Teck Seing and Co., Ltd. vs. Pacific Commercial Company, et al.

A partnership that fails to include the name of any partner in its firm name, as required by Article 126 of the Code of Commerce, is nevertheless a general partnership as to third persons who dealt with it in good faith, where the partnership was organized by public instrument and duly registered in the mercantile registry. The partners cannot invoke their own defect in organization to escape the solidary and unlimited liability that the law attaches to general partnerships.

The case arose from insolvency proceedings initiated by the "Sociedad Mercantil, Teck Seing & Co., Ltd.," a commercial entity organized under a public instrument executed on October 31, 1919, and registered in the mercantile registry on February 11, 1920. The entity was formed by five partners — Santiago Jo Chung Cang, Go Tayco, Yap Gueco, Lim Yogsing, and Jo Ybec — each contributing P6,000 to a capital of P30,000, divided into five shares. The partnership deed denominated the entity "una sociedad mercantil limitada" (a limited commercial partnership), but the firm name "Teck Seing & Co., Ltd." contained no partner's name. The applicable legal framework was the Code of Commerce, particularly Articles 119, 120, 125, 126, 127, and 237, together with the Insolvency Law (Act No. 1956), particularly Section 51.

Teck Seing & Co., Ltd. was organized by a public instrument executed on October 31, 1919, in Cebu, by five partners: Santiago Jo Chung Cang, Go Tayco, Yap Gueco, Lim Yogsing, and Jo Ybec (the last represented by Ho Seng Sian). The deed purported to form "una sociedad mercantil limitada" with a capital of P30,000 divided into five shares of P6,000 each, a duration of six years, and the object of buying and selling merchandise in general. The deed provided that Lim Yogsing, together with Vicente Jocson Jo, would manage the company and could use the firm signature; each administrator was allotted P1,200 annually for private expenses. The document was acknowledged before Notary Public F. V. Arias and was presented for record and inscribed in the mercantile registry on February 11, 1920.

Following the presentation of an application by Teck Seing & Co., Ltd. to be adjudged an insolvent, the creditors — Pacific Commercial Company, Piñol & Company, Riu Hermanos, and W. H. Anderson & Company — filed a motion praying that the individual partners be declared parties to the proceeding, be required to file inventories of their properties under Section 51 of Act No. 1956, and be adjudicated insolvent debtors. The trial judge first granted the motion but, on renewed opposition, denied it, apparently persuaded by the argument that the entity was merely a de facto commercial association under the ruling in Hung-Man-Yoc vs. Kieng-Chiong-Seng.

The parties disagreed on the legal nature of the entity. Counsel for the petitioner and appellee at one point described it as "una verdadera sociedad anonima" (a true sociedad anonima), but later contended that it was neither a regular collective partnership nor a limited partnership, but rather "una sociedad mercantil limitada," and ultimately argued that it was "una sociedad mercantil de facto solamente" (only a de facto commercial association). The creditors, for their part, contended that the partnership contract established a general partnership.

• Nature of the Entity: Petitioner argued that Teck Seing & Co., Ltd. was not "una sociedad regular colectiva, ni siquiera comanditaria, sino una sociedad mercantil limitada" — that is, neither a regular general partnership nor a limited partnership, but a limited commercial partnership.
• De Facto Association: Petitioner alternatively argued that the entity was "una sociedad mercantil de facto solamente" (only a de facto commercial association), relying on the ruling in Hung-Man-Yoc vs. Kieng-Chiong-Seng (1906) 6 Phil., 498, which held that an unregistered, informally organized partnership was merely de facto, with the right of action lying only against the persons in charge of management under Article 120 of the Code of Commerce.

• General Partnership: The creditors contended that the partnership contract established a general partnership, notwithstanding the defective firm name, and that all partners should therefore be held liable in solidum with their separate properties.
• Partners' Liability: The creditors prayed that the individual partners be declared parties to the insolvency proceeding, be required to file inventories of their properties under Section 51 of the Insolvency Law, and be adjudicated insolvent debtors, on the theory that the partners' personal liability attached notwithstanding the entity's defective organization.

• Nature of the Partnership: Whether Teck Seing & Co., Ltd. constituted a general partnership, a limited partnership, or a mere de facto commercial association, given that its firm name did not include the name of any partner.
• Liability of the Partners: Whether the individual partners could be declared parties to the insolvency proceeding and adjudged insolvent debtors, with their separate properties liable for the firm's debts.

• Nature of the Partnership: Yes. Teck Seing & Co., Ltd. was a general partnership, notwithstanding the failure of its firm name to include the name of any partner. The entity was not a limited partnership because it lacked at least one general partner whose name appeared in the firm name, and it was not a mere de facto association because it was organized by public instrument and duly registered in the mercantile registry.
• Liability of the Partners: Yes. The partners were liable personally and in solidum with all their property for the results of transactions made in the name and for the account of the partnership, under Articles 127 and 237 of the Code of Commerce, and Section 51 of the Insolvency Law made all the separate property of each partner liable.

• Nature of the Partnership: The Court proceeded by process of elimination. Teck Seing & Co., Ltd. was not a corporation, and no one contended it was a joint account association (cuenta en participacion). It could not be a sociedad anonima because the provisions of the Code of Commerce relating to such entities were repealed by Section 191 of the Corporation Law (Act No. 1459), with exceptions not applicable here. It could not be a limited partnership (sociedad en comandita) because the Code of Commerce requires at least one general partner and the name of at least one general partner in the firm name (Articles 122[2], 146, 148), and neither requirement was fulfilled. The general rule is that those seeking the protection of laws permitting limited partnerships must show substantial compliance; a limited partnership that has not complied with the law of its creation is not a limited partnership at all but a general partnership in which all members are liable. The Court then examined whether the entity was a general partnership. Article 125 of the Code of Commerce requires the articles of general copartnership to state the names, surnames, and domiciles of the partners; the firm name; the names of the managing partners; the capital contributions; the duration; and the amounts for managing partners' private expenses. All these requirements were met except the composition of the firm name. The Court distinguished Hung-Man-Yoc vs. Kieng-Chiong-Seng on the ground that in that case the partnership was not organized by public document and was not recorded in the mercantile registry, whereas here the partnership was organized by public instrument and duly registered. The Court held that Article 126's requirement that the general copartnership transact business under the name of all its members, several of them, or one only, was inserted more for the protection of creditors than of partners. A distinction was drawn between the rights of partners who failed to comply with the law and the rights of third persons who dealt with the partnership. The Supreme Court of Spain had repeatedly held that failure to register does not prejudice the rights of third persons, and the same reasoning applied to the less formal requisite of the firm name. The common law was to the same effect, as shown by the Michigan case of Cashin vs. Pliter, which held that statutes requiring the disclosure of partners' names should be construed as rendering contracts unlawful and unenforceable at the instance of the offending party only, but not as designed to take away the rights of innocent parties who dealt with the offenders in ignorance of the violation. The Court also quoted Prautch Scholes & Co. vs. Hernandez for the proposition that parties cannot escape liability by their own failure to comply with the Code of Commerce, "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." The legal intention deducible from the acts of the parties controls in determining the existence of a partnership; the parties intended to establish a partnership which they erroneously denominated a limited partnership, and all subterfuges to evade liability while assuming the advantages of the relation must be disregarded.
• Liability of the Partners: Articles 127 and 237 of the Code of Commerce make all members of a general copartnership liable personally and in solidum with all their property for the results of 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 partner liable. If a firm is insolvent but one or more partners are solvent, 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. The Court concluded that the contract of partnership established a general partnership, or to be more exact, a partnership as that word is used in the Insolvency Law, and that the partners could therefore be declared parties to the insolvency proceeding.

• Defective firm name does not negate general partnership — A partnership that fails to include the name of any partner in its firm name, as required by Article 126 of the Code of Commerce, is nevertheless a general partnership as to third persons who dealt with it in good faith, where the partnership was organized by public instrument and duly registered in the mercantile registry. The requirement of the firm name was inserted for the protection of creditors, not of partners, and partners cannot invoke their own defect in organization to escape liability.
• Substantial compliance required for limited partnership — 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.
• Defects in organization cannot prejudice third persons — Defects in the organization of a commercial association cannot affect relations with third persons. Members who contract with other persons before the association is lawfully organized are liable to those persons. An association whose articles have not been registered is valid in favor of third persons, and the failure to register cannot prejudice the rights of third persons.
• Nonperformance of duty cannot benefit the person in default — It is contrary to all legal principles that the nonperformance of a duty should redound to the benefit of the person in default, whether intentional or unintentional. Partners who have disguised their identity under a designation distinct from that of any of the members of the firm should be penalized, not the creditors who presumably dealt with the partnership in good faith.

• "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." — This passage states the controlling rule for determining when a defective limited partnership is treated as a general partnership, and it is central to the Court's reasoning.
• "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." — This passage articulates the distinction between the rights of partners who failed to comply with the law and the rights of third persons who dealt with the partnership, which is the ratio decidendi of the case.
• "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." — This passage states the principle that the parties' intention, as deduced from their acts, controls in determining the existence of a partnership, and that subterfuges to evade liability will 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." — This passage summarizes the policy underlying the Court's holding that the partners cannot escape liability to third persons who dealt with the firm in good faith.

• Hung-Man-Yoc vs. Kieng-Chiong-Seng, 6 Phil., 498 (1906) — Distinguished. In that case, the partnership was not organized by public document, was not recorded in the mercantile registry, and the firm name was not proven to be the firm name but rather the designation of the partnership; the partnership was held to be merely de facto. Here, the partnership was organized by public instrument and duly registered, so the case was not controlling.
• Cashin vs. Pliter, 168 Mich., 386 (1912) — Cited as persuasive common-law authority. The Michigan Supreme Court held that a statute requiring the disclosure of partners' names should be construed as rendering contracts unlawful and unenforceable at the instance of the offending party only, but not as designed to take away the rights of innocent parties who dealt with the offenders in ignorance of the violation.
• Prautch Scholes & Co. vs. Hernandez, 1 Phil., 705 (1903) — Cited for the proposition that parties cannot escape liability by their own failure to comply with the Code of Commerce, 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.
• Lichauco vs. Lichauco, 33 Phil., 350 (1916) — Cited in support of the same principle as Prautch Scholes & Co. vs. Hernandez.
• De los Reyes vs. Lukban and Borja, 35 Phil., 757 (1916) — Cited for the rule that if a firm is insolvent but one or more partners are solvent, 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.
• Involuntary Insolvency of Campos Rueda & Co. vs. Pacific Commercial Co., 44 Phil., 916 (1922) — Cited for the same rule regarding the liability of solvent partners in insolvency proceedings.

• Article 119, Code of Commerce — Requires every commercial association, before beginning its business, to state its articles, agreements, and conditions in a public instrument, which shall be presented for record in the mercantile registry. The Court found that Teck Seing & Co., Ltd. had fulfilled this provision.
• Article 120, Code of Commerce — Provides that the persons in charge of the management of an association who violate the provisions of Article 119 shall be responsible in solidum to persons not members of the association with whom they transacted business in the name of the association. The Court noted that applying this provision to permit creditors to look only to the managing partner would not prove very helpful to them.
• Article 122(2), Code of Commerce — Requires that a limited partnership (sociedad en comandita) have at least one general partner. The Court found this requirement was not fulfilled.
• Article 125, Code of Commerce — Requires the articles of general copartnership to state the names, surnames, and domiciles of the partners; the firm name; the names of the managing partners; the capital contributions; the duration; and the amounts for managing partners' private expenses. The Court found all these requirements were met except the composition of the firm name.
• Article 126, Code of Commerce — Requires the general copartnership to transact business under the name of all its members, of several of them, or of one only, with the words "and company" to be added in the latter two cases. The Court held that this provision was inserted more for the protection of creditors than of partners, and its violation did not prevent the creation of a general partnership as to third persons.
• Articles 127 and 237, Code of Commerce — Make all members of a general copartnership liable personally and in solidum with all their property for the results of transactions made in the name and for the account of the partnership. The Court applied these provisions to hold the partners liable.
• Articles 146 and 148, Code of Commerce — Relate to the requirements for a limited partnership, including the appearance of the general partner's name in the firm name. The Court found these requirements were not fulfilled.
• Section 51, Insolvency Law (Act No. 1956) — Makes all the property of the partnership and also all the separate property of each of the partners liable in insolvency proceedings. The Court applied this provision to require the partners to file inventories of their properties and to be adjudicated insolvent debtors.
• Section 82, Insolvency Law (Act No. 1956) — Governs appeals from orders in insolvency proceedings. The Court noted that the appeal was taken in accordance with this provision.
• Section 191, Corporation Law (Act No. 1459) — Repealed the provisions of the Code of Commerce relating to sociedades anonimas, with exceptions for those lawfully organized at the time of the passage of the Corporation Law. The Court applied this provision to exclude the possibility that Teck Seing & Co., Ltd. was a sociedad anonima.

Chief Justice Araullo and Justices Johnson, Street, Avanceña, Villamor, Johns, and Romualdez concurred.