PART I.

PARTNERSHIP
(THE NEW CIVIL CODE OF THE PHILIPPINES)
(ART. 1767-1867)

GENERAL PROVISIONS

Article 1767. By the contract of partnership two or more persons bind themselves to
contribute money, property, or industry to a common fund, with the intention of
dividing the profits among themselves.

Two or more persons may also form a partnership for the exercise of a profession.

BRIEF REVIEW OF BASIC PRINCIPLES OF CONTRACTS

Art. 1305. A contract is a meeting of minds between two persons whereby one binds himself, with
respect to the other, to give something or to render some service.

Art. 1318. There is no contract unless the following requisites concur:

(1) Consent of the contracting parties;
(2) Object certain which is the subject matter of the contract;
(3) Cause of the obligation which is established.

CONSENT:
Art. 1319. Consent is manifested by the meeting of the offer and the acceptance upon the thing
and the cause which are to constitute the contract. The offer must be certain and the acceptance
absolute. A qualified acceptance constitutes a counter-offer.

Art. 1327. The following cannot give consent to a contract:

(1) Unemancipated minors;
(2) Insane or demented persons, and deaf-mutes who do not know how to write.

OBJECT:
Art. 1347. All things which are not outside the commerce of men, including future things, may be
the object of a contract. All rights which are not intransmissible may also be the object of contracts.

CAUSE OR CONSIDERATION:
Art. 1350. In onerous contracts the cause is understood to be, for each contracting party, the
prestation or promise of a thing or service by the other; in remuneratory ones, the service or
benefit which is remunerated; and in contracts of pure beneficence, the mere liberality of the
benefactor.

DEFECTIVE CONTRACTS: RESCISSIBLE, VOIDABLE, UNENFORCEABLE, VOID OR INEXISTENT

CONTRACTS

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CHARACTERISTIC ELEMENTS OF A PARTNERSHIP

1. CONSENSUAL. It is perfected by mere consent, that is, upon the express or implied
agreement of two or more persons.

2. NOMINATE. It has a special name or designation in our law.

3. BILATERAL. It is entered into by two or more persons and the rights and obligations arising
therefrom are always reciprocal.

4. ONEROUS. Each of the parties aspires to procure for himself a benefit through the giving of
something.

5. COMMUTATIVE. The undertaking of each of the partner is considered as the equivalent of

that of the others.

6. PRINCIPAL. It does not depend for its existence or validity upon some other contract.

7. PREPARATORY. It is entered into as a means to an end.

ESSENTIAL FEATURES OF A PARTNERSHIP

1. There must be a VALID CONTRACT.

-Partnership is a form of voluntary association entered into by the associates. It is a

personal association in which the elements of DELECTUS PERSONAE exists.

DELECTUS PERSONAE (literally means choice of the person or choice of the persons.)
- It means that no one can become a member of the partnership association without
the consent of all other associates.

- The terms of the association is written document known as ARTICLES OF

PARTNERSHIP.

2. The parties must have the LEGAL CAPACITY to enter into the contract.

- It is essential that the contracting parties have the necessary legal capacity to enter into
the contract.

The following cannot give consent to a contract of partnership:

a. Unemancipated minors
b. Insane or demented persons
c. Deaf-mutes who do not know how to write.
d. Persons who are suffering from civil interdiction.
e. Incompetents who are under guardianship.

3. There must be a MUTUAL CONTRIBUTION of money, property, or industry to a common fund.

-Partners must have financial interest in the business. Without the element of
MUTUAL CONTRIBUTION to a common fund, there can be no partnership.

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 MONEY - need not be legal tender of the Philippines.

PROPERTY - Real or Personal/ Tangible or Intangible. Promissory Notes or other

evidence of obligation is considered property.

INDUSTRY - Work or services of the party associated. It can be personal manual

efforts or intellectual.

4. The object must be LAWFUL.

• It must not be contrary to law, moral, good customs, public order or public policy.
• A partnership may be organized for any purpose except for those enterprises for
which the law requires a specific form of business organization like BANKS for
example which must be a stock corporation.

5. The primary purpose must be to OBTAIN PROFITS and DIVIDE the same among the parties.

• The very reason for the existence of the partnership must be to obtain pecuniary
profit or gain directly as a result of the business to be carried on.

• A partnership is essentially a business enterprise established for a profit.

• The distribution of losses is a possible consequence of “sharing of profits”.

Ø A partnership may likewise be entered into for the purpose of practicing a profession.

ART. 1768. The partnership has a juridical personality separate and distinct from that
of each of the partners, even in case of failure to comply with the requirements of
article 1772, first paragraph.

• The law grants a juridical personality separate and distinct from that of each
partners.
• It may acquire property as well as incur obligations in its own name.
• It may bring civil or criminal actions in accordance with law and regulations of the
organization.

Art. 1769. In determining whether a partnership exists, these rules shall apply:

(1) Except as provided by Article 1825, persons who are not partners as to each other
are not partners as to third persons;
(2) Co-ownership or co-possession does not of itself establish a partnership, whether
such-co-owners or co-possessors do or do not share any profits made by the use of the
property;
(3) The sharing of gross returns does not of itself establish a partnership, whether or
not the persons sharing them have a joint or common right or interest in any property
from which the returns are derived;

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(4) The receipt by a person of a share of the profits of a business is prima facie
evidence that he is a partner in the business, but no such inference shall be drawn if
such profits were received in payment:
(a) As a debt by installments or otherwise;
(b) As wages of an employee or rent to a landlord;
(c) As an annuity to a widow or representative of a deceased partner;
(d) As interest on a loan, though the amount of payment vary with the profits of
the business;
(e) As the consideration for the sale of a goodwill of a business or other property
by installments or otherwise. (n)

• Article 1769 lays downs the rule in determining whether or not an association is a
partnership. This rule applies only if there is a doubt as to the existence of a
partnership.
• When all essential characteristics of a partnership is present then it is a partnership.
• In case of doubt, Article 1769 shall apply.

1. PARTNERS NOT PARTNERS AS TO EACH OTHER

Simply put, if the partners are not partners as between themselves, they cannot be partners
as to third persons.

2. CO-OWNERSHIP OR CO-POSSESSION
There is co-ownership whenever the ownership of an undivided thing or right belongs to
different persons.

Example: A parcel of land is owned by A, B, and C.

• Co-ownership of the property does not of itself establish the existence of a

partnership even if they share in the profits derived from their ownership of the
property.
• The profits must be derived from the operation of the business by the members of
the association and not merely from property ownership.

3. SHARING OF GROSS RETURNS

- The sharing of the profits as a co-owner of the business is that makes one a partner.
Thus, if one takes a share of the profits as payment of a debt, he is not a partner.

4. RECEIPT OF SHARE IN THE PROFITS

- An agreement to share both profits and losses tends to strongly establish the existence
of a partnership.

TESTS AND INCIDENTS OF PARTNERSHIP

1. The partners share in profits and losses.

2. They have equal rights in the management and conduct of the partnership business.
3. Every partner is an agent of the partnership, and entitled to bind the other partners by his acts,
and for the purpose of its business.

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Art. 1770. A partnership must have a lawful object or purpose, and must be established
for the common benefit or interest of the partners.

When an unlawful partnership is dissolved by a judicial decree, the profits shall be

confiscated in favor of the State, without prejudice to the provisions of the Penal Code
governing the confiscation of the instruments and effects of a crime. (1666a)

LAWFUL OBJECT OR PURPOSE. The object or purpose must be LAWFUL, meaning, it must be
within the commerce of man, possible, and not contrary to law, morals, good customs, public order
or public policy.

EFFECTS OF AN UNLAWFUL PARTNERSHIP

1. The contract is VOID AB INITIO and the partnership never existed in the eyes of the law.
2. The profits shall be confiscated in favor of the government.

Art. 1771. A partnership may be constituted in any form, except where immovable
property or real rights are contributed thereto, in which case a public instrument shall
be necessary. (1667a)

FORMAL/STATUTORY REQUIREMENTS OF A PARTNERSHIP

GENERAL RULE: No particular form is necessary for the validity of a partnership.

EXCEPTION: Contribution consists of immovable property or real rights, a public instrument is
necessary.

ART. 1772. Every contract of partnership having a capital of Three thousand pesos or
more, in money or property, shall appear in a public instrument, which must be
recorded in the Office of the Securities and Exchange Commission.

Failure to comply with the requirements of the preceding paragraph shall not affect the
liability of the partnership and the members thereof to third persons.

RULE: When the capital of partnership is P3,000.00 or more, in money or property:

1. The contract must appear in a public instrument; and
2. It must be registered with the Securities and Exchange Commission (SEC).

EFFECT OF NON-COMPLIANCE: Failure to comply with the requirements does not prevent the
formation of the partnership and it does not affect the liability of the partnership and that of its
members to third persons.

• The purpose of registration is necessary as “a condition for the issuance of licenses to

engage in business or trade.”

Art. 1773. A contract of partnership is void, whenever immovable property is

contributed thereto, if an inventory of said property is not made, signed by the parties,
and attached to the public instrument. (1668a)

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FORM OF PARTNERSHIP CONTRACT

General Rule: For VALIDITY of the contract as well as ENFORCEABILITY, NO FORM is

required, regardless of the value of the contributions. Therefore, the contract may even be ORAL.

Exception: Whenever real properties or real rights in real properties are contributed,
regardless of the value, a PUBLIC INSTRUMENT is needed.
• There must also be an INVENTORY of the immovables. This INVENTORY must be
signed by the parties and attached to the public instrument.
• Without the public instrument, the partnership is VOID.

Art. 1774. Any immovable property or an interest therein may be acquired in the
partnership name. Title so acquired can be conveyed only in the partnership name. (n)

Art. 1775. Associations and societies, whose articles are kept secret among the
members, and wherein any one of the members may contract in his own name with
third persons, shall have no juridical personality, and shall be governed by the
provisions relating to co-ownership. (1669)

IF ARTICLES ARE KEPT SECRET. The association here is certainly not a partnership and therefore
not a legal person, because “anyone of the members may contract in his own name with third
persons” and not in the name of the firm.

IMPORTANCE OF GIVING PUBLICITY TO ARTICLES OF PARTNERSHIP: For the protection of the

members as well as those of third persons.

Art. 1776. As to its object, a partnership is either universal or particular. As regards the
liability of the partners, a partnership may be general or limited. (1671a)

CLASSIFICATION OF PARTNERSHIPS

A. AS TO SUBJECT MATTER:
1. Universal
a. with all present property (defined in Art. 1778)
b. with all profits (defined in Art. 1780)
2. Particular (Art. 1983)

B. AS TO LIABILITY:
1. General Partnership is one where all the partners are general partners. (They are liable
even with respect to their individual properties, after the assets of the partnership have been
exhausted).
2. Limited Partnership is one where at least one partner is a general partner and the others
are limited partners. (A limited partner is one whose liability is limited only up to the extent of his
contributions).

KINDS OF PARTNERS
1. Capitalist Partner – one who contributes money or property to the common fund.
2. Industrial Partner – one who contributes only his industry or personal service.
3. General Partner – one whose liability third persons extends to his separate property. He
may be a capitalist or industrial partner.
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 4. Limited Partner – one whose liability to third persons is limited to his capital contribution.
He does not participate in the management of the business.
5. Managing Partner – one who manages the affairs or business of the partnership.

Art. 1777. A universal partnership may refer to all the present property or to all the
profits. (1672)

Art. 1778. A partnership of all present property is that in which the partners contribute
all the property which actually belongs to them to a common fund, with the intention of
dividing the same among themselves, as well as all the profits which they may acquire
therewith. (1673)

Art. 1779. In a universal partnership of all present property, the property which
belongs to each of the partners at the time of the constitution of the partnership,
becomes the common property of all the partners, as well as all the profits which they
may acquire therewith.

A stipulation for the common enjoyment of any other profits may also be made; but the
property which the partners may acquire subsequently by inheritance, legacy, or
donation cannot be included in such stipulation, except the fruits thereof. (1674a)

UNIVERSAL PARTNERSHIP OF ALL PRESENT PROPERTY

The contribution here consists of:

1. All the properties actually belonging to the partners at the time of the constitution of the
partnership.
2. The profits acquired with said properties

Contribution of future property:

General Rule: Future properties cannot be contributed.
Exception: Unless there is a stipulation for the contribution of any other profits or future
property.

Property acquired by: Inheritance, Legacy or Donation cannot be included. Any stipulation
to the contrary shall be void.

Art. 1780. A universal partnership of profits comprises all that the partners may acquire
by their industry or work during the existence of the partnership.

Movable or immovable property which each of the partners may possess at the time of
the celebration of the contract shall continue to pertain exclusively to each, only the
usufruct passing to the partnership. (1675)

UNIVERSAL PARTNERSHIP OF ALL PROFITS

RULES:
1. ALL PROFITS acquired by the INDUSTRY or WORK of the partners DURING THE
EXISTENCE OF THE PARTNERSHIP become COMMON PROPERTY. (QUESTION: What
about profits acquired through CHANCE?)

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 2. Only the USUFRUCT or USE of the properties, present and future, of the parties
becomes COMMON PROPERTY of the partnership. The partners retain ownership of their
property.
3. Profits/fruits obtained from PROPERTY SUBSEQUENTLY ACQUIRED shall belong to the
partners alone, unless there is a stipulation to the contrary.
4. Profits from properties acquired through INHERITANCE, LEGACY OR DONATION cannot
be included. Any stipulation to the contrary shall be void.

Art. 1781. Articles of universal partnership, entered into without specification of its
nature, only constitute a universal partnership of profits. (1676)

PRESUMPTION: When the articles of partnership do not specify the nature of the partnership,
whether it is one of “PRESENT PROPERTY” or “OF PROFITS” only, and the presumption is that the
parties intended merely a partnership of profits.

Reason: The universal partnership of profits imposes less obligations on the partners since they
preserve ownership of their separate property.

Art. 1782. Persons who are prohibited from giving each other any donation or
advantage cannot enter into universal partnership. (1677)

Example: Between spouses, between persons guilty of adultery or concubinage

Art. 1783. A particular partnership has for its object determinate things, their use or
fruits, or specific undertaking, or the exercise of a profession or vocation. (1678)

Examples:
1. To purchase real property and resell it at a profit.
2. To carry out a specific enterprise like the construction of a building.
3. To practice a vocation or profession.

OBLIGATIONS OF THE PARTNERS

A. OBLIGATION OF THE PARTNERS AMONG THEMSELVES

When two persons, A and B, form a partnership, different relations may arise:
a. Relations between A and B;
b. Relations between A and B on the one hand, and the partnership on the other hand;
c. Relations between A and B on the one hand, and third persons on the other hand;
d. Relations between the partnership and the third persons.

Art. 1784. A partnership begins from the moment of the execution of the
contract, unless it is otherwise stipulated. (1679)

When a Partnership Begins

Gen. Rule: A partnership is a consensual contract, it exists from the moment of the
execution of the contract.
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 Exception: When there is a contrary stipulation.

Art. 1785. When a partnership for a fixed term or particular undertaking is continued
after the termination of such term or particular undertaking without any express
agreement, the rights and duties of the partners remain the same as they were at such
termination, so far as is consistent with a partnership at will.

A continuation of the business by the partners or such of them as habitually acted

therein during the term, without any settlement or liquidation of the partnership
affairs, is prima facie evidence of a continuation of the partnership. (n)

PARTNERSHIP WITH A FIXED TERM

Ø It is one in which the term of existence has been agreed upon expressly (there is a
definite period) or impliedly (It is formed for a particular purpose). THE EXPIRATION OF THE TERM
OR ACCOMPLISHMENT OF THE PURPOSE WILL CAUSE THE AUTOMATIC DISSOLUTION OF THE
PARTNERSHIP.
Ø If the partners agree to renew or extend the partnership expressly or impliedly (by
continuing the business after the termination of the term or particular undertaking) it becomes a
PARTNERSHIP AT WILL.

PARTNERSHIP AT WILL
Ø One in which no time is specified and is not formed for a particular undertaking or
venture and which may be terminated anytime by mutual agreement of the partners or by the will
of any partner alone.

Ø PARTNERSHIP FOR A FIXED TERM OR PARTICULAR PURPOSE which is continued by

the partners after the termination of such term or particular undertaking without express
agreement.

Art. 1786. Every partner is a debtor of the partnership for whatever he may have
promised to contribute thereto.

He shall also be bound for warranty in case of eviction with regard to specific and
determinate things which he may have contributed to the partnership, in the same
cases and in the same manner as the vendor is bound with respect to the vendee. He
shall also be liable for the fruits thereof from the time they should have been delivered,
without the need of any demand. (1681a)

OBLIGATION WITH RESPECT TO CONTRIBUTION OF PROPERTY

1. To contribute at the beginning of the partnership or at the stipulated time the money,
property or industry which he may have promised;
2. To answer for eviction in case the partnership is deprived of the determinate property
contributed;
3. To answer to the partnership for the fruits of the property the contribution of which he
delayed, from the date they should have been contributed up to the time of the actual delivery.

Ø MUTUAL CONTRIBUTION to a common fund is of the essence in a contract of

partnership, for without the contributions, the partnership is useless.
Ø FAILURE TO CONTRIBUTE PROPERTY PROMISED automatically makes the partner a
DEBTOR of the partnership even without demand.
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 Ø The remedy is an action for specific performance (to collect what is owing) with
damages from the defaulting partner who is made a debtor for what he has promised to contribute
to the partnership.

Art. 1787. When the capital or a part thereof which a partner is bound to contribute
consists of goods, their appraisal must be made in the manner prescribed in the
contract of partnership, and in the absence of stipulation, it shall be made by experts
chosen by the partners, and according to current prices, the subsequent changes
thereof being for account of the partnership. (n)

WHEN CONTRIBUTION CONSISTS OF GOODS

Ø Appraisal of value is needed to determine how much has been contributed by the
partners.

How Appraisal is Made

1. Firstly, as prescribed in the contract of partnership.
2. Secondly, in default of the first, by EXPERTS chosen by the partners, and at CURRENT
prices.

Risk of Loss: After the goods have been contributed, the partnership bears the risks of
subsequent changes in their value.

Art. 1788. A partner who has undertaken to contribute a sum of money and fails to do
so becomes a debtor for the interest and damages from the time he should have
complied with his obligation.

The same rule applies to any amount he may have taken from the partnership coffers,
and his liability shall begin from the time he converted the amount to his own use.
(1682)

Cases Covered By The Article:

1. When money promised is not given on time.
2. When partnership money is converted to the personal use of the partner.

Coverage of Liability:
1. To pay the agreed of legal interest (12%), if he fails to pay his contribution on time or in
case he takes any amount from the common fund and converts it to his own use; and
2. To indemnify the partnership for damages caused to it by the delay in the contribution or
the conversion of any sum for his personal benefit.

TAKE NOTE: NO DEMAND IS NECESSARY. The partner is liable for interest and damages from the
time he should have complied with his obligation or from the time he converted the amount to his
own use, as the case may be.

Art. 1789. An industrial partner cannot engage in business for himself, unless the
partnership expressly permits him to do so; and if he should do so, the capitalist
partners may either exclude him from the firm or avail themselves of the
benefits which he may have obtained in violation of this provision, with a right to
damages in either case. (n)
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CLASSIFICATION OF PARTNERS

1. From the viewpoint of Capitalist

CONTRIBUTION Industrial

2. From the viewpoint of General

LIABILITY Limited

3. From the viewpoint of Managing

MANAGEMENT Silent
Liquidating
Ostensible

Capitalist Partner – one who furnishes capital. (He is not exempted from the losses. He can engage
in other business provided there is NO COMPETITION between the partnership and his business.)
Art. 1808.

Industrialist Partner – one who furnishes industry or labor. (He is exempted from the losses as
between the partners. He CANNOT engage in any other business without the express consent of
the other partners; otherwise:
1. He can be EXCLUDED from the firm (PLUS DAMAGES); or
2. The benefits he obtains from the other businesses can be availed by other partners (PLUS
DAMAGES). Art. 1789.

Note: The rule remains whether or not there is COMPETITION. Reason: All his industry is supposed
to be given only to the partnership.

Art. 1790. Unless there is a stipulation to the contrary, the partners shall contribute
equal shares to the capital of the partnership. (n)

AMOUNT OF CONTRIBUTION
a. It is allowable to contribute unequal shares, if there is a stipulation to this effect.
b. In the absence of proof, the shares are presumed equal. (Partners have equal rights and
obligations).

Ø The rule is applied to capitalist partners. This rule applies to industrial partners when they
are also capitalist partners.

Art. 1791. If there is no agreement to the contrary, in case of an imminent loss of the
business of the partnership, any partner who refuses to contribute an additional share
to the capital, except an industrial partner, to save the venture, shall he obliged to sell
his interest to the other partners. (n)

OBLIGATION OF THE CAPITALIST PARTNER TO

CONTRIBUTE ADDITIONAL CAPITAL

General Rule: A capitalist partner is not bound to contribute to the partnership more than
what he agreed to contribute.
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 Exception: If there is imminent loss to the business of the partnership and additional share
is necessary to save the venture.

When a Capitalist Partner is Obliged to Sell

His Interest to the Other Partners

1. If there is imminent loss to the business of the partnership; and

2. He refuses (deliberately and not because of his financial inability to do so) to contribute
an additional share to the capital; and
3. There is no agreement to the contrary.

Reason for the Sanction: The refusal of the partner to contribute his additional share reflects his
lack of interest in the continuance of the partnership.

Art. 1792. If a partner authorized to manage collects a demandable sum which was
owed to him in his own name, from a person who owed the partnership another sum
also demandable, the sum thus collected shall be applied to the two credits in
proportion to their amounts, even though he may have given a receipt for his own
credit only; but should he have given it for the account of the partnership credit, the
amount shall be fully applied to the latter.

The provisions of this article are understood to be without prejudice to the right
granted to the other debtor by Article 1252, but only if the personal credit of the
partner should be more onerous to him. (1684)

For this Article to apply the following requisites must concur:

1. The existence of at least 2 debts (one where the firm is the creditor; the other where the partner
is the creditor.)
2. Both sums are demandable.
3. The collecting partner is a managing partner.

Example:
P, a managing partner, is X’s creditor to the amount of P1M, already demandable. X also
owes the partnership P1M, also demandable. P collects P1M from X.

a. If P gives a receipt for the firm, it is the firm’s credit that has been collected.
b. If P gives a receipt for his own credit only, P500,000 will be given to him, the other P500,000 to
the firm.
Reason: To prevent furtherance of the partner’s personal interest to the detriment of the
firm.

When Article Does Not Apply

This article does not apply if the partner collecting is not a managing partner. Here there is
no suspicion that the partner is in BAD FAITH.

Art. 1793. A partner who has received, in whole or in part, his share of a partnership
credit, when the other partners have not collected theirs, shall be obliged, if the debtor
should thereafter become insolvent, to bring to the partnership capital what he
received even though he may have given receipt for his share only. (1685a)

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ART. 1792 AND ART. 1793 COMPARED

ARTICLE 1792 ARTICLE 1793

a. Two debts a. One debt only (firm credit)

b. Applies to managing partner only b. applies to any partner

Example:

X owes a partnership firm P1.8M, A, a partner was given his share of

P600,000.00 ahead of B and C, the two other partners. When B and C were
collecting from D, the latter was already insolvent. Must A share the P600,000.00
with the other partners?

Answer: Yes, even if A had given receipt for his share only.
Reason for the law: Equity demands proportionate share in the benefits and losses.

Art. 1794. Every partner is responsible to the partnership for damages suffered by it
through his fault, and he cannot compensate them with the profits and benefits which
he may have earned for the partnership by his industry. However, the courts may
equitably lessen this responsibility if through the partner's extraordinary efforts in
other activities of the partnership, unusual profits have been realized. (1686a)

WHY GENERAL DAMAGES CANNOT BE OFFSET BY BENEFITS

a. Firstly, the partner has the DUTY to secure benefits for the partnership.
Ø The profits which he may have earned pertain as a matter of right to the
partnership.
b. Secondly, he has the DUTY also not to be at fault.

Since both are duties, compensation should not take place, the partner being the debtor in
both instances. Compensation requires 2 persons who are reciprocally debtors and creditors of each
other.

What is Compensation? It is the extinguishment to the concurrent amount of the

debts of two persons who, in their own right, are debtors and creditors of each
other.

Exception: If unusual profits are realized through the extraordinary efforts of the partner at fault,
the courts are authorized by law to equitably mitigate or lessen his liability for damages.

Art. 1795. The risk of specific and determinate things, which are not fungible,
contributed to the partnership so that only their use and fruits may be for the common
benefit, shall be borne by the partner who owns them.

If the things contribute are fungible, or cannot be kept without deteriorating, or if they
were contributed to be sold, the risk shall be borne by the partnership. In the absence
of stipulation, the risk of the things brought and appraised in the inventory, shall also
be borne by the partnership, and in such case the claim shall be limited to the value at
which they were appraised. (1687)
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RISK OF LOSS OF THINGS CONTRIBUTED

1. SPECIFIC AND DETERMINATE THINGS WHICH ARE NOT FUNGIBLE WHERE ONLY THE USE IS
CONTRIBUTED

Ø The risk is borne by the partner because he remains the owner of things (for
example: a car).

2. SPECIFIC AND DETERMINATE THINGS THE OWNERSHIP OF WHICH IS TRANSFERRED TO THE

PARTNERSHIP

Ø The risk is for the account of the partnership, being the owner.

3. FUNGIBLE THINGS OR THINGS WHICH CANNOT BE KEPT WITHOUT DETERIORATING EVEN IF

THEY ARE CONTRIBUTED ONLY FOR THE USE OF THE PARTNERSHIP

Ø Partnership or firm bears the loss for evidently, ownership was being transferred;
otherwise use is impossible without the things being consumed or impaired. (for example: oil, wine,
rice, etc.)

4. THINGS CONTRIBUTED TO BE SOLD

Ø Firm bears the loss for evidently; firm was intended to be the owner; otherwise a
sale could not be made.

5. THINGS BROUGHT AND APPRAISED IN THE INVENTORY

Ø The partnership bears the risk of loss because the intention of the parties was to
contribute to the partnership the price of the things contributed with an appraisal of the inventory.
There is thus an implied sale making the partnership owner of the said things.

Art. 1797. The losses and profits shall be distributed in conformity with the agreement.
If only the share of each partner in the profits has been agreed upon, the share of each
in the losses shall be in the same proportion.

In the absence of stipulation, the share of each partner in the profits and losses shall be
in proportion to what he may have contributed, but the industrial partner shall not be
liable for the losses. As for the profits, the industrial partner shall receive such share as
may be just and equitable under the circumstances. If besides his services he has
contributed capital, he shall also receive a share in the profits in proportion to his
capital. (1689a)

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HOW PROFITS ARE DISTRIBUTED

1. According to Agreement

Example: A (managing partner), B, and C formed a partnership, whereby each of them contributed
A-P30,000, B-P20,000 and C-P10,000. They agreed that should the partnership realize profits, the
same shall be distributed in the following proportions: A -50%, B-25%, C-25%

IF THE PROFIT IS P90,000.00

AGREED SHARING SHARE IN THE PROFITS

OF PROFITS
A 50% P45,000.00
B 25% P22,500.00
C 25% P22,500.00

2. If there is no Agreement, According to their Contribution

IF THE PROFIT IS P90,000.00

CONTRIBUTION PROPORTION TO SHARE IN THE

CONTRIBUTION PROFITS
A P30,000.00 3/6 P45,000.00
B P20,000.00 2/6 P29,700.00
C P10,000.00 1/6 P15,300.00
P60,000.00 P90,000.00

HOW LOSSES ARE DISTRIBUTED

1. According to Agreement

IF THE LOSS IS P90,000.00

AGREED SHARING SHARE IN THE LOSSES

OF LOSSES
A 60% P54,000.00
B 20% P18,000.00
C 20% P18,000.00

2. If there is no Agreement, According to Agreement as to Profits

AGREED SHARING SHARE IN THE LOSSES

OF PROFITS
A 50% P45,000.00
B 25% P22,500.00
C 25% P22,500.00

15
3. If None, According to their Contribution

CONTRIBUTION PROPORTION TO SHARE IN THE

CONTRIBUTION LOSSES
A P30,000.00 3/6 P45,000.00
B P20,000.00 2/6 P29,700.00
C P10,000.00 1/6 P15,300.00
P60,000.00 P90,000.00

INDUSTRIAL PARTNER’S PROFITS

Ø A just and equitable share (under the old law, a share equivalent to that of the
capitalist partner with the least capital).

INDUSTRIAL PARTNER’S LOSSES

Ø Industrial Partners are not liable for losses but the same shall be borne by the
capitalist partners. However, if he is also a capitalist partner then he shall share in the losses.

Art. 1798. If the partners have agreed to entrust to a third person the designation of
the share of each one in the profits and losses, such designation may be impugned only
when it is manifestly inequitable. In no case may a partner who has begun to execute
the decision of the third person, or who has not impugned the same within a period of
three months from the time he had knowledge thereof, complain of such decision.

The designation of losses and profits cannot be intrusted to one of the partners. (1690)

DESIGNATION BY THIRD PERSON OF SHARES IN PROFITS AND LOSSES

1. The Article speaks of a “third person,” not a partner.

Reason: To avoid PARTIALITY.

2. When designation by 3rd party may be impugned (questioned):

WHEN IT IS MANIFESTLY INEQUITABLE.

3. When designation by 3rd party cannot be impugned (questioned) even if manifestly inequitable:

a. If the aggrieved partner has begun to execute the decision;

b. If he had not impugned (questioned) the same within a period of THREE MONTHS from the time
he had knowledge thereof.

REASON: The party is guilty of estoppel or to have given his consent or ratification to the
designation.

IMPORTANT: The designation of losses and profits cannot be intrusted to one of the partners.

16
Art. 1799. A stipulation which excludes one or more partners from any share in the
profits or losses is void. (1691)

General Rule: A stipulation excluding one or more of the partners from any share in the profits or
losses is void. REASON: The partnership is for COMMON BENEFIT

Exception: In case of the INDUSTRIAL PARTNER whom the law itself excuses from losses (Art.
1797, par. 2)

Note: The limitation does not mean that the partners cannot stipulate for unequal shares in the
profits and losses even if their respective contributions are equal.

Art. 1800. The partner who has been appointed manager in the articles of partnership
may execute all acts of administration despite the opposition of his partners, unless he
should act in bad faith; and his power is irrevocable without just or lawful cause. The
vote of the partners representing the controlling interest shall be necessary for such
revocation of power.

A power granted after the partnership has been constituted may be revoked at any
time. (1692a)

HOW A MANAGING PARTNER IS APPOINTED

A. Appointment as manager in the Articles of Partnership

B. Appointment as manager after constitution of the partnership

APPOINTMENT AS MANAGER IN THE ARTICLES OF PARTNERSHIP

Ø He may execute all acts of administration (not those of strict ownership as

enumerated in Article 1818, par. 3)

ARTICLE 1818, PAR. 3

Except when authorized by the other partners or unless they have abandoned the
business, one or more but less than all the partners have no authority to:
(1) Assign the partnership property in trust for creditors or on the assignee's promise
to pay the debts of the partnership;
(2) Dispose of the good-will of the business;
(3) Do any other act which would make it impossible to carry on the ordinary
business of a partnership;
(4) Confess a judgment;
(5) Enter into a compromise concerning a partnership claim or liability;
(6) Submit a partnership claim or liability to arbitration;
(7) Renounce a claim of the partnership.

Ø His power is revocable only upon JUST AND LAWFUL CAUSE and upon vote of the
partners representing the controlling interest (controlling financial interest).

17
APPOINTMENT AS MANAGER AFTER CONSTITUTION OF THE PARTNERSHIP

Ø He may perform all acts of administration.

Ø His power may be revoked anytime, WITH OR WITHOUT just cause.
Reason: Such appointment is a mere delegation of power, revocable anytime.

Art. 1801. If two or more partners have been intrusted with the management of the
partnership without specification of their respective duties, or without a stipulation
that one of them shall not act without the consent of all the others, each one may
separately execute all acts of administration, but if any of them should oppose the acts
of the others, the decision of the majority shall prevail. In case of a tie, the matter shall
be decided by the partners owning the controlling interest. (1693a)

Article 1801 applies when:

a. two or more partners are managers;
b. there is NO specification of respective duties;
c. there is no stipulation requiring unanimity.

Specific Rules
a. Each may separately execute all acts of administration (unlimited powers to administer)
b. EXCEPT if any of the managers should oppose – the decision of the MAJORITY (per head) of the
managers shall prevail.

Suppose there is a TIE, the partners owing the CONTROLLING INTEREST prevail.

Example:
The controlling interests of the partners in a partnership are as follows:
A – 5% D – 15%
B – 10% E – 20%
C – 15% F – 35%

Situation No. 1: A, B, and E were appointed as managing partners.

A contract was entered into by A, with the conformity of B. E was against it.
The contract is valid because decision of the majority of the managers prevailed.

Situation No. 2: A, B, C and E were appointed as managing partners.

A contract was entered into by A, with the conformity of B. C and E was against it, so there
is a TIE.

When put to a vote, A, B and D (Total- 30%) were for the contract and C,E,F (Total – 70%)
were against it. The contract is not valid.

18
Art. 1802. In case it should have been stipulated that none of the managing partners
shall act without the consent of the others, the concurrence of all shall be necessary for
the validity of the acts, and the absence or disability of any one of them cannot be
alleged, unless there is imminent danger of grave or irreparable injury to the
partnership. (1694)

WHEN UNANIMITY IS REQUIRED

Ø This article applies when there is a stipulation that the managers must act
UNANIMOUSLY otherwise Article 1801 shall apply.

Suppose one of the managers is ABSENT or INCAPACITATED, is unanimity still required?

YES, for absence or incapacity is no excuse.

Exception: When there is imminent danger of grave or irreparable injury to the partnership.

Art. 1803. When the manner of management has not been agreed upon, the following
rules shall be observed:

(1) All the partners shall be considered agents and whatever any one of them may do
alone shall bind the partnership, without prejudice to the provisions of Article 1801.
(2) None of the partners may, without the consent of the others, make any important
alteration in the immovable property of the partnership, even if it may be useful to the
partnership. But if the refusal of consent by the other partners is manifestly prejudicial
to the interest of the partnership, the court's intervention may be sought. (1695a)

RULE WHEN MANNER OF MANAGEMENT

HAS NOT BEEN AGREED UPON.

Ø All partners are considered managers. Each partner is also an agent of the partnership. The
act of any one of them may bind the partnership subject however to the provisions of Art.
1801.
Ø Unanimous consent is required for any important alteration in immovable property of
partnership.

Art. 1804. Every partner may associate another person with him in his share, but the
associate shall not be admitted into the partnership without the consent of all the other
partners, even if the partner having an associate should be a manager. (1696)

SUB-PARTNERSHIP

Ø The association formed between a member of a partnership and a third person for a
division of the profits coming to him from the partnership. The associate is called a SUB-PARTNER.
Ø Sub-partnership agreements do not in any way affect the composition, existence, or
operations of the firm.
Ø For a partner to have an associate in his share, consent of the other partners is not
required.
Ø For the associate to become a partner, ALL partners must consent (whether the
partner having the associate is a manager or not.)
- Partnership is based on mutual trust and confidence.
- Change in membership is a modification or novation of the contract.
19
Art. 1805. The partnership books shall be kept, subject to any agreement between the
partners, at the principal place of business of the partnership, and every partner shall
at any reasonable hour have access to and may inspect and copy any of them. (n)

DUTY TO KEEP PARTNERSHIP BOOKS

Ø The duty to keep true and correct books showing the firm’s accounts rests on the
MANAGING or ACTIVE PARTNER or the PARTICULAR PARTNER GIVEN RECORD-KEEPING DUTIES.

RIGHTS WITH RESPECT TO PARTNERSHIP BOOKS

Ø Each partner has a right to FREE ACCESS to them and INSPECT and COPY any of
them at any reasonable time. This right is granted to enable the partners to have true and full
information of all things affecting the partnership.

Ø Any Reasonable Hour means Reasonable Hours on Business Days.

Art. 1806. Partners shall render on demand true and full information of all things
affecting the partnership to any partner or the legal representative of any deceased
partner or of any partner under legal disability. (n)

DUTY TO RENDER INFORMATION

Reason for the Law: There must be no concealment between partners in all matters
affecting the firm’s interest. This is required by good faith.

Note: Even without demand, honesty demands the giving of vital information, the refraining from
all kinds of concealment.

Who Can Demand Information:

1. Any Partner
2. Legal representative of a dead partner
3. Legal representative under legal disability

Art. 1807. Every partner must account to the partnership for any benefit, and hold as
trustee for it any profits derived by him without the consent of the other partners from
any transaction connected with the formation, conduct, or liquidation of the
partnership or from any use by him of its property. (n)

DUTY TO ACCOUNT

Reason for the Law: The fiduciary relationship between partners are relationships of trust
and confidence which must not be abused or used to personal advantage.

DUTY TO ACCOUNT FOR SECRET AND SIMILAR PROFITS

A partner who makes a secret profit out of the operation of the partnership or makes a
secret commission from a third person dealing with the partnership, is duty bound to
account such profit or commission with his co-partners.
20
Examples:

(1) A partner with partnership funds, and unknown to the others, purchased a house in his
own name. Who owns the house?

(2) A partner in the real estate business, without the knowledge of the other partners,
bought a parcel of land in his daughter’s name and subsequently sold the same at a profit. Should
the other partners share in the profits?

Art. 1808. The capitalist partners cannot engage for their own account in any operation
which is of the kind of business in which the partnership is engaged, unless there is a
stipulation to the contrary.

Any capitalist partner violating this prohibition shall bring to the common funds any
profits accruing to him from his transactions, and shall personally bear all the losses.
(n)

General Rule: Capitalist partners can engage in another business aside from the partnership.
Exception: If the business is similar to the business of the partnership.
Exception to the exception: Stipulation to the contrary.

WHEN CAN CAPITALIST PARTNER ENGAGE IN BUSINESS

1. When it is expressly stipulated that the capitalist partner can engage in business for himself.
2. When the other partners allow him to do so.
3. When the other partners IMPLIEDLY allow him to do so.
(Example: When ALL of them are violating this article.)
4. When the company ceases to be engaged in business.
Reason: There can be no possibility of unfair competition.

Effect of Violation:
1. The violator shall bring to the partnership all the profits illegally obtained.
2. He shall personally bear the losses.
3. He can be ousted from the firm.

Art. 1809. Any partner shall have the right to a formal account as to partnership affairs:

(1) If he is wrongfully excluded from the partnership business or possession of its

property by his co-partners;
(2) If the right exists under the terms of any agreement;
(3) As provided by article 1807;
(4) Whenever other circumstances render it just and reasonable. (n)

RIGHT OF PARTNER TO FORMAL ACCOUNT

Gen. Rule: During the existence of the partnership, a partner is not entitled to a formal
accounting of partnership affairs. A formal accounting is demandable only after dissolution
of the partnership.

21
 A formal accounting is a necessary incident to the dissolution of a partnership.

Reason: There is access to books under Article 1805 as well as the duty to render
information under Article 1806.

B. PROPERTY RIGHTS OF A PARTNER

Art. 1810. The property rights of a partner are:

(1) His rights in specific partnership property;
(2) His interest in the partnership; and
(3) His right to participate in the management. (n)

PRINCIPAL RIGHTS
1. His rights in specific partnership property (Art. 1811)
2. His interest in the partnership (Art. 1812)
3. His right to participate in the management (Art. 1803)

RELATED RIGHTS
1. Right to reimbursement for amounts advanced to the partnership and to indemnification for risks
in consequence of management (Art. 1796)
2. Right to associate with another person in his share (Art. 1804)
3. Right to access and inspection of partnership books (Art. 1805)
4. Right to true and full information of all things affecting the partnership (Art. 1806)
5. Right to a formal account of partnership affairs under certain circumstances (Art. 1809)
6. Right to have the partnership dissolved under certain conditions (Art. 1830-1831)

PARTNERSHIP PROPERTY PARTNERSHIP CAPITAL

Its value varies from day to day. It remains unchanged as the amount fixed by
agreement of the partners.

Includes not only the original capital It represents the aggregate of the individual
contributions of the partners, but all property contributions made by the partners.
subsequently acquired on account of the
partnership or with partnership funds.

Art. 1811. A partner is co-owner with his partners of specific partnership property.

The incidents of this co-ownership are such that:

(1) A partner, subject to the provisions of this Title and to any agreement between the
partners, has an equal right with his partners to possess specific partnership property
for partnership purposes; but he has no right to possess such property for any other
purpose without the consent of his partners;

(2) A partner's right in specific partnership property is not assignable except in

connection with the assignment of rights of all the partners in the same property;

22
(3) A partner's right in specific partnership property is not subject to attachment or
execution, except on a claim against the partnership. When partnership property is
attached for a partnership debt the partners, or any of them, or the representatives of a
deceased partner, cannot claim any right under the homestead or exemption laws;

(4) A partner's right in specific partnership property is not subject to legal support
under Article 291. (n)

Example of “SPECIFIC PARTNERSHIP PROPERTY”

A and B each contributed a car for the partnership.

The two cars are specific partnership property.

RIGHTS OF PARTNER IN SPECIFIC PARTNERSHIP PROPERTY

1. In general, he has an equal right with his partners to possess the car but only for partnership
purposes and not for other purposes.

2. A partner cannot assign his right in the car (except if all other partners assign their rights in the
same property)

Ø If the rule is violated, the assignment is VOID.

Ø Same rule applies if the property is mortgaged, the assignee or mortgagee does not
become a co-owner of the specific partnership property with the other partners.

3. His right in the car is not subject to ATTACHMENT or EXECUTION (except on a claim against
partnership)

Ø The car is not considered the separate or individual property of A and B, it belongs to
the partnership considered as a juridical person.
Ø If there is a partnership debt, the specific property can be attached.

Art. 1812. A partner's interest in the partnership is his share of the profits and surplus.
(n)

PROFIT – Excess of income over expenses

SURPLUS – Assets of the partnership after partnership debts and liabilities are paid and
settled and the rights of the partners among themselves are adjusted.

Art. 1813. A conveyance by a partner of his whole interest in the partnership does not
of itself dissolve the partnership, or, as against the other partners in the absence of
agreement, entitle the assignee, during the continuance of the partnership, to interfere
in the management or administration of the partnership business or affairs, or to
require any information or account of partnership transactions, or to inspect the
partnership books; but it merely entitles the assignee to receive in accordance with his
contract the profits to which the assigning partner would otherwise be entitled.
However, in case of fraud in the management of the partnership, the assignee may
avail himself of the usual remedies.

23
In case of a dissolution of the partnership, the assignee is entitled to receive his
assignor's interest and may require an account from the date only of the last account
agreed to by all the partners. (n)

EFFECTS OF CONVEYANCE BY PARTNER OF HIS INTEREST IN THE PARTNERSHIP

a. If a partner CONVEYS (meaning assigns, sells, donates) his WHOLE interest in the partnership,
either of two things may happen:
1. Partnership may still remain; or
2. Partnership may be dissolved.
b. The assignee (conveyee) does not necessarily become a partner.
REASON: MUTUAL TRUST AND CONFIDENCE/DELECTUS PERSONAE
c. The assignee cannot even interfere in the management or administration of the partnership
business or affairs.
d. The assignee cannot also demand:1)information, 2) Accounting, 3) Inspection of partnership
books.

RIGHTS OF THE ASSIGNEE:

a. To get whatever profits the assignor-partner would have obtained.
b. To avail himself of the usual remedies in case of fraud in the management.

C. OBLIGATIONS OF THE PARTNERS WITH REGARD TO THIRD PERSONS

Art. 1815. Every partnership shall operate under a firm name, which may or may not
include the name of one or more of the partners.

Those who, not being members of the partnership, include their names in the
firm name, shall be subject to the liability of a partner. (n)

1. This is the name of the juridical entity.

2. The partnership may adopt any name it wishes as long as it is not IDENTICAL with or
DECEPTIVELY SIMILAR to a name which was previously adopted by any other entity.
3. USE OF NAME OF DECEASED PERSONS – The continued use of the name of a deceased partner
is permissible provided that the firm indicates in all its communications that said partner is
deceased. (See: Rule 302, Code of Professional Responsibilites)
4. STRANGERS, who not being partners, include their names in the firm name DO NOT ACQUIRE
the rights of a partner BUT they shall be SUBJECT TO THE LIABILITY of a partner insofar as third
persons without notice are concerned.

24
Art. 1816. All partners, including industrial ones, shall be liable pro rata with all their
property and after all the partnership assets have been exhausted, for the contracts
which may be entered into in the name and for the account of the partnership, under its
signature and by a person authorized to act for the partnership. However, any partner
may enter into a separate obligation to perform a partnership contract. (n)

Liability and Losses Distinguished

Liability – refers to responsibility towards third persons

Loss – refers to responsibility as among partners

Art. 1816 lays down the rule that the partners including the industrial partner, are liable to creditors
of the partnership for the obligations contracted in the name and for the account of the
partnership.

Ø The debts of the partnership are also the debts of each individual member.
Ø PRO-RATA here means equally not its literal meaning, in proportion, because the pro-
rating is based on the number of partners.

EXAMPLE:

Q: A, B, and C, capitalist partners, each contributed P100,000; and D, the industrial partner
contributed his services. Suppose X, is the creditor of the firm in the amount of
P900,000.00, what should X do?

A: X must sue the firm and all partners, including D. After getting the P300,000 (capital
assets of the firm) he can still recover P600,000.00 from the 4 partners pro-rata. Hence, he
can recover P150,000.00 each from A,B,C and D. D can later on recover P150,000.00 from
A,B, and C at the rate of P50,000.00 each.

D is exempted from the losses but not from liabilities. (Industrial partners are exempted
from losses)

EFFECT OF STIPULATION EXEMPTING LIABILITY TO THIRD PERSONS

QUESTION: Suppose it is stipulated that all industrial partners and some of the capitalist partners
would be exempted from liability insofar as third persons are concerned, would the stipulation be
valid?

Art. 1817. Any stipulation against the liability laid down in the preceding article shall be
void, except as among the partners. (n)

Compare with

Art. 1799. A stipulation which excludes one or more partners from any share in the
profits or losses is void.

Q: As among partners, is it permissible to stipulate that a capitalist partner be exempted from

liability?

25
A: Yes. However, under Art. 1799, A stipulation which excludes one or more partners (capitalist)
from any share in the profits or losses is VOID.

How do you reconcile these 2 articles?

It is permissible to stipulate among them that a capitalist partner will be exempted from
liability in excess of the original capital contributed; but will not be exempted insofar as his capital
is concerned.

Example:

Q: A, B, and C, capitalist partners, each contributed P100,000.00. The firm’s indebtedness

amounts to P900,000.00. It was stipulated that A would be exempted from liability. Assuming that
the capital of P300,000.00 is still in the firm. What would be the rights of the firm’s creditors?

A: To get the P300,000.00 and to get still P200,000.00 each from the 3 partners (a total of
P900,000.00). A will thus be liable to the third persons for P200,000.00.

How much, if any can A recover from B and C? He can recover P100,000.oo each from B
and C for as to liability as among them, he is exempted (Art. 1817) but he cannot recover his
original capital of P100,000.00 (Art. 1799).

Art. 1818. Every partner is an agent of the partnership for the purpose of its business,
and the act of every partner, including the execution in the partnership name of any
instrument, for apparently carrying on in the usual way the business of the partnership
of which he is a member binds the partnership, unless the partner so acting has in fact
no authority to act for the partnership in the particular matter, and the person with
whom he is dealing has knowledge of the fact that he has no such authority.

An act of a partner which is not apparently for the carrying on of business of the
partnership in the usual way does not bind the partnership unless authorized by the
other partners.

Except when authorized by the other partners or unless they have abandoned the
business, one or more but less than all the partners have no authority to:
(1) Assign the partnership property in trust for creditors or on the assignee's promise
to pay the debts of the partnership;
(2) Dispose of the good-will of the business;
(3) Do any other act which would make it impossible to carry on the ordinary business
of a partnership;
(4) Confess a judgment;
(5) Enter into a compromise concerning a partnership claim or liability;
(6) Submit a partnership claim or liability to arbitration;
(7) Renounce a claim of the partnership.

No act of a partner in contravention of a restriction on authority shall bind the

partnership to persons having knowledge of the restriction.

WHEN A PARTNER CAN BIND OR CANNOT BIND THE FIRM

26
This article speaks of:
1. The fact that the partner is an agent;
2. The instances when he can bind the partnership;
3. The instances when cannot bind the partnership (in which case, should he enter into the
contract, he alone, and not the firm nor the partner would be liable).

Partnership is a mutual agency – each partner is acting as a principal on his own behalf, and as an
agent for his co-partners or the firm.

WHEN CAN A PARTNER BIND THE PARTNERSHIP

1. When he is EXPRESSLY or IMPLIEDLY authorized;
2. When he acts in behalf and in the name of the partnership.

INSTANCES OF IMPLIED AUTHORIZATION:

1. When the other partners do not object, although they have knowledge of the act;
2. When the act is for “apparently carrying on the business of the partnership (Binding on the firm
even if the partner was not authorized provided that the 3rd party is in GOOD FAITH).

WHEN WILL THE ACT OF THE PARTNER NOT BIND THE PARTNERSHIP
a. When although for “apparently carrying on in the usual way of the business of the partnership,”
still the partner has in fact NO AUTHORITY, and the 3rd party knows that the partner has no
authority.
b. When the act is NOT for “apparently carrying on in the usual way” of the partnership and the
partner has NO AUTHORITY.

Art. 1819. Where title to real property is in the partnership name, any partner may
convey title to such property by a conveyance executed in the partnership name; but
the partnership may recover such property unless the partner's act binds the
partnership under the provisions of the first paragraph of article 1818, or unless such
property has been conveyed by the grantee or a person claiming through such grantee
to a holder for value without knowledge that the partner, in making the conveyance,
has exceeded his authority.

Where title to real property is in the name of the partnership, a conveyance executed
by a partner, in his own name, passes the equitable interest of the partnership,
provided the act is one within the authority of the partner under the provisions of the
first paragraph of Article 1818.

Where title to real property is in the name of one or more but not all the partners, and
the record does not disclose the right of the partnership, the partners in whose name
the title stands may convey title to such property, but the partnership may recover such
property if the partners' act does not bind the partnership under the provisions of the
first paragraph of Article 1818, unless the purchaser or his assignee, is a holder for
value, without knowledge.

Where the title to real property is in the name of one or more or all the partners, or in a
third person in trust for the partnership, a conveyance executed by a partner in the
partnership name, or in his own name, passes the equitable interest of the partnership,

27
provided the act is one within the authority of the partner under the provisions of the
first paragraph of Article 1818.

Where the title to real property is in the name of all the partners a conveyance
executed by all the partners passes all their rights in such property. (n)

CONVEYANCE OF PARTNERSHIP PROPERTY – sale, donation, assignment, mortgage

1. TITLE IN PARTNERSHIP NAME; CONVEYANCE IN PARTNERSHIP NAME

Ø There can be transfer of title to the grantee.
Ø Partnership may recover the property in the ff instances: a) if conveyance was not in the
usual way of business, or b) if there was no authority even if in the usual way of
business, if grantee has knowledge of lack of authority.

2. TITLE IN PARTNERSHIP NAME; CONVEYANCE IN PARTNER’S NAME

Ø There is only transfer of equitable interest, PROVIDED, the conveyance is in the usual
way of business, or the partner making the conveyance is authorized.
Ø Otherwise, conveyance will not pass any title at all. Partnership can recover the
property.

3. TITLE IN PARTNER’S NAME; CONVEYANCE IN SAME PARTNER’S NAME

Ø If records do not disclose the partnership’s interest, title is conveyed to grantee.
Ø Partnership may recover property when the partner’s act does not bind the partnership,
as when a) conveyance is not in the usual way of business, or b) partner is not
authorized.
Ø But the partnership cannot recover property from innocent purchasers for value.
(purchaser in good faith and for value)

4. TITLE IN THE NAME OF ONE, MORE, OR ALL PARTNERS, OR THIRD PERSON IN TRUST
FOR THE PARTNERSHIP; CONVEYANCE IN PARTNERSHIP NAME OR SUCH PARTNER’S
NAME
Ø Conveyance passes only equitable interest, similar to rules in No. 2.

5. TITLE IN THE NAME OF ALL PARTNERS; CONVEYANCE IN THE NAME OF ALL PARTNERS
Ø Conveyance passes all title, even though sale is not in the usual way of business.

Art. 1821. Notice to any partner of any matter relating to partnership affairs, and the
knowledge of the partner acting in the particular matter, acquired while a partner or
then present to his mind, and the knowledge of any other partner who reasonably could
and should have communicated it to the acting partner, operate as notice to or
knowledge of the partnership, except in the case of fraud on the partnership,
committed by or with the consent of that partner. (n)

GENERAL RULE: Notice to a partner is notice to the partnership.

Art. 1822. Where, by any wrongful act or omission of any partner acting in the ordinary
course of the business of the partnership or with the authority of co-partners, loss or
injury is caused to any person, not being a partner in the partnership, or any penalty is

28
incurred, the partnership is liable therefor to the same extent as the partner so acting
or omitting to act. (n)

Art. 1823. The partnership is bound to make good the loss:

(1) Where one partner acting within the scope of his apparent authority receives
money or property of a third person and misapplies it; and

(2) Where the partnership in the course of its business receives money or
property of a third person and the money or property so received is misapplied
by any partner while it is in the custody of the partnership. (n)

Art. 1824. All partners are liable solidarily with the partnership for everything
chargeable to the partnership under Articles 1822 and 1823. (n)

LIABILITY FOR WRONGFUL ACT OR OMISSION, OR BREACH OF TRUST

Ø Solidary liability
Ø Distinguish from contractual obligations where liability is joint (pro rata)

Art. 1825. When a person, by words spoken or written or by conduct, represents

himself, or consents to another representing him to anyone, as a partner in an existing
partnership or with one or more persons not actual partners, he is liable to any such
persons to whom such representation has been made, who has, on the faith of such
representation, given credit to the actual or apparent partnership, and if he has made
such representation or consented to its being made in a public manner he is liable to
such person, whether the representation has or has not been made or communicated to
such person so giving credit by or with the knowledge of the apparent partner making
the representation or consenting to its being made:

(1) When a partnership liability results, he is liable as though he were an actual

member of the partnership;
(2) When no partnership liability results, he is liable pro rata with the other persons, if
any, so consenting to the contract or representation as to incur liability, otherwise
separately.

When a person has been thus represented to be a partner in an existing partnership, or

with one or more persons not actual partners, he is an agent of the persons consenting
to such representation to bind them to the same extent and in the same manner as
though he were a partner in fact, with respect to persons who rely upon the
representation. When all the members of the existing partnership consent to the
representation, a partnership act or obligation results; but in all other cases it is the
joint act or obligation of the person acting and the persons consenting to the
representation. (n)

PARTNER BY ESTOPPEL/PARTNERSHIP BY ESTOPPEL

WHEN PARTNERSHIP LIABILITY/ PARTNERSHIP BY ESTOPPEL RESULTS:

If all the partners consented to the representation, then the liability of the person who represented
himself to be a partner or who consented to such representation and the actual partners is
considered PARTNERSHIP LIABILITY. THIS IS A CASE OF PARTNERSHIP BY ESTOPPEL.

29
WHEN LIABILITY IS PRO RATA:
When there is no existing partnership and all those represented as partners consented to the
representation, or not all the partners of an existing partnership consented to the representation ,
then the liability of the person who represented himself to be a partner, and all those who made
and consented to such representation is joint or pro rata.

Example:
1. A, B, and C are partners in X & Co. D represented himself as a partner in X & Co. to E who, on
the faith of such representation, extended credit to X & Co. D is a partner by estoppel. He is liable
to E as though he is an actual member of X & Co.

If all the partners A, B, and C consented to the representation, then a partnership liability results.
This is a case of partnership by estoppel. All the partners and D are liable.

2. If only A and B consented to the representation, there is no partnership liability. Only A,

B, and D are partners by estoppel. They are liable PRO RATA to E.

Art. 1826. A person admitted as a partner into an existing partnership is liable for all
the obligations of the partnership arising before his admission as though he had been a
partner when such obligations were incurred, except that this liability shall be satisfied
only out of partnership property, unless there is a stipulation to the contrary. (n)

NEWLY ADMITTED PARTNER:

Ø Liable for existing obligations at the time of his admission to the partnership, but only up
to the extent of his contribution to the partnership. EXCEPT: contrary stipulation.
Ø Liable with his separate property for obligations incurred after his admission.

Art. 1827. The creditors of the partnership shall be preferred to those of each partner
as regards the partnership property. Without prejudice to this right, the private
creditors of each partner may ask the attachment and public sale of the share of the
latter in the partnership assets. (n)

Ø Partnership property is to be paid for partnership debts.

Ø Private creditors of the partner may ask for the attachment of a partner’s interest or
share.

DISSOLUTION AND WINDING UP

OF PARTNERSHIP

Art. 1828. The dissolution of a partnership is the change in the relation of the partners
caused by any partner ceasing to be associated in the carrying on as distinguished from
the winding up of the business. (n)

Art. 1829. On dissolution the partnership is not terminated, but continues until the
winding up of partnership affairs is completed. (n)

30
 DISSOLUTION
The Change in the relation of the partners caused by any partner
ceasing to be associated in the carrying on of the business. It
represents the life of the partnership.

WINDING UP
The process of settling the business or partnership affairs after
dissolution.

TERMINATION
The point in time when all partnership affairs are completely wound
up and finally settled. It signifies the end of the partnership life.

Ø Dissolution is not equivalent to extinguishment. It means that no new partnership business

should be undertaken.
Ø It is not yet the actual cessation of partnership business.
Ø It must also be distinguished from suspension of operations.

Art. 1830. Dissolution is caused:

(1) Without violation of the agreement between the partners:

(a) By the termination of the definite term or particular undertaking specified in
the agreement;
(b) By the express will of any partner, who must act in good faith, when no
definite term or particular is specified;
(c) By the 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) By the expulsion of any partner from the business bona fide in accordance
with such a power conferred by the agreement between the partners;

(2) In contravention of the agreement between the partners, where the circumstances
do not permit a dissolution under any other provision of this article, by the express will
of any partner at any time;

(3) By any event which makes it unlawful for the business of the partnership to be
carried on or for the members to carry it on in partnership;

31
(4) When a specific thing which a partner had promised to contribute to the
partnership, perishes before the delivery; in any case by the loss of the thing, when the
partner who contributed it having reserved the ownership thereof, has only transferred
to the partnership the use or enjoyment of the same; but the partnership shall not be
dissolved by the loss of the thing when it occurs after the partnership has acquired the
ownership thereof;

(5) By the death of any partner;

(6) By the insolvency of any partner or of the partnership;

(7) By the civil interdiction of any partner;

(8) By decree of court under the following article. (1700a and 1701a)

1. Dissolution may be caused WITHOUT VIOLATION of the partnership agreement (as provided for
in No. 1) or IN CONTRAVENTION of the partnership agreement (as provided for in No. 2).

CAUSE NO. 1

a. Termination of the definite term or particular undertaking or definite term

After the expiration of the term or particular undertaking, partnership is automatically

dissolved, if the partners do not extend the term or undertaking. If they do, without making a new
agreement it becomes a PARTNERSHIP AT WILL.

b. Express will of any partner, who must act in good faith, when no definite term or particular is
specified

Each partner has both the power and the right to terminate the partnership relations at any
time. If there is BAD FAITH he is liable for DAMAGES.

c. Expulsion in good faith of a member

If one partner is expelled, the number of partners is decreased, hence, the dissolution.

CAUSE NO. 2

Partnership is based on trust and confidence. Any partner may cause the dissolution of the
partnership at any time with or without justifiable cause at any time without the consent of his co-
partners by expressly withdrawing therefrom even though the partnership as entered into for a
definite term or particular undertaking.

CAUSE NO. 3

A partnership must have a lawful object or purpose. If the business becomes unlawful, it
follows that the firm will not be allowed to carry on.

Art. 1831. On application by or for a partner the court shall decree a dissolution
whenever:

32
(1) A partner has been declared insane in any judicial proceeding or is shown to
be of unsound mind;

(2) A partner becomes in any other way incapable of performing his part of the
partnership contract;

(3) A partner has been guilty of such conduct as tends to affect prejudicially the
carrying on of the business;

(4) A partner willfully or persistently commits a breach of the partnership

agreement, or otherwise so conducts himself in matters relating to the
partnership business that it is not reasonably practicable to carry on the business
in partnership with him;

(5) The business of the partnership can only be carried on at a loss;

(6) Other circumstances render a dissolution equitable.

On the application of the purchaser of a partner's interest under Article 1813 or

1814:

(1) After the termination of the specified term or particular undertaking;

(2) At any time if the partnership was a partnership at will when the interest was
assigned or when the charging order was issued. (n)

GROUNDS FOR DISSOLUTION BY DECREE OF THE COURT (JUDICIAL DISSOLUTION)

A. On application of a partner:
• Insanity – judicially declared insanity or fact of insanity duly proved
• Incapacity
• Misconduct and persistent breach of partnership agreement
• Business can be carried on only at a loss – when it is apparent that the
business is unprofitable with no reasonable prospects of success
B. On application of a purchaser of a partner’s interest

Art. 1832. Except so far as may be necessary to wind up partnership affairs or to

complete transactions begun but not then finished, dissolution terminates all authority
of any partner to act for the partnership:

(1) With respect to the partners:

(a) When the dissolution is not by the act, insolvency or death of a
partner; or
(b) When the dissolution is by such act, insolvency or death of a partner,
in cases where article 1833 so requires;

(2) With respect to persons not partners, as declared in article 1834. (n)

Ø GENERAL RULE: Dissolution terminates the actual authority of a partner to undertake new
business for the partnership.
33
 Ø QUALIFICATIONS: (Note: ACT – retiring/withdrawing)
1) When dissolution is not caused by act, insolvency, or death of a partner (AID), the
authority of a partner to bind the partnership by a new contract is immediately
terminated. If the dissolution is caused by AID, the termination of authority depends
upon whether or not the partner had knowledge or notice of the dissolution. (Art. 1833)
2) With respect to third persons, partnership is generally bound by the new contract
despite dissolution, but innocent partners can always recover from the partner who
acted wrongfully.(Art. 1834)

Art. 1836. Unless otherwise agreed, the partners who have not wrongfully dissolved
the partnership or the legal representative of the last surviving partner, not insolvent,
has the right to wind up the partnership affairs, provided, however, that any partner,
his legal representative or his assignee, upon cause shown, may obtain winding up by
the court. (n)

MANNER OF WINDING UP THE AFFAIRS OF A DISSOLVED PARTNERSHIP

1. Judicially – under the control and direction of the proper court
2. Extra-judicially – by the partners themselves without intervention of the court

Persons authorized to wind up:

1. Partners designated by agreement
2. In the absence of agreement, all of the partners who have not wrongfully dissolved
the partnership
3. The legal representative of the last surviving partner who is not insolvent.

LIQUIDATION AND DISTRIBUTION OF ASSETS OF DISSOLVED PARTNERSHIP

Art. 1839. In settling accounts between the partners after dissolution, the following
rules shall be observed, subject to any agreement to the contrary:
(1) The assets of the partnership are:
(a) The partnership property,
(b) The contributions of the partners necessary for the payment of all the
liabilities specified in No. 2.

(2) The liabilities of the partnership shall rank in order of payment, as follows:
(a) Those owing to creditors other than partners,
(b) Those owing to partners other than for capital and profits,
(c) Those owing to partners in respect of capital,
(d) Those owing to partners in respect of profits.

xxx

(9) Where a partner has become insolvent or his estate is insolvent, the claims
against his separate property shall rank in the following order:
(a) Those owing to separate creditors;
(b) Those owing to partnership creditors;
(c) Those owing to partners by way of contribution. (n)

34
 LIMITED PARTNERSHIP

Art. 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.

CHARACTERISTICS

1. Formed by compliance with statutory requirements laid down in Article 1844.

a. Sign and swear to a certificate or articles of limited partnership.
b. Such certificate shall be filed for record in the Office of the Securities and Exchange
Commission.
Ø A limited partnership is not created by mere voluntary agreement.
Ø Substantial, not strict, compliance of the statutory requirements is necessary.
Ø A partnership transacting business is, prima facie, a general partnership
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 in the management of the business and are not personally liable to the partnership
obligations beyond their capital contributions.
4. The limited partners may ask for the return of their capital contributions.

Art. 1845. The contributions of a limited partner may be cash or property, but not
services.

Ø A partner may be a general partner and a limited partner in the same partnership at the
same time.
Ø An industrial partner may be a general partner but not a limited partner.

Art. 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.

Art. 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.

Ø A limited partner is liable as a general partner for the firm's obligations if he becomes
involved in the management of the firm's business.

35
Art. 1849. After the formation of a lifted partnership, additional limited partners may be
admitted upon filing an amendment to the original certificate in accordance with the
requirements of Article 1865.

Ø Admission of additional limited partners is allowed provided there is proper

amendment in the certificate.

Art. 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.
XXX

Ø A general partner in a limited partnership is much like a partner in an ordinary partnership,

and he may bind the partnership by any act of administration.

Art. 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.

SPECIFIC RIGHTS OF A LIMITED PARTNER:

1. To require that partnership books be kept at the principal place of business of the
partnership.
2. To inspect and copy at a reasonable hour partnership books.
3. To demand true and full information of all things affecting the partnership.
4. To demand a formal account of partnership affairs.
5. To ask for dissolution and winding up by decree of court.
6. To receive a share in the profits or other compensation by way of income.
7. To receive the return of his contribution, provided the partnership assets are in excess of
its liabilities.

Art. 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.

36
 Ø A partner who is both a general and limited partner at the same time has the rights and
powers of a general power. Hence, he is liable with his separate property to third persons.
Ø However, with respect to his contribution, he would have the right of a limited partner
insofar as the other partners are concerned.

Art. 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:

1. All liabilities of the partnership have been paid, or if they have not yet been paid, the assets of
the partnership is sufficient to pay the liabilities.
2. The consent of all the members (general and limited) has been obtained.
3. The certificate is cancelled or so amended as to set forth the withdrawal or reduction of the
contribution.

The return of contribution is a matter of right when:

1. Upon dissolution of the partnership, or;
2. Upon the arrival of the date specified in the certificate for its return;
3. If no time for the return of contribution or for dissolution is fixed in the certificate, after
expiration of 6 months' notice in writing given by such partner demanding return to the other
partners.

A limited partner is required to receive cash as a return for contribution, except:

1. When there is stipulation to the contrary in the certificate, or;
37
2. Where all partners consent to the return other than cash.

Art. 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 1848.

Ø Change in the relations among limited partners does not dissolve the partnership.
Ø Assignee vs Substituted Limited Partner

Substituted limited partner - a person admitted to all the rights of a limited partner who has died or
has assigned his interest in a partnership.

Requisites in order for an assignee to become a substituted limited partner:

1. All members must consent to the assignee becoming a substituted limited partner, or if the right
is granted in the certificate, the partner assigning his interest must give the assignee the right to
become a SLP;
2. The certificate must be amended and then registered with the SEC.

38
 GENERAL PARTNER/PARTNERSHIP LIMITED PARTNER/PARTNERSHIP
A general partner is personally liable for A limited partner's liability extends only
partnership obligations. to his capital contribution.
When manner of management has not A limited partner has no share in the
been agreed upon, all of the general management of the limited partnership.
partners have an equal right in the
management of the business.
A general partner may contribute money, A limited partner must contribute cash or
property, or industry. property but not services. (Hence, an
industrial partner may be a general
partner but not a limited partner.)
A general partner's interest in the A limited partner's interest is freely
partnership cannot be assigned as to assignable and the assignee acquired the
make the assignee a new partner rights of the limited partner.
without the consent of the other
partners.
The name of the general partner may As a general rule, the name of the
appear in the firm name. limited partner must not appear in the
firm name.
A general partner who is a capitalist A limited partner may engage in any
partner cannot engage in a business business for himself, for he is merely a
similar to the business of the contributor to the partnership.
partnership; or if he is an industrial
partner, he cannot engage in any
business.
The retirement, death, insolvency, The retirement, death, insolvency,
insanity, or insolvency of a general insanity, or insolvency of a limited
partner dissolves the partnership. partner does not dissolve the partnership
A general partnership may be constituted A limited partnership is created by the
in any form by contract or conduct of the members after compliance with statutory
parties. requirements; and its firm name must
always be followed by the word
"Limited".

39
 PART II. PRIVATE CORPORATIONS
(CORPORATION CODE OF THE PHILIPPINES)
(Batas Pambansa Blg. 68)

WHAT IS A CORPORATION?
Sec. 2. Corporation defined. - A corporation is an artificial being created by
operation of law, having the right of succession and the powers, attributes and
properties expressly authorized by law or incident to its existence.

WHAT ARE THE ATTRIBUTES OF A CORPORATION?

1. It is an artificial being with separate and distinct personality;
2. It is created by operation of law;
3. It has the right of succession;
4. It has powers and attributes conferred by law or incident to its existence.

A. CORPORATION AS AN ARTIFICIAL PERSONALITY

Ø a corporation is a legal or juridical person with a personality separate and apart from its
individual members or stockholders.

CONSEQUENCE OF SEPARATE PERSONALITY:

Ø Property – It is entitled to own properties in its own name and its properties are not the
properties of its stockholders, directors and officers and vice versa.

Ø Obligations – It can incur obligations and its obligations are not the obligations of its
stockholders, directors and officers at the same time obligations of the stockholders,
directors and officers are not obligations of the corporation.

Ø Rights – Rights belonging to the corporation cannot be invoked by the stockholders,

directors and officers.

Example: Tax exemption in favor of the corporation cannot be likewise be used by its
stockholders.

Ø Nationality – Generally, the corporation is considered a national of the country where it was
incorporated.

Ø Death of Stockholders – A corporation remains unchanged and unaffected in its identity by

changes in its individual membership. It has a continuous existence since it would even exist
even if all stockholders die.

DOCTRINE OF PIERCING THE VEIL OF CORPORATE ENTITY

Ø Also known as doctrine of disregarding fiction of corporate entity
Ø When the veil of corporate fiction is used as a shield to perpetuate fraud, to defeat public
convenience, justify wrong or defend crime, this fiction shall be disregarded and the
individuals composing it will be treated identically. IN OTHER WORDS, THE LAW WILL NOT
RECOGNIZE SEPARATE CORPORATE EXISTENCE.
Ø It is a theory introduced for the purpose of convenience and to serve the ends of justice.

Ø EFFECT: Creditors of financially troubled corporations benefit when they succeed in piercing
the corporate veil for they can go after the assets of the individual stockholders.
40
INSTANCES WHERE FICTION IS DISREGARDED:
1. Where a corporation functions for the benefit of a single person who has complete control over
the funds and the said person is the sole owner thereof.
2. Where a domestic or Philippine corporation is controlled by aliens.
3. Where a corporation is organized by an insolvent debtor to defraud his creditors and he transfers
his properties to it in furtherance of such fraudulent purpose.
4. Where a corporation is formed by a person for the purpose of evading his individual contract.

B. CORPORATION CREATED BY OPERATION OF LAW

Ø It means that corporations cannot come into existence by mere agreement of parties as in
the case of business partnerships. It must be created under the provisions of the
CORPORATION CODE.
Ø Filing of the Articles of Incorporation with the Securities and Exchange Commission.
Ø The life of the Corporation starts from the issuance of the CERTIFICATE OF
INCORPORATION (Birthday of the Corporation)

C. RIGHT OF SUCCESSION
Ø Its existence continues even if the stockholder dies, withdraws, becomes insolvent or
incapacitated.
Ø A corporation is not IMMORTAL. A corporation has a life of 50 years unless sooner dissolved
or unless extended.

D. POWERS, ATTRIBUTES, AND PROPERTIES OF A CORPORATION

Ø Being a creation of law, a corporation may exercise only such powers as are granted by law.
An express grant of power is not necessary. All powers implied from that expressly granted
by law which are incidental or essential to the corporation’s existence may be exercised.
Ø Powers of corporation may be express or implied.

CORPORATION VS. PARTNERSHIP

PARTNERSHIP CORPORATION
MANNER OF CREATION
Created by mere agreement of parties Created by law of operation of law
NUMBER OF INCORPORATORS
May be organized by only two persons Requires at least five (5) incorporators
COMMENCEMENT OF JURIDICAL PERSONALITY
Upon execution of the contract of partnership Upon the issuance of the certificate of
incorporation
MANAGEMENT
When management is not agreed upon, every The power to do business and manage its
partner is an agent of the partnership affairs is vested in the board of directors or
trustees.
TERM OF EXISTENCE
It may be established for any period of time A corporation may not be formed for a term in
stipulated by the partners. excess of 50 years extendible to not more
than 50 years in any one instance.
DISSOLUTION
It may be dissolved at any time by the will of A corporation can only be dissolved with the
any or all of the partners. consent of the state.
41
 LAW WHICH GOVERNS
Civil Code of the Philippines Corporation Code of the Philippines

Sec. 3. Classes of corporations. - Corporations formed or organized under this Code

may be stock or non-stock corporations. Corporations which have capital stock divided
into shares and are authorized to distribute to the holders of such shares dividends or
allotments of the surplus profits on the basis of the shares held are stock corporations.
All other corporations are non-stock corporations.

CLASSES OF CORPORATION:

STOCK CORPORATION – A corporation in which capital stock is divided into shares and is
authorized to distribute to the holders of such shares dividends or allotments of the surplus profits
on the basis of the shares held.

NON-STOCK CORPORATION – A corporation which does not issue stocks and does not distribute
dividends to their members.

DOMESTIC CORPORATION – corporation formed, organized or existing under Philippine laws.

FOREIGN CORPORATION – those formed, organized or existing under any law other than those of
the Philippines whose law allow Filipino citizens or corporations to do business in their country.

CLOSE CORPORATION – one which is limited to selected persons or members of a family.

DE JURE CORPORATION – a corporation existing in fact or in law

DE FACTO CORPORATION – a corporation existing in fact but not in law.

Sec. 5. Corporators and incorporators, stockholders and members. - Corporators are

those who compose a corporation, whether as stockholders or as members.
Incorporators are those stockholders or members mentioned in the articles of
incorporation as originally forming and composing the corporation and who are
signatories thereof.

Corporators in a stock corporation are called stockholders or shareholders. Corporators

in a non-stock corporation are called members.

COMPONENTS OF A CORPORATION:

1. INCORPORATORS – the persons originally forming and composing the corporation as

mentioned in the articles of incorporation.
Ø Requirements:
a. They must be natural persons;
b. At least five (5) but not more than fifteen (15);
c. They must be of legal age;
d. Majority must be residents of the Philippines; and
e. Each must own or subscribe to at least one share.

42
 2. CORPORATORS – all stockholders and members of a corporation including the incorporators
who are still stockholders.
3. STOCKHOLDERS AND MEMBERS – stockholders are persons who own shares in a stock
corporation while members are those who compose the non-stock corporation.
4. DIRECTORS AND TRUSTEES – the Board of Directors are the governing body in a stock
corporation while the Board of Trustees is the governing body in a non-stock corporation. They
exercise the powers of a corporation.
5. CORPORATE OFFICERS – they are the officers who are identified as such in the corporation
code, the articles of incorporation or the by-laws of the corporation.
6. PROMOTER – a self-appointed organizer who finds and enterprise or venture and helps to
attract investors, forms a corporation and launches it in business, all with a view to promotion of
profits.

Sec. 6. Classification of shares. - The shares of stock of stock corporations may be

divided into classes or series of shares, or both, any of which classes or series of shares
may have such rights, privileges or restrictions as may be stated in the articles of
incorporation. XXX

POWER TO CLASSIFY SHARES – incumbent upon the corporation and should be stated in the
articles of incorporation.

DOCTRINE OF EQUALITY OF SHARES – Each share shall be in all respects EQUAL to every other
share, except as otherwise provided in the articles of incorporation and stated in the certificate of
stock.

CAPITAL STOCK – the amount fixed in the articles of incorporation, to be subscribed and paid in by
the shareholders, either in money or property. It limits the maximum amount or number of each
class of shares that may be issued by the corporation.

CAPITAL CAPITAL STOCK

The actual corporate property. It refers to the It refers to an amount. It is abstract.
entire property or assets of the corporation. It is
a concrete thing.
Fluctuates or varies from day to day as there are Amount fixed in the articles of incorporation and
profits or losses. is unaffected by profits and losses.
Belongs to the corporation and may either be When issued, belongs to the stockholders and is
real or personal property. always personal property.

STOCK OR SHARE OF STOCK – one of the units into which the capital stock is divided.

CERTIFICATE OF STOCK – the written acknowledgment by the corporation of the interest, right,
participation of a person in the management, profits, and assets of a corporation. It is the formal
written evidence of the holder’s ownership of one or more shares and is a convenient instrument
for the transfer of title.

INCORPORATION AND ORGANIZATION

43
 OF PRIVATE CORPORATIONS

Sec. 10. Number and qualifications of incorporators. - Any number of natural persons
not less than five (5) but not more than fifteen (15), all of legal age and a majority of
whom are residents of the Philippines, may form a private corporation for any lawful
purpose or purposes. Each of the incorporators of s stock corporation must own or be a
subscriber to at least one (1) share of the capital stock of the corporation.

Ø The right to form and act as a corporation is not a natural and civil right; it is only a special
privilege conferred by the State.
Ø Until there is a grant of such right, therefore, whether by special act of legislature or under
a general law, there can be no corporation.

STEPS IN THE CREATION OF A CORPORATION:

1. Promotion
2. Incorporation
a. Drafting and execution of the articles of incorporation
b. Filing with the SEC of the articles of incorporation together with relevant documents
c. Payment of filing and publication fees
d. Issuance by the SEC of the certificate of incorporation
3. Formal organization and commencement of business operations

INCORPORATORS: NUMBER AND QUALIFICATIONS

Ø Not less than 5 but not more than 15
Ø Natural persons ( A corporation cannot be an incorporator of another corporation.)
Ø Must have capacity to contract
Ø Majority must be residents of the Philippines (Residence requirement is mandatory.)
Ø Certain corporations require Filipino citizenship for its owners
Ø Must own or subscribe to at least 1 share

Sec. 11. Corporate term. - A corporation shall exist for a period not exceeding fifty (50)
years from the date of incorporation unless sooner dissolved or unless said period is
extended. The corporate term as originally stated in the articles of incorporation may
be extended for periods not exceeding fifty (50) years in any single instance by an
amendment of the articles of incorporation, in accordance with this Code; Provided,
That no extension can be made earlier than five (5) years prior to the original or
subsequent expiry date(s) unless there are justifiable reasons for an earlier extension
as may be determined by the Securities and Exchange Commission.

TERM OF CORPORATE EXISTENCE

Ø A corporation shall exist for the term specified in the articles of incorporation but shall not
exceed 50 years.
Ø The corporate life may be reduced or extended by amendment of the articles of
incorporation.
Ø The amendment for extension of corporate term should be made before the expiration of
the term of existence.
Ø AUTOMATIC EXTENSION OF TERM - allowed by amendment of the articles within the 5 year
period before the expiration of the existing term.

44
Sec. 12. Minimum capital stock required of stock corporations. - Stock corporations
incorporated under this Code shall not be required to have any minimum authorized
capital stock except as otherwise specifically provided for by special law, and subject to
the provisions of the following section.

Ø No minimum capital stock requirement, as long as the paid-up capital is not less than
P5,000.00.

Sec. 13. Amount of capital stock to be subscribed and paid for the purposes of
incorporation. - At least twenty-five percent (25%) of the authorized capital stock as
stated in the articles of incorporation must be subscribed at the time of incorporation,
and at least twenty-five (25%) per cent of the total subscription must be paid upon
subscription, the balance to be payable on a date or dates fixed in the contract of
subscription without need of call, or in the absence of a fixed date or dates, upon call
for payment by the board of directors: Provided, however, That in no case shall the
paid-up capital be less than five Thousand (P5,000.00) pesos.

MINIMUM SUBSCRIPTION AND PAID-UP CAPITAL

Ø PRE-INCORPORATION REQUIREMENTS: At least 25% of the capital stock must have been
actually subscribed and at least 25% of such subscription is paid. These are mandatory
requirements before incorporation is granted by SEC.
Ø IMPORTANT: Paid-up capital must be at least P5,000.00.
Ø Example: If capital stock of a ABC Corporation is P100,000.00, at least P25,000 of the stock
shall have been subscribed and at least P5,000 shall have been paid.

Sec. 18. Corporate name. - No corporate name may be allowed by the Securities and
Exchange Commission if the proposed name is identical or deceptively or confusingly
similar to that of any existing corporation or to any other name already protected by
law or is patently deceptive, confusing or contrary to existing laws. When a change in
the corporate name is approved, the Commission shall issue an amended certificate of
incorporation under the amended name.

LIMITATIONS UPON USE OF CORPORATE NAME:

Ø Identical or deceptively or confusingly similar to that of any existing corporation
Ø Identical or deceptively or confusingly similar to any other name already protected by law
Ø Patently deceptive, confusing or contrary to existing laws

Sec. 19. Commencement of corporate existence. - A private corporation formed or

organized under this Code commences to have corporate existence and juridical
personality and is deemed incorporated from the date the Securities and Exchange
Commission issues a certificate of incorporation under its official seal; and thereupon
the incorporators, stockholders/members and their successors shall constitute a body
politic and corporate under the name stated in the articles of incorporation for the
period of time mentioned therein, unless said period is extended or the corporation is
sooner dissolved in accordance with law.

Ø A corporation commences to have juridical personality and legal existence only at the time
the SEC issues a certificate of incorporation under its official seal.

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Sec. 20. De facto corporations. - The due incorporation of any corporation claiming in
good faith to be a corporation under this Code, and its right to exercise corporate
powers, shall not be inquired into collaterally in any private suit to which such
corporation may be a party. Such inquiry may be made by the Solicitor General in a quo
warranto proceeding.

DE JURE VS DE FACTO CORPORATION

Ø De jure corporation is created in strict or substantial conformity with the mandatory
statutory requirements for incorporation.
Ø De facto corporation is one which actually exists for all practical purposes as a corporation
but which has no legal right to corporate existence as to the State. It is one which had not
complied with all requirements necessary to be a de jure corporation but has complied
sufficiently to be accorded corporate status as against third parties although not against the
State.
Example: The corporate name closely resembles the name of an existing
corporation, incorporators are not residents of the Philippines, the articles of incorporation is
not properly notarized.

REQUISITES OF A DE FACTO CORPORATION:

1. A valid law under which a corporation with powers assumed might be incorporated;
2. A bona fide attempt to organize a corporation under such law;
3. Actual user or exercise in good faith of corporate powers conferred upon it by law.

Sec. 21. Corporation by estoppel. - All persons who assume to act as a corporation
knowing it to be without authority to do so shall be liable as general partners for all
debts, liabilities and damages incurred or arising as a result thereof: Provided,
however, That when any such ostensible corporation is sued on any transaction entered
by it as a corporation or on any tort committed by it as such, it shall not be allowed to
use as a defense its lack of corporate personality.

On who assumes an obligation to an ostensible corporation as such, cannot resist

performance thereof on the ground that there was in fact no corporation.

CORPORATION BY ESTOPPEL
Ø A corporation by estoppel has no real existence in law. It is neither de jure nor a de facto
corporation.
Ø It exists only between the persons who misrepresented their status and the parties who
relied on the misrepresentation.

INSTANCES OF ESTOPPEL:
Ø The stockholders or members of a pretended or ostensible corporation who participated in
holding out as a corporation are precluded to deny its existence against creditors for the
purpose of escaping corporate debts.
Ø Third persons who deal with a pretended or ostensible corporation knowing it to be such are
estopped from denying its corporate existence in order to defeat a liability growing out of a
contract between them and such entity.
Ø Persons who assume to act as members or stockholders of a non-existing corporation are
estopped from denying its existence for the purpose of escaping liabilities, debts, and

46
 damages arising as a result of such misrepresentation. These persons shall be liable as
general partners.

Sec. 22. Effects on non-use of corporate charter and continuous inoperation of a

corporation.- If a corporation does not formally organize and commence the
transaction of its business or the construction of its works within two (2) years from
the date of its incorporation, its corporate powers cease and the corporation shall be
deemed dissolved. However, if a corporation has commenced the transaction of its
business but subsequently becomes continuously inoperative for a period of at least
five (5) years, the same shall be a ground for the suspension or revocation of its
corporate franchise or certificate of incorporation.

This provision shall not apply if the failure to organize, commence the transaction of its
businesses or the construction of its works, or to continuously operate is due to causes
beyond the control of the corporation as may be determined by the Securities and
Exchange Commission.

CONDITIONS PRECEDENT
Ø These are conditions which must exist prior to incorporation and which should be complied
with, otherwise the corporation cannot have legal existence.
1. Filing of the articles of incorporation with the SEC under Sec. 14;
2. The issuance of certificate of incorporation by the SEC;
3. The legal requirements as to 25% subscription of capital stock and 25% paid-up capital.
CONDITIONS SUBSEQUENT
Ø Conditions to be complied with after acquiring corporate existence in order that a
corporation may legally continue as such.

NON-USE OF CORPORATE CHARTER

Ø When a corporation does not formally organize (i.e. adoption of bylaws and election of
board of directors or trustees and other officers) and commence the transaction of its
business within 2 years from date of incorporation.
Ø EFFECT: Corporate powers will cease and the corporation shall be deemed dissolved.

CONTINUOUS INOPERATION
Ø When a corporation has commenced its transaction of its business but subsequently
becomes inoperative for a period of at least 5 years.
Ø EFFECT: Shall be a ground for the suspension or revocation of its corporate franchise or
certificate of incorporation.

EXCEPTION: If the failure to organize or commence the transaction of its business or to

continuously operate us due to causes beyond the control of the corporation as determined by the
SEC.

BOARD OF DIRECTORS/TRUSTEES/OFFICERS
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Sec. 23. The board of directors or trustees.

Ø Directly exercises corporate powers, conducts all business, and controls all properties of the
corporation.
Ø It is the governing body of the corporation.
Ø Must be at least 5 but not more than 15 in every corporation.
Ø Elected from among the stockholders or members of the corporation and shall hold office
for 1 year and until their successors are elected and qualified. (hold-over capacity)
Ø QUALIFICATIONS: IN A STOCK CORPORATION-
a. Must own at least 1 share of the capital stock.
b. The share of stock held by the director must be registered in his name in the books of
the corporation.
c. Must continuously own at least 1 share of stock during his term, otherwise he shall
automatically cease to be a director.
d. Majority of the directors must be residents of the Philippines

Sec. 24. Election of directors or trustees.

Ø The election must be made at a meeting of stockholders/members called for such purpose,
and the owners of the majority of the outstanding capital stock/members entitled to vote
should be preset or represented by proxy.
Ø GENERAL RULE: The election shall be made by VIVA VOCE OR ROLL CALL. EXCEPTION: by
BALLOT, if requested by any stockholder or member.

METHODS OF VOTING IN A STOCK CORPORATION:

a. STRAIGHT VOTING – every stockholder “may vote such number of shares for as persons as
there are directors” to be elected.

Ex. A owns 100 shares of a stock corporation. If there are 5 directors to be

chosen, A is entitled to 500 votes obtained by multiplying 100 by 5. He may give to
the five candidates he wants to be elected 100 votes each.

b. CUMULATIVE VOTING FOR ONE CANDIDATE – a stockholder is allowed to concentrate his votes
and “give one candidate as many votes as the number of directors to be elected multiplied by the
number of his shares shall equal”

Ex. If A owns 100 shares of stock and there are five directors to be elected,
he is entitled to 500 votes all of which he may cast in favor of any one candidate.

c. CUMULATIVE VOTING BY DISTRIBUTION – a stockholder may cumulate his shares by

multiplying also the number of his shares by the number of directors to be elected and distribute
the same among as many candidates as he shall see fit.

Ex. With 100 shares of stock A is entitled to 500 votes if there are five
directors to be elected. A may distribute his votes to candidates W, X, and Y by
giving W – 100 votes, X- 150 votes and Y – 250 votes.

METHODS OF VOTING IN A NON-STOCK CORPORATION:

Ø Members may cast as many votes as there are trustees to be elected but may not cast more
than one vote for one candidate.
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 Ex. If A is a member of a non-stock corporation and there are 5 directors to be
elected, he is entitled only to 5 votes. He may give 1 vote to each of the 5 candidates that he
wants to be elected.

CORPORATION OFFICERS

ELECTION
Ø Boards of Directors are elected to their office by the stockholders or members at the
stockholders’ or members’ meeting.
Ø Officers are then elected by the Board of Directors or Trustees.

The corporate officers are:

Ø President (who shall be a director)

Ø Treasurer (who may or may not be a director)
Ø Corporate Secretary (who may or may not be a director and shall be a resident and citizen
of the Philippines) and
Ø Such other officers as may be provided by the by-laws.

Concurrent Positions:
Ø Any two (2) positions may be held concurrently by the same person,
EXCEPT: President and Secretary or President and Treasurer.

REQUISITES FOR BOARD MEETING/

VALIDITY OF A CORPORATE ACT

Ø Requisites:
1. Meeting of the Board of Directors or Trustees duly assembled as a board.
2. Presence of Quorum.
Ø Quorum – such number of the membership of a collective body as is competent to transact
its business or do any other corporate act
3. Decision of the majority of the quorum or, in other cases, a majority of the entire board;
4. Meeting at the place, time, and in the manner provided for in the by-laws.

Ø Directors/trustees cannot validly act by proxy.

Ø Proxy – designates the formal written authority given by the holder or owner of the stock,
who has a right to vote it, or by a member, as principal, to another person, as agent, to
exercise the voting rights of the former.

DISQUALIFICATION OF DIRECTORS/TRUSTEES/OFFICERS

Sec. 27. Disqualification of directors, trustees or officers. - No person convicted by

final judgment of an offense punishable by imprisonment for a period exceeding six
(6) years, or a violation of this Code committed within five (5) years prior to the date
of his election or appointment, shall qualify as a director, trustee or officer of any
corporation.

REMOVAL AND VACANCIES IN THE BOARD (Sec. 28)

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Requisites for REMOVAL:
1. It must take place either at a regular meeting or special meeting of the stockholders or
members called for the purpose;
2. There must be a previous notice to the stockholders or members of the intention to remove;
3. The removal must be by a vote of the stockholders representing 2/3 outstanding capital stock
or 2/3 of members;
4. The director may be removed with or without cause UNLESS he was elected by the
minority, in which case, it is required that there is cause for removal.

Ø THE BOARD OF DIRECTORS (OR TRUSTEES) has no power to remove one of its members
as director (or trustee).

FILLING OF VACANCIES IN THE BOARD

Ø A person elected to fill a vacancy holds office only for the unexpired term of his
predecessor.

Vote by Stockholders or Members – if the vacancy is the result of:

1. REMOVAL;
2. EXPIRATION OF THE TERM;
3.GROUNDS OTHER THAN REMOVAL OR EXPIRATION like death, resignation or abandonment,
where the remaining directors do not constitute a quorum;
4. INCREASE IN THE NUMBER OF DIRECTORS.

Vote by the Board – if the remaining directors constitute a quorum except in cases not reserved to
stockholders or members.

COMPENSATION

Ø GENERAL RULE: Directors/trustees shall not receive any compensation as such directors
except for reasonable per diems (daily allowance). Reason: They are trustees of the funds
of the corporation.
Ø EXCEPTION: When the by-laws fix the amount of compensation for such directors.
Ø The directors have no authority to grant compensation to themselves.
Ø The general rule shall not apply to corporate officers who are not directors.
Ø Corporate officers who are also directors may receive compensation as such officers in
addition to their per diems as directors.

THREE-FOLD DUTY OF A DIRECTOR

1. Duty of Obedience (Sec. 31)
2. Duty of Diligence (Sec. 31)
3. Duty of Loyalty (Sec. 31 & 35)

SELF-DEALING DIRECTORS/TRUSTEES
Ø When a corporation deals or enters into a contract with its own directors/trustees.
Ø General Rule: Self-dealing contracts are VOIDABLE, at the option of the corporation.
Ø Self-dealing contracts are VALID if all of the following are present:
a. The presence of such director or trustee in the board meeting which the contract was
approved was not necessary to constitute a quorum.
b. The vote of such director was not necessary for the approval of the contract.
c. The contract is fair and reasonable under the circumstances, and

50
 d. In case of an officer, the contract with the officer has been previously authorized by the
BOD.

INTERLOCKING DIRECTOR

Ø There is an interlocking director in a corporation when one (or some or all) of the directors
in one corporation is (or are) a director in another corporation.

RULES:
a. If the interests of the interlocking director in the corporations are both SUBSTANTIAL
(stockholdings exceed 20% of the outstanding capital stock)
o Gen. Rule: A contract between two or more corporations having interlocking directors
shall not be invalidated on that ground alone.
o Exception: If the contract is fraudulent or not fair and reasonable.

b. If the interest of the interlocking director in one corporation is NOMINAL while SUBSTANTIAL in
the other, the contract shall be valid, provided the following conditions are present:
o The presence of such director/trustee in the board meeting in which the contract was
approved was NOT necessary to constitute a quorum for such meeting;
o The vote of such director/trustee was not necessary for the approval of the contract;
o The contract is fair and reasonable under the circumstances.

c. Otherwise, the contract shall be voidable.

DOCTRINE OF CORPORATE OPPORTUNITY (Sec. 34)

Ø If there is presented to a corporate officer or director a business opportunity which:

a. corporation is financially able to undertake;
b. is in line with the corporations business and is of practical advantage to it; and
c. one in which the corporation has an interest or a reasonable expectancy

Ø If the officer/director seizes the opportunity there obtaining profits to the expense of the
corporation, he must account all the profits by refunding the same to the Corporation unless the
act has been ratified by a vote of the stockholders owning or representing at least two-thirds (2/3)
of the outstanding capital stock.

EXECUTIVE COMMITTEE

Ø A corporation may create an executive committee composed of not less than 3 members of
the board to be appointed by the board.
Ø The Board delegates to the Executive Committee corporate powers to expedite action on
some matters without the need for a board meeting especially when such meeting cannot be
readily held. It cannot delegate powers to which only the board duly called upon and assembled as
such can act upon.
Ø All members of the executive committee must be directors.

POWERS OF CORPORATIONS

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DOCTRINE OF LIMITED CAPACITY
Ø A corporation has only such powers as are expressly granted and those that are necessarily
implied from those expressly granted and those which are incidental to its existence.

CLASSIFICATION OF CORPORATE POWERS

1. EXPRESS POWERS - powers expressly granted or authorized by law.

2. IMPLIED POWERS - powers reasonably necessary to the exercise of express powers and to
the accomplishment of the purposes for which the corporation is formed.
a. Acts in the usual course of business
b. Acts to protect the debts owing to the corporation
c. Acts to increase business
d. Acts in part or wholly to protect or aid employees

Ø Embarking in a different business: A corporation may not engage in a business

different from that for which it was formed.

3. INCIDENTAL OR INHERENT POWERS - powers which a corporation can exercise by the

mere fact of its being a corporation or powers which are necessary to corporate existence.
They exist independently of express powers. Examples: power of succession, power to sue
and be sued, to have a corporate name, to adopt and use a corporate seal, to contract, to
make bylaws)

POWER TO EXTEND OR SHORTEN CORPORATE TERM

Ø REQUISITES:
1. Vote of majority of the Board
2. Ratified at a meeting of the stockholders representing at least 2/3 of the OCS or 2/3 of
the members.

POWER TO DECREASE OR INCREASE CAPITAL STOCK

Ø Same requisites as in power to extend/shorten corporate term.
Ø Ways of increasing/decreasing authorized capital stock:
1. By increasing/decreasing the number of shares authorized to be issued without
increasing/decreasing the par value thereof;
2. By increasing/decreasing the par value without increasing/decreasing the number of
shares;
3. By increasing/decreasing both the number of shares to be issued and the par value
thereof.

PRINCIPLE OF PRE-EMPTION OR PRE-EMPTIVE RIGHT OF STOCKHOLDERS

Ø Whenever the capital stock is increased and new shares are issued, the new issue must be
offered first to the shareholders who are such at the time the increase was made andin
proportion to their respective shareholdings.
Ø Stockholder may waive this right.

POWER TO DENY PRE-EMPTIVE RIGHT

Ø Must be stated in the articles of incorporation or an amendment thereto.

TRUST FUND DOCTRINE

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 Ø The assets of the corporation as represented by its capital stock are "trust funds" to be
maintained unimpaired and to be used to pay corporate creditors in the sense that there
can be no distribution of such assets among stockholders without making provision for the
payment of corporate debts. Any such disposition is a fraud of creditors and therefore void.

POWER TO DECLARE DIVIDENDS

Ø DIVIDEND - that part or portion of the profits of a corporation set aside, declared and
ordered by the directors to be paid pro rata to the stockholders on demand or at a fixed
time.
Ø Dividends come from profits, while profits are a source of dividends.
Ø Profits are not dividends until so declared or set aside by the corporation. In the meantime,
all profits are a part of the assets of the corporation and do not belong to the stockholders
individually.
Ø Dividends may be declared and paid out of the unrestrained retained earnings of the
corporation. Reason: Trust Fund Doctrine
Ø UNRESTRAINED RETAINED EARNINGS - refers to all the excess of the assets over its
liabilities including legal or stated capital.

Common classes of dividends that may be declared by the corporation:

a. Cash dividends
b. Property dividends
c. Stock dividends
d. Optional dividend
e. Composite dividends

ULTRA VIRES ACTS

Ø Act beyond the conferred powers of a corporation or the purposes for which it was created.
Ø An ultra vires act is not necessarily illegal; but an illegal act is always an ultra vires act.
Ø Intra vires acts, on the other hand, are those acts which are within the legitimate powers of
the corporation.

BY-LAWS

BY-LAWS
Ø The rules of action adopted by the corporation for its internal regulations and for the
government of its officers and of its stockholders or members.
Ø Should be adopted by the corporation within 1 month after the receipt of official notice of
the issuance of its Certificate of Incorporation from the SEC.

ARTICLES OF INCORPORATION BY-LAWS

• Constitutes the charter or fundamental • Rules and regulations adopted by the
law of the corporation. corporation
• Executed before the incorporation by the • Usually executed after incorporation by
incorporators. the stockholders or members.
• A condition precedent to corporate • A condition subsequent.
existence.

MEETINGS

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KINDS OF MEETINGS OF STOCKHOLDERS/MEMBERS
AND OF DIRECTORS/TRUSTEES

1. REGULAR - those held on a date fixed by the by-laws.

Ø In case of meetings of the stockholders, the regular meetings shall be held annually
on a date specified by the by-laws, and if not so fixed, on any date in April of every
year to be determined by the board.
Ø In case of meetings of the board, regular meetings shall be held monthly, unless the
by-laws provide otherwise.
2. SPECIAL - those held at any time deemed necessary.

Ø The President shall preside at all meetings of directors or trustees and of the stockholders or
members, unless otherwise provided by the by-laws.

QUORUM IN MEETINGS
Ø Unless provided for by the Corporation Code or in the by-laws, a quorum shall consist of the
stockholders representing a majority of the outstanding capital stock or a majority of the
members in case of a non-stock corporation.

VOTING TRUST AGREEMENT

Ø An agreement in writing whereby one or more stockholders of a stock corporation transfer
his or their shares to any person or persons or to a corporation having authority to act as
trustee for the purpose of vesting rights such as the right to vote and other rights pertaining
to such share for a period not exceeding 5 years at any one time.

STOCKS AND STOCKHOLDER

SUBSCRIPTION CONTRACT
Ø Any contract for the acquisition of unissued stock in an existing corporation or a corporation
still to be formed shall be deemed a subscription notwithstanding the fact that the parties
refer to it as a purchase or some other contract.

DERIVATIVE SUIT
Ø One brought by one or more stockholders or members in the name and on behalf of the
corporation to redress wrongs committed against it or to protect or vindicate corporate
rights, whenever the officials of the corporation refuse to sue, or are the ones to be sued or
hold control of the corporation.
Ø The plaintiff is suing for a wrong done to the corporation and not one done to himself.

INDIVIDUAL SUIT
Ø An action brought by the stockholder against the corporation for direct violation of his
contractual rights as such individual stockholder such as the right to vote, the right to
dividends, the right to inspect corporate books and records, etc.

REPRESENTATIVE SUIT
Ø A suit brought against the corporation by a stockholder in behalf of himself and all other
stockholders who are similarly situated. This is a kind of class suit.

WATERED STOCKS
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 Ø Stock issued for no value at all or for a value less than its equivalent either in cash,
property, shares, stock dividends, or services.
Ø The law prohibits the issuance of watered stocks.
Ø Any director or officer consenting to the issuance of watered stocks shall be liable to the
corporation and its creditors for the value received at the time of issuance of the stock and
the par or issued value of the same.

CORPORATE BOOKS AND RECORDS

Ø Every corporation is required to keep books and records at its principal office.
Ø Corporate books and records shall be open to the inspection of any director, trustee, or
stockholder or member of the corporation at reasonable hours on business days.

MERGER AND CONSOLIDATION

COMMON FORMS OF CORPORATE COMBINATIONS

1. SALE OF ASSETS
2. LEASE OF ASSETS
3. SALE OF STOCK
4. MERGER
Ø By this method, two (or more) corporations unite, one corporation which remains in being,
absorbing or merging in itself the other which disappears as a separate corporation.
Ø One where a corporation absorbs the other and remains in existence while others are
dissolved.

Example:
A Inc. and B Inc. are existing corporations. A Inc. transfers all its assets to B Inc. B Inc. absorbs
and acquires all the property, rights and liabilities of A Inc. which dissolved B Inc. continues its
corporate existence.

A Inc. is the merged or absorbed corporation while B Inc. is the merging, absorbing, or surviving
corporation that continues the combined business. The stockholders of A inc. become stockholders
of B Inc.

5. CONSOLIDATION
Ø By this method, two or more) corporations unite, giving rise to a new corporate body and
dissolving the constituent corporations as separate corporations.
Ø One where a new corporation is created, and consolidating corporations are extinguished.

Example:
A Inc. and B Inc. are existing corporations. They unite together to form C Inc. to which they
transfer all their assets. A Inc. and B Inc. are dissolved by the consolidation. The title to their
property passes to C Inc. and all their rights and liabilities are assumed by C Inc. C Inc., the new
corporation is called the consolidated corporation. The stockholders of A Inc. and B Inc. become
stockholders of C Inc.

Ø MERGER OR CONSOLIDATION does not become effective by mere agreement of the

constituent corporation of the constituent corporations. The approval of the SEC is required.

55
EFFECT OF MERGER OR CONSOLIDATION
1. The constituent corporations shall become a single corporation.
2. The separate existence of the constituent corporations shall cease except that of the surviving
corporation (in merger) or the consolidated corporation (in consolidation).
3. The properties of the constituent corporations shall be deemed transferred to the surviving or
consolidated corporation.
4. All liabilities of the constituent corporations shall pertain to the surviving or consolidated
corporation.

APPRAISAL RIGHT

Ø Refers to the right of a stockholder to demand payment of the fair value of his shares, after
dissenting from a proposed corporate action, in the cases provided by the law.

INSTANCES WHEN APPRAISAL RIGHT IS AVAILABLE (Sec. 81)

1. In case any amendment to the articles of incorporation has the effect of changing or restricting
the rights of any stockholders or class of shares, or of authorizing preferences in any respect
superior to those of outstanding shares of any class, or of extending or shortening the term of
corporate existence;
2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or
substantially all of corporate property and assets;
3. In case of merger or consolidation.

HOW IS RIGHT EXERCISED

1. Dissenting stockholder shall make a written demand on the corporation for the payment of
the fair value of his shares within 30 days after the date on which the vote was taken.

Ø Failure of the stockholder to make the demand within the 30-day period shall be
deemed a waiver of his appraisal right.

2. If the proposed corporate action is implemented, the corporation shall pay to dissenting
stockholder, upon surrender of his certificates of stock, within 10 days after demanding
payment of his shares.

NON-USE OF CORPORATE CHARTER AND CONTINUOUS INOPERATION

EFFECTS OF NON-USE OF CORPORATE CHARTER

AND CONTINUOUS INOPERATION OF CORPORATION

a. When the corporation does not fully organize and commence the transaction of its business or
the construction of its works WITHIN 2 YEARS FROM THE DATE OF ITS INCORPORATION, its
corporate powers cease and the corporation shall be deemed dissolved.

b. When the corporation has commenced the transaction of its business but subsequently becomes
CONTINUOUSLY INOPERATIVE FOR A PERIOD OF AT LEAST 5 YEARS, the certificate of registration
may be suspended or revoked. Suspension or cancellation of corporate franchise is not automatic.
Exception: Inoperation is beyond the control of the corporation.

DISSOLUTION (Sec. 117)

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DISSOLUTION as applied to a corporation, signifies extinguishment of its franchise to be a
corporation and the termination of its corporate existence,

A. VOLUNTARY DISSOLUTION

1. By vote of the board of directors/trustees and the stockholders/members, where no creditors

are affected. (Sec. 118)
2. By judgment of the Securities and Exchange Commission (SEC) after hearing of petition for
voluntary dissolution, where creditors are affected. (Sec. 119)
3. By amending the articles of incorporation to shorten the corporate term. (Sec. 120)

B. INVOLUNTARY DISSOLUTION

Ø By filing a verified complaint with the SEC based on any ground provided by law or rules,
including:
1. By expiration of term provided for in the original articles of incorporation. (Sec. 11)
2. By legislative enactment.
3. By failure to formally organize and commence the transaction of its business within (2) years
from date of incorporation.
4. Continuously inoperative for 5 years.

EFFECTS OF DISSOLUTION

1. The corporation ceases as a body corporate to continue the business for which it was
established.
2. The corporation continues as a body corporate for three (3) years for purposes of WINDING-UP
OR LIQUIDATION.
3. Upon the expiration of the winding-up period of three (3) years, the corporation ceases to exist
for all purposes and a general rule, it can no longer be sue and be sued as such.

CORPORATE LIQUIDATION

Ø Means the winding up of the affairs of the corporation, by reducing its assets into money,
settling with creditors and debtors, apportioning the amount of profit and loss.

Ø The process by which all assets of the corporation are converted into liquid assets (cash) in
order to facilitate the payment of obligations to creditors, and the remaining balance if any
is to be distributed to the stockholders.

Modes of liquidation:
1. By the corporation itself.
2. Through a trustee to whom the properties are conveyed.
3. By management committee or rehabilitation receiver.

CLOSE CORPORATIONS
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Ø A corporation in which the stock is held in few hands, or in few families, and which stock is
not at all or only dealt in buying or selling.

REQUISITES:
1. The Articles of Incorporation must state that the number of stockholders must not exceed 20.
2. The Articles of Incorporation must contain restriction on the transfer of issued stocks.
3. The stocks cannot be listed in the stock exchange nor be publicly offered.

Note: The Corporation is not a close corporation even if the shares belong to less than twenty if not
all the requisites are present. The three requisites must concur.

The following cannot be a close corporation:

a. mining companies;
b. oil companies;
c. stock exchanges;
d. banks;
e. insurance companies
f. public utility;
g. other corporation declared to be vested with public interest.

NON-STOCK CORPORATION

Ø A non-stock corporation is one where no part of its income is distributable as dividends to its
members, trustees, or officers, subject to the provisions of this Code on dissolution.

Ø A non-stock corporation is a non-profit corporation while a stock corporation is a profit

corporation.

Note: Any profit derived by a non-stock corporation from any authorized activity cannot be
distributed as dividends to its members. Incidental profits obtained from its operations, shall be
used for the furtherance of the purpose or purposes for which the corporation was organized.

SOME RULES APPLICABLE ONLY TO NON-STOCK CORPORATION:

1. No part of its income is distributable as dividends to its members.
2. It cannot engage in business with the object of making profit.
3. The right to vote of members may be limited, broadened, or even denied in the AOI or By-Laws.

SPECIAL CORPORATIONS
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EDUCATIONAL CORPORATIONS
Ø May be stock or non-stock and organized to provide facilities for teaching or instruction.
Ø Governed by special laws
Ø The BOT shall not be less than 5 nor more than 15, and shall be in multiples of 5.

RELIGIOUS CORPORATIONS
Ø Corporations composed entirely of spiritual persons and which is erected for the furtherance
of religion.
Ø Classifications:
a. Corporation Sole – incorporated by one person and consists of one member.
b. Religious society – incorporated by an aggregate of persons.

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