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CHAPTER 4LIMITED PARTNERSHIP (N)

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Art. 1843. A limited partnership is oneformed by two or more persons under theprovisions of the following article, havingas members one or more general partnersand one or more limited partners. Thelimited partners as such shall not be bound

by the obligations of the partnership.

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Art. 1844. Two or more persons desiring to form alimited partnership shall: (1) Sign and swear to a certificate, which shallstate -

(a) The name of the partnership, adding theretothe 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 eachmember, general and limited partners beingrespectively designated; (e) The term for which the partnership is to exist; (f) The amount of cash and a description of andthe agreed value of the other propertycontributed by each limited partner;

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(g) The additional contributions, if any, to be made byeach limited partner and the times at which or events onthe happening of which they shall be made;

(h) The time, if agreed upon, when the contribution ofeach limited partner is to be returned; (i) The share of the profits or the other compensation byway of income which each limited partner shall receiveby reason of his contribution;

(j) The right, if given, of a limited partner to substitute anassignee as contributor in his place, and the terms andconditions of the substitution; (k) The right, if given, of the partners to admit additionallimited partners; (l) The right, if given, of one or more of the limitedpartners to priority over other limited partners, as tocontributions or as to compensation by way of income,and the nature of such priority;

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(m) The right, if given, of the remaining generalpartner or partners to continue the business onthe death, retirement, civil interdiction, insanityor insolvency of a general partner; and(n) The right, if given, of a limited partner todemand and receive property other than cash inreturn for his contribution.(2) File for record the certificate in the Office ofthe Securities and Exchange Commission.A limited partnership is formed if there has beensubstantial compliance in good faith with theforegoing requirements.

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Reason for adopting Limited

PartnershipA limited partner may contribute so muchmoney to the capital without risking hisseparate property for the payment ofpartnership obligation.

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Characteristics of a limited

partnership1. Must be organized in compliance with therequirements of the law.2. There must be one or more general partners.

3. There must be one or more limited partnerscontributing capital and sharing in the profits.4. The limited partners do not participate in thecontrol of the business of the partnership.5. The limited partners are not bound by theobligation of the partnership.6. Partnership debts shall be paid out of thecommon fund and the separate properties of thegeneral partners.

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Requisites in the formation

of limited partnership1. The certificate must be signed and sworn toby all of the partners.

2. The certificate must be registered in theoffice of the Securities and ExchangeCommission.

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Non-fulfillment of the

requisitesIf the proposed partnership has not compliedsubstantially with the requirements of thelaw the same will not be considered as alimited partnership, but a generalpartnership, in which all members are liableto the extent of their separate property.

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Effect of omitting the word

“Limited” or “LTD” in thefirm nameCannot be considered as a firm name and the

partnership will be treated as a generalpartnership.

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Effect if only the aggregate

contribution is statedThe law says that the contribution of eachlimited partner must be stated. Hence, if theaggregate sum given by two or more limitedpartners is given, the law has not beencomplied with.

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Art. 1845. The contributions of a limitedpartner may be cash or property, but notservices.

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Status of a limited partner

contributing industryConsidered a general partner

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Art. 1846. The surname of a limited partner shallnot appear in the partnership name unless: (1) It is also the surname of a general partner, or

(2) Prior to the time when the limited partnerbecame such, the business has been carried onunder a name in which his surname appeared. A limited partner whose surname appears in apartnership name contrary to the provisions of the

first paragraph is liable as a general partner topartnership creditors who extend credit to thepartnership without actual knowledge that he isnot a general partner.

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Art. 1847. If the certificate contains a falsestatement, one who suffers loss by reliance onsuch statement may hold liable any party to

the certificate who knew the statement to befalse: (1) At the time he signed the certificate, or (2) Subsequently, but within a sufficient timebefore the statement was relied upon toenable him to cancel or amend the certificate,or to file a petition for its cancellation oramendment as provided in Article 1865.

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Art. 1848. A limited partner shall notbecome liable as a general partner unless,in addition to the exercise of his rights andpowers as a limited partner, he takes part inthe control of the business.

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Limited partner without

right of managementActs which do not constitute taking “ part inthe control of the business”

1. Mere dealing with a customer.2. Mere consultation on one occasion withthe general partners.

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Acts constituting taking

“part in the control of thebusiness”Selection of who will be the managingpartner.Supervision over a superintendent of thebusiness of the firm.

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Prohibition not applicable

after dissolutionProhibition against taking part in the controlof the business is with regard to an existingpartnership and not with a partnership whichis already dissolved.

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Limited partner cannot

perform acts ofadministrationLimited partners may not perform acts of

administration with respect to the interests ofthe partnership, not even in the capacity ofagents of the managing partners.

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Art. 1849. After the formation of a limitedpartnership, additional limited partnersmay be admitted upon filing anamendment to the original certificate inaccordance with the requirements of Article1865.

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Requisites for the admission

of a limited partner1. Amendment of the certificate.2. The certificate must be signed and sworn

to by all the partners, including newlyadmitted limited partner.3. Filing of the certificate with the SEC.

Note: If articles are not properly amendedwith the SEC, it does not result to thedissolution of the limited partnership.

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Art. 1850. A general partner shall have all therights and powers and be subject to all therestrictions and liabilities of a partner in a

partnership without limited partners.However, without the written consent orratification of the specific act by all the limitedpartners, a general partner or all of the general

partners have no authority to: (1) Do any act in contravention of thecertificate; (2) Do any act which would make it impossibleto carry on the ordinary business of thepartnership; (3) Confess a judgment against thepartnership;

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(4) Possess partnership property, or assigntheir 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, unlessthe right so to do is given in the certificate;(7) Continue the business with partnershipproperty on the death, retirement, insanity,civil interdiction or insolvency of a generalpartner, unless the right so to do is given inthe certificate.

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Reason why they cannot

perform the 7 actsThe acts are acts of strict dominion and notmerely routinary in the ordinary conduct ofthe business of the partnership.

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Art. 1851. A limited partner shall have the samerights as a general partner to: (1) Have the partnership books kept at the

principal place of business of the partnership, andat a reasonable hour to inspect and copy any ofthem; (2) Have on demand true and full information of allthings affecting the partnership, and a formalaccount of partnership affairs whenevercircumstances render it just and reasonable; and (3) Have dissolution and winding up by decree ofcourt. A limited partner shall have the right to receive ashare of the profits or other compensation by wayof income, and to the return of his contribution asprovided in Articles 1856 and 1857.

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Art. 1852. Without prejudice to the provisionsof Article 1848, a person who has contributedto the capital of a business conducted by aperson or partnership erroneously believingthat he has become a limited partner in alimited partnership, is not, by reason of hisexercise of the rights of a limited partner, ageneral partner with the person or in thepartnership carrying on the business, or boundby the obligations of such person orpartnership, provided that on ascertaining themistake he promptly renounces his interest inthe profits of the business, or othercompensation by way of income.

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Contributor who erroneously

believes he has become alimited partnerA , B, C, D and E formed a limited partner

A and B : general partnersC and D: general partnersE: left out as to the designation and heerroneously believes that he has become alimited partnerRule: Generally, he should not be consideredliable as a general partners.

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Art. 1853. A person may be a generalpartner and a limited partner in the same

partnership at the same time, providedthat this fact shall be stated in thecertificate provided for in Article 1844. A person who is a general, and also at thesame time a limited partner, shall have allthe rights and powers and be subject to allthe restrictions of a general partner; exceptthat, in respect to his contribution, he shallhave the rights against the other memberswhich he would have had if he were notalso a general partner.

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Rights and Liabilities of

General-limited partnerHas all the rights and powers and is subject toall liabilities of a general partnerRight to participate in the management ofthe business of the partnership; his separateproperties are liable for the payment ofpartnership debts

If compelled to pay the creditors of thepartnership, his pro-rata share remains to bethe rule but later on he can askreimbursements from his co-partner

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Art. 1854. A limited partner also may loan money toand transact other business with the partnership, and,unless he is also a general partner, receive on account

of resulting claims against the partnership, withgeneral creditors, a pro rata share of the assets. Nolimited partner shall in respect to any such claim: (1) Receive or hold as collateral security anypartnership property, or (2) Receive from a general partner or the partnershipany payment, conveyance, or release from liability if atthe time the assets of the partnership are not sufficientto discharge partnership liabilities to persons notclaiming as general or limited partners. The receiving of collateral security, or payment,conveyance, or release in violation of the foregoingprovisions is a fraud on the creditors of the partnership.

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Limited Partner’s right to

deal with the partnership1. Loan money to the partnership2. Transact business with the partnership

3. Receive a pro-rata share of the partnershipassets with general creditors, unless he is ageneral-limited partner

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Example

A, B and C are partners in Y Partnership, Ltd.with A and B as general partners and C aslimited partner, each contributing P10,000.The partnership incurred an obligation to X, astranger, for P12,000 and to C, the limitedpartner for P6,000.

Upon dissolution, the partnership estateamounts to P203,000, a parcel of land valuedP200,000 and P3,000 cash.

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Question

If X and C will proceed against thepartnership, with respect to the P3,000 cash,who will be paid first?

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Answer

Both, in proportion to their right because thepartnership is solvent and C is a limitedpartner.

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Question

Supposing the partnership is insolvent, thatis, no parcel of land but only cash of P3,000.Who will be paid first?

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Answer

X , because the partnership is insolvent.Paying C or pro-rata between X and C will beconsidered fraudulent because the assets ofthe partnership are not sufficient to dischargepartnership liabilities.

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Question

Supposing C is a general partner and it is ageneral partnership, the partnership issolvent, who will be paid first?

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Answer

X, because he is an outside creditor. Applyonly the rule on pro-rata if the followingrequisites are present:A. Partnership is solventB. One of the creditors is a limited partner.

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Art. 1855. Where there are several limitedpartners the members may agree that oneor more of the limited partners shall have apriority over other limited partners as tothe return of their contributions, as to their

compensation by way of income, or as toany other matter. If such an agreement ismade it shall be stated in the certificate,and in the absence of such a statement allthe limited partners shall stand upon equalfooting.

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Preferred Limited Partner

Agreement must be stated in the certificate,and in the absence of such a statement all thelimited partners shall stand upon equal

footing.

Nature of preference

A. The return of the contributionB. CompensationC. Other matters

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Art. 1856. A limited partner may receive fromthe partnership the share of the profits or thecompensation by way of income stipulated forin the certificate; provided that after suchpayment is made, whether from property ofthe partnership or that of a general partner,the partnership assets are in excess of allliabilities of the partnership except liabilitiesto limited partners on account of theircontributions and to general partners.

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Profit or compensation of

Limited partnerGiven only if after payment, the partnershipassets are in excess of the liabilities of thefirm to third persons and to limited partnersfor claims other than their capitalcontribution.

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Art. 1857. A limited partner shall not receive from

a general partner or out of partnership propertyany part of his contributions until: (1) All liabilities of the partnership, exceptliabilities to general partners and to limitedpartners on account of their contributions, havebeen paid or there remains property of thepartnership sufficient to pay them; (2) The consent of all members is had, unless thereturn of the contribution may be rightfullydemanded under the provisions of the secondparagraph; and (3) The certificate is cancelled or so amended as toset forth the withdrawal or reduction.

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Subject to the provisions of the firstparagraph, a limited partner may rightfullydemand the return of his contribution: (1) On the dissolution of a partnership; or (2) When the date specified in the certificatefor its return has arrived, or (3) After he has six months' notice in writing toall other members, if no time is specified in thecertificate, either for the return of thecontribution or for the dissolution of thepartnership.

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In the absence of any statement in the certificateto the contrary or the consent of all members, alimited partner, irrespective of the nature of hiscontribution, has only the right to demand andreceive cash in return for his contribution. A limited partner may have the partnershipdissolved and its affairs wound up when:

(1) He rightfully but unsuccessfully demands thereturn of his contribution, or (2) The other liabilities of the partnership have notbeen paid, or the partnership property isinsufficient for their payment as required by thefirst paragraph, No. 1, and the limited partnerwould otherwise be entitled to the return of hiscontribution.

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When contributions of

limited partners can bereturnedRequisites1. All liabilities of the partnership have been paid orthere are sufficient assets to pay partnershipliabilities, except liabilities to general partners and tolimited partners on account of their contribution2. Consent of all partners is obtained, except when

the return of the contribution may be rightfullydemanded.3. The certificate is cancelled or amended showingthe withdrawal or reduction of the contribution.

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When limited partner may

rightfully demand return ofcontributionA. On dissolution of the partnership

B. Upon arrival of the date specified in thecertificate of its returnC. If no time is fixed, after six months noticein writing is given to all other partners.

Note: A limited partner can only demand andreceive in cash the return of his contribution

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Liability of a limited

partner who has withdrawn A limited partner is still answerable toprevious creditors if later on the firmbecomes insolvent.

His contribution is returned to him shall betreated as trust fund for the discharge ofpartnership liabilities including interestearned.

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Art. 1858. A limited partner is liable to thepartnership: (1) For the difference between hiscontribution as actually made and thatstated in the certificate as having beenmade; and (2) For any unpaid contribution which heagreed in the certificate to make in thefuture at the time and on the conditionsstated in the certificate.

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The liabilities of a limited partner as set forth in

this article can be waived or compromised only bythe consent of all members; but a waiver orcompromise shall not affect the right of a creditorof a partnership who extended credit or whoseclaim arose after the filing and before a

cancellation or amendment of the certificate, toenforce such liabilities. When a contributor has rightfully received thereturn in whole or in part of the capital of hiscontribution, he is nevertheless liable to thepartnership for any sum, not in excess of suchreturn with interest, necessary to discharge itsliabilities to all creditors who extended credit orwhose claims arose before such return.

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Limited partner’s liability

as a trusteeA. Specific property stated in the certificateas contributed by him but which was notactually contributed.B. Specific property which has beenwrongfully returned to him.C. Money or property wrongfully paid orconveyed to him on account of hiscontribution

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Limited partner’s liability

for contributionA. For the difference between the amount ofhis actual contribution and what he shouldhave contributed as stated in the certificate.

B. For any additional contribution which heagrees to make at a future time.

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Art. 1859. A limited partner's interest isassignable. A substituted limited partner is a person admittedto all the rights of a limited partner who has diedor has assigned his interest in a partnership. An assignee, who does not become a substitutedlimited partner, has no right to require anyinformation or account of the partnershiptransactions or to inspect the partnership books;he is only entitled to receive the share of theprofits or other compensation by way of income,or the return of his contribution, to which hisassignor would otherwise be entitled.

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An assignee shall have the right to become a substitutedlimited partner if all the members consent thereto or ifthe assignor, being thereunto empowered by thecertificate, gives the assignee that right. An assignee becomes a substituted limited partner whenthe certificate is appropriately amended in accordancewith Article 1865. The substituted limited partner has all the rights andpowers, and is subject to all the restrictions and liabilitiesof his assignor, except those liabilities of which he wasignorant at the time he became a limited partner andwhich could not be ascertained from the certificate. The substitution of the assignee as a limited partnerdoes not release the assignor from liability to thepartnership under Articles 1847 and 1848.

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Assignment of limited

partner’s interestInterest of a limited partner is assignable buthe does not become a substituted limitedpartner unless certain specified conditions aremet.

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Rights of assignee ( who is

not admitted as SLP)Only entitled to receive the share of theprofits or other compensation by way ofincome or the return of his contribution in

which the assignor would otherwise beentitled.

Note: he has no right to require anyinformation or accounting of partnershipaffairs or to inspect the book of thepartnership

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Substitute Limited Partner

A person admitted to all the rights of alimited partner who has dies or has assignedhis interest in a partnership.

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Rights and liabilities of a

substituted limited partnerHas all the rights and powers, and is subjectto all the liabilities of his assignor, exceptthose liabilities which were unknown to himat the time of substitution and which couldnot be ascertained from the certificate.

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Liabilities of Assignor

The substitution of the assignee as a limitedpartner does not release the assignor fromliability:A. To person suffering losses by relying on afalse statement in the certificateB. To creditors who extended credit or whoseclaim arose before the substitution.

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Art. 1860. The retirement, death,insolvency, insanity or civil interdiction of ageneral partner dissolves the partnership,unless the business is continued by theremaining general partners: (1) Under a right so to do stated in the

certificate, or (2) With the consent of all members.

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Effect of insanity of a

general partnerA. If general partnership, the insanity of apartner is a ground for judicial dissolution butthe firm is not automatically dissolved.

B. If limited partnership, the insanity of ageneral partner will automatically dissolvethe partnership.

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Art. 1861. On the death of a limited partnerhis executor or administrator shall have allthe rights of a limited partner for thepurpose of setting his estate, and suchpower as the deceased had to constitute hisassignee a substituted limited partner.

The estate of a deceased limited partnershall be liable for all his liabilities as alimited partner.

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Art. 1862. On due application to a court ofcompetent jurisdiction by any creditor of a limitedpartner, the court may charge the interest of theindebted limited partner with payment of theunsatisfied amount of such claim, and mayappoint a receiver, and make all other orders,directions and inquiries which the circumstancesof the case may require. The interest may be redeemed with the separateproperty of any general partner, but may not beredeemed with partnership property. The remedies conferred by the first paragraph

shall not be deemed exclusive of others whichmay exist. Nothing in this Chapter shall be held to deprive alimited partner of his statutory exemption.

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Attachment and execution,

including redemption oflimited partner’s interest

Partner’s interest in the partnership may byorder of the court be attached and executedby his separate creditors.

Interest charged may be redeemed by theseparate property of any general partner butnot with partnership property.

A t 1863 I tti t ft di l ti th li biliti f

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Art. 1863. In setting accounts after dissolution the liabilities ofthe partnership shall be entitled to payment in the followingorder: (1) Those to creditors, in the order of priority as provided bylaw, except those to limited partners on account of theircontributions, and to general partners; (2) Those to limited partners in respect to their share of theprofits and other compensation by way of income on theircontributions; (3) Those to limited partners in respect to the capital of theircontributions; (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.

Subject to any statement in the certificate or to subsequentagreement, limited partners share in the partnership assets inrespect to their claims for capital, and in respect to theirclaims for profits or for compensation by way of income ontheir contribution respectively, in proportion to the respectiveamounts of such claims.

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Order of preference,

liquidation of a limitedpartnership1. Outside creditors and limited partners unlesspartnership is insolvent.2. Limited partner’s share in the profit.3. Limited partner’s return of capitalcontribution.

4.General partners aside from profits and capital5. General partner’s profit6. General partner’s return of capital contribution

Art. 1864. The certificate shall be cancelled when the partnership isdissol ed or all limited partners cease to be s ch

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dissolved or all limited partners cease to be such. A certificate shall be amended when: (1) There is a change in the name of the partnership or in the amountor 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 issentenced to civil interdiction and the business is continued under

Article 1860; (6) There is a change in the character of the business of thepartnership; (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 thedissolution of the partnership or for the return of a contribution;

(9) A time is fixed for the dissolution of the partnership, or the returnof a contribution, no time having been specified in the certificate, or (10) The members desire to make a change in any other statement inthe certificate in order that it shall accurately represent theagreement among them.

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When certificate is

cancelled1. when the partnership is dissolved2. When all limited partners cease to belimited partners

Art 1865 The writing to amend a certificate

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Art. 1865. The writing to amend a certificateshall: (1) Conform to the requirements of Article1844 as far as necessary to set forth clearly thechange in the certificate which it is desired tomake; and (2) Be signed and sworn to by all members,and an amendment substituting a limitedpartner or adding a limited or general partnershall be signed also by the member to besubstituted or added, and when a limitedpartner is to be substituted, the amendmentshall also be signed by the assigning limitedpartner. The writing to cancel a certificate shall besigned by all members.

A person desiring the cancellation or amendment of a certificate, ifd d h f d d h

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any person designated in the first and second paragraphs as a personwho must execute the writing refuses to do so, may petition thecourt to order a cancellation or amendment thereof. 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 ofthe Securities and Exchange Commission where the certificate isrecorded, to record the cancellation or amendment of the certificate;and when the certificate is to be amended, the court shall also causeto be filed for record in said office a certified copy of its decreesetting forth the amendment. A certificate is amended or cancelled when there is filed for record inthe Office of the Securities and Exchange Commission, where thecertificate is recorded: (1) A writing in accordance with the provisions of the first or secondparagraph, or (2) A certified copy of the order of the court in accordance with theprovisions of the fourth paragraph; (3) After the certificate is duly amended in accordance with thisarticle, the amended certified shall thereafter be for all purposes thecertificate provided for in this Chapter.

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Requisites for amendment ofcertificate

A. It must be in writingB. It must be signed and sworn to by allmembersC. It must be filed with the SEC

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Requisites for cancellation

A. It must be in writingB. It must be signed by all members

C. It must be filed with the SEC.

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Art. 1866. A contributor, unless he is ageneral partner, is not a proper party toproceedings by or against a partnership,except where the object is to enforce alimited partner's right against or liability tothe partnership.

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Limited partner is not aparty to an action by oragainst the partnership

All action by or against the partnership must beprosecuted and defended in the name of thepartnership.

Limited partners are not necessary party to such

actionsException: Where its object is to enforce alimited partner’s right or liability to thepartnership

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Art. 1867. A limited partnership formed under the law prior tothe effectivity of this Code, may become a limited partnershipunder this Chapter by complying with the provisions of Article1844, provided the certificate sets forth: (1) The amount of the original contribution of each limited

partner, and the time when the contribution was made; and (2) That the property of the partnership exceeds the amountsufficient to discharge its liabilities to persons not claiming asgeneral or limited partners by an amount greater than the sumof the contributions of its limited partners. A limited partnership formed under the law prior to theeffectivity of this Code, until or unless it becomes a limitedpartnership under this Chapter, shall continue to be governedby the provisions of the old law.

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