner  The other liabilities of the partnership (except) liabilities to general
is considered as a non-partner creditor. partners and to limited partners on account of their contributions, have
 However, third persons always enjoy preferential rights insofar as the partnership not been paid, OR
assets are concerned in view of the natural tendency of partners to give preference  The partnership property is insufficient for their payment, and the
to each other. limited partner would otherwise be entitled to the return of his
8. Dissolution of a limited partner contribution.
 Notice of dissolution.
ART. 1863. In settling accounts after dissolution, the liabilities of the partnership shall be
o Firm is dissolved by the expiration of the term fixed in certificate
entitled to payment in the following order:
 Notice of the dissolution need not be given since the papers filed and
recorded in the Securities and Exchange Commission are notice to all
(1) Those to creditors, in the order of priority as provided by law, except those to limited
the world of the term of the partnership.
partners on account of their contributions, and to general partners;
o Dissolution is by the express will of the partners
(2) Those to limited partners in respect to their share of the profits and other compensation
 Certificate shall be cancelled and a dissolution of the partnership is not
by way of income on their contributions;
effected until there has been compliance with the requirement
(3) Those to limited partners in respect to the capital of their contributions;
(4) Those to general partners other than for capital and profits;  Winding up
(5) Those to general partners in respect to profits; o Consequences of the dissolution of a general partnership apply to limited
(6) Those to general partners in respect to capital. partnership.
o When a limited partnership has been duly dissolved, the general partners
Subject to any statement in the certificate or to subsequent agreement, limited partners have the right and power to wind up its affairs
share in the partnership assets in respect to their claims for capital, and in respect to their o It is not the duty of the limited partner or of the representative of a deceased
claims for profits or for compensation by way of income on their contribution respectively, limited partner to care for or collect the assets of the fi rm.
in proportion to the respective amounts of such claims. o The representatives of the general partners, not the limited partners, succeed
the general partners.

Priority in the distribution of partnership assets.


Dissolution of a limited partnership.  Article 1863 provides for priority in the distribution of the assets after dissolution.
 Causes  Partnership creditors are entitled to first distribution, followed by limited partners
o A limited partnership is dissolved in much the same way as an ordinary who take priority over general partners.
partnership.  NB: in a general partnership, the claims of the general partners in respect of
o It may be dissolved capital enjoy preference over those in respect of profits. (see Art. 1839[1, c, d].)
 For the misconduct of a general partner
 On the retirement, death, etc. of a general partner Share of limited partners in partnership assets.
 When all the limited partners ceased to be such on the expiration of the  In absence of stipulation as to share in profits, limited partners share in the
term partnership assets in respect to their claims for capital and profits in proportion to
 By mutual consent of the partners before the expiration of the firm’s the respective amounts of such claims.
original term.  This proportional sharing by the limited partners takes place where the partnership
 Suit for dissolution. assets are insuffi cient to pay such claims.
o A limited partner may bring a suit for
 Dissolution Priority of claims of limited partners.
 Accounting,  The members of a limited partnership may include in the articles an agreement for
 Appointment of a receiver or priority of distribution on the winding up of partnership affairs.
 Insolvency  In the absence of any contrary agreement, all the limited partners stand upon
o A limited partner may have the partnership dissolved equal footing.
Limited Partnership 13

 The claims of limited partners for profits and other compensation by way of in the first and second paragraphs as a person who must execute the writing refuses to do
income and return of capital contributions rate ahead with respect to all claims of so, may petition the court to order a cancellation or amendment thereof.
general partners.
 For claims arising from individual loans to, or other business transactions with, the If the court finds that the petitioner has a right to have the writing executed by a person
partnership, other than for capital contributions, the limited partner is placed in who refuses to do so, it shall order the Office of the Securities and Exchange Commission
the same category as a non-member creditor. (Art. 1854, par. 1.) 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 the said office a certified copy of its decree setting forth the amendment.

A certificate is amended or cancelled when there is filed for record in the Office of the
9. Cancellation or Amendment of Certificate Securities and Exchange Commission, where the certificate is recorded:
ART. 1864. The certificate shall be cancelled when the partnership is dissolved or all limited (1) A writing in accordance with the provisions of the first or second paragraph; or
partners cease to be such. (2) A certified copy of the order in accordance with the provisions of the fourth paragraph;
(3) After the certificate is duly amended in accordance with this article, the amended
A certificate shall be amended when: certificate shall thereafter be for all purposes the certificate provided for in this Chapter.

(1) There is a change in the name of the partnership or in the amount or character of the Requirements for amendment and cancellation of certificate.
contribution of any limited partner;  Requirements to amend/cancel a certificate:
(2) A person is substituted as a limited partner; a) The amendment must be in writing;
(3) An additional limited partner is admitted; b) It must be signed and sworn to by all the members including the new
(4) A person is admitted as a general partner; members, and the assigning limited partner in case of substitution or
(5) A general partner retires, dies, becomes insolvent or insane, or is sentenced to civil addition of a limited or general partner; and
interdiction and the business is continued under article 1860; c) The certificate, as amended, must be filed for record in the Securities
(6) There is change in the character of the business of the partnership; and Exchange Commission.
(7) There is a false or erroneous statement in the certificate; o From the moment the amended certificate or a certified copy of a court
(8) There is a change in the time as stated in the certificate for the dissolution of the order granting the petition for amendment has been filed, such amended
partnership or for the return of a contribution; certificate shall thereafter be for all purposes the certificate of the
(9) A time is fixed for the dissolution of the partnership, or the return of a contribution, no partnership under Article 1844.
time having been specified in the certificate; or
(10) The members desire to make a change in any other statement in the certificate in The approval by the Commission of the amendment or cancellation is not required.
order that it shall accurately represent the agreement among them.
10. Action against a limited partnership
ART. 1866. A contributor, unless he is a general partner, is not a proper party to
ART. 1865. The writing to amend a certificate shall: proceedings by or against a partnership, except where the object is to enforce a limited
partner’s right against or liability to the partnership.
(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 Limited partner, a mere contributor.
 A limited partner is referred to in Article 1866 as mere contributor.
(2) Be signed and sworn to by all members, and an amendment substituting a limited
 He is practically a stranger in the limited partnership whose liability is limited to his
partner or adding a limited or general partner shall be signed also by the member to be
interest in the firm (Art. 1843.), without any right and power to participate in the
substituted or added, and when a limited partner is to be substituted, the amendment shall
management and control of the business. (see Arts. 1848, 1851.)
also be signed by the assigning limited partner.
 Unlike in the case of a general partner, the relationship between a limited partner,
on the one hand, and the other partners and the partnership, on the other hand, is
The writing to cancel a certificate shall be signed by all members.
not one of trust and confidence.
 A limited partner is, therefore, not prohibited from engaging in business for
A person desiring the cancellation or amendment of a certificate, if any person designated
himself even in competition with that conducted by the partnership (see Arts.
Limited Partnership 14

1789, 1808.) and may transact business with the partnership for ordinary purposes
as though he were a stranger. (see Art. 1854.)

Parties to action by or against partnership.


 Since limited partners are not principals in partnership transactions, their liability,
as a general rule, is to the partnership, not to the creditors of the partnership. (see
Art. 1858.)
 For the same reason, they have no right of action against third persons against
whom the partnership has any enforceable claim.
 Hence, he is not a proper party to proceedings by or against the partnership.

When limited partner a proper party.


 The limited partner may maintain an action in his own name where the object is to
enforce his individual rights against the partnership (Art. 1851.), and to recover
damages for violation of such right.
 An action at law may be maintained by creditors of a firm against a limited partner
to account for and restore sums withdrawn by him from the capital of the firm with
outstanding debts on a voluntary dissolution.
o This is confined to judgment creditors of the firm with unsatisfied
executions against the general partners, and this remedy has been
denied to creditors who have not exhausted their remedies at law
against the general partners.

Nature of limited partner’s interest in firm.


 The limited partner’s contributions to the firm is not a loan, and he is not a creditor
of the firm because of his contribution thereto.
o A loan of money to a person engaged in business, under a detailed
agreement for its payment and security, does not constitute a limited
partnership.
 A limited partner’s contribution is not a mere investment, as in the case of one
purchasing stock in a corporation.
 A limited partner is, in a sense, an owner, which in interest in the capital of the
firm and its business as such, but he has no property right in the firm’s assets.
o He is not the owner of the property of the partnership any more than are
the stockholders in the corporation;
o but in accordance with statutory provisions, a limited partner may be a
co-owner with his partners of partnership property,
 A limited partner’s interest is in personal property, and it is immaterial whether
the firm’s assets consist of realty or tangible or intangible personalty.
 The nature of the limited partner’s interest in the firm amounts to a share in the
partnership assets after its liabilities have been deducted and a balance struck.
o This interest is a chose in action, and hence, intangible personal
property.