[G.R. No. 110782. September 25, 1998] IRMA IDOS, petitioner, vs.

COURT OF APPEALS
and PEOPLE OF THE PHILIPPINES, respondents.

2) 103110294 P135,828.87
3) 103115490 9-30-86 P135,828.87

Before this Court is the petition for review of the Decision of respondent Court of
Appeals[1] dismissing petitioners appeal in CA-G.R. CR No. 11960; and affirming her conviction as
well as the sentence imposed on her by the Regional Trial Court of Malolos, Bulacan, in Criminal
Case No. 1395-M-88[2] as follows:
WHEREFORE . . . the [c]ourt finds the accused Irma Idos guilty beyond reasonable
doubt and is hereby sentenced to suffer the penalty of imprisonment of six (6)
months and to pay a fine of P135,000.00 and to pay private complainant Eddie
Alarilla the amount of the check in question of P135,000.00 at 12% interest from the
time of the filing of the [i]nformation (August 10, 1988) until said amount has been
fully paid.
Elevated from the Third Division [3] of this Court, the case was accepted for resolution en
banc on the initial impression that here, a constitutional question might be involved. [4] It was
opined that petitioners sentence, particularly six months imprisonment, might be in violation of
the constitutional guarantee against imprisonment for non-payment of a debt.[5]
A careful consideration of the issues presented in the petition as well as the comments
thereon and the findings of fact by the courts below in the light of applicable laws and
precedents convinces us, however, that the constitutional dimension need not be reached in
order to resolve those issues adequately.For, as herein discussed, the merits of the petition could
be determined without delving into aspects of the cited constitutional guarantee vis--vis
provisions of the Bouncing Checks Law (Batas Pambansa Blg. 22). There being no necessity
therefor, we lay aside discussions of the constitutional challenge to said law in deciding this
petition.
The petitioner herein, Irma L. Idos, is a businesswoman engaged in leather tanning. Her
accuser for violation of B.P. 22 is her erstwhile supplier and business partner, the complainant
below, Eddie Alarilla.

4) 103115491 10-30-86 P126,656.01

The complainant was able to encash the first, second, and fourth checks, but the
third check (Exh. A) which is the subject of this case, was dishonored on October 14,
1986 for insufficiency of funds. The complainant demanded payment from the
accused-appellant but the latter failed to pay. Accordingly, on December 18, 1986,
through counsel, he made a formal demand for payment. (Exh. B) In a letter dated
January 2, 1987, the accused-appellant denied liability. She claimed that the check
had been given upon demand of complainant in May 1986 only as assurance of his
share in the assets of the partnership and that it was not supposed to be deposited
until the stocks had been sold.
Complainant then filed his complaint in the Office of the Provincial Fiscal of Bulacan
which on August 22, 1988 filed an information for violation of BP Blg. 22 against
accused-appellant.
Complainant denied that the checks issued to him by accused-appellant were
subject to the disposition of the stocks and the collection of receivables of the
business. But the accused-appellant insisted that the complainant had known that
the checks were to be funded from the proceeds of the sale of the stocks and the
collection of receivables. She claimed that the complainant himself asked for the
checks because he did not want to continue in the tannery business and had no use
for a share of the stocks. (TSN, p. 7, April 14, 1991; id., pp. 8-9, Nov. 13, 1989; id.,
pp. 12, 16, 20, Feb. 14, 1990; id., p. 14, June 4, 1990).
On February 15, 1992, the trial court rendered judgment finding the accusedappellant guilty of the crime charged. The accused-appellants motion for annulment
of the decision and for reconsideration was denied by the trial court in its order
dated April 12, 1991.[6]

As narrated by the Court of Appeals, the background of this case is as follows:

The complainant Eddie Alarilla supplied chemicals and rawhide to the accusedappellant Irma L. Idos for use in the latters business of manufacturing leather. In
1985, he joined the accused-appellants business and formed with her a partnership
under the style Tagumpay Manufacturing, with offices in Bulacan and Cebu City.
However, the partnership was short lived. In January, 1986 the parties agreed to
terminate their partnership. Upon liquidation of the business the partnership had as
of May 1986 receivables and stocks worth P1,800,000.00. The complainants share of
the assets was P900,000.00 to pay for which the accused-appellant issued the
following postdated checks, all drawn against Metrobank Branch in Mandaue, Cebu:
CHECK NO. DATE AMOUNT
1) 103110295 8-15-86 P135,828.87

Herein respondent court thereafter affirmed on appeal the decision of the trial
court. Petitioner timely moved for a reconsideration, but this was subsequently denied by
respondent court in its Resolution[7] dated June 11, 1993. Petitioner has now appealed to us by
way of a petition for certiorariunder Rule 45 of the Rules of Court.
During the pendency of this petition, this Court by a resolution [8] dated August 30, 1993,
took note of the compromise agreement executed between the parties, regarding the civil
aspect of the case, as manifested by petitioner in a Motion to Render Judgment based on
Compromise Agreement[9]filed on August 5, 1993. After submission of the Comment[10] by the
Solicitor General, and the Reply[11] by petitioner, this case was deemed submitted for decision.
Contending that the Court of Appeals erred in its affirmance of the trial courts decision,
petitioner cites the following reasons to justify the review ofher case:

1. The Honorable Court of Appeals has decided against the innocence of the accused
based on mere probabilities which, on the contrary, should have warranted her
acquittal on reasonable doubt. Even then, the conclusion of the trial court is contrary
to the evidence on record, including private complainants judicial admission that there
was no consideration for the check.

funds or credit or would have been dishonored for the same reason had not the drawer, without
any valid reason, ordered the bank to stop payment, shall be punished by imprisonment of not
less than thirty days but not more than one (1) year or by a fine of not less than but not more
than double the amount of the check which fine shall in no case exceed Two hundred thousand
pesos, or both such fine and imprisonment at the discretion of the court.

2. The Honorable Court of Appeals has confused and merged into one the legal concepts
of dissolution, liquidation and termination of a partnership and, on the basis of such
misconception of the law, disregarded the fact of absence of consideration of the
check and convicted the accused.

The same penalty shall be imposed upon any person who having sufficient funds in or credit with
the drawee bank when he makes or draws and issues a check, shall fail to keep sufficient funds
or to maintain a credit or to cover the full amount of the check if presented within a period of
ninety (90) days from the date appearing thereon, for which reason it is dishonored by the
drawee bank.

3. While this appeal was pending, the parties submitted for the approval of the Honorable
Court a compromise agreement on the civil liability. The accused humbly submits that
this supervening event, which by its terms puts to rest any doubt the Court of Appeals
had entertained against the defense of lack of consideration, should have a legal
effect favorable to the accused, considering that the dishonored check constitutes a
private transaction between partners which does not involve the public interest, and
considering further that the offense is not one involving moral turpitude.
4. The Honorable Court of Appeals failed to appreciate the fact that the accused had
warned private complainant that the check was not sufficiently funded, which should
have exonerated the accused pursuant to the ruling in the recent case of Magno vs.
Court of Appeals, 210 SCRA 471, which calls for a more flexible and less rigid
application of the Bouncing Checks law.[12]
For a thorough consideration of the merits of petitioners appeal, we find pertinent and
decisive the following issues:
1. Whether respondent court erred in holding that the subject check was issued by petitioner to
apply on account or for value, that is, as part of the consideration of a buy-out of said
complainants interest in the partnership, and not merely as a commitment on petitioners part to
return the investment share of complainant, along with any profit pertaining to said share, in the
partnership.
2. Whether the respondent court erred in concluding that petitioner issued the subject check
knowing at the time of issue that she did not have sufficient funds in or credit with the drawee
bank and without communicating this fact of insufficiency of funds to the complainant.
Both inquiries boil down into one ultimate issue: Did the respondent court err in affirming
the trial courts judgment that she violated Batas Pambansa Blg. 22?
Considering that penal statutes are strictly construed against the state and liberally in
favor of the accused, it bears stressing that for an act to be punishable under the B.P. 22, it must
come clearly within both the spirit and the letter of the statute. [13] Otherwise, the act has to be
declared outside the laws ambit and a plea of innocence by the accused must be sustained.
The relevant provisions of B.P. 22 state that:
SECTION 1. Checks without sufficient funds. Any person who makes or draws and issues any
check to apply on account or for value, knowing at the time of issue that he does not have
sufficient funds in or credit with the drawee bank for the payment of such check in full upon its
presentment, which check is subsequently dishonored by the drawee bank for insufficiency of

Where the check is drawn by a corporation, company or entity, the person or persons who
actually signed the check in behalf of such drawer shall be liable under this Act.
SECTION 2. Evidence of knowledge of insufficient funds. The making, drawing and issuance of a
check payment of which is refused by the drawee because of insufficient funds in or credit with
such bank, when presented within ninety (90) days from the date of the check, shall be prima
facie evidence of knowledge of such insufficiency of funds or credit unless such maker or drawer
pays the holder thereof the amount due thereon, or makes arrangements for payment in full by
the drawee of such check within five (5) banking days after receiving notice that such check has
not been paid by the drawee.(Underscoring supplied)
As decided by this Court, the elements of the offense penalized under B.P. 22, are as
follows: (1) the making, drawing and issuance of any check to apply to account or for value; (2)
the knowledge of the maker, drawer or issuer that at the time of issue he does not have
sufficient funds in or credit with the drawee bank for the payment of such check in full upon its
presentment; and (3) subsequent dishonor of the check by the drawee bank
forinsufficiency of funds or credit or dishonor for the same reason had not the drawer, without
any valid cause, ordered the bank to stop payment.[14]
In the present case, with regard to the first issue, evidence on record would show that the
subject check was to be funded from receivables to be collected and goods to be sold by the
partnership, and only when such collection and sale were realized. [15] Thus, there is sufficient
basis for the assertion that the petitioner issued the subject check (Metrobank Check No.
103115490 dated October 30, 1986, in the amount of P135,828.87) to evidence only
complainants share or interest in the partnership, or at best, to show her commitment that when
receivables are collected and goods are sold, she would give to private complainant the net
amount due him representing his interest in the partnership. It did not involve a debt of or any
account due and payable by the petitioner.
Two facts stand out. Firstly, three of four checks were properly encashed by complainant;
only one (the third) was not. But eventually even this one was redeemed by petitioner. Secondly,
even private complainant admitted that there was no consideration whatsoever for the issuance
of the check, whose funding was dependent on future sales of goods and receipts of payment of
account receivables.
Now, it could not be denied that though the parties petitioners and complainant had
agreed to dissolve the partnership, such agreement did not automatically put an end to the
partnership, since they still had to sell the goods on hand and collect the receivables from
debtors. In short, they were still in the process of winding up the affairs of the partnership, when
the check in question was issued.

Under the Civil Code, the three final stages of a partnership are (1) dissolution; (2)
winding-up; and (3) termination. These stages are distinguished, to wit:
(1) Dissolution Defined
Dissolution is the change in the relation of the partners caused by any
partner ceasing to be associated in the carrying on of the business
(Art. 1828). It is that point of time the partners cease to carry on the
business together. [Citation omitted]
(2) Winding Up Defined
Winding up is the process of settling business affairs after dissolution.
(NOTE: Examples of winding up: the paying of previous
obligations; the collecting of assets previously demandable; even new
business if needed to wind up, as the contracting with a demolition
company for the demolition of the garage used in a used car
partnership.)
(3) Termination Defined
Termination is the point in time after all the partnership affairs have
been wound up.[16] [Citation omitted] (Underscoring supplied.)
These final stages in the life of a partnership are recognized under the Civil Code that
explicitly declares that upon dissolution, the partnership is not terminated, to wit:
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.
Art. 1829. On dissolution the partnership is not terminated, but continues until the winding up of
partnership affairs is completed. (Underscoring supplied.)
The best evidence of the existence of the partnership, which was not yet terminated
(though in the winding up stage), were the unsold goods and uncollected receivables, which
were presented to the trial court. Since the partnership has not been terminated, the petitioner
and private complainant remained as co-partners. The check was thus issued by the petitioner
to complainant, as would a partner to another, and not as payment from a debtor to a creditor.
The more tenable view, one in favor of the accused, is that the check was issued merely to
evidence the complainants share in the partnership property, or to assure the latter that he
would receive in time his due share therein. The alternative view that the check was in
consideration of a buy out is but a theory, favorable to the complainant, but lacking support in
the record; and must necessarily be discarded.
For there is nothing on record which even slightly suggests that petitioner ever became
interested in acquiring, much less keeping, the shares of the complainant. What is very clear
therefrom is that the petitioner exerted her best efforts to sell the remaining goods and to collect
the receivables of the partnership, in order to come up with the amount necessary to satisfy the

value of complainants interest in the partnership at the dissolution thereof. To go by accepted

custom of the trade, we are more inclined to the view that the subject check was issued merely
to evidence complainants interest in the partnership. Thus, we are persuaded that the check was
not intended to apply on account or for value; rather it should be deemed as having been drawn
without consideration at the time of issue.
Absent the first element of the offense penalized under B.P. 22, which is the making,
drawing and issuance of any check to apply on account or for value, petitioners issuance of the
subject check was not an act contemplated in nor made punishable by said statute.
As to the second issue, the Solicitor General contends that under the Bouncing Checks
Law, the elements of deceit and damage are not essential or required to constitute a violation
thereof. In his view, the only essential element is the knowledge on the part of the maker or
drawer of the check of the insufficiency of his/her funds at the time of the issuance of said
check.
The Bouncing Checks Law makes the mere act of issuing a bad or worthless check a
special offense punishable by law. Malice or intent in issuing the worthless check is immaterial,
the offense being malum prohibitum,[17] so goes the argument for the public respondents.
But of course this could not be an absolute proposition without descending to
absurdity. For if a check were issued by a kidnap victim to a kidnapper for ransom, it would be
absurd to hold the drawer liable under B.P. 22, if the check is dishonored and unpaid. That would
go against public policy and common sense.
Public respondents further contend that since petitioner issued the check in favor of
complainant Alarilla and when notified that it was returned for insufficiency of funds, failed to
make good the check, then petitioner is liable for violation of B.P. 22. [18] Again, this matter could
not be all that simple.For while the makers knowledge of the insufficiency of funds is legally
presumed from the dishonor of his checks for insufficiency of funds, [19] this presumption is
rebuttable.
In the instant case, there is only a prima facie presumption which did not preclude the
presentation of contrary evidence.[20] In fact, such contrary evidence on two points could be
gleaned from the record concerning (1) lack of actual knowledge of insufficiency of funds; and
(2) lack of adequate notice of dishonor.
Noteworthy for the defense, knowledge of insufficiency of funds or credit in the drawee
bank for the payment of a check upon its presentment is an essential element of the offense.
[21]
It must be proved, particularly where the prima facie presumption of the existence of this
element has been rebutted.The prima facie presumption arising from the fact of drawing, issuing
or making a check, the payment of which was subsequently refused for insufficiency of funds is,
moreover, not sufficient proof of guilt by the issuer.
In the case of Nieva v. Court of Appeals,[22] it was held that the subsequent dishonor of the
subject check issued by accused merely engendered theprima facie presumption that she knew
of the insufficiency of funds, but did not render the accused automatically guilty under B.P. 22. [23]
The prosecution has a duty to prove all the elements of the crime, including the acts that give
rise to the prima facie presumption; petitioner, on the other hand, has a right to rebut the prima
facie presumption. Therefore, if such knowledge of insufficiency of funds is proven to
be actually absent or non-existent, the accused should not be held liable for the offense defined
under the first paragraph of Section 1 of B.P. 22. Although the offense charged is amalum

prohibitum, the prosecution is not thereby excused from its responsibility of proving beyond
reasonable doubt all the elements of the offense, one of which is knowledge of the insufficiency
of funds.
Section 1 of B.P. 22 specifically requires that the person in making, drawing or issuing the
check, be shown that he knows at the time of issue, that he does not have sufficient funds in or
credit with the drawee bank for the payment of such check in full upon its presentment.
In the case at bar, as earlier discussed, petitioner issued the check merely to evidence the
proportionate share of complainant in the partnership assets upon its dissolution. Payment of
that share in the partnership was conditioned on the subsequent realization of profits from the
unsold goods and collection of the receivables of the firm. This condition must be satisfied or
complied with before the complainant can actually encash the check. The reason for the
condition is that petitioner has no independent means to satisfy or discharge the complainants
share, other than by the future sale and collection of the partnership assets. Thus, prior to the
selling of the goods and collecting of the receivables, the complainant could not, as of yet,
demand his proportionate share in the business. This situation would hold true until after the
winding up, and subsequent termination of the partnership. For only then, when the goods were
already sold and receivables paid that cash money could be availed of by the erstwhile partners.
Complainant did not present any evidence that petitioner signed and issued four checks
actually knowing that funds therefor would be insufficient at the time complainant would present
them to the drawee bank. For it was uncertain at the time of issuance of the checks whether the
unsold goods would have been sold, or whether the receivables would have been collected by
the time the checks would be encashed. As it turned out, three were fully funded when
presented to the bank; the remaining one was settled only later on.
Since petitioner issued these four checks without actual knowledge of the insufficiency of
funds, she could not be held liable under B.P. 22 when one was not honored right away. For it is
basic doctrine that penal statutes such as B.P. 22 must be construed with such strictness as to
carefully safeguard the rights of the defendant x x x. [24] The element of knowledge of
insufficiency of funds has to be proved by the prosecution; absent said proof, petitioner could
not be held criminally liable under that law. Moreover, the presumption of prima facie knowledge
of such insufficiency in this case was actually rebutted by petitioners evidence.
Further, we find that the prosecution also failed to prove adequate notice of dishonor of
the subject check on petitioners part, thus precluding any finding of prima facie evidence of
knowledge of insufficiency of funds. There is no proof that notice of dishonor was actually sent
by the complainant or by the drawee bank to the petitioner. On this point, the record is bereft of
evidence to the contrary.

issuing a bum check; there must also be a showing that, within five banking days from receipt of
the notice of dishonor, such maker or drawer failed to pay the holder of the check the amount
due thereon or to make arrangement for its payment in full by the drawee of such check.
[25]
[Underscoring supplied.]
The absence of a notice of dishonor necessarily deprives an accused an opportunity to preclude
a criminal prosecution. Accordingly, procedural due process clearly enjoins that a notice of
dishonor be actually served on petitioner. Petitioner has a right to demand and the basic
postulates of fairness require that the notice of dishonor be actually sent to and received by her
to afford her the opportunity to avert prosecution under B.P. 22.[26]
Further, what militates strongly against public respondents stand is the fact that petitioner
repeatedly notified the complainant of the insufficiency of funds. Instructive is the following
pronouncement of this Court in Magno v. Court of Appeals:
Furthermore, the element of knowing at the time of issue that he does not have sufficient funds
in or credit with the drawee bank for the payment of such check in full upon its presentment,
which check is subsequently dishonored by the drawee bank for insufficiency of funds or credit
or would have been dishonored for the same reason x x x is inversely applied in this case. From
the very beginning, petitioner never hid the fact that he did not have the funds with which to put
up the warranty deposit and as a matter of fact, he openly intimated this to the vital conduit of
the transaction, Joey Gomez, to whom petitioner was introduced by Mrs. Teng. It would have
been different if this predicament was not communicated to all the parties he dealt with
regarding the lease agreement the financing of which was covered by L.S. Finance Management.
[27]

In the instant case, petitioner intimated to private complainant the possibility that funds
might be insufficient to cover the subject check, due to the fact that the partnerships goods
were yet to be sold and receivables yet to be collected.
As Magno had well observed:
For all intents and purposes, the law was devised to safeguard the interest of the banking
system and the legitimate public checking account user. It did not intend to shelter or favor nor
encourage users of the system to enrich themselves through manipulations and circumvention
of the noble purpose and objective of the law. Least should it be used also as a means of
jeopardizing honest-to-goodness transactions with some color of get-rich scheme to the
prejudice of well-meaning businessmen who are the pillars of society.
xxx

But in fact, while the subject check initially bounced, it was later made good by
petitioner. In addition, the terms of the parties compromise agreement, entered into during the
pendency of this case, effectively invalidates the allegation of failure to pay or to make
arrangement for the payment of the check in full. Verily, said compromise agreement constitutes
an arrangement for the payment in full of the subject check.
The absence of notice of dishonor is crucial in the present case. As held by this Court in
prior cases:
Because no notice of dishonor was actually sent to and received by the petitioner, the prima
facie presumption that she knew about the insufficiency of funds cannot apply. Section 2 of B.P.
22 clearly provides that this presumption arises not from the mere fact of drawing, making and

Thus, it behooves upon a court of law that in applying the punishment imposed upon the
accused, the objective of retribution of a wronged society, should be directed against the actual
and potential wrongdoers. In the instant case, there is no doubt that petitioners four (4) checks
were used to collateralize an accommodation, and not to cover the receipt of an actual account
or credit for value as this was absent, and therefore petitioner should not be punished for mere
issuance of the checks in question. Following the aforecited theory, in petitioners stead the
potential wrongdoer, whose operation could be a menace to society, should not be glorified by
convicting the petitioner.[28]
Under the circumstances obtaining in this case, we find the petitioner to have issued the
check in good faith, with every intention of abiding by her commitment to return, as soon as
able, the investments of complainant in the partnership. Evidently, petitioner issued the check

with benign considerations in mind, and not for the purpose of committing fraud, deceit, or
violating public policy
To recapitulate, we find the petition impressed with merit. Petitioner may not be held liable
for violation of B.P. 22 for the following reasons: (1) the subject check was not made, drawn and
issued by petitioner in exchange for value received as to qualify it as a check on account or for
value; (2) there is no sufficient basis to conclude that petitioner, at the time of issue of the
check, had actual knowledge of the insufficiency of funds; and (3) there was no notice of
dishonor of said check actually served on petitioner, thereby depriving her of the opportunity to
pay or make arrangements for the payment of the check, to avoid criminal prosecution.
Having resolved the foregoing principal issues, and finding the petition meritorious, we no
longer need to pass upon the validity and legality or necessity of the purported compromise
agreement on civil liability between the petitioner and the complainant.
WHEREFORE, the instant petition is hereby GRANTED AND THE PETITIONER
ACQUITTED. The Decision of the respondent Court of Appeals in CA-G.R. CR No. 11960 is hereby
REVERSED and the Decision of Regional Trial Court in Criminal Case No. 1395-M-88 is hereby SET
ASIDE.
NO COSTS.
SO ORDERED.

[G.R. No. 142293. February 27, 2003]

VICENTE SY, TRINIDAD PAULINO, 6BS TRUCKING CORPORATION, and SBT [1] TRUCKING
CORPORATION,petitioners, vs. HON. COURT OF APPEALS and JAIME
SAHOT, respondents.
DECISION
QUISUMBING, J.:
This petition for review seeks the reversal of the decision [2] of the Court of Appeals dated
February 29, 2000, in CA-G.R. SP No. 52671, affirming with modification the decision [3] of the
National Labor Relations Commission promulgated on June 20, 1996 in NLRC NCR CA No.
010526-96. Petitioners also pray for the reinstatement of the decision [4] of the Labor Arbiter in
NLRC NCR Case No. 00-09-06717-94.
Culled from the records are the following facts of this case:
Sometime in 1958, private respondent Jaime Sahot [5] started working as a truck helper for
petitioners family-owned trucking business named Vicente Sy Trucking. In 1965, he became a
truck driver of the same family business, renamed T. Paulino Trucking Service, later 6Bs Trucking
Corporation in 1985, and thereafter known as SBT Trucking Corporation since 1994. Throughout
all these changes in names and for 36 years, private respondent continuously served the
trucking business of petitioners.
In April 1994, Sahot was already 59 years old. He had been incurring absences as he was
suffering from various ailments. Particularly causing him pain was his left thigh, which greatly
affected the performance of his task as a driver. He inquired about his medical and retirement
benefits with the Social Security System (SSS) on April 25, 1994, but discovered that his
premium payments had not been remitted by his employer.
Sahot had filed a week-long leave sometime in May 1994. On May 27th, he was medically
examined and treated for EOR, presleyopia, hypertensive retinopathy G II (Annexes G-5 and G-3,
pp. 48, 104, respectively),[6] HPM, UTI, Osteoarthritis (Annex G-4, p. 105), [7] and heart
enlargement (Annex G, p. 107). [8] On said grounds, Belen Paulino of the SBT Trucking Service
management told him to file a formal request for extension of his leave. At the end of his weeklong absence, Sahot applied for extension of his leave for the whole month of June, 1994.It was
at this time when petitioners allegedly threatened to terminate his employment should he refuse
to go back to work.

At this point, Sahot found himself in a dilemma. He was facing dismissal if he refused to
work, But he could not retire on pension because petitioners never paid his correct SSS
premiums. The fact remained he could no longer work as his left thigh hurt abominably.
Petitioners ended his dilemma. They carried out their threat and dismissed him from work,
effective June 30, 1994. He ended up sick, jobless and penniless.
On September 13, 1994, Sahot filed with the NLRC NCR Arbitration Branch, a complaint for
illegal dismissal, docketed as NLRC NCR Case No. 00-09-06717-94. He prayed for the recovery of
separation pay and attorneys fees against Vicente Sy and Trinidad Paulino-Sy, Belen Paulino,
Vicente Sy Trucking, T. Paulino Trucking Service, 6Bs Trucking and SBT Trucking, herein
petitioners.
For their part, petitioners admitted they had a trucking business in the 1950s but denied
employing helpers and drivers. They contend that private respondent was not illegally dismissed
as a driver because he was in fact petitioners industrial partner. They add that it was not until
the year 1994, when SBT Trucking Corporation was established, and only then did respondent
Sahot become an employee of the company, with a monthly salary that reached P4,160.00 at
the time of his separation.
Petitioners further claimed that sometime prior to June 1, 1994, Sahot went on leave and
was not able to report for work for almost seven days. On June 1, 1994, Sahot asked permission
to extend his leave of absence until June 30, 1994. It appeared that from the expiration of his
leave, private respondent never reported back to work nor did he file an extension of his
leave. Instead, he filed the complaint for illegal dismissal against the trucking company and its
owners.
Petitioners add that due to Sahots refusal to work after the expiration of his authorized
leave of absence, he should be deemed to have voluntarily resigned from his work. They
contended that Sahot had all the time to extend his leave or at least inform petitioners of his
health condition. Lastly, they cited NLRC Case No. RE-4997-76, entitled Manuelito Jimenez et al.
vs. T. Paulino Trucking Service, as a defense in view of the alleged similarity in the factual milieu
and issues of said case to that of Sahots, hence they are in pari material and Sahots complaint
ought also to be dismissed.
The NLRC NCR Arbitration Branch, through Labor Arbiter Ariel Cadiente Santos, ruled that
there was no illegal dismissal in Sahots case. Private respondent had failed to report to work.
Moreover, said the Labor Arbiter, petitioners and private respondent were industrial partners
before January 1994. The Labor Arbiter concluded by ordering petitioners to pay financial
assistance of P15,000 to Sahot for having served the company as a regular employee since
January 1994 only.
On appeal, the National Labor Relations Commission modified the judgment of the Labor
Arbiter. It declared that private respondent was an employee, not an industrial partner, since the
start. Private respondent Sahot did not abandon his job but his employment was terminated on
account of his illness, pursuant to Article 284[9] of the Labor Code. Accordingly, the NLRC ordered
petitioners to pay private respondent separation pay in the amount of P60,320.00, at the rate of
P2,080.00 per year for 29 years of service.
Petitioners assailed the decision of the NLRC before the Court of Appeals. In its decision
dated February 29, 2000, the appellate court affirmed with modification the judgment of the
NLRC. It held that private respondent was indeed an employee of petitioners since 1958 . It also
increased the amount of separation pay awarded to private respondent to P74,880, computed at
the rate of P2,080 per year for 36 years of service from 1958 to 1994. It decreed:

WHEREFORE, the assailed decision is hereby AFFIRMED with MODIFICATION. SB Trucking

Corporation is hereby directed to pay complainant Jaime Sahot the sum of SEVENTY-FOUR
THOUSAND EIGHT HUNDRED EIGHTY (P74,880.00) PESOS as and for his separation pay. [10]
Hence, the instant petition anchored on the following contentions:
I
RESPONDENT COURT OF APPEALS IN PROMULGATING THE QUESTION[ED] DECISION AFFIRMING
WITH MODIFICATION THE DECISION OF NATIONAL LABOR RELATIONS COMMISSION DECIDED NOT
IN ACCORD WITH LAW AND PUT AT NAUGHT ARTICLE 402 OF THE CIVIL CODE. [11]
II
RESPONDENT COURT OF APPEALS VIOLATED SUPREME COURT RULING THAT THE NATIONAL
LABOR RELATIONS COMMISSION IS BOUND BY THE FACTUAL FINDINGS OF THE LABOR ARBITER
AS THE LATTER WAS IN A BETTER POSITION TO OBSERVE THE DEMEANOR AND DEPORTMENT OF
THE WITNESSES IN THE CASE OF ASSOCIATION OF INDEPENDENT UNIONS IN THE PHILIPPINES
VERSUS NATIONAL CAPITAL REGION (305 SCRA 233).[12]
III
PRIVATE RESPONDENT WAS NOT DISMISS[ED] BY RESPONDENT SBT TRUCKING CORPORATION.[13]
Three issues are to be resolved: (1) Whether or not an employer-employee relationship
existed between petitioners and respondent Sahot; (2) Whether or not there was valid dismissal;
and (3) Whether or not respondent Sahot is entitled to separation pay.
Crucial to the resolution of this case is the determination of the first issue. Before a case
for illegal dismissal can prosper, an employer-employee relationship must first be established. [14]
Petitioners invoke the decision of the Labor Arbiter Ariel Cadiente Santos which found that
respondent Sahot was not an employee but was in fact, petitioners industrial partner. [15] It is
contended that it was the Labor Arbiter who heard the case and had the opportunity to observe
the demeanor and deportment of the parties. The same conclusion, aver petitioners, is
supported by substantial evidence.[16]Moreover, it is argued that the findings of fact of the Labor
Arbiter was wrongly overturned by the NLRC when the latter made the following pronouncement:
We agree with complainant that there was error committed by the Labor Arbiter when he
concluded that complainant was an industrial partner prior to 1994. A computation of the age of
complainant shows that he was only twenty-three (23) years when he started working with
respondent as truck helper. How can we entertain in our mind that a twenty-three (23) year old
man, working as a truck helper, be considered an industrial partner. Hence we rule that
complainant was only an employee, not a partner of respondents from the time complainant
started working for respondent.[17]
Because the Court of Appeals also found that an employer-employee relationship existed,
petitioners aver that the appellate courts decision gives an imprimatur to the illegal finding and
conclusion of the NLRC.

Private respondent, for his part, denies that he was ever an industrial partner of
petitioners. There was no written agreement, no proof that he received a share in petitioners
profits, nor was there anything to show he had any participation with respect to the running of
the business.[18]
The elements to determine the existence of an employment relationship are: (a) the
selection and engagement of the employee; (b) the payment of wages; (c) the power of
dismissal; and (d) the employers power to control the employees conduct. The most important
element is the employers control of the employees conduct, not only as to the result of the work
to be done, but also as to the means and methods to accomplish it.[19]
As found by the appellate court, petitioners owned and operated a trucking business since
the 1950s and by their own allegations, they determined private respondents wages and rest
day.[20] Records of the case show that private respondent actually engaged in work as an
employee. During the entire course of his employment he did not have the freedom to
determine where he would go, what he would do, and how he would do it. He merely followed
instructions of petitioners and was content to do so, as long as he was paid his wages. Indeed,
said the CA, private respondent had worked as a truck helper and driver of petitioners not for his
own pleasure but under the latters control.
Article 1767[21] of the Civil Code states that in a 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. [22] Not one of these circumstances is present
in this case. No written agreement exists to prove the partnership between the parties. Private
respondent did not contribute money, property or industry for the purpose of engaging in the
supposed business. There is no proof that he was receiving a share in the profits as a matter of
course, during the period when the trucking business was under operation. Neither is there any
proof that he had actively participated in the management, administration and adoption of
policies of the business. Thus, the NLRC and the CA did not err in reversing the finding of the
Labor Arbiter that private respondent was an industrial partner from 1958 to 1994.
On this point, we affirm the findings of the appellate court and the NLRC. Private
respondent Jaime Sahot was not an industrial partner but an employee of petitioners from 1958
to 1994. The existence of an employer-employee relationship is ultimately a question of
fact[23]and the findings thereon by the NLRC, as affirmed by the Court of Appeals, deserve not
only respect but finality when supported by substantial evidence. Substantial evidence is such
amount of relevant evidence which a reasonable mind might accept as adequate to justify a
conclusion.[24]
Time and again this Court has said that if doubt exists between the evidence presented by
the employer and the employee, the scales of justice must be tilted in favor of the latter. [25] Here,
we entertain no doubt. Private respondent since the beginning was an employee of, not an
industrial partner in, the trucking business.

In his decision, the Labor Arbiter concluded that:

While it may be true that respondents insisted that complainant continue working with
respondents despite his alleged illness, there is no direct evidence that will prove that
complainants illness prevents or incapacitates him from performing the function of a driver. The
fact remains that complainant suddenly stopped working due to boredom or otherwise when he
refused to work as a checker which certainly is a much less strenuous job than a driver. [26]
But dealing the Labor Arbiter a reversal on this score the NLRC, concurred in by the Court
of Appeals, held that:
While it was very obvious that complainant did not have any intention to report back to work due
to his illness which incapacitated him to perform his job, such intention cannot be construed to
be an abandonment. Instead, the same should have been considered as one of those falling
under the just causes of terminating an employment. The insistence of respondent in making
complainant work did not change the scenario.
It is worthy to note that respondent is engaged in the trucking business where physical strength
is of utmost requirement (sic). Complainant started working with respondent as truck helper at
age twenty-three (23), then as truck driver since 1965. Complainant was already fifty-nine
(59) when the complaint was filed and suffering from various illness triggered by his work and
age.
x x x[27]
In termination cases, the burden is upon the employer to show by substantial evidence
that the termination was for lawful cause and validly made. [28] Article 277(b) of the Labor Code
puts the burden of proving that the dismissal of an employee was for a valid or authorized cause
on the employer, without distinction whether the employer admits or does not admit the
dismissal.[29] For an employees dismissal to be valid, (a) the dismissal must be for a valid cause
and (b) the employee must be afforded due process.[30]
Article 284 of the Labor Code authorizes an employer to terminate an employee on the
ground of disease, viz:
Art. 284. Disease as a ground for termination- An employer may terminate the services of an
employee who has been found to be suffering from any disease and whose continued
employment is prohibited by law or prejudicial to his health as well as the health of his coemployees: xxx
However, in order to validly terminate employment on this ground, Book VI, Rule I, Section
8 of the Omnibus Implementing Rules of the Labor Code requires:

Coming now to the second issue, was private respondent validly dismissed by petitioners?
Petitioners contend that it was private respondent who refused to go back to work. The
decision of the Labor Arbiter pointed out that during the conciliation proceedings, petitioners
requested respondent Sahot to report back for work. However, in the same proceedings, Sahot
stated that he was no longer fit to continue working, and instead he demanded separation pay.
Petitioners then retorted that if Sahot did not like to work as a driver anymore, then he could be
given a job that was less strenuous, such as working as a checker. However, Sahot declined that
suggestion. Based on the foregoing recitals, petitioners assert that it is clear that Sahot was not
dismissed but it was of his own volition that he did not report for work anymore.

Sec. 8. Disease as a ground for dismissal- Where the employee suffers from a disease and his
continued employment is prohibited by law or prejudicial to his health or to the health of his coemployees, the employer shall not terminate his employment unless there is a certification by
competent public health authority that the disease is of such nature or at such a stage that it
cannot be cured within a period of six (6) months even with proper medical treatment. If the
disease or ailment can be cured within the period, the employer shall not terminate the
employee but shall ask the employee to take a leave. The employer shall reinstate such
employee to his former position immediately upon the restoration of his normal health. (Italics
supplied).

As this Court stated in Triple Eight integrated Services, Inc. vs. NLRC, [31] the requirement
for a medical certificate under Article 284 of the Labor Code cannot be dispensed with;
otherwise, it would sanction the unilateral and arbitrary determination by the employer of the
gravity or extent of the employees illness and thus defeat the public policy in the protection of
labor.
In the case at bar, the employer clearly did not comply with the medical certificate
requirement before Sahots dismissal was effected. In the same case of Sevillana vs. I.T.
(International) Corp., we ruled:
Since the burden of proving the validity of the dismissal of the employee rests on the employer,
the latter should likewise bear the burden of showing that the requisites for a valid dismissal due
to a disease have been complied with. In the absence of the required certification by a
competent public health authority, this Court has ruled against the validity of the employees
dismissal. It is therefore incumbent upon the private respondents to prove by the quantum of
evidence required by law that petitioner was not dismissed, or if dismissed, that the dismissal
was not illegal; otherwise, the dismissal would be unjustified. This Court will not sanction a
dismissal premised on mere conjectures and suspicions, the evidence must be substantial and
not arbitrary and must be founded on clearly established facts sufficient to warrant his
separation from work.[32]
In addition, we must likewise determine if the procedural aspect of due process had been
complied with by the employer.
From the records, it clearly appears that procedural due process was not observed in the
separation of private respondent by the management of the trucking company. The employer is
required to furnish an employee with two written notices before the latter is dismissed: (1) the
notice to apprise the employee of the particular acts or omissions for which his dismissal is
sought, which is the equivalent of a charge; and (2) the notice informing the employee of his
dismissal, to be issued after the employee has been given reasonable opportunity to answer and
to be heard on his defense.[33] These, the petitioners failed to do, even only for record purposes.
What management did was to threaten the employee with dismissal, then actually implement
the threat when the occasion presented itself because of private respondents painful left thigh.
All told, both the substantive and procedural aspects of due process were violated. Clearly,
therefore, Sahots dismissal is tainted with invalidity.
On the last issue, as held by the Court of Appeals, respondent Jaime Sahot is entitled to
separation pay. The law is clear on the matter. An employee who is terminated because of
disease is entitled to separation pay equivalent to at least one month salary or to one-half
month salary for every year of service, whichever is greater xxx. [34] Following the formula set in
Art. 284 of the Labor Code, his separation pay was computed by the appellate court at P2,080
times 36 years (1958 to 1994) or P74,880. We agree with the computation, after noting that his
last monthly salary was P4,160.00 so that one-half thereof is P2,080.00. Finding no reversible
error nor grave abuse of discretion on the part of appellate court, we are constrained to sustain
its decision. To avoid further delay in the payment due the separated worker, whose claim was
filed way back in 1994, this decision is immediately executory. Otherwise, six percent (6%)
interest per annum should be charged thereon, for any delay, pursuant to provisions of the Civil
Code.
WHEREFORE, the petition is DENIED and the decision of the Court of Appeals dated
February 29, 2000 is AFFIRMED. Petitioners must pay private respondent Jaime Sahot his
separation pay for 36 years of service at the rate of one-half monthly pay for every year of

service, amounting to P74,880.00, with interest of six per centum (6%) per annum from finality
of this decision until fully paid.
Costs against petitioners.
SO ORDERED.

Doa Raymunda Chuidian retired from the partnership November 4, 1885. On January 1, 1888,
the partnership went into liquidation, and it does not appear that the liquidation had been
terminated when this action was brought.
Down to the time the partnership went into liquidation the accounts-current of D. Telesforo
Chuidian and Doa Candelaria Chuidian had been diminished in an amount aggregating about
288,000 pesos, while that of D. Mariano Buenaventura had been increased about 51,000 pesos.
During the period from the commencement of the liquidation down to January 1, 1896, the
account-current of each of the Chuidians had been still further decreased, while that of D.
Mariano Buenaventura had been still further increased.
On January 1, 1894, D. Mariano Buenaventura died, his estate passing by will to his children,
among whom was D. Vicente Buenaventura. Upon the partition of the estate the amount of the
interest of D. Vicente Buenaventura in his father's account-current and in the capital was
ascertained and recorded in the books of the firm.

JOSE MACHUCA, plaintiff-appellee,

vs.
CHUIDIAN, BUENAVENTURA & CO., defendants-appellants.

On December 15, 1898, D. Vicente Buenaventura executed a public instrument in which for a
valuable consideration he "assigns to D. Jose Gervasio Garcia . . . a 25 per cent share in all that
may be obtained by whatever right in whatever form from the liquidation of the partnership of
Chuidian, Buenaventura & Co., in the part pertaining to him in said partnership, . . . the
assignee, being expressly empowered to do in his own name, and as a part owner, by virtue of
this assignment in the assets of the partnership, whatever things may be necessary for the
purpose of accelerating the liquidation, and of obtaining on judicially or extrajudicially the
payment of the deposits account-current pertaining to the assignor, it being understood that D.
Jose Gervasio Garcia is to receive the 25 per cent assigned to him, in the same form in which it
may be obtained from said partnership, whether in cash, credits, goods, movables or
immovables, and on the date when Messrs. Chuidian, Buenaventura & Co., in liquidation, shall
have effected the operations necessary in order to satisfy the credits and the share in the
partnership capital hereinbefore mentioned."

Simplicio del Rosario for appellants.

Joaquin Rodriguez Serra for appellee.

The plaintiff claims under Garcia by virtue of a subsequent assignment, which has been notified
to the liquidator of the partnership.

LADD, J.:

The liquidator of the partnership having declined to record in the books of the partnership the
plaintiff's claim under the assignment as a credit due from the concern to him this action is
brought to compel such record to be made, and the plaintiff further asks that he be adjudicated
to be a creditor of the partnership in an amount equal to 25 per cent of D. Vicente
Buenaventura's share in his father's account-current, as ascertained when the record was made
in the books of the partnership upon the partition of the latters estate, with interest, less the
liability to which the plaintiff is subject by reason of his share in the capital; that the necessary
liquidation being first had, the partnership pay to the plaintiff the balance which may be found to
be due him; and that if the partnership has no funds with which to discharge this obligation an
adjudication of bankruptcy be made. He also asks to recover the damages caused by reason of
the failure of the liquidator to record his credit in the books of partnership.

G.R. No. 1011

May 13, 1903

Most of the allegations of the complaint were admitted by the defendant at the hearing, and the
judgment of the court below is based on the state of facts appearing from such admissions, no
evidence having been taken.
The defendants are a regular general partnership, organized in Manila, December 29, 1882, as a
continuation of a prior partnership of the same name. The original partners constituting the
partnership of 1882 were D. Telesforo Chuidian, Doa Raymunda Chuidian, Doa Candelaria
Chuidian, and D. Mariano Buenaventura. The capital was fixed in the partnership agreement at
16,000 pesos, of which the first three partners named contributed 50,000 pesos each, and the
last named 10,000 pesos, and it was stipulated that the liability of the partners should be
"limited to the amounts brought in by them to form the partnership stock."
In addition to the amounts contributed by the partners to the capital, it appears from the
partnership agreement that each one of them had advanced money to the preexisting
partnership, which advances were assumed or accounts-current aggregated something over
665,000 pesos, of which sum about 569,000 pesos represented the advances from the Chuidians
and the balance that balance that from D. Mariano Buenaventura.

The judgment of the court below goes beyond the relief asked by the plaintiff in the complaint,
the plaintiff being held entitled not only to have the credit assigned him recorded in the books of
the partnership but also to receive forthwith 25 per cent of an amount representing the share of
D. Vicente Buenaventura in the account-current at the time of the partition of his father's estate,
with interest, the payment of the 25 percent of Buenaventura's share in the capital to be
postponed till the termination of the liquidation. This point has not, however, been taken by
counsel, and we have therefore considered the case upon its merits.

The underlying question in the case relates to the construction of clause 19 of the partnership
agreement, by which it was stipulated that "upon the dissolution of the company, the pending
obligations in favor of outside parties should be satisfied, the funds of the minors Jose and
Francisco Chuidian [it does not appear what their interest in the partnership was or when or how
it was acquired] should be taken out, and afterwards the resulting balance of the account-current
of each one of those who had put in money (imponentes) should be paid."
Our construction of this clause is that it establishes a a basis for the final adjustment of the
affairs of the partnership; that that basis is that the liabilities to noncompartners are to be first
discharged; that the claims of the Chuidian minors are to be next satisfied; and that what is due
to the respective partners on account of their advances to the firm is to be paid last of all,
leaving the ultimate residue, of course, if there be any, to be distributed, among the partners in
the proportions in which they may be entitled thereto.
Although in a sense the partners, being at the same time creditors, were "outside parties," it is
clear that a distinction is made in this clause between creditors who were partners and creditors
who were not partners, and that the expression "outside parties" refers to the latter class. And
the words "pending obligations," we think, clearly comprehend outstanding obligations of every
kind in favor of such outside parties, and do not refer merely, as claimed by counsel for the
plaintiff, to the completion of mercantile operations unfinished at the time of the dissolution of
the partnership, such as consignments of goods and the like. As respects the claims of the
Chuidian minors, the suggestion of counsel is that the clause in question means that their
accounts are to be adjusted before those of the partners but not paid first. Such a provision
would have been of no practical utility, and the language used that the funds should be
"taken out" (se dedujeran) does not admit of such a construction.
Such being the basis upon which by agreement of the partners the assets of the partnership are
to be applied to the discharge of the various classes of the firm's liabilities, it follows that D.
Vicente Buenaventura, whose rights are those of his father, is in no case entitled to receive any
part of the assets until the creditors who are nonpartners and the Chuidian minors are paid.
Whatever rights he had either as creditor or partner, he could only transfer subject to this
condition. And it is clear, from the language of the instrument under which the plaintiff claims,
that this conditional interest was all that D. Vicente Buenaventura ever intended to transfer. By
that instrument he undertakes to assign to Garcia not a present interest in the assets of the
partnership but an interest in whatever "may be obtained from the liquidation of the
partnership," which Garcia is to receive "in the same form in which it may be obtained from said
partnership," and "on the date when Messrs. Chuidian, Buenaventura & Co., in liquidation, shall
have effected the operations necessary in order to satisfy" the claims of D. Vicente
Buenaventura.
Upon this interpretation of the assignment, it becomes unnecessary to inquire whether article
143 of the Code of Commerce, prohibiting a partner from transferring his interest in the
partnership without the consent of the other partners, applies to partnerships in liquidation, as
contended by the defendant. The assignment by its terms is not to take effect until all the
liabilities of the partnership have been discharged and nothing remains to be done except to
distribute the assets, if there should be any, among the partners. Meanwhile the assignor,
Buenaventura, is to continue in the enjoyment of the rights and is to remain subject to the
liabilities of a partner as though no assignment had been made. In other words, the assignment
does not purport to transfer an interest in the partnership, but only a future contingent right to
25 per cent of such portion of the ultimate residue of the partnership property as the assignor
may become entitled to receive by virtue of his proportionate interest in the capital.
There is nothing in the case to show either that the nonpartner creditors of the partnership have
been paid or that the claims of the Chuidian minors have been satisfied. Such rights as the
plaintiff has acquired against the partnership under the assignment still remain, therefore,

subject to the condition which attached to them in their origin, a condition wholly uncertain of
realization, since it may be that the entire assets of the partnership will be exhausted in the
payment of the creditors entitled to preference under the partnership agreement, thus
extinguishing the plaintiff's right to receive anything from the liquidation.
It is contended by the plaintiff that, as the partnership was without authority to enter upon new
mercantile operations after the liquidation commenced, the increase in D. Mariano
Buenaventura's account-current during that period was the result of a void transaction, and that
therefore the plaintiff is entitled to withdraw at once the proportion of such increase to which he
is entitled under the assignment. With reference to this contention, it is sufficient to say that it
nowhere appears in the case that the increase in D. Mariano Buenaventura's account-current
during the period of liquidation was the result of new advances to the firm, and the figures would
appear to indicate that it resulted from the accumulation of interest.
Counsel for the plaintiff have discussed at length in their brief the meaning of the clause in the
partnership agreement limiting the liability of the partners to the amounts respectively brought
into the partnership by them, and the effect of this stipulation upon their rights as creditors of
the firm. These are questions which relate to the final adjustment of the affairs of the firm, the
distribution of the assets remaining after all liabilities have been discharged, or, on the other
hand, the apportionment of the losses if the assets should not be sufficient to meet the
liabilities. They are in no way involved in the determination of the present case.
The plaintiff having acquired no rights under the assignment which are now enforceable against
the defendant, this action can not be maintained. The liquidator of the defendant having been
notified of the assignment, the plaintiff will be entitled to receive from the assets of the
partnership, if any remain, at the termination of the liquidation, 25 per cent of D. Vicente's
resulting interest, both as partner and creditor. The judgment in this case should not affect the
plaintiff's right to bring another action against the partnership when the affairs of the same are
finally wound up. The proper judgment will be that the action be dismissed. The judgment of the
court below is reversed and the case is remanded to that court with directions to enter a
judgment of dismissal. So ordered.
Arellano, C.J., Torres, Cooper, Willard and Mapa, JJ., concur.
McDonough, J., did not sit in this case.

PANGANIBAN, J.:
A share in a partnership can be returned only after the completion of the latters
dissolution, liquidation and winding up of the business.
The Case
The Petition for Review on Certiorari before us challenges the March 23, 2000
Decision[1] and the July 26, 2000 Resolution[2] of the Court of Appeals[3] (CA) in CA-GR CV No.
41026. The assailed Decision disposed as follows:
WHEREFORE, foregoing premises considered, the Decision dated July 21, 1992 rendered by the
Regional Trial Court, Branch 148, Makati City is hereby SET ASIDE and NULLIFIED and in lieu
thereof a new decision is rendered ordering the [petitioners] jointly and severally to pay and
reimburse to [respondents] the amount of P253,114.00. No pronouncement as to costs.[4]
Reconsideration was denied in the impugned Resolution.
The Facts
On July 25, 1984, Luzviminda J. Villareal, Carmelito Jose and Jesus Jose formed a
partnership with a capital of P750,000 for the operation of a restaurant and catering business
under the name Aquarius Food House and Catering Services. [5] Villareal was appointed general
manager and Carmelito Jose, operations manager.
Respondent Donaldo Efren C. Ramirez joined as a partner in the business on September 5,
1984. His capital contribution of P250,000 was paid by his parents, Respondents Cesar and
Carmelita Ramirez.[6]
After Jesus Jose withdrew from the partnership in January 1987, his capital contribution
of P250,000 was refunded to him in cash by agreement of the partners.[7]
In the same month, without prior knowledge of respondents, petitioners closed down the
restaurant, allegedly because of increased rental. The restaurant furniture and equipment were
deposited in the respondents house for storage.[8]
On March 1, 1987, respondent spouses wrote petitioners, saying that they were no longer
interested in continuing their partnership or in reopening the restaurant, and that they were
accepting the latters offer to return their capital contribution. [9]

[G.R. No. 144214. July 14, 2003]

LUZVIMINDA
J.
VILLAREAL,
DIOGENES
VILLAREAL
and
CARMELITO
JOSE, petitioners, vs. DONALDO EFREN C. RAMIREZ and Spouses CESAR G.
RAMIREZ JR. and CARMELITA C. RAMIREZ, respondents.
DECISION

On October 13, 1987, Carmelita Ramirez wrote another letter informing petitioners of the
deterioration of the restaurant furniture and equipment stored in their house. She also reiterated
the request for the return of their one-third share in the equity of the partnership. The repeated
oral and written requests were, however, left unheeded.[10]
Before the Regional Trial Court (RTC) of Makati, Branch 59, respondents subsequently filed
a Complaint[11] dated November 10, 1987, for the collection of a sum of money from petitioners.
In their Answer, petitioners contended that respondents had expressed a desire to
withdraw from the partnership and had called for its dissolution under Articles 1830 and 1831 of

the Civil Code; that respondents had been paid, upon the turnover to them of furniture and
equipment worth over P400,000; and that the latter had no right to demand a return of their
equity because their share, together with the rest of the capital of the partnership, had been
spent as a result of irreversible business losses.[12]
In their Reply, respondents alleged that they did not know of any loan encumbrance on the
restaurant. According to them, if such allegation were true, then the loans incurred by
petitioners should be regarded as purely personal and, as such, not chargeable to the
partnership. The former further averred that they had not received any regular report or
accounting from the latter, who had solely managed the business. Respondents also alleged that
they expected the equipment and the furniture stored in their house to be removed by
petitioners as soon as the latter found a better location for the restaurant. [13]
Respondents filed an Urgent Motion for Leave to Sell or Otherwise Dispose of Restaurant
Furniture and Equipment[14] on July 8, 1988.The furniture and the equipment stored in their house
were inventoried and appraised at P29,000.[15] The display freezer was sold forP5,000 and the
proceeds were paid to them.[16]
After trial, the RTC[17] ruled that the parties had voluntarily entered into a partnership,
which could be dissolved at any time. Petitioners clearly intended to dissolve it when they
stopped operating the restaurant. Hence, the trial court, in its July 21, 1992 Decision, held them
liable as follows:[18]
WHEREFORE, judgment is hereby rendered in favor of [respondents] and against the
[petitioners] ordering the [petitioners] to pay jointly and severally the following:
(a) Actual damages in the amount of P250,000.00
(b) Attorneys fee in the amount of P30,000.00
(c) Costs of suit.
The CA Ruling
The CA held that, although respondents had no right to demand the return of their capital
contribution, the partnership was nonetheless dissolved when petitioners lost interest in
continuing the restaurant business with them. Because petitioners never gave a proper
accounting of the partnership accounts for liquidation purposes, and because no sufficient
evidence was presented to show financial losses, the CA computed their liability as follows:
Consequently, since what has been proven is only the outstanding obligation of the partnership
in the amount of P240,658.00, although contracted by the partnership before [respondents]
have joined the partnership but in accordance with Article 1826 of the New Civil Code, they are
liable which must have to be deducted from the remaining capitalization of the said partnership
which is in the amount of P1,000,000.00 resulting in the amount of P759,342.00, and in order to
get the share of [respondents], this amount of P759,342.00 must be divided into three (3) shares
or in the amount of P253,114.00 for each share and which is the only amount which [petitioner]
will return to [respondents] representing the contribution to the partnership minus the
outstanding debt thereof.[19]
Hence, this Petition.[20]

Issues
In their Memorandum,[21] petitioners submit the following issues for our consideration:
9.1. Whether the Honorable Court of Appeals decision ordering the distribution of the capital
contribution, instead of the net capital after the dissolution and liquidation of a partnership,
thereby treating the capital contribution like a loan, is in accordance with law and jurisprudence;
9.2. Whether the Honorable Court of Appeals decision ordering the petitioners to jointly and
severally pay and reimburse the amount of [P]253,114.00 is supported by the evidence on
record; and
9.3. Whether the Honorable Court of Appeals was correct in making [n]o pronouncement as to
costs.[22]
On closer scrutiny, the issues are as follows: (1) whether petitioners are liable to
respondents for the latters share in the partnership; (2) whether the CAs computation
of P253,114 as respondents share is correct; and (3) whether the CA was likewise correct in not
assessing costs.
This Courts Ruling
The Petition has merit.
First Issue:
Share in Partnership
Both the trial and the appellate courts found that a partnership had indeed existed, and
that it was dissolved on March 1, 1987. They found that the dissolution took place when
respondents informed petitioners of the intention to discontinue it because of the formers
dissatisfaction with, and loss of trust in, the latters management of the partnership affairs. These
findings were amply supported by the evidence on record. Respondents consequently demanded
from petitioners the return of their one-third equity in the partnership.
We hold that respondents have no right to demand from petitioners the return of their
equity share. Except as managers of the partnership, petitioners did not personally hold its
equity or assets. The partnership has a juridical personality separate and distinct from that of
each of the partners.[23] Since the capital was contributed to the partnership, not to petitioners, it
is the partnership that must refund the equity of the retiring partners.[24]
Second Issue:
What Must Be Returned?
Since it is the partnership, as a separate and distinct entity, that must refund the shares of
the partners, the amount to be refunded is necessarily limited to its total resources. In other
words, it can only pay out what it has in its coffers, which consists of all its assets.However,
before the partners can be paid their shares, the creditors of the partnership must first be

compensated.[25] After all the creditors have been paid, whatever is left of the partnership assets
becomes available for the payment of the partners shares.
Evidently, in the present case, the exact amount of refund equivalent to respondents onethird share in the partnership cannot be determined until all the partnership assets will have
been liquidated -- in other words, sold and converted to cash -- and all partnership creditors, if
any, paid. The CAs computation of the amount to be refunded to respondents as their share was
thus erroneous.
First, it seems that the appellate court was under the misapprehension that the total
capital contribution was equivalent to the gross assets to be distributed to the partners at the
time of the dissolution of the partnership. We cannot sustain the underlying idea that the capital
contribution at the beginning of the partnership remains intact, unimpaired and available for
distribution or return to the partners.Such idea is speculative, conjectural and totally without
factual or legal support.
Generally, in the pursuit of a partnership business, its capital is either increased by profits
earned or decreased by losses sustained. It does not remain static and unaffected by the
changing fortunes of the business. In the present case, the financial statements presented
before the trial court showed that the business had made meager profits. [26] However, notable
therefrom is the omission of any provision for the depreciation [27] of the furniture and the
equipment. The amortization of the goodwill[28] (initially valued at P500,000) is not reflected
either. Properly taking these non-cash items into account will show that the partnership was
actually sustaining substantial losses, which consequently decreased the capital of the
partnership. Both the trial and the appellate courts in fact recognized the decrease of the
partnership assets to almost nil, but the latter failed to recognize the consequent corresponding
decrease of the capital.
Second, the CAs finding that the partnership had an outstanding obligation in the amount
of P240,658 was not supported by evidence.We sustain the contrary finding of the RTC, which
had rejected the contention that the obligation belonged to the partnership for the following
reason:
x x x [E]vidence on record failed to show the exact loan owed by the partnership to its
creditors. The balance sheet (Exh. 4) does not reveal the total loan.The Agreement (Exh. A) par.
6 shows an outstanding obligation of P240,055.00 which the partnership owes to different
creditors, while the Certification issued by Mercator Finance (Exh. 8) shows that it was Sps.
Diogenes P. Villareal and Luzviminda J. Villareal, the former being the nominal party defendant in
the instant case, who obtained a loan of P355,000.00 on Oct. 1983, when the original
partnership was not yet formed.
Third, the CA failed to reduce the capitalization by P250,000, which was the amount paid
by the partnership to Jesus Jose when he withdrew from the partnership.
Because of the above-mentioned transactions, the partnership capital was actually
reduced. When petitioners and respondents ventured into business together, they should have
prepared for the fact that their investment would either grow or shrink. In the present case, the
investment of respondents substantially dwindled. The original amount of P250,000 which they
had invested could no longer be returned to them, because one third of the partnership
properties at the time of dissolution did not amount to that much.
It is a long established doctrine that the law does not relieve parties from the effects of
unwise, foolish or disastrous contracts they have entered into with all the required formalities

and with full awareness of what they were doing. Courts have no power to relieve them from
obligations they have voluntarily assumed, simply because their contracts turn out to be
disastrous deals or unwise investments.[29]
Petitioners further argue that respondents acted negligently by permitting the partnership
assets in their custody to deteriorate to the point of being almost worthless. Supposedly, the
latter should have liquidated these sole tangible assets of the partnership and considered the
proceeds as payment of their net capital. Hence, petitioners argue that the turnover of the
remaining partnership assets to respondents was precisely the manner of liquidating the
partnership and fully settling the latters share in the partnership.
We disagree. The delivery of the store furniture and equipment to private respondents was
for the purpose of storage. They were unaware that the restaurant would no longer be reopened
by petitioners. Hence, the former cannot be faulted for not disposing of the stored items to
recover their capital investment.
Third Issue:
Costs
Section 1, Rule 142, provides:
SECTION 1. Costs ordinarily follow results of suit. Unless otherwise provided in these rules, costs
shall be allowed to the prevailing party as a matter of course, but the court shall have power, for
special reasons, to adjudge that either party shall pay the costs of an action, or that the same be
divided, as may be equitable. No costs shall be allowed against the Republic of the Philippines
unless otherwise provided by law.
Although, as a rule, costs are adjudged against the losing party, courts have discretion, for
special reasons, to decree otherwise. When a lower court is reversed, the higher court normally
does not award costs, because the losing party relied on the lower courts judgment which is
presumed to have been issued in good faith, even if found later on to be erroneous. Unless
shown to be patently capricious, the award shall not be disturbed by a reviewing tribunal.
WHEREFORE, the Petition is GRANTED, and the assailed Decision and Resolution SET
ASIDE. This disposition is without prejudice to proper proceedings for the accounting, the
liquidation and the distribution of the remaining partnership assets, if any. No pronouncement as
to costs.
SO ORDERED.

G.R. No. 19892

September 6, 1923

TECK SEING AND CO., LTD., petitioner-appellee.

SANTIAGO JO CHUNG, ET AL., partners,
vs.
PACIFIC COMMERCIAL COMPANY, ET AL., creditors-appellants.
Del Rosario & Del Rosario and Block, Johnston and Greenbaum for appellants.
F. V. Arias for appellants Jo Ibec and Go Tayco.
No appearance for petitioner and appellee.
Jose A. Espiritu and Felipe Ysmael as amici curiae.
MALCOLM, J.:
Following the presentation of an application to be adjudged an insolvent by the "Sociedad
Mercantil, Teck Seing & Co., Ltd.," the creditors, the Pacific Commercial Company, Piol &
Company, Riu Hermanos, and W. H. Anderson & Company, filed a motion in which the Court was
prayed to enter an order: "(A) Declaring the individual partners as described in paragraph 5
parties to this proceeding; (B) to require each of said partners to file an inventory of his property
in the manner required by section 51 of Act No. 1956; and (C) that each of said partners be
adjudicated insolvent debtors in this proceeding." The trial judge first granted the motion, but,
subsequently, on opposition being renewed, denied it. It is from this last order that an appeal
was taken in accordance with section 82 of the Insolvency Law.
There has been laid before us for consideration and decision a question of some importance and
of some intricacy. The issue in the case relates to a determination of the nature of the mercantile
establishment which operated under the name of Teck Seing & co., Ltd., and this issue requires
us to look into, and analyze, the document constituting Teck Seing & Co., Ltd. It reads:
ESCRITURA DE SOCIEDAD MERCANTIL LIMITADA

Sepan todos por la presente:

Que nosotros, Santiago Jo Chung Cang, mayor de edad comerciante, vecino y
residente del municipio de Tabogon Provincia de Cebu, Islas Filipinas, Go Tayco, mayor
de edad, comerciante, vecino y residente del municipio de Cebu Provincia de Cebu,
Islas Filipinas, Yap Gueco, mayor de edad, comerciante, vecino y residente del
municipio y Provincia de Cebu, Islas Filipinas, Lim Yogsing, mayor de edad
comerciante, vecino y residente del municipio de Cebu, Provincia de Cebu, Islas
Filipinas, y Jo Ybec, mayor de edad, comerciante, vecino y residente del municipio de
Jagna, Provincia de Bohol, Islas Filipinas, hacemos constar por la presente, que
constituimos y formamos una sociedad mercantil limitada, bajo las leyes vigentes en
las Islas Filipinas y para ser registrada de acuerdo con los reglamentos vigentes del
Codigo de Comercio en Filipinas.
Que la razon social se denominara "Teck Seing & Co., Ltd." y tendra su domicilio
principal en la Calle Magallanes No. 94, de la Ciudad de Cebu, Provincia de Cebu, Islas
Filipinas.
Que el capital social sera de treinta mil pesos (P30,000) moneda legal de las Islas
Filipinas, dividido en cinco acciones de a P6,000 como sigue:

Santiago Jo Chung Cang . . . . . . . . . . . . .

P6,000.00

Go Tayco . . . . . . . . . . . . . . . . . . . . . . . . . .

6,000.00

Yap Gueco . . . . . . . . . . . . . . . . . . . . . . . .

6,000.00

Jo Ybec . . . . . . . . . . . . . . . . . . . . . . . . . . .

6,000.00

Lim Yogsing . . . . . . . . . . . . . . . . . . . . . . .

6,000.00

Total . . . . . . . . . . . . . . . . . . . . . .

30,000.00

Que la duracion de la sociedad sera la de seis aos, a contar de la fecha de esta

escritura, pudiendo prorrogarse este tiempo a discrecion unanime de todos los
accionistas.
El objeto de la sociedad sera la compra y venta de mercaderias en general.

El administrador o administradores de la sociedad podran, previa conformidad de los

accionistas, establecer cuantas sucursales o establecimientos considere necesarios
para facilitar sus negocios y el mayor desarrollo del comercio a que se dedica la
sociedad, verificando todas las operaciones que crean convenientes para el fomento
de su capital.
Las ganancias o perdidas que resultaren durante cada ao comercial, se distribuiran
proporcionalmente entre los accionistas, de acuerdo con el capital aportado por cada
uno de los mismos.
Las ganancias que resultaren en cada ao comercial, si resultaren algunas ganancias,
no podran ser retiradas pors los accionistas hasta dentro del termino de tres aos a
contar de la fecha del primer balance anual del negocio, quedadno por tanto estas
ganancias en reserva, para ampliar el capital aportado opor los accionistas y ampliar
por tanto la esfera de accion emprendida por la misma sociedad. Al pasar o expirar el
termino de tres aos, cada accionista podra retirar o depositar en poder de la
sociedad, las ganancias que le debiera corresponder durante dicho termino de tres
aos.
Que los accionistas no podran extraer ni disponer en ningun tiempo cualesquiera
cantidad o cantidades de la sociedad, que haya sido aportado por los mismos, para
atender sus gastos particulares ni aun pagando redito alguno sobre la cantidad que
intenen disponer o extraer de dicha sociedad.
El accionista Sr. Lim Yogsing tendra a su cargo, en union del Sr. Vicente Jocson Jo, la
administracion de la Compaia, quienes podran usar indistintamente la firma social,
quedando por consiguiente autorizados amobs para hacer en nombre de ella toda
calse de operaciones, negocios y especulaciones mercantiles, practicando judicial y
extra-judicialment cuantos actos se requieran para el bien de la sociedad, nombrar
procuradores o abogados para reclamaciones y cobro de creditos y proponer ante los
tribunales las demandas, convenios, transacciones y excepciones procdentes. En caso
de ausencia, enfermedad o cualquier otro impedimento del accionista administrador
Sr. Lim Yogsing, este podra conferir poder general o especial al accionista que crea
conveniente para que en union del administrador auxiliar Sr. Vicente Jocson Jo,
pudieran ambos administrar convenientemente los negocios de la sociedad. Que los
administradores podran tener los empleados necesarios para el mejor que debieran
percibir dichos empleados por servicios rendidos a la sociedad.
Que ambos administradores podran disponer de mil discientos pesos (P1,200) moneda
filipina, anualmente, para sus gastos particulares, siendo dicha cantidad de P1,200 la
que corresponde a cada uno de dichos administradores, como emolumentos o salarios
que se les asigna a cas uno, por sus trabajos en la administracion de la
sociedad. Entendiendose, que, los accionistas podran disponer cada fin de aola
gratificacion quese concedera a cada administrador, si los negocios del ao fueran
boyantes y justifiquen la concesion de una gratificacion especial, aparte del salario
aqui dispuesto y especificado.
Que pasado el termino de seis aos, y es de la conveniencia de los accionistas la
continuacion del negocio de esta sociedad, dicho termino sera prorrogado por igual
numero de aos, sin necesidas del otorgamiento de ulteriores escrituras, quedando la
presente en vigor hasta el termino dispuesto por todos los accionistas.
Que las diferencias que pudieran suscitarse entre los accionistas, bien sea por razon
de lo estipulado en esta en ella comprendidos, se procurara arreglar entre los mismos
amistosa y extrajudicialmente, y si no se consiguiere un arreglo de este modo, dichos
accionistas nombraran un arbitro, cuya resolucion estan todos obligados y por la
presente se comprometen y se obligan a acatarla en todas sus partes, renunciando
ulteriores recursos.

En cuyos terminos dejamos formalizada esta escritura de sociedad mercantillimitada,

y prometemos cumplirla fiel y estrictamente segun los pactos que hemos establecido.

Presentado a las diez y cuarenta y tres minutos de la maana de hoy, segun el asiento
No. 125, pagina 9 del Tomo 1. del Libro Diario. Cebu, 11 de febrero de 1920.

En testimonio de todo lo cual, firmamos en la Ciudad de Cebu, Provincia de Cebu, Islas

Filipinas, hoy 31 de octubre de mil novecientos diez y nueve.
(Fdo.) "QUIRICO ABETO
[SELLO] "Registrador Mercantil Ex-Officio"
(Fdos.) "LIM YOGSING
"Jo YBec por Ho Seng Sian
"SANTIAGO JO CHUNG CANG
"GO TAYCO
"YAP GUECO

Firnando en presencia de:

(Fdos.) "ATILANO LEYSON
"JULIO DIAZ
"ESTADOS UNIDOS DE AMERCA
"ISLAS FILIPINAS
"PROVINCIA DE CEBU
En el Municipio de Cebu, de la Provincia antes mencionada, I.F., hoy 31 de octubre de
1919, A.D., ante mi, Notario Publico que subscribe, comprecieron personalmente
Santiago Jo Chung Cang, Go Tayco, Yap Gueco, Lim Yogsing y Jo Ybec, representado
este ultimo por Ho Seng Sian, segun autorizacion hecha en telegrama de fecha 27 de
septiembre de 1919 que se me ha presentado en este mismo acto, de quienes doy fe
de que les conozco por ser las mismas personas que otorgaron el preinserto
documento, ratificando ant emi su contenido y manifestando ser el mismo un acto de
su libre y voluntario otorgamiento. El Sr. Santiago Jo Chung Cang me exhibio su cedula
personal expedida en Cebu, Cebu, I.F. el dia 19 de septiembre de 1919 bajo el No.
H77742, Go Tayco tambien me exhibio la suya expedida en Cebu, Cebu, I.F., el dia 9
de octubre de 1919 bajo el No. G2042490, Yap Gueco tambien me exhibio la suya
expedida en Cebu, Cebu, I.F. el dia 20 de enero de 1919 bajo el No. F1452296, Lim
Yogsing tambien me exhibio la suya expedida en Cebu, Cebu, I.F., el dia 26 de febrero
de 1919 bajo el No. F1455662, y Ho Seng Sian representante de Jo Ybec, me exhibio
su cedula personal expedida en Cebu, Cebu, I.f. el dia 4 de febrero de 1919 bajo el No.
F1453733.
Ante mi,

(Fdo.) "F.V.ARIAS
"Notario Publico
"Hasta el 1. de enero de 1920

Inscrito el documento que preced al folio 84 hoja No. 188, inscripcion 1.a del Tomo 3.
del Libro Registro de Sociedades Mercantiles. Cebu, 11 de febrero de 1920. Honorarios
treinta pesos con cincuenta centavos. Art. 197, Ley No. 2711, Codigo Administrativo.

(Fdo.) "QUIRICO ABETO

[SELLO] "Registrador Mercantil Ex-Officio"

Proceeding by process of elimination, it is self-evident that Teck Seing & Co., Ltd., is not a
corporation. Neither is it contended by any one that Teck Seing & Co., Ltd., is accidental
partnership denominated cuenta en participacion (joint account association).
Counsel for the petitioner and appellee described his client in once place in his opposition to the
motion of the creditors as "una verdadera sociedad anonima" (a true sociedad anonima). The
provisions of the Code of Commerce relating to sociedades anonimas were, however, repealed
by section 191 of the Corporation Law (Act No. 1459), with the exceptions the sociedades
anonimas lawfully organized at the time of the passage of the Corporation Law were recognized,
which is not our case.
The document providing for the partnership contract purported to form "una sociedad mercantil
limitada," and counsel for the petitioner's first contention was that Teck Seing & Co., Ltd., was
not "una sociedad regular colectiva, ni siquiera comanditaria, sino una sociedad mercantil
limitada." Let us see if the partnership contract created a "sociedad en comandita," or, as it is
known in English, and will hereafter be spoken of, "a limited partnership."
To establish a limited partnership there must be, at least, one general partner and the name of
the least one of the general partners must appear in the firm name. (Code of Commerce, arts.
122 [2], 146, 148.) But neither of these requirements have been fulfilled. The general rule is,
that those who seek to avail themselves of the protection of laws permitting the creation of
limited partnerships must show a substantially full compliance with such laws. A limited
partnership that has not complied with the law of its creation is not considered a limited
partnership at all, but a general partnership in which all the members are liable. (Mechem,
Elements of Partnership, p. 412; Gilmore, Partnership, pp. 499, 595; 20 R C. L. 1064.)
The contention of the creditors and appellants is that the partnership contract established a
general partnership.

"Asiento No. 157

Pagina No. 95 de mi
Registro Notarial
Serie 1919
Libro 2.

Article 125 of the Code of Commerce provides that the articles of general copartnership must
estate the names, surnames, and domiciles of the partners; the firm name; the names, and
surnames of the partners to whom the management of the firm and the use of its signature is
instrusted; the capital which each partner contributes in cash, credits, or property, stating the
value given the latter or the basis on which their appraisement is to be made; the duration of
the copartnership; and the amounts which, in a proper case, are to be given to each managing
partner annually for his private expenses, while the succeeding article of the Code provides that
the general copartnership must transact business under the name of all its members, of several

of them, or of one only. Turning to the document before us, it will be noted that all of the
requirements of the Code have been met, with the sole exception of that relating to the
composition of the firm name. We leave consideration of this phase of the case for later
discussion.
The remaining possibility is the revised contention of counsel for the petitioners to the effect
that Teck Seing & Co., Ltd., is "una sociedad mercantil "de facto" solamente" (only a de
facto commercial association), and that the decision of the Supreme court in the case of HungMan-Yoc vs. Kieng-Chiong-Seng [1906], 6 Phil., 498), is controlling. It was this argument which
convinced the trial judge, who gave effect to his understanding of the case last cited and which
here must be given serious attention.
The decision in Hung-Man-Yoc vs. Kieng-Chiong-Seng, supra, discloses that the firm KiengChiong-Seng was not organized by means of any public document; that the partnership had not
been recorded in the mercantile registry; and that Kieng-Chiong-Seng was not proven to be the
firm name, but rather the designation of the partnership. The conclusion then was, that the
partnership in question was merely de facto and that, therefore, giving effect to the provisions of
article 120 of the Code of Commerce, the right of action was against the persons in charge of the
management of the association.
Laying the facts of the case of Hung-Man-Yoc vs. Kieng-Chiong-Seng, supra, side by side with the
facts before us, a marked difference is at once disclosed. In the cited case, the organization of
the partnership was not evidenced by any public document; here, it is by a public document. In
the cited case, the partnership naturally could not present a public instrument for record in the
mercantile registry; here, the contract of partnership has been duly registered. But the two cases
are similar in that the firm name failed to include the name of any of the partners.
We come then to the ultimate question, which is, whether we should follow the decision in HungMan-Yoc vs. Kieng-Chiong-Seng, supra, or whether we should differentiate the two cases, holding
Teck Seing & Co., Ltd., a general copartnership, notwithstanding the failure of the firm name to
include the name of one of the partners. Let us now notice this decisive point in the case.
Article 119 of the Code of Commerce requires every commercial association before beginning its
business to state its article, agreements, and conditions in a public instrument, which shall be
presented for record in the mercantile registry. Article 120, next following, provides that the
persons in charge of the management of the association who violate the provisions of the
foregoing article shall be responsible in solidum to the persons not members of the association
with whom they may have transacted business in the name of the association. Applied to the
facts before us, it would seem that Teck Seing & Co., Ltd. has fulfilled the provisions of article
119. Moreover, to permit the creditors only to look to the person in charge of the management
of the association, the partner Lim Yogsing, would not prove very helpful to them.
What is said in article 126 of the Code of Commerce relating to the general copartnership
transacting business under the name of all its members or of several of them or of one only, is
wisely included in our commercial law. It would appear, however, that this provision was inserted
more for the protection of the creditors than of the partners themselves. A distinction could well
be drawn between the right of the alleged partnership to institute action when failing to live up
to the provisions of the law, or even the rights of the partners as among themselves, and the
right of a third person to hold responsible a general copartnership which merely lacks a legal
firm name in order to make it a partnership de jure.
The civil law and the common law alike seem to point to a difference between the rights of the
partners who have failed to comply with the law and the rights of third persons who have dealt
with the partnership.
The supreme court of Spain has repeatedly held that notwithstanding the obligation of the
members to register the articles of association in the commercial registry, agreements
containing all the essential requisites are valid as between the contracting parties, whatever the
form adopted, and that, while the failure to register in the commercial registry necessarily
precludes the members from enforcing rights acquired by them against third persons, such

failure cannot prejudice the rights of third persons. (See decisions of December 6, 1887, January
25, 1888, November 10, 1890, and January 26, 1900.) The same reasoning would be applicable
to the less formal requisite pertaining to the firm name.
The common law is to the same effect. The State of Michigan had a statute prohibiting the
transaction of business under an assumed name or any other than the real name of the
individual conducting the same, unless such person shall file with the county clerk a certificate
setting forth the name under which the business is to be conducted and the real name of each of
the partners, with their residences and post-office addresses, and making a violation thereof a
misdemeanor. The supreme Court of Michigan said:
The one object of the act is manifestly to protect the public against imposition and
fraud, prohibiting persons from concealing their identity by doing business under an
assumed name, making it unlawful to use other than their real names in transacting
business without a public record of who they are, available for use in courts, and to
punish those who violate the prohibition. The object of this act is not limited to
facilitating the collection of debts, or the protection of those giving credit to persons
doing business under an assumed name. It is not unilateral in its application. It applies
to debtor and creditor, contractor and contractee, alike. Parties doing business with
those acting under an assumed name, whether they buy or sell, have a right, under
the law, to know who they are, and who to hold responsible, in case the question of
damages for failure to perform or breach of warranty should arise.
The general rule is well settled that, where statutes enacted to protect the public
against fraud or imposition, or to safeguard the public health or morals, contain a
prohibition and impose a penalty, all contracts in violation thereof are void. . . .
As this act involves purely business transactions, and affects only money interests, we
think it should be construed as rendering contracts made in violation of it unlawful
and unforceable at the instance of the offending party only, but not as designed to
take away the rights of innocent parties who may have dealt with the offenders in
ignorance of their having violated the statute. (Cashin vs. Pliter [1912], 168 Mich.,
386; Ann. Cas. [1913-C, 697.)
The early decision of our Supreme Court in the case of Prautch Scholes & Co. vs. Hernandez
[1903], 1 Phil., 705), contains the following pertinent observations:
Another case may be supposed. A partnership is organized for commercial purposes. It
fails to comply with the requirements of article 119. A creditor sues the partnership for
a debt contracted by it, claiming to hold the partners severally. They answer that their
failure to comply with the Code of Commerce makes them a civil partnership and that
they are in accordance with article 1698 of the Civil Code only liable jointly. To allow
such liberty of action would be to permit the parties by a violation of the Code to
escape a liability which the law has seen fit to impose upon persons who organized
commercial partnership; "Because it would be contrary to all legal principles that the
nonperformance of a duty should redound to the benefit of the person in default either
intentional or unintentional." (Mercantile Law, Eixala, fourth ed., p. 145.)" (See
also Lichauco vs. Lichauco [1916], 33 Phil., 350, 360.)
Dr. Jose de Echavarri y Vivanco, in his Codigo de Comercio, includes the following comment after
articles 121 and 126 of the Code:
From the decisions cited in this and in the previous comments, the following is
deduced: 1st. Defects in the organization cannot affect relations with third persons.
2d. Members who contract with other persons before the association is lawfully
organized are liable to these persons. 3d. The intention to form an association is
necessary, so that if the intention of mutual participation in the profits and losses in a
particular business is proved, and there are no articles of association, there is no
association. 4th. An association, the articles of which have not been registered, is valid
in favor of third persons. 5th. The private pact or agreement to form a commercial

association is governed not by the commercial law but by the civil law. 6th. Secret
stipulations expressed in a public instrument, but not inserted in the articles of
association, do not affect third persons, but are binding on the parties themselves.
7th. An agreement made in a public instrument, other than the articles of association,
by means of which one of the partners guarantees to another certain profits or
secures him from losses, is valid between them, without affecting the association.
8th. Contracts entered into by commercial associations defectively organized are valid
when they are voluntarily executed by the parties, if the only controversy relates to
whether or not they complied with the agreement.
xxx

xxx

xxx

The name of the collective merchant is called firm name. By this name, the new being
is distinguished from others, its sphere of action fixed, and the juridical personality
better determined, without constituting an exclusive character of the general
partnership to such an extent as to serve the purpose of giving a definition of said
kind of a mercantile partnership, as is the case in our Code.
Having in mind that these partnerships are prevailingly of a personal character, article
126 says that they must transact business under the name of all its members, of some
of them, or of one only, the words "and company" to be added in the latter two cases.
It is rendered impossible for the general partnership to adopt a firm name appropriate
to its commercial object; the law wants to link, and does link, the solidary and
unlimited responsibility of the members of this partnership with the formation of its
name, and imposes a limitation upon personal liberty in its selection, not only by
prescribing the requisites, but also by prohibiting persons not members of the
company from including their names in its firm name under penalty of civil solidary
responsibility.
Of course, the form required by the Code for the adoption of the firm name does not
prevent the addition thereto of any other title connected with the commercial purpose
of the association. The reader may see our commentaries on the mercantile registry
about the business names and firm names of associations, but it is proper to establish
here that, while the business name may be alienated by any of the means admitted by
the law, it seems impossible to separate the firm names of general partnerships from
the juridical entity for the creation of which it was formed. (Vol. 2, pp. 197, 213.)
On the question of whether the fact that the firm name "Teck Seing & Co., Ltd." does not contain
the name of all or any of the partners as prescribed by the Code of Commerce prevents the
creation of a general partnership, Professor Jose A. Espiritu, as amicus curi, states:
My opinion is that such a fact alone cannot and will not be a sufficient cause of
preventing the formation of a general partnership, especially if the other requisites are
present and the requisite regarding registration of the articles of association in the
Commercial Registry has been complied with, as in the present case. I do not believe

that the adoption of a wrong name is a material fact to be taken into consideration in
this case; first, because the mere fact that a person uses a name not his own does not
prevent him from being bound in a contract or an obligation he voluntarily entered
into; second, because such a requirement of the law is merely a formal and not
necessarily an essential one to the existence of the partnership, and as long as the
name adopted sufficiently identity the firm or partnership intended to use it, the acts
and contracts done and entered into under such a name bind the firm to third persons;
and third, because the failure of the partners herein to adopt the correct name
prescribed by law cannot shield them from their personal liabilities, as neither law nor
equity will permit them to utilize their own mistake in order to put the blame on third
persons, and much less, on the firm creditors in order to avoid their personal
possibility.
The legal intention deducible from the acts of the parties controls in determining the existence
of a partnership. If they intend to do a thing which in law constitutes a partnership, they are
partners, although their purpose was to avoid the creation of such relation. Here, the intention of
the persons making up Teck Seing & co., Ltd. was to establish a partnership which they
erroneously denominated a limited partnership. If this was their purpose, all subterfuges
resorted to in order to evade liability for possible losses, while assuming their enjoyment of the
advantages to be derived from the relation, must be disregarded. The partners who have
disguised their identity under a designation distinct from that of any of the members of the firm
should be penalized, and not the creditors who presumably have dealt with the partnership in
good faith.
Articles 127 and 237 of the Code of Commerce make all the members of the general
copartnership liable personally and in solidum with all their property for the results of the
transactions made in the name and for the account of the partnership. Section 51 of the
Insolvency Law, likewise, makes all the property of the partnership and also all the separate
property of each of the partners liable. In other words, if a firm be insolvent, but one or more
partners thereof are solvent, the creditors may proceed both against the firm and against the
solvent partner or partners, first exhausting the assets of the firm before seizing the property of
the partners. (Brandenburg of Bankcruptcy, sec. 108; De los Reyes vs. Lukban and Borja [1916],
35 Phil., 757; Involuntary Insolvency of Campos Rueda & Co. vs. Pacific Commercial Co. [1922],
44 Phil., 916).
We reach the conclusion that the contract of partnership found in the document hereinbefore
quoted established a general partnership or, to be more exact, a partnership as this word is used
in the Insolvency Law.
Wherefore, the order appealed from is reversed, and the record shall be returned to the court of
origin for further proceedings pursuant to the motion presented by the creditors, in conformity
with the provisions of the Insolvency Law. Without special findings as to the costs in this
instance, it is ordered.
Araullo, C.J., Johnson, Street, Avancea, Villamor, Johns and Romualdez, JJ., concur.