Review Notes On Partnership Agency And Trusts.docx

REVIEW NOTES Partnership, Agency and Trusts  DISSOLUTION AND WINDING UP 

Article 1828. Definition of Dissolution  

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Change in the relation of the partners Who causes: Any partner ceasing to be associated in the carrying an Dissolution compared Winding Up and Termination Winding up – actual process of settling the business or partnership affairs after dissolution; final step after dissolution in the termination of the partnership Termination – all partnership affairs are completely wound and finally settled Effects of change in membership of a partnership 1. Dissolution of existing partnership and formation of a new one 2. Transformation of all partners into incoming partners 3. Continuance by remaining partners of partnership as before The change in the relation of the partners will dissolve the partnership but will not disturb the continuance by the remaining partners or by the existing and new partners of the business as before

Partnership not terminated Partnership continues for a limited purpose – purpose of making goof all outstanding engagements, taking and settling all accounts and collecting all

Dissolution of a partnership must be distinguished from a mere suspension in the conduct of its business or operations

Article 1830. Causes of Dissolution Act of the Parties not in violation of their agreement I.

Article 1829. Effects of Dissolution  

the property, means and asses of the partnership Transaction of new business prohibited

Without violation of the agreement between partners: a. Termination of the definite term or particular undertaking specified in the agreement b. Express will of any partner in good faith when no definite term or particular undertaking is specified (partnership at will) c. (no liability extends)Express will of all the partners who have not assigned their interests or suffered them to be charged for their separate debts, either before or after the termination of any specified term or particular undertaking d. Expulsion of any partner from the business bona fide in accordance with such a power conferred by the agreement between partners Act of the Parties in violation of their Agreement

II.

In contravention of the agreement where the circumstances do not

permit a dissolution by the express will of any partner at any time Example: withdrawal of any partner at any time at his will, thus he is liable for damages Doctrine of delectus personae – allows the partners to have the power, although not necessarily right, the right to dissolve the partnership Operation of Law III.

By any event which makes it unlawful to be carried on – when a supervening event makes the business itself of the partnership unlawful Loss of a specific thing a. Loss before delivery – failure of a partner to fulfill his part or obligation b. Loss after delivery – partnership not dissolved but it assumes the loss of the thing having acquired ownership c. Loss where only use or enjoyment contributed – dissolves the partnership because the partner cannot fulfill his undertaking Death of any partner – ipso facto dissolution of the partnership Insolvency of any partner or of the partnership Civil interdiction of any partner

IV.

V. VI. VII.

not ipso facto bring about the dissolution of the partnership Article 1831. Judicial determination as to dissolution On application by or for a partner: I. II. III. IV. V. VI.

On application of the purchases of a partner’s interest I. II.

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After the termination of the specified term or particular undertaking At any time if the partnership is at will when the interest was assigned or when the charging order was issued

Article 1832. Effect of Dissolution on Authority of partner GR – dissolution terminates all authority of any partner to act for the partnership Exception – as may be necessary to wind up partnership affairs or complete transactions begun but not then finished With respect to the partners

Court Decree VIII.

Insanity Incapacity Misconduct Persistent breach of partnership agreement Business can be carried on only at loss Other circumstances (example: abandonment of the business, fraud in the management of the business, refusal without justifiable cause to render accounting of partnership affairs, etc.)

Decree of court

I.

Effect of sale or assignment by one partner of his entire interest in the partnership to a third person – it does

II.

Dissolution is not by the act, insolvency or death of a partner Dissolution is by such act, insolvency or death of a partner With respect to persons not partners as declared in Art. 1834

Article 1833. Dissolution caused by the act, insolvency or death of a partner Dissolution is caused by act, death or insolvency of a partner – each partner is liable to his co-partners for his share of any liability created by any partner acting for the partnership as if the partnership had not been dissolved unless: 1. Cause of the dissolution is the act of a partner and the acting partner had knowledge of such dissolution 2. Cause of dissolution is the death or insolvency of a partner and the acting partner had knowledge or notice of the death or insolvency Article 1834. Cases when a partner continues or cannot continue to bind the partnership even after dissolution (bind or does not bind) Can bind the partnership 1. By an act appropriate for winding up partnership affairs or completing transactions unfinished at dissolution 2. By any transaction which would bind the partnership if dissolution had not taken place, provided the following occurs: a. Had extended credit to the partnership prior to dissolution and had no knowledge or notice of the dissolution b. Had not extended credit, had nevertheless known of the partnership prior to dissolution, no knowledge or notice of dissolution, the fact that dissolution had not been advertised in a newspaper of general circulation.

Liability of a partner under the 1st paragraph no. 2 shall be satisfied out of partnership assets alone when such partner had been prior to dissolution: 1. Unknown as partner to the person with whom the contract is made 2. So far unknown and inactive in partnership affairs that the business reputation of the partnership could not be said to have been in any degree due to his connection with it. Cases where partnership is in no case bound by any act of a partner after dissolution: 1. Partnership is dissolved because if is unlawful to carry on the business unless the act is appropriate for winding up partnership affairs; or 2. The partner has become insolvent; or 3. The partner had no authority to wind up partnership affairs, except, by a transaction with one who: a. Had extended credit to the partnership prior to dissolution and had no knowledge or notice of his want or authority; or b. Had not extended credit to the partnership prior to dissolution, and having no knowledge or notice of his want or authority, the fact of his want/authority has not been advertised in the manner provided for advertising Article 1835. Effect of dissolution on partner’s existing liability 

The dissolution of a partnership does not of itself discharge the existing liability of a partner.

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A partner may be relieved from all existing liabilities upon dissolution only by an agreement to that effect between himself, the partnership creditor and the other partners. The consent of the creditor and the other partners to the novation may be implied from their conduct The individual property of a deceased partner shall be liable for all obligations of the partnership incurred while he was a partner. Individual creditors of the deceased partner are to be preferred over partnership creditors with respect to the separate property of said deceased partner.

Article 1836. Manner of winding up UNLESS OTHERWISE AGREED: GR – Partners who have not wrongfully dissolved the partnership or the legal representative of the last surviving partners not insolvent has the right to wind up the partnership affairs EXCEPTION – Any partner, his legal representative or his assignee, upon cause shown may obtain winding up by the court

b. In the absence of the agreement, all the partners who have not wrongfully dissolved the partnership c. Legal representative (executor or administrator) of the last surviving partner (when all the partners are already dead), not insolvent 2. The court may, in its discretion, after considering all facts and circumstances of the particular case, appoint a receiver to wind up the partnership affairs where such step is shown to be the best interests of all persons concerned. An insolvent partner does not have the right to wind up partnership affairs. Powers of liquidating partner: 1. Make new contracts 2. Raise money to pay partnership debts 3. Incur obligations to complete existing contracts or preserve partnership assets 4. Incur expenses necessary in the conduct of litigation 

Manner of Winding up: 1. Judicially – under the control and direction of the proper court upon cause shown by any partner, his legal representative or his assignee 2. Extrajudicially – by the partners themselves without intervention of the court Persons authorized to wind up: 1. Persons a. Partners designated by the agreement

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For the purpose of winding up the affairs of a dissolved partnership, the surviving partner has full authority to do everything that may be necessary, but his power is limited to the performance of acts which are indispensable to that end. The deceased partner’s estate is not liable for any subsequent debts or losses incurred by the surviving partners who continued the partnership business without the consent of the estate

Article 1837. Liquidation of the assets of the partnership following its dissolution 

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Dissolution is caused in any way except in contravention of the partnership agreement  Each partner as against his copartners and all persons claiming through them in respect of their interests in the partnership unless otherwise agreed :partnership property applied to discharge its liabilities :surplus applied to pay in cash the net amount owing to the respective partners Dissolution is caused by expulsion of a partner, bona fide under the partnership agreement And if the expelled partner is discharged from all partnership liabilities, either by payment or agreement under the 2nd paragraph of Art 1835  He shall receive in cash only the net amount due him from the partnership Dissolution is caused in contravention of the partnership agreement, the rights of the partners are the following: 1. (innocent partner) Each partner who has NOT caused dissolution wrongfully shall have: a. All the rights specified in the 1st paragraph of this article; and b. The right, as against each partner who has caused dissolution wrongfully, to

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damages for breach of the agreement Partners who have not caused the dissolution wrongfully :they all desire to continue the business in the same manner in the same name either :by themselves or jointly with others, may do so, during the agreed term and for that purpose may possess the partnership property, provided they secure the payment by bond approved by the court, or to pay any partner who has caused the dissolution wrongfully, the value of his interest in the :partnership at the dissolution :less damages recoverable under the 2nd par. No. 1 (b) :indemnify him against all present or future partnership liabilities Partner who has caused the dissolution wrongfully shall: a. If the business not continued under the provisions of the 2nd par. No. 2, all the rights of a partner under the 1st par, subject to liability for damages in the 2nd par No. 1 (b) of this article b. If the business NOT continued under the 2nd par No.2 of this article, the right as against his co-partners and all claiming

through them in respect of their interests in the partnership, to have the value of his interest in the partnership :less any damage caused to his copartners by the dissolution :ascertained and paid to him in cash :or the payment secured by a bond approved by the court :to be released from all existing liabilities of the partnership :but in ascertaining the value of the partner’s interest, the value of the good will of the business shall NOT be considered Rights where dissolution contravention of agreement:

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UNLESS OTHERWISE AGREED 1.

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To have the partnership PROPERTY applied to discharge the liabilities of the partnership; and To have the SURPLUS, if any, applied to pay in cash the net amount owing to the respective partners

Dissolution is caused by expulsion of a partner bona fide (so without violation of the partnership agreement) 1. EXPELLED PARTNER MAY BE DISCHARGED FROM ALL PARTNERSHIP LIABILITIES either by PAYMENT OR BY AN AGREEMENT

between him, the partnership creditors and the other partners 2. Shall have the right only to receive in cash the net amount due him from the partnership. 

If the dissolution is PROPER or RIGHTFUL, no partner is liable for any loss sustained as a result of the dissolution.

Rights where dissolution in contravention of the agreement: :depends if he is an INNOCENT or GUILTY partner 1. Rights of Innocent Partner a. To have partnership property applied for the payment of its liabilities and to receive in cash his share of the surplus b. To be indemnified for damages causes by the partner guilty of wrongful dissolution c. To continue the business in the same name during the agreed term of the partnership, by themselves or jointly with others; and d. To possess partnership property should they decide to continue the business 2. Rights of a guilty partner a. If the business is not continued by the other partners, to have the partnership property applied to discharge its liabilities and to receive in cash his share of the surplus less damages caused by his wrongful dissolution b. If the business is continued:

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To have the value of his interest in the partnership at the time of the dissolution, less any damage caused by the dissolution to his copartners, ascertained and paid in cash or secured by bond approved by the court; and To be released from all existing and future liabilities of the partnership

Goodwill of the business – advantage which it has from its establishment or from the patronage of its customers, over and above the mere value of its property and capital Article 1838. Rights of injured partner where partnership contract rescinded on the ground of fraud or misrepresentation 1. Right of a lien on, or retention of, the surplus of partnership property after satisfying partnership liabilities for any sum of money paid or contributed by him; 2. Right to subrogation in place of partnership creditors after payment of partnership liabilities; and 3. Right of indemnification by the guilty partner against all debts and liabilities of the partnership Article 1839. Priority system for the distribution of partnership property and individual property is dissolved to those entitled to. Rules as to distribution: (subject to variation by agreement of the partners either in their original partnership agreement or in a

dissolution agreement subject to the rights of partnership creditors) 1. Assets of the partnership. They are: a. Partnership property (including goodwill); and b. Contributions of the partners necessary for the payment of all liabilities in accordance with Art 1797 2. Order of application of the assets: a. 1st, those owing to partnership creditors b. 2nd, those owing to partners other than for capital and profits such as loans given by the partners or advances for business expenses c. 3rd, those owing for the return of the capital contributed by the partners; and d. Finally, if any partnership assets remain, they are distributed as profits to the partners in the proportion in which profits are to be shared Loans and advances made by partners – not capital nor are undivided profits unless otherwise agreed; payable at maturity and accumulated profits may be withdrawn at any time by consent of a majority Capital contributed by partners – represents a debt of the firm to the contributing partners; returnable only after dissolution Right of a partner where assets insufficient – deficit is a capital loss which requires contribution like any other loss Priority to payment of partnership creditors/partners’ creditors – partnership creditors shall first be paid from partnership property and separate creditors from the individual properties of the partners

Liability of deceased partner’s individual property – liable for his share of the contributions necessary to satisfy the liabilities of the partnership incurred while he was a partner Distribution of property of insolvent partner: a. 1st to those owing to separate creditors b. Then, to those owing to partnership creditors; and c. Lastly, to those owing to partners by way of contribution Article 1840. Rights of creditors when the partnership is dissolved by a change of membership and its business is continued with new partners, without liquidation of partnership affairs Dissolution of a partnership by change in membership. Causes: a new partner is admitted, when a partner retires, or dies, or when a new partner withdraws, or is expelled from the partnership; or when the other partners assign their rights to the sole remaining partner; or when all the partners assign their rights in partnership property to third persons Continuation of partnership without liquidation – remaining partners (and/or new partners) may elect to continue the business of the old partnership without interruption by simply taking over the business enterprise 1. Equal rights of dissolved and new partnership creditors – the law makes the creditors of the dissolved partnership also creditors of the persons or partnership continuing the business 2. Liability of persons continuing business – shall be satisfied out of

partnership properly only unless there is a stipulation to the contrary 3. Prior right of dissolved partnership creditors as against purchaser – creditors have an equitable lien on the consideration paid to the retiring or deceased partner by the purchaser thereof. Continuation of dissolved business by another company

partnership

1. When corporation deemed a mere continuation of prior partnership – presumed to have assumed partnership debts and is prima facie liable therefor. 2. When obligations of company bought out considered assumed by vendee – the buyer may be said to assume the obligations of the company. Article 1841. Rights of retiring, or of estate of deceased partner when continued When the dissolution is caused by the retirement or death of a partner and the business is continued without settlement of accounts, the retiring partner or the legal representative of the deceased partner shall have the right: 1. To have the value of the interest of the retiring partner or deceased partner in the partnership ascertained as of the date of dissolution; and 2. To receive thereafter, as an ordinary creditor, an amount equal to the value of his share in the dissolved partnership with interest, or, at his option, in lieu of interest, the profits attributable to the use of his right. Article 1842. Accrual and prescription of a partner’s right to account of his interest

1. The right to demand an accounting of the value of his interest accrues to any partner or his legal representative after dissolution in the absence of an agreement to the contrary. 2. Prescription begins to run only upon the dissolution of the partnership when the final accounting is done. Persons liable to render an account: 1. Winding up partner 2. Surviving partner 3. Person or partnership continuing the business Liquidation necessary for determination of partner’s share: 1. Share of the profits – there is a need for a general liquidation before a member of a partnership may claim a specific sum as his share of the profits. 2. Share in the partnership – a partner’s share cannot be returned without first dissolving and liquidating the partnership, for the firm’s outside creditors have preference over the assets of the enterprise and the firm’s property cannot be diminished to their prejudice. When liquidation not required GR – when a partnership is dissolved, a partner or his legal representative is entitled to the payment of what may be due after a liquidation. EXPN – no liquidation is necessary when there is already a settlement or an agreement as to what he shall receive

LIMITED PARTNERSHIP

Article 1843. Definition of Limited Partnership  

Composed of two classes of partners Liability to third persons of one or more of its members referred to as limited (or special) partners is limited to a fixed amount, their capital contributions or the amount they have invested in the partnership

Characteristics of limited partnership: GR: 1. Formed by compliance with the statutory requirements 2. One or more general partners control the business and are personally liable to creditors 3. One or more limited partners contribute to the capital and share in the profits but do not participate on the management of the business and are not personally liable for partnership obligations beyond the amount of their capital contributions 4. Limited partners may ask for the return of their capital contributions under the conditions prescribed by law 5. Partnership debts are paid out of common fund and the individual properties of the general partners. 

Limited liability of limited partners is an exception to the general rule that all partners, including industrial partners, are liable pro rata with all their property for partnership debts.

Business reason and purpose of statutes authorizing limited partnerships 1. Secure capital from others for one’s business and still retain control – men

in business often desire to secure capital from others 2. Share in profits of a business without risk of personal liability – bring into trade and commerce funds of those not inclined to engage in that business, who are disposed to furnish capital upon such limited liability with a view to the share of profits which might be expected to result to them from its use. 3. Associate as partners with those having business skill – encourage those having capital to become partners with those having skill, by limiting the liability of the former to the incidental amount actually contributed by them Difference between a partner/partnership and a partner/partnership:

Liability

Manner of Manageme nt has not been agreed

General Partner Personally liable Have an equal right in the manageme nt w/o not the GP has made any capital contributio n

Contributio n

Money, Property or Industry Proceedings Proper party to proceedings

general limited

Limited Partner Extends only to his capital contribution No share in the management ; his rights being limited to those enumerated in Art 1851; such that he renders himself liable to creditors as a GP if he takes part in the control of the business

Interest

May not be assigned as to make the assignee a new partner w/out the consent of the other partners although he may associate a 3rd person with him in his share Name May appear in the firm name Engaging in Prohibited a business from of the same engaging if kind he is a capitalist

Cash or Property but not Services Not a proper party by or against a partnership unless he is also a general partner/whe re the object of the proceeding is to enforce a limited partner’s right against, or liability, to the partnership Freely assignable with the assignee acquiring all the rights subject to certain qualifications

GR – must not appear No prohibition for he is considered as a mere

partner or in any business for himself if he is an industrial partner Causes of Retirement, dissolution death, insanity or insolvency

Form

Compositio n

contributor to the partnership

No effect for his executor or administrato r shall have the rights of a limited partner for the purpose of selling his estate Any form by Members contract or after conduct of compliance the parties with the requirement set by law General Followed by partners; the word operate “Limited” under a firm name Dissolution and winding up are governed by different rules May carry on business which could be carried on by a general partnership

Article 1844. Essential requirements for the formation of a limited partnership

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Limited partnership not created by mere voluntary agreement

Requirements for formation of a limited partnership 1. The certificate or articles of the limited partnership which states the matters enumerated in the article, must be SIGNED and SWORN to; and 2. Such certificate must be filed for record in the Office of the Securities and Exchange Commission (SEC) Purpose: give actual or constructive notice to potential creditors or persons dealing with the partnership to acquaint them with its essential features, foremost among which is the limited liability of the limited partners so that they may not be defrauded or misled Execution of the prescribed certificate: 1. Names of the partners, capital contributed by the limited partners, duration of the partnership – designed for the protection of those who deal with the firm and must be strictly observed by the partners 2. Immaterial – if the certificate is for renewal or continuance of existing limited partnership when it is in fact a formation of a new one as long as the essential requirements prescribed are met 3. Statements required in the certificate – true at the time the certificate and other required papers are filed with the SEC 4. Person who files a false certificate renders himself liable as a general partner  Substantial compliance in good faith sufficient, otherwise the partnership becomes a general partnership as far as third persons are concerned.

Rules applicable where there is no substantial compliance – there is authority to the effect that the firm is such a general partnership only as to its relation to third persons; that the firm; in form is a limited partnership, subject to all the rules applicable to such partnership; that as between the partners they are bound by their agreement; and that all the limited partner’s relations to his co-partners and their obligations to him growing out of the relation remain unimpaired. Rule where partnership creditor guilty of estoppel – if attaching creditors recognize and deal with a firm as limited partnership, they will be estopped from insisting that there is no such partnership

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Article 1845. Limited partner’s contribution Medium:   

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Presumption of General Partnership:  

Partnership transacting business is prima facie a general partnership To obtain the privilege of a limited partnership liability, one must conform to the statutory requirements regulating the formation of limited partnerships

Construction partnerships   

of

provisions

on

limited

The courts should adopt and enforce a reasonable construction The courts must consider substance rather than form Construe to insure compliance with all the statutory provisions to protect persons dealing with the partnership

Who may become limited partners  

Specified persons Existing general partnership maybe changed into a limited one

Partner in the former general partnership may become a limited partner in the limited partnership

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A limited partner/special partner is not allowed to contribute services He can contribute only money or property Otherwise he shall be considered an industrial and general partner; in which case, he shall not be exempted from personal liability He can be a general partner and a limited partner in the same partnership at the same time; provided that this shall be stated in the certificate A limited partner may not be an industrial partner without being a general partner (Art. 1845) which requires that a limited partner must be a capital contributor.

Time:  

Must be paid before the formation of the limited partnership Additional contributions they may be paid after the limited partnership has been formed

Article 1846. Effect where surname of limited partner appears in partnership name  

GR – limited partners is liable to partnership creditors without the rights of a general partner Such limited partner shall not be liable as a general partner, with respect to third persons with actual knowledge that he is only a limited partner

Article 1847. Certificate of Partnership Liability for False Statement in Certificate: Requisites: 1. He knew the statement to be false at the time he 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; 2. The person seeking to enforce liability has relied upon the false statement in transacting business with the partnership; and 3. The person suffered loss as a result of reliance upon such false statement.