WARNING: THIS CONTAINS THE FIRST 12 MINUTES AND FIFTH 12 MINUTES ONLY 1st 12 MINUTES

List of partners:

General partners

TK 5M

TP 5M

TN 5M

Industrial partner Services

Limited partners

BN 5M

Industrial partner 2M

AL 10M

TK 2M

TP 2M

Can an Industrial Partner become a Limited Partner?

- Yes, provided he contributes money or property.

Are limited partners true partners?

- No, not in the truest sense of the word. Maybe partly, they are partners. But in the

general concept of a partnership, they are not really partners. They are merely

contributors or investors. A true partner, as a general partner, manages the partnership.

As a matter of fact, if a limited partner participates in the management of the business,

he becomes a true partner and his liability becomes that of a general partner and not of

a mere contributor.

Can TK (or TP) be a limited partner?

- Yes. His total investment or exposure is now 7M (5M as general partner and 2M as

limited partner).

What’s the use of putting the 2M under the category of a limited partner? Why not just add it to the

contribution as a General Partner?

- Limited partners have preferences/priorities over general partners. The purpose is to

induce them to invest more, to secure additional capital, and not to have more general

partners. These include preferences/priorities in the distribution of profits, periodic

distribution of profits (more often than general partners), return of capital,

compensation, interest, and their investment may only be for a certain period (may be

returned before end of life of partnership). Thus, there is a need to indicate a separate

list of limited partners.

Instances when a limited partner may become liable as general partner:

- His surname appears in the partnership name

- There is no substantial compliance with the statutory requirements in the constitution of

the partnership

- He participates in the management of the partnership

- He fails to amend the certificate knowing that there is error or false statement in the

certificate

<<<<12:00 – 24:00>>>> Sir: If in our illustration, AL was a limited partner and yet because of his expertise in human resources, all applicants for work or employment were referred to Al and it AL who decides whom to employ whom to reject: A: AL takes part in the management; hence, he is liable as a general partner even though his designation is a limited partner Sir: What are the rights of a limited partner which is not enjoyed by a general partner? A: These are:

- Right to receive the contribution ahead of time

- right to be preferred in partnership property

***Rights of the general partner in a limited partnership is not the same as the rights by general partners in a general partnership Sir: So can the general partners admit new general partners? A: No, they cannot admit without the consent of all the members Sir: So what rights of the general partner that they cannot enjoy without the consent of the limited partner because we have been saying they (the limited partners) are only contributors, but there could be instances when other than being mere contributors, they up to a certain extent, have a participation in the operation of the partnership . A: (Student’s answer: Art 1850 of the NCC)

Sir: There are instances when so long as the general partners agree, they can do it. But her e in a limited partnership, even if all the general partners agree they cannot be carried out without the consent of the limited partners. A: Article 1850 (refer above) Sir: On the other hand, what are the rights of a limited partner? A:

Sir: so that, here, although we said that a limited partner is a mere contributor, he is not just a mere investor. So that while we said, in a general partnership, each partner is an agent of the partnership, can a limited bind the partnership?

A: No, because he is not entitled to the management of the partnership Sir: Well, only he is not entitled to the management of the partnership, what’s the danger is we allow him to act as agent of the partnership? A: He may contract with another person and incur liabilities which may prejudice the general partnership because the limited partner is liable only up to the extent of his contribution Sir: So a limited partner cannot bind the partnership, however, this rights are limited. What are the objectives of these rights? A: To protect his interest in the partnership Sir: His rights are given not because he is now empowered in behalf of the partnership but more on to protect his investments. As a matter of fact, in the extreme impossibility, he could? A: Demand dissolution Sir: Example A:

- Contravention by the general partners of the certificate of partnership

- He asks for his contribution and it is not given to him

Sir: Demands for the return of his contribution perhaps because? A: Partnership is about to be insolvent hence he can demand return but was unjustly denied Sir: When can a limited partner demand for return of his contribution? A: Par 2 of Art 1857

24:00 – 36:00

Q: So that if there is no term as to when contribution is to be returned, if there is no agreement, can he demand for the return if there is no agreement? Should he be obliged to stay there, we did not agree that you can w/draw? A: Yes, he is not bound to the whole term of the partnership. Q: When? A: The LP, if there is no term, he can demand by serving a 6-month notice. There's no term, well, it would be unfair to compel a LP to stay forever in the P. The intention of the law is investment, contribution. In an investment, you are not obliged to stay, you can w/draw so long as you comply w/ certain conditions. Q: What are the conditions? A: The condition is that first, agreed upon by the parties. Absence any agreement of the contribution, the LP may recover his contribution by giving a 6-month notice to the partnership prior to the intended date. Q: Going back to the illustration, who are the GP and at the same time LP? A: TK and TP.

Q: The creditor went to TK because the properties of the partnership are not enough. The creditors want to go after the personal properties of TK because he is a GP. TK said, “No, because I am an LP in the list”? A: Yes, he can go after the personal properties of TP and TK because while they are listed as LP, they are also listed as GP, which means that they only enjoy preference in the distribution of profits and capital ahead of the distribution to the GP, but they are not exempted from their liabilities as GP. As GP they are liable up to the extent of their personal properties. Q: But they are also LP? A: Yes, but being LPs, TK and TP only enjoy preference with their co-partners. It does not make them less liable as GP, if one is both GP and LP, so fas as the public is concerned, he is a GP. Q: May an LP deal w/ the partnership? A: Yes. Q: Can he sell? Here is a partnership engaged in public transpo. Here is Partner Al engaged in dealership of car batteries. Can he sell batteries to the Partnership? A: Yes, he can transact with the partnership. Q: Can he demand immediate payment from the P for the batteries? A: No because the creditors of the partnership are prioritized before him. If the LP is prioritized over the creditors which are not partners, there is a presumption of defrauding the creditors. A LP is a junior creditor to outside creditors. He ranks after 3rd party creditors. To GP, he is a senior creditor, enjoys priority over them. He cannot exercise his preferential right w/out first settling the liabilites due to the 3rd parties. Q: So now the Partnership now engaged in “Rent a Car.” Al now offering ten units of his cars to the P. He extended credit to the P, requiring the P to pay only downpayment. Normally so long as the balance remained unpaid, those units are mortgaged to the dealer. P defaulted in the payment and the creditors of the P were now running after the properties of the partnership, including the 10 units of Al acquired by the P. Al said: You cannot touch them. I have priority over these cars because they are mortgaged to me. Preference over the cars: 3rd party or Al who was the dealer? A: The 3rd party is preferred sir over Al, because if the partnership will prioritize such partner in answering for the credit, there is the presumption of them defrauding the 3rd party creditors, if payment is first made to the LP. Q: There is fraud under what circumstances? A: When the LP is paid ahead of 3rd party creditors, because we said that the preference of LP to GP is senior and junior to 3rd party creditors. If LP is paid ahead, in fraud of creditors. Q: Here there is no payment. Al is simply saying "That's mine. I have not paid the balance. That came from me. I should have priority over it." What do you think? A: The LP can hold the specific partnership property as collaterals if there are enough assets to cover the debts to third party creditors. Q: So this is about collaterals now.

A: We’re talking about mortgage sir.

(Continuation of the situation mentioned).. Q: Can a limited partner-dealer say to third-party creditors that do not mortgage the 10 cars because the partnership still has a balance owing to him, he should be the one attaching it, it belongs to him? A: No. It is because the rule that a limited partner cannot hold as collateral security any partnership property is an absolute rule. Sir: The limited partner cannot claim mortgage. Although you can lend, but you cannot hold the assets of the partnership as collateral security. Q: Who has now the preference, the limited partner or the third-party creditors? A: The third-party creditors. Q: So, what are the disadvantages of being a limited partner? A: The limited partner cannot hold as security any partnership property and cannot receive payments if the third party creditors have not yet received payments. Sir: The limited partner can receive payments so long as third-party creditors have been paid. Otherwise, there is a presumption of fraud of creditors, in which case. A: In which case, it can be withdrawn and the limited partner be compelled to remit it to the partnership creditors. Sir: Of the 10 million that AL promised, can he pay in one instance or in instalments? A: They may agree on the terms. Sir: If they agree on 3 gives, first for 5 million, second for 3, third for 2. If he failed to pay the second and third? A: He can be compelled to pay the remaining 5 million. Sir: Before he can pay the remaining, the partnership was dissolved. What could happen? A: (answered later) Sir: Can third-party creditors go to the limited partner for the unpaid contributions? A: (answered later) Sir: So that the taxi units remember, they were not paid yet and AL said, Well, I have not also paid the balance of the contributions and I was not paid of the balance of the taxi units, can we call it quits? A: (answered later) Sir: There is double whamming on the part of the limited partner: he cannot hold the cars as collateral security and he can be compelled to pay the unpaid balance of the contributions because these unpaid contributions are already part of the partnership funds. All these because he is junior to the third-parties. (These are the answers)

Art. 1854. A limited partner also may loan money to and transact other business with the partnership, and, unless he is also a general partner, receive on account of resulting claims against the partnership, with general creditors, a pro rata share of the assets. No limited partner shall in respect to any such claim:

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

(2) Receive from a general partner or the partnership any payment, conveyance, or release from liability if at the time the assets of the partnership are not sufficient to discharge partnership liabilities to persons not claiming as general or limited partners.

The receiving of collateral security, or payment, conveyance, or release in violation of the foregoing provisions

is a fraud on the creditors of the partnership.

Art. 1858. A limited partner is liable to the partnership:

(1) For the difference between his contribution as actually made and that stated in the certificate as

having been made; and

(2) For any unpaid contribution which he agreed in the certificate to make in the future at the time

and on the conditions stated in the certificate.

Q: Can general partner assign his interest? Would it need the consent of the other partners? A: Yes, the general partner can assign his interest, but there is no need of the consent of the other partners because he owns his interest. Q: However, we said, what are the rights of the assignee? A: It is limited to the inspection of the partnership books, information to protect the interest. Sir: Just to protect the interest on the partnership. Q: Can limited partner assign his interest? A: (continuation na sa next na mutranscribe)

5th 12 MINUTES: 47:59 - 1.00 Student: The rights of the assignee in the general partnership is limited to the inspection Sir: Yes, to inspect in order to protect his interests Sir: Can the limited partner assign? YES. A limited partner can assign his interest in the partnership, just like a general partner can in a general partnership, even without the authority of all of the partners. IF there is an intention to make the assignee a partner, in a GENERAL PARTNERSHIP, there is a need of consent of ALL of the partners In limited partnership, to make the assignee a substituted limited partner, there is a need of consent of all partners OR without such consent so long as the right is granted in the certificate/articles of limited partnership. Death of a general partner dissolves the partnership. Death of a limited partner will not dissolve the partnership. If a general partner dies, the partnership is dissolved and it may result to a winding up of the partnership affair. Once the limited partnership is dissolved by retirement, insolvency, death, insanity, civil interdiction, of a GENERAL PARTNER, the partners may pursue the business of the partnership with the consent of ALL members OR when such right is granted in the articles/certificate of limited partnership. On the death of the limited partner, there will be a settlement of the ESTATE of the deceased limited partner and during the settlement, he is represented by his heirs, most likely, could be the executor or administrator. An administrator is the one appointed by the court while an executor is the one designated in the will. If the limited partner dies testate, his estate will be settled by an executor; if dies intestate, it will be settled by the administrator. The limited partner’s estate will be settled, meanwhile, his executor/administrator will act as the limited partner or he may be represented by a substituted limited partner. NEXT TOPIC for the next transcriptionist: CHARGING INTEREST In general partnership, there is a charging order. In which case, the creditor may go to court and ask to charge the interest of an indebted partner. But that creditor cannot become a partner. The creditor is only entitled to whatever profit that the general partner may receive from the partnership.

Art. 1859. A limited partner's interest is assignable.

As discussed previously, the charged interest may be redeemed. Charging order applies also to limited partner’s interest however, unlike in general partnership, Art. 1859 The interest may be redeemed with the separate property of any partner, but may not be redeemed with partnership property.

In general partnership, the charged interest may be redeemed by the property of the partnership, and it can also be redeemed by the separate property of any partner. It is clear that the charged interest of a limited partner cannot be redeemed by the property of the partnership. We now proceed with the preference of credit in case of dissolution. Art. 1863. In settling accounts after dissolution the liabilities of the partnership shall be entitled to payment in the following order: 1. Those to creditors, in the order if 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. So we now have several claimants, the creditor in respect to his credit against the partnership, the limited partner in respect to his profits and capital contribution, the general partners in respect to his profit and capital contribution. So, that is the order of preference. And after everything had been settled, that is the end of partnership.