II.C. Obligations of Partners to Creditors

Question 1

What are the obligations of the partners to creditors

Answer 1

1. To have his partnership interest charged for personal debts (primary) Art. 1814, 1827
2. To be liable pro rata for partnership debts (subsidiary & joint) Art. 1816, 1817, 1835
3. Tort liability; Breach of trust liability (primary & solidary) Art. 1822 to 1824
4. Liability in case of estoppel Art. 1825; Revised Corporation Code, Sec. 20
5. Liability of new partners (subsidiary) Art. 1826

Question 2

What is a “charging order”?

Answer 2

• A charging order is an order issued by the court in order for the separate creditor to secure a judgment on his credit by subjecting the interest of the debtor partner in the partnership (Art. 1812) with the payment of the unsatisfied amount of such judgment with interest thereon with the least interference with the partnership and the rights of the other partners.
• By virtue of the charging order, any amount or portion thereof which the partnership would otherwise pay to the debtor-partner should instead be given to the judgment creditor.

Question 3

May the judgment creditor charge the interest of the debtor partner in the partnership to satisfy the latter’s debts to the former?

Answer 3

Yes. Under Art. 1814, “[…] the court which entered the judgment, or any other court, may charge the interest of the debtor partner with payment of the unsatisfied amount of such judgment debt with interest thereon; an may then or later appoint a receiver of his share of the profits, and of any other money due or to fall due to him in respect of the partnership, and make all other orders, directions, accounts and inquiries which the debtor partner might have made, or which the circumstances of the case may require.

Question 4

Is the interest charged in the charging order redeemable?

Answer 4

Yes. Under Art. 1814 par. 2. The interest charged may be redeemed at any time before foreclosure, or in case a sale being directed by the court, may be purchased without thereby causing a dissolution:

• (1) With separate property, by any one or more of the partners; or
• (2) With partnership property, by any one or more of the partners with the consent of all the partners whose interests are not so charged or sold.

Question 5

What is the order of preference in the satisfaction of credits in a partnership by partnership property?

Answer 5

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.

Question 6

Are the partners also liable for contracts entered into the partnership name? Does this include the industrial partner?

Answer 6

Yes. Art. 1816. All partners, including industrial ones, shall be liable pro rata with their property and after all the partnership assets have been exhausted, for the contract 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.

Question 7

May the partners stipulate that they shall not be pro rata subsidiarily liable to the obligations of the partnerships referred to in Art. 1816?

Answer 7

No. Art. 1817. Any stipulation against the liability laid down in the preceding article shall be void, except as among the partners.

Question 8

Does the dissolution of a partnership discharge the existing liability of any partner?

Answer 8

No. Art. 1835 par. 1. The dissolution of the partnership does not of itself discharge the existing liability of any partner.

Question 9

When is a partner discharged from any existing liability?

Answer 9

Art. 1835. par. 2. A partner is discharged from any existing liability upon the dissolution of the partnership by an agreement to that effect between himself, the partnership creditor and the person or partnership continuing the business;

and such agreement may be inferred from the course of dealing between the creditor having knowledge of the dissolution and the person or partnership continuing the business.

Question 10

To what extent will the property of a deceased partner be liable to the creditors of a partnership?

Answer 10

Art. 1835 par. 3. The individual property of a deceased partner shall be liable for all obligations of the partnership incurred while he was a partner, but subject to the prior payment of his separate debts.

Question 11

Is the partner also liable to the wrongful act or omission of a partner?

Answer 11

Yes but only to the same extent as the partner so acting or omitting to act. Art. 1822 NCC, “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 his co-partners, loss or injury is caused to any person, not being a partner in the partnership, or any penalty is incurred, the partnership is liable therefor to the same extent as the partner so acting or omitting to act.”

Question 12

What is the nature of the liability of the partner with the partnership in case of misapplication of funds by the partner?

Answer 12

Partner liability is primary and solidary with partnership. Art. 1823 NCC:

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.

Question 13

What is the liability of the partners in cases falling under Art. 1822 (wrongful act or omission) and Art. 1823 (misapplication of funds)?

Answer 13

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

Question 14

When is there liability in case of estoppel?

Answer 14

A partnership by estoppel exists 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. The said person making the representation or consenting to the representation becomes a partner by estoppel, and cannot deny the existence of a partnership to deny the liability incurred. (see Art. 1825).

Question 15

What is the liability of a person who 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?

Answer 15

Under Art. 1825, the person is liable to any such persons to whom such representation has been made, who has, on faith of such representation, given credit to the actual or apparent partnership.

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 faith of such representation, given credit to the actual or apparent partnership. [Art. 1825 as discussed by De Leon]

Question 16

When will a person who is not a partner become liable to third persons as if he were a partner?

Answer 16

A person not a partner may become a partner by estoppel and thus be held liable to third persons as if he were a partner, when by words or by conduct he:

(a) Directly represents himself to anyone as a partner in an existing partnership or in a non-existing partnership (with one [1] or more persons not actual partners); or
(b) Indirectly represents himself by consenting to another representing him as a partner in an existing partnership or in a non-existing partnership. [Art. 1825 as discussed by De Leon]

Question 17

When will there be a partnership liability in a partnership by estoppel through direct/indirect representation?

Answer 17

If all the actual 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 a partnership liability. [Art. 1825 as discussed by De Leon]

Question 18

When will the liability of the partners who consented to the representation be pro rata?

Answer 18

When there is no existing partnership and all those represented as partners consented to the representation, or not all of the partners of an existing partnership consented to the representation, then, the liability of the person who represented himself to be a partner or who consented to his being represented as partner, and all those who made and consented to such representation, is joint or pro rata. [Art. 1825 as discussed by De Leon]

Question 19

When will liability be separate in case of a partnership by estoppel?

Answer 19

When there is no existing partnership and not all but only some of those represented as partners consented to the representation, or none of the partners in an existing partnership consented to such representation, then the liability will be separate– that of the person who represented himself as a partner or who consented to his being represented as a partner, and those who made and consented to the representation, or that only of the person who represented himself as a partner. [Art. 1825 as discussed by De Leon]

Question 20

When is there a corporation by estoppel?

Answer 20

Revised Corp. Code. SEC. 20. 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 its lack of corporate personality as a defense. Anyone who assumes an obligation to an ostensible corporation as such cannot resist performance thereof on the ground that there was in fact no corporation.

Question 21

Is a newly admitted partner liable for the past/existing obligations of the partnership?

Answer 21

Yes. Art. 1826. A person admitted as a partner into an existing partnership is liable for all 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.