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Business Laws and Regulations

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0% found this document useful (0 votes)
31 views52 pages

Business Laws and Regulations

Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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BUSINESS LAWS AND

REGULATIONS (CONT.)

- Christine T. Balagan, CPA


Effects of the acts of partners
ACTS OF A PARTNER EFFECT

Acts for apparently carrying on in the usual way the business of With binding effect except:
the partnership 1. When the partner so acting has in fact no authority to act
for the partnership in the particular matter, and
2. The person with whom he is dealing has knowledge of
the fact that he has no such authority
Acts not in the ordinary course of business Do not bind partnership unless authorized by other partners
(par. 2, Art. 1818, NCC)
Acts of strict dominion or ownership: GR: One or more but less than all the partners have no
1. Assigning partnership property in trust for creditors; authority
2. Disposing of goodwill of business; XPNs:
3. Doing an act which would make it impossible to carry on 1. authorized by the other partners; or
the ordinary business of partnership; 2. partners have abandoned the business (par. 2, Art. 1818,
4. Confessing a judgment; NCC)
5. Entering into a compromise concerning a partnership
claim or liability;
6. Submitting partnership claim or liability to arbitration;
7. Renouncing claim of partnership
Acts in contravention of a restriction on authority Partnership is not liableto 3rd persons having actual or
presumptive knowledge of the restriction
Effect of conveyance of a real property

TYPE OF CONVEYANCE EFFECT


Title in the partnership’s name; Conveyance passes title but partnership can
Conveyance in partnership name recover unless:
1.
a. Conveyance was done in the usual way of
business, and
b. The partner so acting has the authority to
act for the partnership; or
2. The property which 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
Title in the partnership’s name; Conveyance does not pass title but only
Conveyance in partner's name equitable interest, provided:
1. Conveyance was done in the usual way of
business, or
2. The partner so acting has the authority to
act for the partnership
TYPE OF CONVEYANCE EFFECT

Title in the name of 1 or more partners, and the Conveyance passes title but the partnership
record does not disclose the right of the may recover such property if the partners’ act
partnership; Conveyance in name of partner/s does not bind the partnership:
in whose name title stands 1. The partner so acting has no authority to
act for the partnership, and
2. The person with whom he is dealing has
knowledge of the fact unless the purchaser
of his assignee, is a holder for value,
without knowledge
Title in name of 1 or more or all partners or 3rd Conveyance will only pass equitable interest,
person in trust for partnership; Conveyance provided:
executed in partnership name or in name of 1. The act is one within the authority of the
partners partner, and
2. Conveyance was done in the usual way of
the business
Title in the names of all the partners; Conveyance will pass all the rights in such
Conveyance executed by all the partners property
Rights and Obligations of Partnership

 Partnership to partners
1. Refund the amounts disbursed by partner in behalf of
the partnership plus corresponding interest from the
time the expenses are made (e.g. loans and advances
made by a partner to the partnership aside from capital
contribution)
2. Answer for obligations a partner may have contracted
in good faith in the interest of the partnership business
3. Answer for risks in consequence of its management
(Art. 1796)
Rights and Obligations of Partners among
themselves

1. Contribution of property (Art. 1786)


2. Contribution of money and money converted to personal
use (Art. 1788)
3. Prohibition in engaging in business for himself (Art. 1789)
4. Contribute additional capital (Art. 1791)
5. Managing partner who collects debt (Art. 1792)
6. Partner who receives share of partnership credit (Art. 1793)
7. Damages to partnership (Art. 1794)
8. Render information (Art. 1806)
9. Accountable as fiduciary (Art. 1807)
Obligations of partners with respect to contribution
of property

1. Contribute at the beginning of the partnership, or at


the stipulated time, the money, property or industry
which he may have promised to contribute
2. Answer for eviction in case the partnership is
deprived of the determinate property contributed
3. 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 actual delivery
4. Preserve said property with the diligence of a good
father of a family, pending delivery to the
partnership
5. Indemnify the partnership for any damage caused
to it by the retention of the same or by the delay in
its contribution
 Risk of loss of things contributed:
Kind of Property/Thing Who bears the risk?
Specific and determinate things which are Partners
not fungible where only the use is
contributed
Specific and determinate things the
ownership of which is transferred to the
partnership
Fungible things (Consumable) Partnership

Things contributed to be sold


Things brought and appraised in the
inventory
 Effect if a partner fails to contribute the property
which he promised to deliver to the partnership:
1. Partners become ipso jure a debtor of the
partnership even in the absence of any demand
(Art. 1786, NCC)
2. Remedy of the other partner is not rescission but
specific performance with damages from
defaulting partner
Contribution of Money and Money Converted to
Personal Use

 Rules regarding contribution of money to the partnership:


1. To Contribute on the date fixed the amount the partner has
undertaken to contribute to the partnership
2. To Reimburse any amount the partner may have taken from
the partnership coffers and converted to his own use
3. To Indemnify the partnership for the damages caused to it
by delay in the contribution or conversion of any sum for
the partner’s personal benefits
4. To Pay for the agreed or legal interest, if the partner 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
Prohibition in Engaging in
Business
 Rules regarding the prohibition to engage in
another business:
Industrial Partner Capitalist Partner
Prohibition
Cannot engage in business for himself unless Cannot engage in business (with same kind of
the partnership expressly permits him to do business with the partnership) for his own
so account, unless there is a stipulation to the
contrary
Remedy
Capitalist partners may: Capitalist partner, who violated shall:
1. Exclude him from the firm 1. Bring to the common fund any profits
2. Avail themselves of the benefits which he accruing to him from said transaction;
may have obtained and
3. Damages, in either case (Art. 1789, NCC) 2. Bears all losses (Art. 1808, NCC)
Contribute additional capital
 Rules regarding obligations to contribute to
partnership capital:
1. Partners must contribute equal shares to the capital of
the partnership unless there is stipulation to contrary
2. Capitalist partners must contribute additional capital
in case of imminent loss to the business of the
partnership when there is no stipulation to the
contrary; Refusal to do so shall create an obligation
on the refusing partner to sell his interest to the other
partners
 Requisites before capitalist partners are compelled
to contribute additional capital:
1. Imminent loss of the business of the partnership
2. Majority of the capitalist partners are of the
opinion that an additional contribution to the
common fund would save the business
3. Capitalist partner refuses deliberately to
contribute (not due to financial inability)
4. There is no agreement to the contrary
Managing Partner who collects debt

 Obligations of managing partners who collect his


personal receivable from a person who also owes
the partnership:
1. Apply sum collected to 2 credits in proportion to
their amounts
2. If he received it for the account of partnership, the
whole sum shall be applied to partnership credit
 Requisites:
1. At least 2 debts, one where the collecting partner
is creditor and the other, where the partnership is
the creditor
2. Both debts are demandable
3. Partner who collects is authorized to manage and
actually manages the partnership
Partner who receives share of partnership credit

 Obligation of a partner who receives share of


partnership credit:
1. To bring to the partnership capital what he has
received even though he may have given receipt for
his share only.
Requisites:
2. A partner has received in whole or in part, his share
of the partnership credit
3. Other partners have not collected their shares
4. Partnership debtor has become insolvent
Damages to Partnership
Rule with regard to the obligation of a partner as to
damages suffered by the partnership through his fault:
GR: Every partner is responsible to the partnership for
damages suffered by it through his own fault. These
damages cannot be offset by the profits or benefits which
he may have earned for the partnership by his industry.
XPN: If unusual profits are realized through extraordinary
efforts of the guilty partner, the courts may equitably
mitigate or lessen his liability for damages. (Art. 1794,
NCC)
Duty to Render Information
 Duty of the partners with respect to information
affecting the partnership:
 They shall render on demand true and full
information of all things affecting the partnership
to:
1. the partner; or
2. legal representative of any deceased or legally
disabled partner. (Art. 1806, NCC)
Accountable as Fiduciary
 How are partners accountable to each other as
fiduciary?
 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.
(Art. 1807, NCC)
Rights of General Partners
 Property rights of a partner:
1. Right in Specific partnership property
2. Interest in the partnership (share in the profits and
surplus)
3. Right to participate in the Management
 Nature of a partner's right in specific partnership property:
1. Equal right to possession for partnership purposes
2. Right is not assignable, except in connection with
assignment of rights of all partners in the same property
3. Right is limited to his share of what remains after
partnership debts have been paid
4. Right is not subject to attachment or execution except on
a claim against the partnership
5. Right is not subject to legal support
Effects of assignment of partner’s whole interest in
the partnership:

 Rights withheld from the assignee:


Such assignment does not grant the assignee the right to:
a. To interfere in the management
b. To require any information or account
c. To inspect partnership books
 Rights of assignee on partner’s interest:
a. To receive in accordance with his contract the profits
accruing to the assigning partner
b. To avail himself of the usual remedies provided by
law in the event of fraud in the management
c. To receive the assignor’s interest in case of dissolution
d. To require an account of partnership affairs, but only
in case the partnership is dissolved, and such account
shall cover the period from the date only of the last
account agreed to by all the partners
 Effects of conveyance of a partner of his interest in
the partnership:
1. Conveyance of his whole interest – partnership
may either remain or be dissolved
2. Assignee does not necessarily become a partner;
he cannot:
a. interfere in the management or administration; or
b. demand information, accounting and inspection of
the partnership books.
 Rights of Assignee:
1. receive in accordance with his contract the profits
which the assigning partner would otherwise be entitled
2. avail himself of the usual remedies provided by law in
event of fraud in management
3. receive assignor’s interest in case of dissolution
4. require and account of partnership affairs but only in
case the partnership is dissolved, and such account shall
cover the period from the date only of the last account
agreed to by all the parties
Obligations of Partnership/Partners to Third
Persons

 Obligations of partners with regard to 3rd persons:


• Every partnership shall operate under a firm name. Persons
who include their names in the partnership name even if they
are not members shall be liable as a partner
• All partners shall be liable for contractual obligations of the
partnership with their property, after all partnership assets
have been exhausted:
a. Pro rata
b. b. Subsidiary
• Admission or representation made by any partner concerning
partnership affairs within the scope of his authority is
evidence against the partnership
• Notice to partner of any matter relating to partnership affairs operates
as notice to partnership except in case of fraud:
a. Knowledge of partner acting in the particular matter acquired while a partner
b. Knowledge of the partner acting in the particular matter then present to his
mind
c. Knowledge of any other partner who reasonably could and should have
communicated it to the acting partner
• Partners and the partnership are solidarily liable to 3rd persons for
the partner's tort or breach of trust
• Liability of incoming partner is limited to:
a. His share in the partnership property for existing obligations
b. His separate property for subsequent obligations
• Creditors of partnership are preferred in partnership property & may
attach partner's share in partnership assets
DISSOLUTION
Dissolution Winding Up Termination

A change in the relation of Settling the partnership Point in time when all
the partners caused by any business or affairs after partnership affairs are
partner ceasing to be dissolution wound up or completed;
associated in carrying on the end of the partnership
the business. life
Causes of dissolution
 Without violating the agreement:
a. Termination of the definite term or specific undertaking
b. Express will of any partner in good faith, when there is
no definite term and no specified undertaking
c. Express will of all partners (except those who have
assigned their interests or suffered them to be charged
for their separate debts) either before or after the
termination of any specified term or particular
undertaking
d. Expulsion of any partner in good faith of a member
 Violating the agreement
 Unlawfulness of the business
 Loss
a. Specific thing promised as contribution is lost or
perished before delivery
b. Loss of a specific thing contributed before or after
delivery, if only the use of such is contributed
 Death of any of the partners
 Insolvency of any partner or of the partnership
 Civil interdiction of any partner
 By decree of court under Art. 1831, NCC
a. a partner has been declared insane or of unsound mind
b. a partner becomes in any other way incapable of performing his part of
the partnership contract
c. a partner has been guilty of such conduct as tends to affect prejudicially
the carrying on of the business
d. a partner willfully or persistently commits a breach of the partnership
agreement
e. the business of the partnership can only be carried on at a loss
f. other circumstances render a dissolution equitable
Effects of dissolution
1. Partnership is not terminated
2. Partnership continues for a limited purpose
3. Transaction of new business is prohibited (De
Leon, Comments and Cases on Partnership,
Agency, and Trust, p. 229, 2005 ed)
Effect of dissolution on the authority of a partner

 GR: The partnership ceases to be a going concern


 XPN: The partner’s power of representation is
confined only to acts incident to winding up or
completing transactions begun but not then
finished. (Art. 1832, NCC)
Liability of a partner where the dissolution is caused by
the act, death or insolvency of a partner

 GR: Each partner is liable to his co ‐partners for his


share, of any liability created by any partner for the
partnership, as if the partnership had not been dissolved.
 XPNs: Partners shall not be liable when:
1. the dissolution, being by act of any partner, the partner
acting for the partnership had knowledge of the
dissolution; or
2. the dissolution, being by the death or insolvency of a
partner, the partner acting for the partnership had
knowledge or notice of the death or insolvency (Art.
1833, NCC)
After the dissolution of a partnership, can a
partner still bind the partnership?
 GR: Yes. A partner continues to bind partnership even after dissolution in the
following cases:
1. Transactions to wind up partnership affairs/complete transactions unfinished at
dissolution;
2. Transactions which would bind partnership if not dissolved dissolution had not
taken place, provided the other party/obligee:
a. i. Had extended credit to partnership prior to dissolution; and
ii. Had no knowledge/notice of dissolution; or
b. i. Did not extend credit to partnership;
ii. Had known partnership prior to dissolution; and
iii. Had no knowledge/notice of dissolution/fact of dissolution not advertised in a
newspaper of general circulation in the place where partnership is regularly
carried on.
 XPNs: Partner cannot bind the partnership anymore after dissolution where
dissolution is due to unlawfulness to carry on business
 XPN to XPN: Winding up of partnership affairs
1. Partner has become insolvent
2. Act is not appropriate for winding up or for completing unfinished transactions
3. Completely new transactions which would bind the partnership if dissolution
had not taken place with third persons in bad faith.
4. Partner is unauthorized to wind up partnership affairs, except by transaction
with one who:
 a.
i. Had extended credit to partnership prior to dissolution;
ii. Had no knowledge or notice of dissolution; or
b.
i. Did not extend credit to partnership prior to dissolution;
ii.. Had known partnership prior to dissolution; and
iii. Had no knowledge/notice of dissolution/fact of dissolution not advertised in a newspaper
of general circulation in the place where partnership is regularly carried on.
Does the dissolution of a partnership
discharge existing liability of a partner?
 GR: No.
 XPN: Said liability is discharged when there is
an agreement between:
1. Partner himself;
2. Person/s continuing the business; and
3. Partnership creditors
Order of priority in the distribution of assets
during the dissolution of a limited partnership
 The liabilities of the partnership shall be entitled to payment in the
following order:
1. Those to creditors, in the order of priority as provided by law,
except those to limited partners on account of their contributions,
and to general partners
2. Those to limited partners in respect to their share of the profits
and other compensation by way of income on their contributions
3. Those to limited partners in respect to the capital of their
contributions
4. Those to general partners other than for capital and profits
5. Those to general partners in respect to profits
6. Those to general partners in respect to capital (Art. 1863, NCC)
WINDING UP
 It is during this time after dissolution that
partnership business or affairs are being settled.
 Examples of winding up:
1. Paying previous obligations
2. Collecting assets previously demandable

 Engaging in new business necessary for winding up


such as contracting with a demolition company for
the demolition of the garage used in a “used car”
partnership
 Persons authorized to wind up:
1. Partners designated by the agreement
2. In the absence of such, all partners who have not
wrongfully dissolved the partnership
3. Legal representative of last surviving partner who
is not insolvent
 Partnership assets:
1. Partnership property
2. Contributions of the partners necessary for the
payment of all liabilities [Art. 1839 (2), NCC]
 Order of payment in winding up
1. Those owing to creditors other than partners
2. Those owing to partners other than for capital or
profits
3. Those owing to partners in respect of capital
4. Those owing to partners in respect to profits [Art.
1839 (2), NCC]
 DOCTRINE OF MARSHALLING OF ASSETS
1. Partnership creditors have preference in
partnership assets
2. Separate or individual creditors have preference in
separate or individual properties
3. Anything left from either goes to the other.
 Rights of a partner where dissolution is not in
contravention of the agreement
 Unless otherwise agreed, the rights of each partner
are as follows:
1. To have the partnership property applied to discharge
the liabilities of partnership; and
2. To have the surplus, if any, applied, to pay in cash the
net amount owing to the respective partners.
 Rights of a partner where dissolution is in contravention of the
agreement
 The rights of a partner vary depending upon whether he is the
innocent or guilty partner.
1. Rights of partner who has not caused the dissolution wrongfully:
a. To have partnership property applied for the payment of its liabilities
and to receive in cash his share of the surplus
b. To be indemnified for the damages caused by the partner guilty of
wrongful dissolution
c. To continue the business in the same name during the agreed term of
the partnership, by themselves or jointly with others
d. To possess partnership property should they decide to continue the
business
2. Rights of partner who has wrongfully caused the
dissolution:
a. If the business is not continued by the other partners, to have
the partnership property applied to discharge its liabilities and
to receive in cash his share of the surplus less damages caused
by his wrongful dissolution
b. If the business is continued:
i. To have the value of his interest in the partnership at the time of the
dissolution, less any damage caused by the dissolution to his co‐
partners, ascertained and paid in cash, or secured by bond approved
by the court; and
ii. To be released from all existing and future liabilities of the
partnership
 Rights of injured partner where partnership
contract is rescinded
1. Right of a lien on, or retention of, the surplus of
partnership property after satisfying partnership
liabilities for any sum of money paid or contributed
by him;
2. Right of subrogation in place of partnership creditors
after payment of partnership liabilities; and
3. Right of indemnification by the guilty partner against
all debts and liabilities of the partnership.
How are the accounts settled between partners?

1. Assets of the partnership include:


a. Partnership property (including goodwill)
b. Contributions of the partners
2. Order of application of the assets:
c. First, those owing to partnership creditors
d. Second, those owing to partners other than for capital and
profits such as loans given by the partners or advances for
business expenses
e. Third, those owing for the return of the capital contributed
by the partners
f. Fourth, the share of the profits, if any, due to each partner
 Partnier’s Lien
- The right of every partner to have the partnership

property applied, to discharge partnership liabilities


and surplus assets, if any, distributed in cash to the
respective partners, after deducting what may be
due to the partnership from them as partners.
Effects when the business of a dissolved
partnership is continued

1. Creditors of old partnership are also creditors of the new


partnership who continues the business of the old one without
liquidation of the partnership affairs.
2. Creditors have an equitable lien on the consideration paid to the
retiring/deceased partner by the purchaser when retiring/deceased
partner sold his interest without final settlement with creditors.
3. Rights of retiring/estate of deceased partner:
a. To have the value of his interest ascertained as of the date of
dissolution; and
b. To receive as ordinary creditor the value of his share in the dissolved
partnership with interest or profits attributable to use of his right, at
his option.
 Persons required to render an account:
1. Winding up partner;
2. Surviving partner; and
3. Person or partnership continuing the business

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