Assessment Reviewer 2 - Partnership

POINTERS TO REVIEW:
- Distribution of Profit or Loss
- Dissolution
- Sharing of Losses and Liabilities
- Limited Partnership

Rules on division of profit and loss (Art. 1797)

1. If all are capitalist partners
a. Profits and losses shall be divided according to their agreement.
b. If only the sharing of the partners in the profits has been agreed upon, the share of each
partner in the losses shall be in the same proportion as the share of each in the profits.
c. In the absence of both, the share of each partner in the profits and losses shall be in
proportion to his capital contribution (original capital).

2. If aside from the capitalist partners, there is also an industrial partner (or there are industrial
partners)

a. Profits
1) Profits shall be divided according to their agreement
2) In the absence of any agreement thereon, the industrial partner shall first receive a just and
equitable share of the profits, and thereafter each capital partner shall share in the profits in
proportion to his capital contribution

b. Losses
1) The industrial partner shall not share in the losses
2) The capitalist partner shall share in the losses:
- Same with rules if all are capitalist partners (a-c)

3. If aside from capitalist partners, there is also a capitalist industrial partner or there are
capitalist-industrial partners)

a. Profits
1) The profits shall be divided according to their agreement
2) In the absence of any agreement thereon, profits shall be divided as follows:
a) The capitalist-industrial partner shall first receive a just and equitable share of the profits in
his capacity as industrial partner;
b) Thereafter, each capitalist partner including the capitalist-industrial partner in his capacity as
capitalist partner, shall share in profits in proportion to his capital contribution.

b. Losses
1) Losses shall divide among the partners including the capitalist-industrial partner in his
capacity as capitalist partner, according to their agreement.

2) In the absence of any agreement thereon, losses shall be divided among the partners
including the capitalist-partner in his capacity as capitalist partner, according to the ratio of
their capital contribution.

3) In both of the above cases, the capitalist-industrial partner shall not share in the losses in his
capacity as an industrial partner.

Note: Any stipulation which excludes one or more partners from any share in profits and losses
is void (Art. 1799) except one which exempts industrial partner form losses because the law
provides that he shall not be liable therefor.

DISSOLUTION AND WINDING UP

a. Creation/Birth (Chapter I)
b. Business proper (Chapter II)

(Chapter III)
c. Dissolution (1828, 1829)
Dissolution is the change in the relation of the partners caused by the partner ceasing to
be associated in carrying on of the business.
- Upon dissolution, the partnership continues and its legal personality is retained, until
the complete winding up of its business
- When there is a change in membership and the partnership is simply continued without
liquidation, creditors of ‘dissolved’ partnership shall automatically be creditors of partnership
continuing the business (1840).

Causes of dissolution (Automatic Dissolution) (Article 1830)

1. Without violation of the agreement of the partners;
a. By the termination of the definite term or particular undertaking specified in the
agreement.
 b. By the express will:
1) Of any partner who must act in good faith, when no definite term or particular
undertaking specified in the agreement.
2) Of all partners who have not assigned their interests or suffered them to be charged
for their separate debts, either before or after termination any specified term or
undertaking.
c. By the expulsion (removal) of any partner from the business bona fide* in accordance
with such a power conferred by the agreement between the partners.

*Bona fide - sincerely; without intention to deceive.

2. In contravention of the agreement between the partners, by the express will of any partner
at anytime.
The withdrawing partner can be held liable for damages.

3. When any event makes it unlawful for the business of the partnership to be carried on or the
members to carry it on in partnership.

4. In the following cases of loss:

a. Loss before or after delivery of property where the partner contributed only its use or
enjoyment, he having reserved the owner thereof.
The partner who owns the property bears the loss.
b. Loss before delivery of specific thing, which a partner had promised to contribute to the
partnership.
If the loss occurs after delivery, the partnership, being already the owner, bears the
loss.
* Res perit domino (the thing is lost to the owner)
5. By the death of the partner.
6. By the insolvency of any partner or of the partnership.
7. By the civil interdiction of any partner. (Art. 1930)
8. By the decree of court in the following cases:
a. On the application by or for a partner (i.e., a partner or his legal representative files the
application) to dissolve the partnership whenever (at whatever time):
1) A partner has been declared insane in any judicial proceeding or is shown to be
of unsound of mind.
2) A partner becomes in any way incapable of performing his part of the
partnership contract.
3) A partner has been guilty of such conduct as tends to affect prejudicially the
 carrying on of the business.
4) A partner willfully or persistently commits a breach of the partnership
agreement, or otherwise so conducts himself in matters relating to the
partnership business that it is not reasonably practicable to carry on the business
in partnership with him.
5) The business of the partnership can only be carried on at a loss. (Art. 1381)
6) Other circumstances render a dissolution equitable (Art. 1831)

b. On the application of the purchaser of a partner’s interest

1) After the termination of the specific term or particular undertaking.
2) At any time when the partnership was a partnership at will when the interest
was assigned or the changing order was issued. (Art. 1831)

Judicial Dissolution
1. Insanity of Partner
2. Incapacity of Parner
3. Partner has been guilty of conduct which tend to affect prejudicially the carrying on the
business
4. Willful violation of the agreement
5. Business can be carried only at all loss
6. Other circumstances which render dissolution equitable:
a. Refusal to give the share of a partner in partnership profits
b. Refusal of a partner’s right to participate in the management of the partnership affairs,
unless otherwise agreed.

Who may sue for judicial dissolution?

1. A partner
2. The assignee or purchaser of a partner’s interest (Art. 1813, 1814)
- When the assignee is not accepted into the partnership.
- When the partnership is a partnership at will.

Effects of Dissolution:
GR: Dissolution shall terminate all authority of any partner to act for the partnership (No
partner can bind the partnership after its dissolution) (1832)
EXC:
1. Except those necessary to wind-up partnership affairs
2. If dissolution is caused by act, insolvency or death of a partner, each partner is liable for his
share of the liability created by any partner acting for the partnership as if the partnership had
not dissolved unless:
a. The acting partner had knowledge (actual awareness) of the dissolution (act);
b. The acting partner had knowledge or notice of the death or insolvency of a partner. (1833)
3. As provided by 1834 (Act of a partner after dissolution, binds the partnership)
a. Business or transaction is necessary for the winding up of the partnership affairs.
b. There is a need to complete unfinished business already begun, otherwise the firm will suffer
prejudices or damages.
c. New transactions entered into by a partner with a third person in good faith.
d. Where although the partner has no authority to wind up partnership affairs, the other party
to the transaction is:
d.1 One who had extended credit to the partnership before dissolution (i.e., previous
creditor), and he had no notice or knowledge of the partner’s lack of authority.
d.2 One who had not so extended credit before dissolution (i.e., new creditor) and
having no notice or knowledge of the partner’s lack of authority, the fact of want of authority
has not been advertised in a newspaper of general circulation in the place (or in each place if
more than one) at which the business is conducted.
4. When the act of the partner after dissolution does not bind the partnership (1834)
a. Where the partnership is dissolved because it is unlawful to carry on the business, unless the
act is appropriate for winding up partnership affairs.
b. Where the acting partner is insolvent.
c. Where the partner had no authority to wind up partnership affairs, except with innocent
third persons. [Please refer to Letter ‘d’ (d.1) and (d.2) of the immediately preceding topic.]
d. Where a partner’s authority is already terminated among the partners and the third person
had actual or constructive knowledge, as the case may be, of the dissolution of the firm.

GR: The dissolution of the partnership will not automatically discharge the liability of a partner
from his obligation to the firm.
EXC: His liability will be discharged only when there is an agreement reached by the partner
concerned, other partners and creditors.

Application of partnership property and other rights of partners on dissolution (1837)

(Rights of partners in dissolution, of innocent and guilty partners)
1. Dissolution without contravention of the partnership agreement
Each partner shall have the following rights:
a. To have the partnership property applied to discharge the liabilities of the partnership.
b. To have the surplus, if any, applied to pay in cash the net amount owing to the respective
partners.
However, if the cause of dissolution is the bona fide expulsion of the partner and the
expelled partner is discharged from all partnership liabilities, either by payment or the
agreement of the expelled partner, the partnership creditor and the person continuing the
business, he shall receive in cash only the net amount due him from the partnership.

2. Dissolution in contravention of the partnership agreement

A. Rights of partner who has not caused the dissolution wrongfully
1) To have the partnership property applied to discharge the liabilities of the partnership.
2) To have the surplus, if any, applied to pay in cash the net amount owing to the respective
partners.
3) To be indemnified for damages from the partner who has caused the wrongful dissolution of
the partnership.

*Surplus - an excess of income or assets over expenditure or liabilities in a given period

4.) To continue the business of the partnership in the same name, either by themselves or
jointly with others, and for that purpose possess ownership property provided that:
a) They pay the partner who has caused the wrongful dissolution of the partnership the value of
his interest in the partnership less damages; or
b) They secure its payment by a bond approved by the court.

B. Rights of partner who has caused the dissolution wrongfully

1) If the business is not continued
a) To have the partnership property applied to discharge the liabilities of the partnership
b) To receive his share in the surplus, less damages suffered by the other partners by reason of
his having caused the wrongful dissolution of the partnership.

2) If the business is continued

a) To have the value of his interest in the partnership less damages paid to him in cash or have
its payment secured by a bond approved by the court.
In ascertaining the value of such partner’s interest, the value of the goodwill shall not be
included.
b) To be released from all existing liabilities of the partnership.

Rescission of partnership contract (Art. 1838)

(Rights of partners in rescinded or annulled partnership)
1. Grounds (Basis) for rescission
a. Fraud or
b. Misrepresentation to enter into the partnership contract

2. Rights of partners who was induced by fraud or misrepresentation

a. Right of lien on, or retention of, the surplus of the partnership property, after the satisfaction
of partnership liabilities for any sum of money paid by him to the partnership by way of capital
or advances.

b. Right of subrogation (substitution) in place of partnership creditors for any payment made by
him for partnership liabilities.

c. Right of indemnification from the person guilty of fraud or misrepresentation against all
debts of the partnership.

d. Liquidation/Winding up - the process of settling the business or partnership affairs after

dissolution (1389)
- Kinds: Extra Judicial and Judicial (1836)

Who may wind up partnership affairs (Art. 1836)

1. Extrajudicially
a. By the partner or partners designated by the agreement
b. If none was designated:
1) The partner or partners who have not wrongfully dissolved the partnership.
2) If all partners are dead, the legal representative of the last surviving partner who
was not insolvent.
2. Judicially
Under the direction and control of the court, upon proper cause shown by any partner,
his legal representative or assignee.

The appointee* of the court should be a surviving partner, not the legal representative
of the deceased partner who was not insolvent except when he was the last surviving partner.

*Appointee - a person empowered by the owner of property to decide the disposition of that
property.

Order of Payment of Liabilities (1389)

 GENERAL PARTNERSHIP LIMITED PARTNERSHIP

Pay outside creditors Pay outside creditors and any debt owing to
limited partners.

Give limited partners their share in profit

Return capital contribution to limited partners

Pay inside creditors Pay inside creditors

Return capital contribution to

partners

Give partners their share in profit Give general partners their share in profit

Return capital contributions to general partners

*In General partnership, capital before profit while in Limited partnership, profit before capital.

e. Termination - that point in time when all partnership affairs are completely wound up and
finally settled. It signifies the end of the partnership life.

Rules on sharing of partnership liabilities to third persons

1. Nature of liability
a. Pro rata - The liability of the partnership shall be equally divided among the partners.
The sharing should be equal, because the liability is imposed on all the partners
including an industrial partner whose proportionate share cannot be determined in the absence
of a profit and loss sharing agreement since he has no capital contribution.

2. Partners liable
All general partners, whether:
a. capitalist partner, or
b. industrial partner.

3. Status of stipulation exempting a general partner from pro rata and subsidiary liability after
the exhaustion of partnership assets
a. Void as to third persons.
b. Valid among the partners (1817)
The stipulation, however, will not totally exempt a partner because his contribution will
be subject to the payment of partnership liabilities. This is to reconcile Art. 1817 with Art. 1819
which declares void any stipulation excluding a partner from losses, except in the case of an
industrial partner.
Accordingly, if there is such stipulation, the liabilities shall be paid as follows:
1. The assets of the partnership shall first be used to pay the liabilities.
2. If the partnership assets are not sufficient, the liability shall paid equally from the separate
assets of the partners including any industrial partner.
3. Thereafter, the person not exempted from pro rata and subsidiary liability shall reimburse
according to the partner’s profit and loss sharing agreement or in the ratio of their capital
contribution, whichever is applicable, to the following partners the amount paid by them:
1) Industrial partner whom the law exempts from losses.
2) General partners exempted from pro rata and subsidiary liability.

Example:
Calixto, Hebron, Austria, Roxas ad Mendez are partners in the firm CHARM Sales Company.
Calixto is an industrial partner, while the rest are capitalist partners with Hebron contributing
P20,000; Austria, P30,000; Roxas, P10,000; and Mendez, P40,000. The partners stipulated that
Hebron shall not be liable for liabilities of the partnership after its assets are exhausted.
After several years of operational losses, CHARM’s assets dwindled (decreased) to
P120,000, while its liabilities reached P160,000. How shall the liabilities be paid?

1. The assets of P120,000 shall first be exhausted. This application leaves a balance of P40,000
of the liabilities.

2. The amount of P40,000 shall be shared equally by the five partners at P8,000 each to be paid
out of their separate assets.

3. Based on the ratio of the capital contributions of partners Austria, Roxas and ,Mendez of
3:1:4, the actual share of each in the balance of P40,000 is P15,000, P5,000 and P20,000
respectively, while none are due from Calixto and Hebron, as shown in the table:
 PARTNER Payment to Actual Share Over (under)
Creditors in Liability payment

Calixto P8,000 None P8,000

Hebron 8,000 None 8,000

Austria 8,000 15,000 (7,000)

Roxas 8,000 5,000 3,000

Mendez 8,000 20,000 (12,000)

As shown in the above table, Austria and Mendez are to give an additional amount of P7,000
and P12,000, respectively, to return Calixto’s payment of P8,000, Hebron’s payment of P8,000
and Roxas’ overpayment of P3,000.

LIMITED PARTNERSHIP (Chapter 4)

- it is a partnership formed by two or more persons in accordance with the requirements
of law (1844) having as one members one or more general partners and one or more limited
partners (1843). The special partners referred to as limited partners are not liable to the
partnership debts. Their liability is limited to the amount that they have contributed or invested
in the partnership.

Characteristics of Limited Partnership:

a. The limited partnership must organized in compliance with the requirement of the law (1844)
- The certificate of Limited Partnership must be signed and sworn by all the partners, GP
and LP.
- The certificate must contain all the information set forth in 1844;
- The name of the LP must contain the word ‘Limited’ or ‘Ltd.’
- The certificate must be filed with SEC
* Note: If these requirements are not complied with, as to third persons, the
partnership is a general partnership. As to the partners, the agreement between the partners
will still subsist (continue), still considered as LP. LP can ask reimbursement from GP, if asked to
pay by third persons.
b. There must be one or more general partners
c. There must be one or more limited partners contributing capital and sharing in the profits;
* Note: A limited partner is not allowed to contribute industry or services, it must be money
and/or property. A limited partner is a capital partner. They are generally those who are
financially capable to invest money for the business of the firm.
d. Limited partners do not take part or do not participate in the control of the business of the
partnership;
e. The limited partners are not personally liable for the partnership obligations beyond the
amount of their capital contributions or investments;
d. The partnership debts/obligations are paid out of partnership assets and separate of general
partners.

Compare and Contrast GENERAL PARTNERSHIP LIMITED PARTNERSHIP

Constitution or Creation As a rule, it may be constituted It must be executed in a

in any form unless immovable certificate of limited partnership
property is contributed (1771) duly signed and sworn to by all
the partners and recorded in
SEC.

Composition It is composed of only general It is composed of at least one

partners general partner, and at least one
limited partner

Firm Name It must operate under a firm The firm name must be
name which may or may not appended with the word
include the name of the “limited” or abbreviation “LTD”
partner/s
Examination:
1. Gregory, Edmond and Mark are partenrs in GEM Company wtih contributions of P10,000,
P40,000 and P50,000 respectively. Their agreement shows that they will share in the profits in
the ratio of 2:3:4. During the year, the partnership sustained a loss of P9,000. How shalll this
loss be dividing among the partners?
a. Equally at P3,000 each.
b. Gregory, P900; Edmond, P3,600; and Mark P4,500.
c. Gregory, P2,000; Edmond, P3,000, and Mark, P4,000.
d. The partners must establish first a loss sharing agreement before the loss may be divided
because they failed to have an agreement on the division of loss.

2. Which of the following stipulations is valid?

a. A stipulation excluding a capital partner from profits.
b. A stipulation exempting a capitalist partner from losses.
c. A stipulation exempting an industrial partner from losses.
d. A stipulation excluding an industrial partner from profits.

3. The change in the relation of the partners caused by any ceasing to be associated in the
carrying on the business is known as:
a. termination of the partnership
b. winding up of partnership affairs
c. liquidation of the partnership business
d. dissolution of the partnership

4. Which of the following losses will not cause the dissolution of a partnership?
a. Loss before delivery of a specific thing which a partner has promised to contribute to the
partnership.
b. Loss of a specific thing after its delivery to and acquisition of its ownership by the partnership
from the partner who contributed the same.
c. Loss after delivery of a specific thing where the partner contributed only it for use and
enjoyment, he having reserved the ownership thereof.
d. Loss before delivery of a specific thing where the partner promise to contribute only its use
and enjoyment, reserving the ownership thereof.

5. A decree by the court is necessary to dissolve a general partnership based on three of the
following grounds. Which one will not require such decree but will cause the automatic
dissolution of the partnership?
a. The business of the partnership can only be carried on at a loss
b. A partner is shown to be of unsound mind
c. A partner has been guilty of such conduct as tends to affect prejudicially the carrying on the
business.
d. A partner is civilly interdicted

6. Three of the following will cause the automatic dissolution of a general partnership. Which
one will not?
a. When any event makes it unlawful for the business of the partnership is to be carried on or
for the members to carry it on in partnership
b. Expulsion of any partner from the business bona fide in accordance with such a power
conferred by the agreement of the parties
c. A partner becomes in any way incapable of performing his part of the partnership contract.
d. The insolvency of the partner or of the partnership.
7. The partnership is not bound in three of the following acts of a partner after dissolution.
However, it is bound one. Which one is it?
a. Where the partner acting in insolvent
b. When it is unlawful to carry on the business
c. When the partner has no authority to wind up partnership affairs and the third person is a
previous creditor who had no knowledge of the partner’s lack of authority.
d. When a partner has no authority to wind up partnership affairs and the third person is a new
creditor who has not read the publication of the lack of authority of the partner in the
newspaper of general circulation in the place or places where the partnership business is
carried on.

8. What is the order of payment of liabilities of a dissolved general partnership using the code
number representing each liability?

I. Those owing to partners other than for capital or for profits.

II. Those owing to creditors other than partners
III. Those owing to partners in respect of profits
IV. Those owing to partners in respect of capital.

a. I, II, III, IV
b. II, I, IV, III
c. II, I, III, IV
d. I, II, IV, III

9. What is the order of payment of liabilities of a dissolved limited partnership using the code
number representing each liability?

I. Those owing to general partners other than for capital or for profits
II. Those owing to creditors including limited partners, except those to limited partners on
account of their contributions and general partners
III. Those owing to limited partners by way of their share in the profits and other
compensation by way of income.
IV. Those owing to limited partners in respect to the capital of their contributions
V. Those owing to general partners in respect of capital
VI. Those owing to general partners in respect of profits

a. I, II, III, IV, V, VI

b. II, I, III, IV, V, VI
c. II, I, III, IV, VI, V
d. II, III, IV, I, VI, V

10. Campos, Urbano, Tamesis and Encanto are partners in CUTE Company each one
contributing P300,000 except for Encanto who is an industrial partner. The partners agreed
that Campos shall be exempted from liability to third persons. Three years of continued
losses after the formation of the partnership resulted in unpaid partnership liabilities to third
persons amounting to P500,000. Partnership assets have also been reduced to P200,000.
From whom may third persons collect the partnership debts?
a. From the partnership assets; thereafter from the partners for their separate assets at
P100,000 each except Campos who was exempted from the liability to third persons by
agreement.
b. From the partnership assets of P200,000, thereafter from the partners for their separate
assets at P100,000 each except for Encanto since an industrial partner does not share in loses.
c. From the partnership assets of P200,000; thereafter from all the partners for their separate
assets P75,000 each including Campos and Encanto.
d. From the partnership assets of P200,000; thereafter from Urbano and Tamesis only for their
separate assets at P150,000 since Campos was exempted from liability by agreement, while
Encanto, being an industrial partner is not liable for losses.

11. In a limited partnership where there are 4 partners:

a. All the partners must be limited partner
b. The number of limited partners must be equal to the number of general partner, that is 2:2.
c. The number of limited partners must be greater than the number of general partners, that is,
3:1.
d. It is enough that there is one limited partner, the rest may all be the general partnership.

12. Wilma, Olga and Wyona agreed to form a limited partnership with Wilma and Olga as
general partners contributing P50,000 each, and Wyona as limited partner contributing
P100,000. The partnership which is to engage in the trading of garments was named “WOW
Garments Co., Limited” as indicated in the certificate signed and sworn to by the partners
before a notary public. However, the certificate was not filed with Securities Exchange and
Commission. In the meantime, the partners already begun operating the business and
transacting with third persons.
a. The partnership entered into by the Wilma, Olga and Wyona is void.
b. The partnership will be considered a general partnership. Accordingly, all the partners will be
liable with their separate property after the exhaustion of partnership assets.
c. The partnership will be considered a limited partnership as indicated in its name. Only Wilma
and Olga will be liable with their separate property after the exhaustion of partnership assets
d. Wilma, Olga and Wynona will be considered separately as sole proprietors with each one
having a capital equivalent to their respective contributions.

13. Teresa, Olga, and Pamela and Sonia, partners in TOPS Company Limited, a trading
company, have contributions of P50,000 each. Teresa and Olga are general partners; Pamela,
a limited partner; and Sonia, a general-limited partner. TOPS Company Limited purchased
merchandise on credit from Moret Sales Co. amounting P180,000. On due date, however,
TOPS Company Limited purchased was unable to pay. Accordingly, Moret Sales Co. filed a
case of collection against the partnership which by then had assets amounting to P150,000.
From whom may Moret Sales Co. collect the sum of P180,000.
a. The partnership for its assets of P150,000; thereafter from Teresa and Olga at P15,000 each
from their separate assets
b. Teresa and Olga only at P90,000 each from their separate assets
c. The partnership for its assets of P150,000, thereafter, from Teraesa, Olga and Sonia at
P10,000 each from their separate property. However, Sonia can recover P5,000 each from
Teresa and Olga.
d. Teresa, Olga and Sonia at P60,000 each. Thereafter, Sonia can recover from Teresa and Olga
P30,000 each.
Correct Answers:

1. C 9. D

2. C 10. C

3. D 11. D

4. B 12. B

5. D 13. C

6. C

7. C

8. B

“Special Credits to Atty. Ida Canton and Fidelito R. Soriano”