Partnership: Limited Partnership (Arts. 1843-1867)

CHAPTER 4

Limited Partnership

Sources of Civil Code provisions.

Chapter 4 (Arts. 1843 to 1867.) on limited partners was adopted, also with appropriate amendments, from the Uniform Limited Partnership Act. The provisions on limited partnerships in the Code of Commerce (Arts. 145 to 150.) were considered too meager and inadequate to govern this juridical institution.

Article 1843.

A limited partnership is one formed by two or more persons

under the provisions of the following article,

having as members one or more general partners and one or more limited partners.

The limited partners as such shall not be bound by the obligations of the partnership.

Concept of limited partnership.

This article defines a limited partnership.
The term is sometimes used to designate:

joint ventures and
partnerships limited only in respect of the nature and scope of the business to be carried on.

The correct usage of the term confines it to the form of business association composed of one or more general partners and one or more special partners, the latter not being personally liable for the partnership debts.
A limited partnership is thus composed of two classes of partners.
It is so called because the 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. This limited liability is the key characteristic of the limited partnership.

Characteristics of limited partnership.

As a general rule, the characteristics of a limited partnership are as follows:

A limited partnership is formed by compliance with the statutory requirements (Art. 1844.);
One or more general partners control the business and are personally liable to creditors (Arts. 1848, 1850.);
One or more limited partners contribute to the capital and share in the profits but do not participate in the management of the business and are not personally liable for partnership obligations beyond the amount of their capital contributions (Arts. 1845, 1848, 1856.);
The limited partners may ask for the return of their capital contributions under the conditions prescribed by law (Arts. 1844[h], 1857.); and
The partnership debts are paid out of common fund and the individual properties of the general partners.

General Partners

The general partners are treated by the law much like a partner in an ordinary partnership.
They are typically those who know how to manage the business.

Limited Partners

The limited partners are usually those who put money for the business.
They are only investors.
Their limited liability is an exception to the general rule that all partners, including industrial partners, are liable pro rata with all their property for partnership debts. (Art. 1816.)
Thus, a limited partner has the same type of liability as stockholder in a corporation.

Business reason and purpose of statutes authorizing limited partnerships.

Secure capital from others for one’s business and still retain control.

“The business reason for the adoption of acts making provisions for limited or special partners is that men in business often desire to secure capital from others. There are at least three classes of contracts which can be made with those from whom the capital is secured: First, the ordinary loan on interest. Second, the loan where the lender, in lieu of interest, takes a share in the profits of the business. Third, those cases in which the person advancing the capital secures, besides a share in the profits, some measure of control over the business. The lender who takes a share in the profits does not by reason of that fact, run a risk of being held as a partner. If, however, his contract falls within the third class mentioned and he has any measure of control over the business, he at once runs serious risk of being liable for the debts of the business as a partner.”

Share in profits of a business without risk of personal liability.

“The policy of laws authorizing the formation of limited partnerships is to 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.”

Associate as partners with those having business skill.

The primary purpose of the statute authorizing the formation of limited partnerships is to 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. The object of such a statute is to furnish reasonable protection to those dealing with the concern by requiring acts to be done and public notice thereof given so that all who desire may know the essential features of the arrangement.”

Differences between a general partner/partnership and a limited partner/partnership.

They are the following:

Liability

General Partner: Personally liable for partnership obligations
Limited Partner: Liability extends only to his capital contribution

Management

General Partner: When the manner of management has not been agreed upon, all of the general partners have an equal right in the management of the business, whether or not the general partner has made any capital contribution
Limited Partner: Has no share in the management of a limited partnership, his rights being limited to those enumerated in Article 1851, such that he renders himself liable to creditors as a general partner if he takes part in the control of the business

Contribution

General Partner: May contribute money, property, or industry to the partnership
Limited Partner: Must contribute cash or property to the partnership but not services

Party to Proceedings

General Partner: A proper party to proceedings by or against a partnership
Limited Partner: Not a proper party to proceedings by or against a partnership unless he is also a general partner, or where the object of the proceeding is to enforce a limited partner’s right against, or liability to, the partnership

Assignment of Interest:

General Partner: Interest in the partnership may not be assigned as to make the assignee a new partner without the consent of the other partners, although he may associate a third person with him in his share
Limited Partner: Interest is freely assignable, with the assignee acquiring all the rights of the limited partner subject to certain qualifications.

limited partner causes no rupture of the partnership business by his assignment, while a general partner’s assignment may cause such a rupture

Name:

General Partner: The name of a general partner may appear in the firm name
Limited Partner: The name of a limited partner must not appear as a general rule

Engaging in Business:

General Partner: Prohibited from engaging in a business which is of the kind of business in which the partnership is engaged, if he is a capitalist partner, or in any business for himself if he is an industrial partner
Limited Partner: There is no such prohibition in the case of a limited partner who is considered as a mere contributor to the partnership

Dissolution:

General Partner: The retirement, death, insanity, or insolvency of a general partner dissolves the partnership
Limited Partner: The retirement, death, insanity, or insolvency of a limited partner does not have the same effect, for his executor or administrator shall have the rights of a limited partner for the purpose of selling his estate

The above also indicate the differences between a general partnership and a limited partnership. The other differences are:

General Partnership: May be constituted in any form by contract or conduct of the parties
Limited Partnership:

Created by the members after compliance with the requirements set forth by law;
it is composed only of general partners;
it must operate under a firm name which in the case of a limited partnership must be followed by the word “Limited”; and
its dissolution and winding up are governed by different rules.
unless prohibited by law, may carry on any business which could be carried on by a general partnership.

Article 1844.

Two or more persons desiring to form a limited partnership shall:

(1) Sign and swear to a certificate, which shall state -

(a) The name of the partnership, adding thereto the word "Limited";

(b) The character of the business;

(d) The name and place of residence of each member, general and limited partners being respectively designated;

(e) The term for which the partnership is to exist;

(f) The amount of cash and a description of and the agreed value of the other property contributed by each limited partner;

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

(h) The time, if agreed upon, when the contribution of each limited partner is to be returned;

(i) The share of the profits or the other compensation by way of income which each limited partner shall receive by reason of his contribution;

(j) The right, if given, of a limited partner to substitute an assignee as contributor in his place, and the terms and conditions of the substitution;

(k) The right, if given, of the partners to admit additional limited partners;

(l) The right, if given, of one or more of the limited partners to priority over other limited partners, as to contributions or as to compensation by way of income, and the nature of such priority;

(m) The right, if given, of the remaining general partner or partners to continue the business on the death, retirement, civil interdiction, insanity or insolvency of a general partner; and

(n) The right, if given, of a limited partner to demand and receive property other than cash in return for his contribution.

(2) File for record the certificate in the Office of the Securities and Exchange Commission.

A limited partnership is formed if there has been substantial compliance in good faith with the foregoing requirements.

Limited partnership not created by mere voluntary agreement.

As owner of a business can avoid personal liability for business debts only if this is provided by statute.
Since in a limited partnership a person is allowed to share in the profits without becoming personally liable to partnership creditors, a limited partnership can be created only where permitted by statute.
The creation of a limited partnership is a formal proceeding and is not a mere voluntary agreement, as in the case of a general partnership.
Accordingly, the requirements of the statute must be followed so that public notice may be given to all who desire to know the essential features of the partnership.
A limited partnership is formed if there has been substantial compliance in good faith with the requirements set forth in Article 1844. (last par.); otherwise, the liability of the limited partners becomes the same as that of general partners.

Requirements for formation of a limited partnership.

Under Article 1844, there are two essential requirements for the formation of a limited partnership:

The certificate or articles of the limited partnership which states the matters enumerated in the article, must be signed and sworn to; and
Such certificate must be filed for record in the Office of the Securities and Exchange Commission.

The purpose of requiring the filing of the certificate is to 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.
As no time is fixed by the law for the filing of the certificate for a limited partnership, a reasonable time is allowed depending on the circumstances of the particular case.

To show failure to comply with certificate requirements and resulting general liability, the burden is on the one seeking to fix general liability.
Article 1844 does not specify the time within which the certificate must be filed with the Securities and Exchange Commission.

Execution of the prescribed certificate.

A prime requisite to the formation of a limited partnership, under Article 1844, is the execution of the prescribed certificate. This document, as a rule, must contain the matters enumerated in said article. Thus, a limited partnership cannot be constituted orally.
The requirement of statements as to the names of the partners, the capital contributed by the limited partners, and the duration of the partnership, is manifestly designed for the protection of those who deal with the firm, and must be strictly observed by the partners.
The certificate need not contain anything concerning the amounts to be contributed by the general partners.
It is immaterial that the certificate purports to be one for the renewal or continuance of an existing limited partnership when it is in fact one for the formation of a new limited partnership, as long as the essential requirements of the law have been satisfied.
The statements required in the certificate must be true at the time the certificate and other required papers are filed with the Securities and Exchange Commission.

A person who files a false certificate thereby renders himself liable as a general partner.
The filing of a false affidavit does not result in imposing personal liability as a penalty, but merely as a consequence of the fact that the law refuses protection to one filing a false affidavit.
The perjurious “limited partner” becomes a general partner, since he is a contributor of capital to a partnership operating in his behalf.

Substantial compliance in good faith sufficient.

A strict compliance with the legal requirements is not necessary.
It is sufficient that there is substantial compliance in good faith.
If there is no substantial compliance, the partnership becomes a general partnership as far as third persons are concerned, in which all the members are liable as general partners.

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 a
Where neither the rights of third parties nor a partner’s claim of limited liability is involved, it is difficult to see how the failure to comply with the legal requirements could affect the existence of a limited partnership insofar as the parties, inter se, are concerned where the written agreement executed by them is clear and unambiguous.
Thus, a limited partner treated as a general partner as far as third persons are concerned is entitled to reimbursement from the general partner or partners for whatever obligations he might have paid to partnership creditors beyond his capital contribution.

Rule where partnership creditor guilty of estoppel.

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

Presumption of general partnership.

A partnership transacting business is, prima facie, a general partnership and those who seek to avail themselves of the protection of laws permitting the creation of limited partnerships must show due compliance with such laws.
In other words, to obtain the privilege of a limited partnership liability, one must conform to the statutory requirements regulating the formation of limited partnerships.
The failure of a limited partnership to extend its term when it expired, and to register it anew with the Commission, has the effect of divesting the limited partners of the privilege of limited liability. As far as third persons are concerned, the law considers the firm as a general partnership having juridical personality.

Construction of provisions on limited partnerships.

In the construction of statutes regulating the organization of limited partnerships, it is a general rule that the courts should adopt and enforce a reasonable construction which, on the one hand, will not defeat one of the objects of the law and, upon the other hand, will not, under cover of a substantial compliance with the requirements of the statute, fritter away the protection which the law has thrown around persons dealing with such partnerships.
Accordingly, the courts must consider substance rather than form in construing the law.
However, it should be construed to insure substantial compliance with all the statutory provisions which are designed for the protection of persons dealing with the partnership.

Who may become limited partners.

Under a statute which provides that the membership of a limited partnership consists of specified “persons” (see Art. 1843.), a partnership cannot become a limited partner.
An existing general partnership may be changed into a limited one, and a partner in the former general partnership may become a limited partner in the limited partnership thus formed.

Article 1845.

The contributions of a limited partner

may be cash or property, but not services.

Limited partner’s contribution.

Medium.

A limited partner or 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.

It is the policy of the Securities and Exchange Commission to require non-resident aliens forming a commercial partnership with Filipinos or resident aliens to pay in full their contributions in the partnership and to be accepted only as limited partners. The reason for this requirement is based upon the fact that once non-resident aliens leave the Philippines, it would be difficult to collect their unpaid contributions or to hold them liable for their share of partnership liabilities should they be allowed to become partners of the firm

A partner may be a general partner and a limited partner in the same partnership at the same time, provided that this fact shall be stated in the certificate provided for in Article 1844 (Art. 1853.), but a limited partner may not be an industrial partner without being a general partner in view of Article 1845 which requires that a limited partner must be a capital contributor. It is not clear whether the rule still applies if the contribution of services is made after the formation of the limited partnership.
Example:

In a limited partnership composed of A, B, and C, the contributions may be as follows:

A — cash (limited partner);
B — cash (general partner); and
C — services (general partner).

Any of the partners may be a general partner and a limited partner at the same time. The contribution may be cash or property only, or both capital and services. Thus, if A, in addition to cash, also contributes services, he becomes a general partner and a limited partner at the same time; if he contributes services only, he is a general partner.
If a partner contributes capital only, he is either a general partner or a limited partner, or both, depending upon the agreement as stated in the certificate.

The law is not satisfied by the limited partner’s contribution in promissory notes, checks, particularly if they are post-dated, or bonds, or by a contribution partly in cash or property and partly in notes or checks.

However, a check may be treated as an actual payment in cash where the limited partner has money actually in the bank to his credit, and he gives the general partner absolute and final control of the amount named therein.
Thus, a certified check or a manager’s check satisfies the law.
A check which is credited to the general partner by his bank as cash has been held to be cash payment by the limited partner.

Time.

The contribution of each limited partner must be paid before the formation of the limited partnership (see Art. 1844[f].), although with respect to the additional contributions they may be paid after the limited partnership has been formed.

Article 1846.

The surname of a limited partner shall not 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 partner became such, the business has been carried on under a name in which his surname appeared.

A limited partner whose surname appears in a partnership name contrary to the provisions of the first paragraph is liable as a general partner to partnership creditors who extend credit to the partnership without actual knowledge that he is not a general partner.

Effect where surname of limited partner appears in partnership name.

The limited partner violating this article is liable, as a general rule, to partnership creditors without, however, the rights of a general partner.
Of course, 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.

If the certificate contains a false statement,

one who suffers loss by reliance on such statement may hold liable any party to the certificate who knew the statement to be false:

(1) At the time he signed the certificate, or

(2) Subsequently, but within a sufficient time before the statement was relied upon to enable him to cancel or amend the certificate, or to file a petition for its cancellation or amendment as provided in article 1865.

Liability for false statement in certificate.

Under this provision, any partner to the certificate containing a false statement is liable provided the following requisites are present:

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;
The person seeking to enforce liability has relied upon the false statement in transacting business with the partnership; and
The person suffered loss as a result of reliance upon such false statement.

It has been held that a limited partner whose capital contribution is greater than that specified in the certificate of limited partnership is not thereby liable for making a false statement under Section 6 of the Limited Partnership Act (Art. 1847.), since there is no liability without showing a loss, and such a loss can be established only by showing a capital contribution which is less, not greater, than that specified.
Article 1847 does not say that the guilty partner shall be liable as a general partner.

The liability imposed by Article 1847 is merely a statutory penalty and does not make the limited partner a general partner for all purposes, even as to third persons.

Examples:

A, a limited partner, appeared as a general partner in the certificate. If Article 1847 is applicable, he cannot raise the defense that he is merely a limited partner to escape personal liability to innocent third persons in case the other general partners are insolvent.
The contribution of A, limited partner, is erroneously stated in the certificate as P15,000.00 instead of P10,000.00. If Article 1847 is applicable, he may be made liable to innocent third persons for the difference of P5,000.00. In the above examples, A is not liable and is a limited partner with respect to his co-partners with knowledge of the falsity.

Article 1848.

A limited partner shall not become liable as a general partner unless,

in addition to the exercise of his rights and powers as a limited partner,

he takes part in the control of the business.

Liability of limited partner for participating in management of partnership.

Under the express provision of Article 1848, a limited partner is liable as a general partner for the firm’s obligations if he takes part or interfere in the management of the firm’s business.
His abstinence from participation in fact in the transaction of the business of the firm is essential to his exemption from liability for the debts of the firm.
The bare grant of apparent control to a limited partner is not sufficient to make him liable as a general partner where he has not actually participated in the control of the partnership.
Whether the limited partner has participated in the management is to be determined by whether he has exercised a controlling power in the firm’s transactions.
What constitutes control of the business sufficient to make a limited partner liable as a general partner has not been clearly defined by the courts.

Active management of partnership business contemplated.

It would seem that such control contemplates active participation in the management of the partnership business and does not comprehend the mere giving of advice to general partners as to specific matters which the latter may follow or not. Being also interested in the success of the partnership business, a limited partner does not thereby forfeit his right to make suggestions or express opinions as to the advisability of certain transactions.
The limited partner takes part in the management of the business and is liable generally for the firm’s obligations where:

The business of the partnership is in fact carried on by a board of directors chosen by the limited partners;
By the terms of the contract between the parties, an appointee of the limited partner becomes the directing manager of the firm;
The limited partner purchases the entire property of the partnership, taking title in himself and then carries on the business in his own name and for his own exclusive benefit; or
He makes or is a party to a contract with creditors of an insolvent firm with respect to the disposal of the firm’s assets in payment of the firm’s debts.

The interference contemplated by Article 1848 is with respect to an existing limited partnership.
Accordingly, a limited partner is not subject to general liability for taking part in the management of the firm because he settles its affairs after dissolution.

Article 1849.

After the formation of a limited partnership,

additional limited partners may be admitted

upon filing an amendment to the original certificate

in accordance with the requirements of article 1865.

Admission of additional limited partners.

After a limited partnership has been formed, additional limited partners may be admitted, provided there is proper amendment to the certificate which must be signed and sworn to by all of the partners, including the new limited partners, and filed in the Securities and Exchange Commission pursuant to the requirements of Article 1865.

Article 1850.

A general partner shall have all the rights and powers

and be subject to all the restrictions and liabilities of a partner in a partnership without limited partners.

However, without the written consent or ratification of the specific act by all the limited partners,

a general partner or all of the general partners have no authority to:

(1) Do any act in contravention of the certificate;

(2) Do any act which would make it impossible to carry on the ordinary business of the partnership;

(3) Confess a judgment against the partnership;

(4) Possess partnership property, or assign their 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, unless the right so to do is given in the certificate;

(7) Continue the business with partnership property on the death, retirement, insanity, civil interdiction or insolvency of a general partner, unless the right so to do is given in the certificate.

Rights, powers, and liabilities of a general partner.

The essential feature of a limited partnership is the union of two classes or types of members — the limited partner and the general partner.
The law expressly requires that there be at least one general partner (Art. 1843.) with unlimited liability.

Right of control/unlimited personal liability.

A general partner in a limited partnership 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, i.e., in a general partnership.
It is in consideration of his unlimited personal liability for the obligation of the partnership that he is granted the general authority to manage the firm’s business.
In the absence of an agreement to the contrary, he is not entitled to compensation for his services beyond his share of the profits.

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 the specific acts enumerated in Article 1850 (even if agreed to by all the general partners) without the written consent or at least ratification of all the limited partners.
The said acts are acts of strict dominion or ownership and are, therefore, beyond the scope of the authority of a general partner. (Art. 1818.)

In No. (1), the act is in violation of the agreement of the partners as contained in the certificate;
In Nos. (2) to (4), the acts are prejudicial to the interests of the limited partners;
In Nos. (5) and (6), the rule is based on the highly fiduciary nature of the partnership relation; and
In No. (7), any of the events mentioned results in the dissolution of the partnership. (see Art. 1860.) The general partner who violates the requirement imposed by Article 1850 is liable for damages to the limited partners.

Other limitations.

The general partners, of course, have no power to bind the limited partners beyond the latter’s investment.
Neither do they have the power to act for the firm beyond the purpose and scope of the partnership, and they have no authority to change the nature of the business without the consent of the limited partners.
In this respect, the certificate duly filed binds all persons dealing with the firm to take notice of, and be charged with knowledge of, its contents. Duties and disabilities arising out of the firm’s transactions with third persons rest solely on the general partners.

Article 1851.

A limited partner shall have the same rights as a general partner to:

(1) Have the partnership books kept at the principal place of business of the partnership, and at a reasonable hour to inspect and copy any of them;

(2) Have on demand true and full information of all things affecting the partnership, and a formal account of partnership affairs whenever circumstances render it just and reasonable; and

(3) Have dissolution and winding up by decree of court.

A limited partner shall have the right to receive a share of the profits or other compensation by way of income, and to the return of his contribution as provided in articles 1856 and 1857.

Rights, in general, of a limited partner.

The limited partner is viewed as a partner only to a certain extent.
His powers, actual or implied, are much more limited than those of a general partner.
As between the members of the firm, the limited partner, in order to protect his interest in the firm, has the same right to compel the partners to account as a general partner has.
Wrongdoing or improper acts on the part of general partners may not give a limited partner greater rights than the law and what his contract grants him.

Specific rights of a limited partner.

Article 1851 enumerates the specific rights of the limited partner in the partnership. They are as follows:

To require that the partnership books be kept at the principal place of business of the partnership;
To inspect and copy at a reasonable hour partnership books or any of them;
To demand true and full information of all things affecting the partnership;
To demand a formal account of partnership affairs whenever circumstances render it just and reasonable;
To ask for dissolution and winding up by decree of court;
To receive a share of the profits or other compensation by way of income; and
To receive the return of his contribution provided the partnership assets are in excess of all its liabilities.

The rights of a limited partner are necessarily lesser than those of a general partner.
He cannot take part in the control of the business (Art. 1848.) which is left to the general partner or partners.
But whenever the liability of a general partner is imposed on a limited partner, he is given the corresponding rights of a general partner.

Article 1852.

Without prejudice to the provisions of article 1848,

a person who has contributed to the capital of a business conducted by a person or partnership

erroneously believing that he has become a limited partner in a limited partnership,

is not, by reason of his exercise of the rights of a limited partner,

a general partner with the person or in the partnership carrying on the business,

or bound by the obligations of such person or partnership,

provided that on ascertaining the mistake

he promptly renounces his interest in the profits of the business,

or other compensation by way of income.

Status of partner where there is failure to create limited partnership.

In this regard, it is to be noted that the law (Art. 1844, par.2.) provides that the limited partnership is formed where there has been substantial compliance in good faith with the requirements thereof.
If the law is not complied with, the attempt to limit the liability of the limited partners will be ineffective, at least as to creditors who have not recognized, or dealt with, the firm as a limited partnership.
However, it may be more accurate to say that sometimes the limited partnership exists in spite of the failure of the firm to comply with the law, and that the limited partner is merely made liable for the debts of the firm as if he were a general partner.
Article 1852 grants exemption from liability in favor of one who has contributed to the capital of a business conducted by a person or partnership erroneously believing that he has becom ea limited partner in a limited partnership, or in a general partnership thinking that it is a limited partnership.
It introduces a substantial modification of liability where there has been a failure to create a limited partnership.

Status of person erroneously believing himself to be a limited partner.

Conditions for exemption from liability as general partner.

A person who has contributed capital to a partnership, erroneously believing that he has become a limited partner, as when his name appears in the certificate as a general partner or he is not designated as a limited partner (see Art. 1844[d].), is not personally liable as a general partner by reason of his exercise of the rights of a limited partner, provided:

On ascertaining the mistake, he promptly renounces his interest in the profits of the business or other compensation by way of income (Art. 1852.);
His surname does not appear in the partnership name (Art. 1846.); and
He does not participate in the management of the business. (Art. 1848.)

Necessity of renouncing his interest.

The person, however, must promptly renounce his interest (e.g., selling it to the general partners) before the partnership has become liable to third persons who cannot be blamed for considering him a general partner.
Where no partnership creditors are prejudiced, it would seem that renunciation of his interest is not necessary.

Obligation to pay back profits and compensation already received.

An interesting question arises: whether it is necessary for such person to pay back all past profits and interest to avoid being held liable as a general partner, or whether he need only renounce all further interest in the profits of the business.

It would seem that the requirement of renunciation refers only to profits or compensation not yet paid over for a person can hardly be said to have an interest in profits or compensation he has already received, and this is fortified by the general usage of the word “renounce” which does not commonly have the meaning of “return.” Hence, there is no obligation to return or pay back profits or compensation already received.
However, the opposite view also has merit. The intention behind the provision should be given more importance than the actual words used. The most that the statute could have intended was to put partnership creditors in the position they would have occupied had there been no limited partner at the time the obligations were contracted.

Example:

A limited partnership was organized under a law that had been repealed, and subsequently, bankruptcy proceedings were instituted against the firm and the members.
Facts: A and B, both stockbrokers, formed a limited partnership for the purpose of engaging in the stock brokerage business in the state of Illinois (U.S.A.). It turned out that the statute under which the firm was organized had been repealed with the adoption of the Uniform Limited Partnership Act by the State of Illinois. A and B had no knowledge of the repeal. Subsequently, bankruptcy proceedings were instituted against the firm and all the members, including the limited partners.
Issue: Are the limited partners entitled to the benefits of Section 11 (Art. 1852.) of the Act?
Held: Yes. Only the general partners could be adjudicated bankrupt.

Status of heirs of a deceased general partner admitted as partners.

An heir of a deceased general partner (in a general or limited partnership), admitted as a partner under the articles of partnership providing for such admission, ordinarily (not necessarily) becomes a limited partner for his own protection, because he would normally prefer to avoid any liability in excess of the value of the estate inherited so as not to jeopardize his personal assets.

Right to elect to become general partner may be exercised.

This statutory limitation of responsibility being designed to protect the heir, the latter may disregard it and instead elect to become a collective or general partner, with all the rights and privileges of one, and answering for the debts of the firm not only with the inheritance but also with the heir’s personal fortune.
This choice pertains exclusively to the heir and does not require the assent of the surviving partner or partners.

Right when given in articles of partnership may be waived.

The articles of partnership may validly provide that in the event of the death of a partner “the partnership shall be continued and the deceased partner shall be represented by his heirs and assignees in said partnership” as general partners.
Of course, the stipulation would not bind the heirs of the deceased partner should they refuse to assume personal and unlimited responsibility for the obligations of the firm.
The heirs, in other words, cannot be compelled to become general partners against their wishes. But because they are not so compellable, it does not follow that they may not voluntarily choose to become general partners, waiving the protective mantle of the general laws of succession.

Article 1853.

A person may be a general partner and a limited partner

in the same partnership at the same time,

provided that this fact shall be stated in the certificate provided for in article 1844.

A person who is a general,

and also at the same time a limited partner,

shall have all the rights and powers

and be subject to all the restrictions of a general partner;

except that, in respect to his contribution,

he shall have the rights against the other members

which he would have had if he were not also a general partner.

One person, both a general partner and a limited partner.

A person may be a general and a limited partner at the same time in the same partnership provided that this fact is stated in the certificate signed, sworn to, and recorded in the Office of the Securities and Exchange Commission. (see Art. 1845.)
Generally, his rights and powers are those of a general partner.

Hence, he is liable with his separate property to third persons. (Art. 1816.)

However, with respect to his contribution as a limited partner, he would have the right of a limited partner insofar as the other partners are concerned. (Arts. 1855-1858.) T

This means that while he is not relieved from personal liability to third persons for partnership debts,

he is entitled to recover from the general partners the amount he has paid to such third persons; and
he shall have priority over general partners in the return of their respective contributions, in settling accounts after dissolution.

Article 1854.

A limited partner also may loan money

to and transact other business with the partnership,

and, unless he is also a general partner,

receive on account of resulting claims against the partnership,

with general creditors, a pro rata share of the assets.

No limited partner shall in respect to any such claim:

(1) Receive or hold as collateral security any partnership property, or

(2) Receive from a general partner or the partnership

any payment, conveyance, or release from liability

if at the time the assets of the partnership are not sufficient

to discharge partnership liabilities to persons not claiming as general or limited partners.

The receiving of collateral security, or payment, conveyance, or release

in violation of the foregoing provisions

is a fraud on the creditors of the partnership.

Loan and other business transactions with limited partnership.

Allowable transactions.

Under this article, a limited partner (who is not also a general partner), being merely a contributor to the partnership (see Art. 1866.) without the right to participate in its management, is not prohibited from:

Granting loans to the partnership;
Transacting other business with it; and
Receiving a pro rata share of the partnership assets with general creditors if he is not also a general partner.

Prohibited transactions.

The limited partner, in respect of any such claim, is, however, prohibited from:

Receiving or holding as collateral security any partnership property; or
Receiving any payment, conveyance, or release from liability if it will prejudice the right of third persons.

Any violation of the prohibition will give rise to the presumption that it has been made to defraud partnership creditors.
It should be emphasized that Article 1854 does not prohibit absolutely the taking as collateral security by a limited partner of any partnership property. Nos. (1) and (2) of Article 1854 are modified by the requirement of sufficient assets to discharge the obligation of the partnership when any payment or conveyance is made or release is given to the limited partner by, or when he receives security from, the partnership.

Preferential rights of third persons.

In transacting business with the partnership as a non-member, the limited partner is considered as a non-partner creditor.
However, third persons always enjoy preferential rights insofar as partnership assets are concerned (see Art. 1827.) in view of the natural tendency of the partners to give preference to each other.
The rule is “designed to prevent illegal competition between the limited partner and creditors of the partnership for the assets of the partnership” in case there is insufficiency of partnership assets with which to discharge partnership liabilities to non-partner creditors.
Such a competition is not a threat if the partnership has sufficient assets to discharge its liabilities to non-member creditors.

Example:

A, B, and C are general partners with D as limited partner. The total assets of the partnership amount to P200,000.00. The partnership owes D P50,000.00 and E, a third party creditor, P250,000.00.
Since the assets of the partnership are not sufficient to discharge its liabilities to E, D cannot receive his claim of P50,000.00 and payment to him will be presumed to have been made to defraud E.
It will likewise raise the same presumption if D is the one indebted to the partnership and he is released from liability.
D, however, is not prohibited from purchasing any partnership property if the purpose is to generate cash with which to pay off partnership obligations to third persons.

Article 1855.

Where there are several limited partners

the members may agree that one or more of the limited partners

shall have a priority over other limited partners

as to the return of their contributions,

as to their compensation by way of income,

or as to any other matter.

If such an agreement is made it shall be stated in the certificate,

and in the absence of such a statement all the limited partners shall stand upon equal footing.

Preferred limited partners.

By an agreement of all the members (general and limited partners) stated in the certificate, priority or preference may be given to some limited partners over other limited partners as to the:

return of their contributions;
their compensation by way of income; or
any other matter.

In the absence of such statement in the certificate, even if there is an agreement, all the limited partners shall stand on equal footing in respect of these matters.

Article 1856.

A limited partner may receive from the partnership

the share of the profits

or the compensation by way of income

stipulated for in the certificate;

provided, that after such payment is made,

whether from property of the partnership or that of a general partner,

the partnership assets are in excess of all liabilities of the partnership

except liabilities to limited partners on account of their contributions and to general partners.

Compensation of limited partner.

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.
In determining the liabilities of the partnership, the liabilities to the limited partners for their contributions and to general partners, whether for contributions or not, are not included. (see Art. 1857.)
Liabilities to limited partners other than on account of their contributions arising from business transactions by them with the partnership, enjoy protection, subject to the preferential rights of partnership creditors. (see Art. 1854.)

Article 1857.

A limited partner shall not receive from a general partner

or out of partnership property

any part of his contributions until:

(1) All liabilities of the partnership,

except liabilities to general partners and to limited partners on account of their contributions,

have been paid

or there remains property of the partnership sufficient to pay them;

(2) The consent of all members is had,

unless the return of the contribution

may be rightfully demanded under the provisions of the second paragraph; and

(3) The certificate is cancelled or so amended

as to set forth the withdrawal or reduction.

Subject to the provisions of the first paragraph,

a limited partner may rightfully demand the return of his contribution:

(1) On the dissolution of a partnership; or

(2) When the date specified in the certificate for its return has arrived, or

(3) After he has six months' notice in writing to all other members,

if no time is specified in the certificate,

either for the return of the contribution or for the dissolution of the partnership.

In the absence of any statement in the certificate to the contrary

or the consent of all members,

a limited partner, irrespective of the nature of his contribution,

has only the right to demand and receive cash in return for his contribution.

A limited partner may have the partnership dissolved

and its affairs wound up when:

(1) He rightfully but unsuccessfully

demands the return of his contribution, or

(2) The other liabilities of the partnership have not been paid,

or the partnership property is insufficient for their payment

as required by the first paragraph, No. 1,

and the limited partner would otherwise be entitled to the return of his contribution.

Requisites for return of contribution of limited partner.

Under the first paragraph, the following conditions must exist before the contribution of a limited partner can be returned to him:

All liabilities of the partnership have been paid or if they have not yet been paid, the assets of the partnership are sufficient to pay such liabilities.

As in Article 1856, liabilities to limited partners on account of their contributions and to general partnership are not considered;

The consent of all the members (general and limited partners) has been obtained except when the return may be rightfully demanded; and
The certificate is cancelled or so amended as to set forth the withdrawal or reduction of the contribution.

Example:

After operating for some time as a limited partnership, X & Co., composed of A, B, and C, as general partners, who contributed P30,000.00 each, and D and E, as limited partners, who contributed P20,000.00 each, has a total assets of P150,000.00 and the following liabilities:

For return of contributions of limited partners (D and E) = P40,000.00
Due to third party credits = 50,000.00
For loan extended by C = 25,000.00
For loan extended by D = 35,000.00
For taxes =15,000.00
For indemnity to B for damages suffered in consequence of management.= 5,000.00

Total ............................................................. P170,000.00

May E legally demand the return of his contribution, assuming that all the partners have given their consent and are willing to have the certificate amended as to set forth the withdrawal?
Yes. The total assets of P150,000.00 are well over the amount of P100,000.00, the total of the liabilities mentioned in Nos. (2), (4), and (5). The other liabilities are not considered in determining whether the contribution of E can be returned to him.

When return of contribution a matter of right.

Under the second paragraph, the limited partner may demand, as a matter ofright, the return of his contribution provided the conditions in paragraph 1, Nos. 1 and 3 have been complied with —

On the dissolution of the partnership; or
Upon the arrival of the date specified in the certificate for the return; or
After the expiration of the 6 months’ notice in writing given by him to the other partners if no time is fixed in the certificate for the return of the contribution or for the dissolution of the partnership.

Right of limited partner to cash in return for contribution.

Under the third paragraph, even if a limited partner has contributed property, he has only the right to demand and receive cash for his contribution.
The exceptions are:

When there is stipulation to the contrary in the certificate; or
Where all the partners (general and limited) consent to the return other than in the form of cash.

When limited partner may have partnership dissolved.

The fourth paragraph provides for additional grounds for the dissolution of the partnership upon petition of a limited partner. (See Arts. 1851[3], 1831.) They are:

When his demand for the return of his contribution is denied although he has a right to such return; or
When his contribution is not paid although he is entitled to its return because the other liabilities of the partnership have not been paid or the partnership property is insufficient fortheir payment.

In other words, were it not for this first condition in the first paragraph of Article 1857 which is not present, he would have been entitled to the return of his contribution because of the presence of the second and third conditions.
The limited partner must first ask the other partners to have the partnership dissolved;

if they refuse, then he can seek the dissolution of the partnership by judicial decree.

Article 1858.

A limited partner is liable to the partnership:

(1) For the difference between his contribution

as actually made and that stated in the certificate as having been made, and

(2) For any unpaid contribution

which he agreed in the certificate to make in the future

at the time and on the conditions stated in the certificate.

A limited partner holds as trustee for the partnership:

(1) Specific property stated in the certificate as contributed by him,

but which was not contributed or which has been wrongfully returned, and

(2) Money or other property wrongfully paid or conveyed to him

on account of his contribution.

The liabilities of a limited partner as set forth in this article

can be waived or compromised

only by the consent of all members;

but a waiver or compromise

shall not affect the right of a creditor of a partnership

who extended credit

or whose claim arose after the filing

and before a cancellation or amendment of the certificate,

to enforce such liabilities.

When a contributor has rightfully received the return

in whole or in part of the capital of his contribution,

he is nevertheless liable to the partnership for any sum,

not in excess of such return with interest,

necessary to discharge its liabilities to all creditors

who extended credit or whose claims arose before such return.

Liabilities of a limited partner.

To the partnership.

As limited partners are not principals in the transaction of a partnership, their liability, as a rule, is to the partnership (Art. 1858.), not to the creditors of the partnership. (see Art. 1866.)
The general partners cannot, however, waive any liability of the limited partners to the prejudice of such creditors.

To partnership creditors and other partners.

A limited partner is liable for partnership obligations:

when he contributes services instead of only money or property to the partnership (Art. 1845.);
when he allows his surname to appear in the firm name (Art. 1846.);
when he fails to have a false statement in the certificate corrected, knowing it to be false (Art. 1847);
when he takes part in the control of the business (Art. 1848.);
when he receives partnership property as collateral security, payment, conveyance, or release in fraud of partnership creditors (Art. 1854); and
when there is failure to substantially comply with the legal requirements governing the formation of limited partnerships. (Art. 1844, par. 2.)

To separate creditors.

As in a general partnership, the creditor of a limited partner may, in addition to other remedies allowed under existing laws, apply to the proper court for a “charging order” subjecting the interest in the partnership of the debtor partner for the payment of his obligation. (Art. 1862.)

Liability for unpaid contribution.

Under the first paragraph of Article 1858, the limited partner is liable not only for the difference between the amount of his actual contributions and that stated in the certificate as having been made but also for any unpaid contribution he agreed to make at a future time.
Example:

A and B are limited partners in a partnership. In the certificate of partnership, it appears that A contributed P10,000.00. Actually, he contributed only P8,000.00. In the certificate too, B promised to give an additional contribution of P4,000.00 at a specified date.
So, A should pay the difference of P2,000.00 and B, the amount of P4,000.00 on the date specified or now, if the date has arrived.

Liability as trustee.

Under the second paragraph of Article 1858, a limited partner is considered as trustee for the partnership for:

Specific property stated in the certificate as contributed by him but which he had not contributed;
Specific property of the partnership which had been wrongfully returned to him;
Money wrongfully paid or conveyed to him on account of his contribution; and
Other property wrongfully paid or conveyed to him on account of his contribution.

Requisites for waiver or compromise of liabilities.

Under the third paragraph of Article 1858, the liabilities of a limited partner may be waived or compromised, provided:

The waiver or compromise is made with the consent of all the partners; and
The waiver or compromise does not prejudice partnership creditors who extended credit or whose claims arose before the cancellation or amendment of the certificate.

Example:

In the preceding illustration, suppose after the liabilities of A and B were waived or compromised with the consent of all the partners, X extended credit to the partnership. Later on, the certificate was amended to set forth the necessary change.
Here, the credit was extended after the filing but before the amendment of the certificate. If the remaining assets are insufficient, X can still enforce the liabilities of A and B.

Liability for return of contribution lawfully received.

Under the fourth paragraph of Article 1858, the limited partner is liable to the partnership for the return of contribution lawfully received by him (see Art. 1857.) to pay creditors who extended credit or whose claim arose before such return.
His liability, of course, cannot exceed the sum received by him (Art. 1843.) with interest.
Example:

Suppose that A lawfully received the return of his contribution in the amount of P10,000.00 on the date specified in the certificate.
Subsequently, the partnership became liable to X. In this case, if the assets of the partnership are insufficient, the claim of X should be directed against the general partners.
But if X extended credit or his claim arose before A received the return of his contribution, then, A is liable to the partnership. Thus, if the partnership needs P7,000.00 to discharge the liabilities to X, then A is liable for the said amount plus interest. But in no case is A liable beyond P10,000.00 plus interest because he is only a limited partner.

Article 1859.

A limited partner's interest is assignable.

A substituted limited partner

is a person admitted to all the rights of a limited partner

who has died or has assigned his interest in a partnership.

An assignee, who does not become a substituted limited partner,

has no right to require any information

or account of the partnership transactions

or to inspect the partnership books;

he is only entitled to receive the share of the profits

or other compensation by way of income,

or the return of his contribution,

to which his assignor would otherwise be entitled.

An assignee shall have the right to become a substituted limited partner

if all the members consent thereto

or if the assignor, being thereunto empowered by the certificate,

gives the assignee that right.

An assignee becomes a substituted limited partner

when the certificate is appropriately amended in accordance with article 1865.

The substituted limited partner has all the rights and powers,

and is subject to all the restrictions and liabilities of his assignor,

except those liabilities of which he was ignorant at the time he became a limited partner

and which could not be ascertained from the certificate.

The substitution of the assignee as a limited partner

does not release the assignor from liability to the partnership under articles 1847 and 1858.

Effect of change in the relation of limited partners.

The substitution of a person as a limited partner in place of an existing limited partner (Art. 1859.), or the withdrawal, death, insolvency, insanity, or civil interdiction of a limited partner (Art. 1860.), or the addition of new limited partners (Art. 1849.) does not necessarily dissolve the partnership.
No limited partner, however, can withdraw his contribution until all liabilities to creditors are paid. (see Art. 1857.)

Rights of assignee of limited partner.

A limited partner may assign his interest in the partnership to another person.
The assignee is only entitled to:

receive the share of the profits
or other compensation by way of income
or the return of the contribution to which the assignor would otherwise be entitled.

His rights are similar to those of a person to whom a partner conveyed his whole interest in the partnership. (Art. 1813.)
Hence, he has no right :

to require any information or
to account of partnership transactions or
to inspect the partnership books.

The assignee acquires all the rights of the limited partner only when he becomes a substituted limited partner.

When assignee may become substituted limited partner.

A substituted limited partner is a person admitted to all the rights of a limited partner who has died or has assigned his interest in a partnership.
The following are the requisites in order that the assignee may become a substituted limited partner:

All the members must consent to the assignee becoming a substituted limited partner or the limited partner, being empowered by the certificate, must give the assignee the right to become a limited partner;
The certificate must be amended in accordance with Article 1865; and
The certificate as amended must be registered in the Securities and Exchange Commission.

Liability of substituted partner and assignor.

It must be observed that the substituted limited partner is liable for all the liabilities of his assignor except:

only those of which he was ignorant at the time he became a limited partner and
which could not be ascertained from the certificate.

Similarly, the assignor is not released from liability to persons who:

suffered damage by reliance on a false statement in the certificate (Art. 1847.)
and to creditors who extended credit or whose claims arose before the substitution. (Art. 1858.)

Article 1860.

The retirement, death, insolvency, insanity or civil interdiction

of a general partner dissolves the partnership,

unless the business is continued by the remaining general partners:

(1) Under a right so to do stated in the certificate, or

(2) With the consent of all members.

Effect of retirement, death, etc. of a general partner.

The retirement or withdrawal, death, insolvency, insanity, or civil interdiction of a general partner dissolves the partnership (see Art. 1830.), while any of such causes affecting a limited partner (see Art. 1861.) does not result in its dissolution unless, of course, there is only one limited partner. (see Art. 1843.)
If the business is continued by the remaining partners under the rights given in the certificate or with the consent of all the members, the limited partnership is not dissolved but the certificate must be amended as required by Article 1864, paragraph 2, No. (5) to reflect the change in order that the limited partners may avail of the protection granted by law.

Article 1861.

On the death of a limited partner

his executor or administrator

shall have all the rights of a limited partner

for the purpose of setting his estate,

and such power as the deceased

had to constitute his assignee a substituted limited partner.

The estate of a deceased limited partner

shall be liable for all his liabilities as a limited partner.

Right of executor on death of a limited partner.

On the death of a limited partner, his executor or administrator shall acquire all the rights for purposes of settling the affairs of the limited partner (see Art. 1851.) and the right to constitute the deceased’s assignee as substituted limited partner.
Note that the executor or administrator may constitute the assignee as a substituted limited partner only if the deceased partner was empowered to do so in the certificate. (Art. 1859, par. 4.)
Under the second paragraph, the estate of the deceased limited partner is liable for all his liabilities contracted while he was a limited partner. (see Art. 1858.)

Article 1862.

On due application to a court of competent jurisdiction by any creditor of a limited partner, the court may charge the interest of the indebted limited partner with payment of the unsatisfied amount of such claim, and may appoint a receiver, and make all other orders, directions and inquiries which the circumstances of the case may require.

The interest may be redeemed with the separate property of any general partner, but may not be redeemed with partnership property.

The remedies conferred by the first paragraph shall not be deemed exclusive of others which may exist.

Nothing in this Chapter shall be held to deprive a limited partner of his statutory exemption.

Rights of creditors of limited partner.

The creditor of a limited partner may apply to the proper court for an order charging the limited partner’s interest in the partnership for the payment of any unsatisfied amount of his claim.
The interest so charged may be redeemed with the separate property of any general partner but not with partnership property.
Under Article 1814, paragraph 2, No. (1), the interest of the debtor partner charged with the payment of the unsatisfied amount of the judgment debt may be redeemed with partnership property with the consent of all the partners whose interests are not so charged.

The limited partner’s right under the exemption laws is also preserved under this article since his interest in the partnership (see Art. 1812.) is actually his property.

Article 1863.

In settling accounts after dissolution the liabilities of the partnership shall be entitled to payment in the following order:

(1) Those to creditors, in the order of priority as provided by law, except those to limited partners on account of their contributions, and to general partners;

(2) Those to limited partners in respect to their share of the profits and other compensation by way of income on their contributions;

(3) Those to limited partners in respect to the capital of their contributions;

(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 subsequent agreement, limited partners share in the partnership assets in respect to their claims for capital, and in respect to their claims for profits or for compensation by way of income on their contribution respectively, in proportion to the respective amounts of such claims.

Dissolution of a limited partnership.

Causes.

A limited partnership is dissolved in much the same way as an ordinary partnership.
It may be dissolved:

for the misconduct of a general partner,
for fraud practiced on the limited partner by the general partner,
on the retirement, death, etc. of a general partner (Art. 1860.),
when all the limited partners ceased to be such (Art. 1864, par. 1.),
the expiration of the term for which it was to exist (Art. 1844[1, e].),
mutual consent of the partners before the expiration of the firm’s original term.

Suit for dissolution.

A limited partner may bring a suit for the dissolution of the firm, an accounting, and the appointment of a receiver when the misconduct of a general partner or the insolvency of the firm warrants it.
Similarly, creditors of a limited partnership are entitled to such relief where the firm is insolvent.
A limited partner may have the partnership dissolved and its affairs wound up when he rightfully but unsuccessfully demands the return of his contribution, or the other liabilities of the partnership, except liabilities to general partners and to limited partners on account of their contributions, have not been paid, or the partnership property is insufficient for their payment, and the limited partner would otherwise be entitled to the return of his contribution. (Art. 1857, par. 4; see Arts. 1830-1831.)

Notice of dissolution.

When the firm is dissolved by the expiration of the term fixed in the certificate, notice of the dissolution need not be given since the papers filed and recorded in the Securities and Exchange Commission are notice to all the world of the term of the partnership.
Where, however, the dissolution is by the express will of the partners, the certificate shall be cancelled, and a dissolution of the partnership is not effected until there has been compliance with the requirement in this respect.

Winding up.

The consequences of the dissolution of a general partnership apply to limited partnership.
Therefore, the partnership continues in operation while winding up.
When a limited partnership has been duly dissolved, the general partners have the right and power to wind up its affairs, as in a general partnership.
It is not the duty of the limited partner or of the representative of a deceased limited partner to care for or collect the assets of the firm.
The representatives of the general partners, not the limited partners, succeed the general partners.

Priority in the distribution of partnership assets.

Article 1863 expressly provides for priority in the distribution of the assets after dissolution. The partnership liabilities shall be settled in the following order:

Those due to creditors, including limited partners, except those on account of their contributions, in the order of priority as provided by law (Arts. 1854, 1856, 1857[1].);
Those due to limited partners in respect to their share of the profits and other compensation by way of income on their contributions;
Those due to limited partners for the return of the capital contributed;
Those due to general partners other than for capital and profits;
Those due to general partners in respect to profits; and
Those due to general partners for the return of the capital contributed.

Partnership creditors are entitled to first distribution, followed by limited partners who take priority over general partners.
Note that in a general partnership, the claims of the general partners in respect of capital enjoy preference over those in respect of profits. (see Art. 1839[1, c, d].)

Share of limited partners in partnership assets.

In the absence of any statement in the certificate as to the share of the profits which each partner shall receive by reason of his contribution (Art. 1844, par. 1[1].) and subject to any subsequent agreement, limited partners share in the partnership assets in respect to their claims for capital and profits in proportion to the respective amounts of such claims.
This proportional sharing by the limited partners takes place where the partnership assets are insufficient to pay such claims.

Priority of claims of limited partners.

The members of a limited partnership, as among themselves, may include in the partnership articles an agreement for priority of distribution on the winding up of partnership affairs.

Such agreement ordinarily becomes controlling as between the partners themselves.

In the absence of any contrary agreement, all the limited partners stand upon equal footing.

The claims of limited partners for profits and other compensation by way of income and return of capital contributions rate ahead with respect to all claims of general partners.

For claims arising from individual loans to, or other business transactions with, the partnership, other than for capital contributions, the limited partner is placed in the same category as a non-member creditor. (Art. 1854, par. 1.)
If return is made to a limited partner of his contribution before creditors are paid, he is under an obligation to reimburse such payments, with interest, so far as necessary to satisfy the claims of creditors. (see Art. 1858, last par.)
In the event of insolvency of the partnership, its creditors take preference over both general and limited partners.

Article 1864.

The certificate shall be cancelled when the partnership is 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 amount or 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 is sentenced to civil interdiction and the business is continued under article 1860;

(6) There is a change in the character of the business of the partnership;

(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 the dissolution of the partnership or for the return of a contribution;

(9) A time is fixed for the dissolution of the partnership, or the return of a contribution, no time having been specified in the certificate, or

(10) The members desire to make a change in any other statement in the certificate in order that it shall accurately represent the agreement among them.

When certificate shall be cancelled or amended.

The certificate shall be cancelled, not merely amended:

When the partnership is dissolved other than by reason of the expiration of the term of the partnership; or
When all the limited partners cease to be such.

A limited partnership cannot exist as such if there are no more limited partners. (Art. 1843.)

In all other cases, only an amendment of the certificate is required. (Art. 1864, Nos. 1-10.)

change in the name of the partnership or in the amount or character of the contribution
substituted as a limited partner;
additional limited partner is admitted;
admitted as a general partner;
general partner retires, dies, becomes insolvent or insane, or is sentenced to civil interdiction and the business is continued;
change in the character of the business of the partnership;
false or erroneous statement in the certificate;
change in the time as stated for the dissolution or for the return of a contribution;
time is fixed for the dissolution of the partnership, or the return of a contribution, no time having been specified in the certificate, or
members desire to make a change

Article 1865.

The writing to amend a certificate shall:

(1) Conform to the requirements of article 1844 as far as necessary to set forth clearly the change in the certificate which it is desired to make; and

(2) Be signed and sworn to by all members, and an amendment substituting a limited partner or adding a limited or general partner shall be signed also by the member to be substituted or added, and when a limited partner is to be substituted, the amendment shall also be signed by the assigning limited partner.

The writing to cancel a certificate shall be signed by all members.

A person desiring the cancellation or amendment of a certificate, if any person designated in the first and second paragraphs as a person who must execute the writing refuses to do so, may petition the court 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 of the Securities and Exchange Commission where the certificate is recorded, to record the cancellation or amendment of the certificate; and when the certificate is to be amended, the court shall also cause to be filed for record in said office a certified copy of its decree setting forth the amendment.

A certificate is amended or cancelled when there is filed for record in the Office of the Securities and Exchange Commission, where the certificate is recorded:

(1) A writing in accordance with the provisions of the first or second paragraph, or

(2) A certified copy of the order of the court in accordance with the provisions of the fourth paragraph;

(3) After the certificate is duly amended in accordance with this article, the amended certified shall thereafter be for all purposes the certificate provided for in this Chapter.

Requirements for amendment and cancellation of certificate.

The following are the requirements to amend a certificate:

The amendment must be in writing;
It must be signed and sworn to by all the members including the new members, and the assigning limited partner in case of substitution or addition of a limited or general partner; and
The certificate, as amended, must be filed for record in the Securities and Exchange Commission.

From the moment the amended certificate or a certified copy of a court order granting the petition for amendment has been filed, such amended certificate shall thereafter be for all purposes the certificate of the partnership under Article 1844.

The cancellation of a certificate must also be in writing and signed by all the members and filed with the Office of the Securities and Exchange Commission.

If the cancellation is ordered by the court, certified copy of such order shall be filed with the Commission.

The approval by the Commission of the amendment or cancellation is not required.

Article 1866.

A contributor, unless he is a general partner, is not a proper party to proceedings by or against a partnership, except where the object is to enforce a limited partner's right against or liability to the partnership.

Limited partner, a mere contributor.

A limited partner is referred to in Article 1866 as mere contributor. (see also Arts. 1846, 1848, 1854, 1857, 1858, 1860.)
He is practically a stranger in the limited partnership whose liability is limited to his interest in the firm (Art. 1843.), without any right and power to participate in the management and control of the business. (see Arts. 1848, 1851.)
Unlike in the case of a general partner, the relationship between a limited partner, on the one hand, and the other partners and the partnership, on the other hand, is not one of trust and confidence. A limited partner is, therefore,

not prohibited from engaging in business for himself even in competition with that conducted by the partnership (see Arts. 1789, 1808.) and
may transact business with the partnership for ordinary purposes as though he were a stranger. (see Art. 1854.)

Parties to action by or against partnership.

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

When limited partner a proper party.

The limited partner may maintain an action in his own name where the object is:

to enforce his individual rights against the partnership (Art. 1851.), and
to recover damages for violation of such right.
to enforce his liability to the partnership. (Art. 1858.)

An action at law may be maintained by creditors of a firm against a limited partner to account for and restore sums withdrawn by him from the capital of the firm with outstanding debts on a voluntary dissolution.

But there is authority that such relief against limited partners who have withdrawn their contributions from an insolvent firm on dissolution is confined to judgment creditors of the firm with unsatisfied executions against the general partners, and this remedy has been denied to creditors who have not exhausted their remedies at law against the general partners.

Nature of limited partner’s interest in firm.

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

Article 1867.

A limited partnership formed under the law prior to the effectivity of this Code, may become a limited partnership under this Chapter by complying with the provisions of article 1844, 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 amount sufficient to discharge its liabilities to persons not claiming as general or limited partners by an amount greater than the sum of the contributions of its limited partners.

A limited partnership formed under the law prior to the effectivity of this Code, until or unless it becomes a limited partnership under this Chapter, shall continue to be governed by the provisions of the old law.

Provisions for existing limited partnerships.

A limited partnership formed under the former law (Articles 145-150, Code of Commerce.) may become a limited partnership under Chapter 4 by complying with the provisions of Article 1844, provided the certificate sets forth the information required by Article 1867.
Until or unless it becomes a limited partnership under this chapter, it shall continue to be governed by the provisions of the old law.
By way of illustration, the requisite in No. (2) is satisfied by a limited partnership formed under the old law, with assets worth P100,000.00, liabilities to third persons in the amount of P70,000.00, and to limited partners on account of their contributions in the amount of P20,000.00, the difference of P30,000.00 being greater than the sum of P20,000.00; but if such difference is only P20,000.00 or less, it cannot become a limited partnership under the Code.

Search This Blog

sic itur ad astra

Partnership: Limited Partnership (Arts. 1843-1867)

Popular posts from this blog

Election Laws: Requirements Before Election

Equality and Human Rights: The United Nations and Human Rights System (September 16, 2023)

Case Digest: Lawyers League for a Better Philippines v. Corazon Aquino, G.R. No. 73748, May 22, 1986