AT A GLANCE:
The Civil Code provides rules governing the distribution of profits and losses, administration of partnership affairs, access to partnership books and information, accounting for benefits obtained from partnership transactions or property, and restrictions on partners engaging in competing businesses. These provisions are intended to regulate the rights and obligations of partners in managing and conducting the affairs of the partnership.
After discussing the obligations of partners to contribute capital, act in good faith, and answer for damages caused to the partnership, it is equally important to understand how partners share profits and losses, exercise management powers, and observe their fiduciary duties toward one another.
How should the profits and losses of the partnership be distributed?
Article 1767 of the Civil Code of the Philippines provides that 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.
What if a partner receives his or her share of a partnership credit before the other partners have collected theirs?
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. (Article 1793, Civil Code)
How should the profits and losses of the partnership be distributed?
Article 1797 of the Civil Code states that 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.
If the partners agree to entrust to a third person the determination of their respective shares in the profits and losses, Article 1798 of the Civil Code shall govern, to wit:
“Article 1798. If the partners have agreed to intrust 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.”
Further, under Article 1799 of the Civil Code, a stipulation that excludes one or more partners from any share in the profits or losses is void.
Who may administer the affairs of the partnership?
The authority to manage the partnership primarily depends on the partnership agreement.
1. One partner appointed
Article 1800 of the Civil Code states that 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.
Take note that under the same provision, a power granted after the partnership has been constituted may be revoked at any time.
2. Two or more partner appointed
If two or more partners have been entrusted 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. (Article 1801, Civil Code)
3. Where the partners have agreed that none of the managing partners may act without the consent of the others, Article 1802 states:
“Article 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.”
What if the manner of management has not been agreed upon?
Under Article 1803 of the Civil Code, when the manner of management has not been agreed upon, the following rules shall be observed:
- 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.
- 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.
May a partner associate another person with his or her share in the partnership?
Article 1804 of the Civil Code provides that 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.
Thus, while a partner may associate another person with his or her share, the associate cannot become a partner without the consent of all the other partners.
May a partner inspect the partnership books?
Under Article 1805 of the Civil Code:
Article 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.
What information must partners provide to one another?
Article 1806 of the Civil Code states that 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.
Must a partner account for benefits or profits obtained from partnership transactions?
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. (Article 1807, Civil Code)
May a capitalist partner engage in a competing business?
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. (Article 1808, Civil Code)
When may a partner demand formal accounting?
Any partner shall have the right to a formal account as to partnership affairs:
- If he is wrongfully excluded from the partnership business or possession of its property by his co-partners;
- If the right exists under the terms of any agreement;
- As provided by article 1807;
- Whenever other circumstances render it just and reasonable.
Read also:
- Obligations of Partners Among Themselves (Part I)
- Existence of Partnership Without Being Legally Formed
Click here to subscribe to our newsletter
Alburo Alburo and Associates Law Offices specializes in business law and labor law consulting. For inquiries regarding legal services, you may reach us at info@alburolaw.com, or dial us at (02)7745-4391/ 09175772207/ 09778050020.
All rights reserved.