CHAPTER 2 administration despite the opposition of his partners except if

BUSINESS LAWS AND the managing partner acts in bad faith.

REGULATIONS (PARTNERSHIP)
2nd rule: When two or more partners are entrusted with
DEFINITION: management and without specification of their respective
duties or without stipulation, then one of them shall not act
The Indian Partnership Act defines partnership as without consent of all the others.
“the relation between persons who have agreed to share the
profits of a business carried on by all or any of them acting for 3rd rule: If it is stipulated that none of the managing partners
all.” shall act without the consent of others.

The Essential Features of Partnership Rules for Distribution of Profits and Losses of a Partnership
From the accounts point of view, the chief point to remember
is that the relations among the partners will be governed by 1. Distribution of Profit
mutual agreement called Partnership Deed.
a. According to agreement
1. An association of two or more persons Profit should be distributed in the conformity of the
2. An agreement entered into by all persons concerned; agreement.
3. Business; b. If there is no agreement
4. The business being carried on by all or any of them acting i. Capitalist Partners
for all; and In proportion to what he may have
5. Sharing of profits (including losses) of the business. contributed to the common fund.
ii. Industrial Partners
Rights Of Partners That which is just and equitable under
circumstances.
1. Property Rights of Partners
2. . Distribution of Loss
a. Rights in specific partnership property.
a. According to agreement
b. Interest in the Partnership. Losses should be distributed in the conformity with the
agreement. If the only agreement pertains to the share of
c. Right to Participate in the Management each partner in the profits, the share of each in the losses
shall be in the same proportion. However, the industrial
Rights in Specific Partnership Property partner shall not be liable of the losses
b. If there is no agreement
Article 1811: A partner is considered a co-owner with his i. Capitalist Partners
co-partners over specific partnership property and as a result In proportion to what he may have
of this co-ownership there are certain incidents. The incidents contributed to the common fund.
of this co-ownership are such that: ii. Industrial Partners
Not liable for losses.
1) A partner, subject to the provisions of this Title and to any
agreement between the partners, has an equal right with Dissolution & Winding Up
his partners to possess specific partnership property for
partnership purposes; but he has no right to possess such Article 1828
property for any other purpose without the consent of his The dissolution of a partnership is the change in the relation of
partners the partners caused by any partner ceasing to be associated in
2) A partner’s right in specific partnership property is not the carrying on as distinguished from the winding up of the
assignable EXCEPT in connection with the assignment of business.
rights of all the partners in the same property;
3) A partner’s right in specific partnership property is not  Dissolution
subject to attachment or execution, EXCEPT on a claim The act of ending an organization or agreement. It is also the
against the partnership. When partnership property is process of making something end or slowly disappear.
attached for a partnership debt the partners, or any of
them, or the representatives of a deceased partner,  Winding Up
cannot claim any right under the homestead or exemption The process of liquidating a company. While winding up, a
laws; company ceases to do business as usual.
4) A partner’s right in specific partnership property is not
subject to legal support under article 291. Effects of Change in Membership of a Partnership
5) Partners interest is not a debt due from partnership.
 Dissolution of existing partnership and formation of a new
Interest in Partnership one.
 Continuance by remaining partners of partnership as
 The interest of a partner in the partnership refers to a before.
partner’s share in the profits meaning the excess of
returns over expenditures in a transaction or a series of Effects of dissolution
transactions and the partnership share in the profits and
the surplus.  Partnership not terminated.
 Partnership continues for a limited purpose.
 Surplus- refers to the assets of partnership after the  Transaction of new business prohibited.
liabilities are paid and the right of partners among
themselves are adjusted. Causes of Dissolution

Right to Participate in Management 1. Without violating the agreement

1st rule: When only one partner is appointed as a managing a. Termination of the definite term or specific
partner then that managing partner may execute all acts of undertaking.
 LIABILITY OF A PARTNER WHERE THE DISSOLUTION IS CAUSED
b. Express will of any partner in good faith, when there BY THE ACT, DEATH OR INSOLVENCY OF A PARTNER
is no definite term and no specified undertaking.
c. Express will of all partners (except those who have Where the dissolution is caused by the act, death or insolvency
assigned their interests or suffered them to be of a partner, each partner is liable to his co-partners for his
charged for their separate debts) either before or share of any liability created by any partner acting for the
after the termination of any specified term or partnership as if the partnership had not been dissolved
particular undertaking. unless:
d. Expulsion of any partner in good faith of a member (1) The dissolution being by act of any partner, the
partner acting for the partnership had knowledge of the
2. Violating the agreement dissolution; or
(2) The dissolution being by the death or insolvency of a
a. Legal effects of dissolution. partner, the partner acting for the partnership had
b. Express will of any partner in good faith, when knowledge or notice of the death or insolvency
there is no definite term and no specified
undertaking. A PARTNER CONTINUES TO BIND PARTNERSHIP EVEN AFTER
DISSOLUTION IN THE FOLLOWING CASES:
3. Unlawfulness of the busines
1. Transactions to wind up partnership affairs or to complete
A partnership must have a lawful object or purpose. (see Art. transactions unfinished at dissolution;
1770.) The partners, however, can change the nature of their 2. Transactions which would bind partnership if dissolution
business and continue the partnership with the new business. had not taken place, provided the other party/obligee:
a) Had extended credit to partnership prior to
4. Loss dissolution; and had no knowledge/notice of
dissolution; or
This provision of Article 1830 refers only to specific things. b) Did not extend credit to partnership; Had known
When the thing to be contributed is not specific, Articles partnership prior to dissolution;
1786 (par. 1) and 1788 shall govern.
a. Loss before delivery. PARTNER CANNOT BIND THE PARTNERSHIP ANYMORE AFTER
b. Loss after delivery. DISSOLUTION:

5. Death of any of the partners 1. Where dissolution is due to unlawfulness to carry on

business; or
The subsequent legal status of a partnership dissolved by the 2. Where partner has become insolvent; or
death of a partner is that of a partnership in liquidation, and 3. Act is not appropriate for winding up or for completing
the only rights inherited by the heirs are those resulting from unfinished transactions; or
the said liquidation in favor of the deceased partner, and
nothing more. A PARTNER CONTINUES TO BIND PARTNERSHIP EVEN AFTER
DISSOLUTION IN THE FOLLOWING CASES:
6. Insolvency of any partner or of the partnership
1. Partner is unauthorized to wind up partnership affairs,
The insolvency of the partner or of the partnership must be except by transaction with one who:
adjudged by a court. a) Had extended credit to partnership prior to
dissolution; AND Had no knowledge or notice of
7. Civil interdiction of any partner dissolution; or
b) Did not extend credit to partnership prior to
Civil interdiction deprives the offender during the time of his dissolution; Had known partnership prior to
sentence of the right to manage his property and dispose of dissolution; AND Had no knowledge/notice of
such property by any act or any conveyance inter vivos. dissolution
2. Completely new transactions which would bind the
8. By decree of court under Art. 1831 partnership if dissolution had not taken place with third
persons in bad faith.
(1) A partner has been declared insane in any judicial
proceeding or is shown to be of unsound mind; WINDING UP OF THE PARTNERSHIP
(2) A partner becomes in any other way incapable of
performing his part of the partnership contract; Partnership business or affairs are being settled The winding up
(3) A partner has been guilty of such conduct as tends to of the dissolved partnership may be done either:
affect prejudicially the carrying on of the business;
(1) Judicially, under the control and direction of the proper
EFFECT OF DISSOLUTION ON AUTHORITY OF PARTNER court upon cause shown by any partner, his legal
(Art.1832) representative, or his assignee; or
(2) Extrajudicially, by the partners themselves without
General rule. Upon dissolution, the partnership ceases to be a intervention of the court. Persons authorized to wind up.
going concern and the partner’s power of representation is a) The partners designated by the agreement;
confined only to acts incident to winding up or completing b) In the absence of such agreement, all the partners
transactions begun but not then finished. who have not wrongfully dissolved the partnership;
or
When the dissolution is by such act, insolvency, or death, the c) The legal representative (executor or administrator)
termination of authority depends upon whether or not the of the last surviving partner (when all the partners
partner had knowledge or notice of the dissolution as are already dead), not insolvent. (Art. 1830[6].)
provided in Article 1833.
RIGHT OF PARTNER TO APPLICATION OF PARTNERSHIP Limited Partnership
PROPERTY ON DISSOLUTION (Art.1837) (Article 1843)

Partner’s lien DEFINITION:

It is the right of every partner to have the partnership property One formed by two or more persons, having as members one
applied, to discharge partnership liabilities and surplus assets, or more general partners and one or more limited partners.
if any, distributed in cash to the respective partners, after The limited partners as such shall not be bound by the
deducting what may be due to the partnership from them as obligations of the partnership.
partners.
In absence of statutory restriction, a limited partnership may
RIGHTS OF INJURED PARTNER WHERE PARTNERSHIP carry on any business which could be carried on by a general
CONTRACT RESCINDED. (A1838) partnership.

1) Right of a lien on, or retention of, the surplus of Characteristics of Limited Partnership
partnership property after satisfying partnership
liabilities for any sum of money paid or contributed by  Article 1844
him; A limited partnership is formed by compliance with the
2) Right to subrogation in place of partnership creditors after statutory requirements.
payment of partnership liabilities; and
3) Right of indemnification by the guilty partner against all  Article 1848 & 1850
debts and liabilities of the partnership. One or more general partners control the business and are
personally liable to creditors.
SETTLEMENT OF ACCOUNTS BETWEEN PARTNERS ( Art. 1839 )
 Article 1845, 1848 & 1856
Assets of the partnership include: One or more limited partners contribute to the capital and
share in the profits, but do not participate in the management
A. Partnership property (including goodwill) and are not liable for obligations beyond their personal
B. Contributions of the partners contributions.

ORDER OF APPLICATION OF THE ASSETS  Article 1844 & 1857

The limited partners may ask for the return of their capital
a) First, those owing to partnership creditors. contributions under the conditions prescribed by law.
b) Second, those owing to partners other than for capital Partnership debts are paid out of the common fund and the
and profits such as loans given by the partners or individual properties of the general partners.
advances for business expenses.
c) Third, those owing for the return of the capital STATUTORY REQUIREMENTS
contributed by the partners
d) Fourth, the share of the profits, if any, due to each REQUIREMENTS FOR FORMATION OF A LIMITED
partner PARTNERSHIP (Article 1844)

EFFECTS WHEN THE BUSINESS OF A DISSOLVED A. The Certificate/Articles of the Limited Partnership which
PARTNERSHIP IS CONTINUED ( Art. 1840 ) states the matters enumerated in Article 1844 must be
signed and sworn to.
1. Creditors of old partnership are also creditors of the new
partnership who continues the business of the old one B. The filing for record of the Certificate/Articles of
without liquidation of the partnership affairs. Partnership in the Office of the Securities and Exchange
2. Creditors have an equitable lien on the consideration paid Commission (SEC).
to the retiring/deceased partner by the purchaser when
retiring/deceased partner sold his interest without final RULES REGARDING LIMITED PARTNERS
settlement with creditors.
LIMITED PARTNER'S CONTRIBUTION (Article 1845)
LIABILITY OF THIRD PERSON BECOMING A PARTNER  The contributions of a limited partner may be cash or
property, but not services.
1. The liability of a third person becoming a partner in the  The contribution must be paid before the formation of the
partnership continuing the business, under Article 1840, shall limited partnership although additional contributions
not extend to his personal property, unless there is a may be paid after the limited partnership has be
stipulation to the contrary.
LIABILITY FOR UNPAID CONTRIBUTION (Article 1858)
RIGHTS OFSEPARATE CREDITORS OFRETIRING/DECEASED  The limited partner is liable not only for the difference
PARTNER WHEN PARTNERSHIP IS CONTINUED between the amount of his actual contributions and that
stated in the certificate as having been made but also
Such creditors have preference to any claim of the retired for any unpaid contribution he agreed to make at a future
partner or the representative of the deceased partner against time.
the partnership continuing the business on account of the
following: LIABILITY FOR RETURN OF CONTRIBUTION LAWFULLY
RECEIVED (Article 1858)
1. Partner’s interest in the dissolved partnership; or  A limited partner who has received his contribution is
2. Any consideration promised for such interest or for his right bound to return the same with interest when there are
in partnership property still liabilities to be paid but the amount returned should
not be in excess of what he received.

LIABILITY AS TRUSTEE (Article 1858)

a. Specific property stated in the certificate as contributed
by him but which he had not contributed.
b. Specific property of the partnership which had been
wrongfully returned to him.
c. Money/Property wongfully paid or conveyed to him on written consent or at tratification of all the limited partners.
account of his contribution. Acts of strict dominion or ownership are, therefore, and the
scope of the authority of a general partner. (Article 1818)
LIABILITY WHERE SURNAME OF LIMITED PARTNER APPEARS
IN PARTNERSHIP NAME (Article 1846) EFFECT OF RETIREMENT, DEATH, ETC. OF A GENERAL PARTNER
 The limited partner whose surname appears in the (Article 1860)
partnership name is liable, as a general rule, to the  The retirement, death, insolvency, insanity or civil
partnership creditors without, however, the rights of a interdiction of a general partner dissolves the partnership,
general partner. Of course, such limited partner shall not unless the business is continued by the remaining
be liable as a general partner with respect to third general partners.
persons with actual knowledge that he is only a limited
partner.  If the business is continued by the remaining partners
under the right given in the certificate or with the consent
REQUISITES TO MAKE LIMITED PARTNER LIABLE FOR FALSE of all members, the certificate must be amended as
STATEMENT IN THE CERTIFICATE OF LIMITED PARTNERSHIP required by Article 1864.
(Article 1847)
A. The partner knew the statement to be false at the time he ORDER OF PAYMENT (Article 1863)
signed the certificate, or subsequently, but having
sufficient time to cancel or amend it or file a petition for
its cancellation or amendment, he failed to do so.
B. The person seeking to enforce liability has relied upon the
false statement in transacting business with the
partnership.
C. The person suffered loss as a result of reliance upon such
false statement.

RIGHTS OF LIMITED PARTNERS (Article 1851)

A. The right to require that the partnership books be kept at
the principal place of business of the limited partnership.
(Article 1805)
B. The right to inspect and copy partnership books during
reasonable hours at the principal office of the partnership.
C. The right to demand true and full information of all things
affecting the partnership.
D. The right to demand a complete and formal accounting of
the partnership affairs from the other.
E. The right to ask for dissolution and winding up by decree
of court (Articles 1831 and 1857).
F. The right to receive a share of the profits or other
compensation by way of income. (Article 1856).
G. The right to receive the return of his contribution,
provided the partnership assets, are in excess of all its
liabilities (Article 1857).

RULES REGARDING A LIMITED PARTNER'S RIGHT TO

TRANSACT BUSINESS WITH THEPARTNERSHIP (Article 1854)

A. ALLOWABLE TRANSACTIONS

a) Granting loans to the partnership.

b) Transacting other business with the partnership

B. PROHIBITED TRANSACTIONS

COMPENSATION OF LIMITED PARTNER BY WAY OF INCOME

(Article 1856)

The right of the limited partner to receive his share of the

profits or compensation by way of income stipulated for in
the certificate is subject to the condition that partnership
assets will still be in excess of partnership liabilities after such
payment. In other words, third party creditors have priority
over the limited partner's rights.

RIGHTS, POWERS, AND LIABILITIES OF GENERAL PARTNER

(Article 1850)
A. RIGHT OF CONTROL/UNLIMITED PERSONAL LIABILITY
A general partner is vested with the entire control of the firm's
business and has all the rights and powers and is subject to all
the liabilities and restrictions of a partner in a partnership
without limited partners, Le in a general partnership.

B. ACTS OF ADMINISTRATION/ACTS OF STRICT DOMINION

As a rule, he may bind the partnership by any act of
administration, but he has no power to do acts strict dominion
(even if agreed to by all the general partners) without the