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A lot of
us have been faced with a situation where the
circumstance calls for an answer on whether or not to be
a partner, a creditor or merely an investor of a
particular project or business.
Being
either of the three creates some legal implications
which we do not readily realize until it is too late.
Depending on your appetite for risk or goals in making
money, you should also take time to consider some of the
legal consequences of what you are putting yourself in,
which is probably as equally important as your financial
goal.
Before
getting all too excited and deciding to take the plunge
into a money-making agreement, you should first consider
the “basic” legal implications of being a partner, a
creditor or an investor.
Ordinary
in all transactions involving money and property, the
parties require a written testament of the terms and
conditions of their agreement. This is called a
contract. Unfortunately, contracts executed by the
parties are sometimes not what they look like. Supreme
Court decisions are consistent in holding that the
intentions of the parties and not the nomenclature are
controlling in determining (and interpreting) the nature
of the agreement they came up with.
An
agreement purporting to be one of “partnership” must
concur with the following requisites: First, two or more
persons agree to contribute money, property or industry
to a common fund. Second, the contribution is for the
purpose of realizing profit and distributing among the
partners the profits realized therefrom.
Based on
the definition, the primary objective of forming a
partnership is realizing and maximizing income. For a
person, there is a great sense of accomplishment and
security when you know that you own the business.
However,
sharing in the income comes with a responsibility.
Implied in this endeavor is the agreement to share in
the losses, if any. If the losses are not borne by the
partners, then probably it is not really a partnership.
Partners are bound by the business of the partnership
and shall be liable, as such, to persons or entities
dealing with the partnership.
This
means that the partnership and/ or the partners shall be
answerable for any claims against it. . . and the most
common is credit or money claims. No partner may be
exempted from this duty. This duty may be waived, but
that agreement is only valid between the partners
themselves but not valid against third persons.
Distinguished from a mere loan agreement, it must be
noted that, generally, partners are not really liable to
one another should the partnership incur losses (unless
one of the partners acted in bad faith). The
relationship between the partners is fiduciary in
nature. Hence, the partners are duty-bound to comply
with their obligations to the partnership.
This is
not to be taken lightly. A partner generally must always
act for the benefit of the partnership before he could
even think about himself. The partners are also bound to
infuse additional capital should the business be on the
verge of closing. If a partner refuses to contribute
additional capital, he may be expelled from the
partnership.
The
contract of partnership demands utmost trust and
confidence between the partners. No one can force
himself to be a partner without the consent of the
other.
Example:
A partner can assign his interest in the partnership,
but the assignee does not automatically become a
partner. In the same manner, no one can be forced to
remain in the partnership. Hold on, though. This does
not mean that you are at liberty to dissolve the
partnership without any cause.
Assuming
the dissolution was with just cause, upon dissolution of
the partnership, if the property is under the
partnership’s name the partners are supposed to share in
the liquidation of the properties according to their
respective interests.
The
capital contributed by each partner may be recovered if
the partnership incurred no monetary liability or the
partnership assets are enough to cover for the
liabilities.
Speaking
about creditors, if you are not ready to handle the
obligations of a partner or the rigors of a partnership,
you may consider being a creditor. In this kind of
setup, the creditor should not suffer should the
business incur losses. This means that whatever happens,
the creditor should and must be paid the amount it lent
to the debtor with stipulated interest.
As for
security, the creditor can secure his credit by asking
the debtor to mortgage his property. Additional security
may come in the form of mortgage redemption insurance or
being an assignee of a life insurance. The creditor can
foreclose the property mortgaged if and when the debtor
fails to pay the amount loaned. (The good thing about
mortgage, and for the advantage of the creditor, is that
it comprehends all improvements and fruits of the
property mortgaged).
The
creditor can also make some other arrangements to secure
his credit. An example is the creditor can stipulate
with the debtor that a certain percentage of the profit
of the business would automatically go to him as payment
for the loan.
What
about an investor? It depends on the deal assumed by the
investor. An investor is neither a partner nor a
creditor. He solely assumes the risk insofar as his cash
outlay is concerned. This is ordinarily embodied in a
trust agreement. The parties are regarded as trustor and
trustee.
The
investor is the trustor. He entrusts his money to a
person for the purpose of using the money for
investment. Hence, should the investment result in a
loss, the person who undertook the investment is not
bound to repay the money.
An
investor assumes a lot of risk. He/she is usually sought
if the business requires additional capital for business
expansion. In a more complex situation, there is a
possibility that the investor may be regarded as a
limited or general partner. If that happens, he may be
held liable to the persons or entity dealing with the
partnership.
In one
case, the Supreme Court held that persons contributing
money to a purported corporation but failed to
incorporate may be treated as partners inter se. For all
we know, the parties who infused capital to the supposed
corporation just wanted to be investors.
To avoid
a similar situation, an investor must make sure that he
does not allow his name to be disclosed in any
transactions. The investor must make sure that he is
plainly regarded as such and the agreement must be
couched in clear and unequivocal terms.
Income-wise, a person stands to earn more as a partner.
Moreover, his interest in the business is more secured.
All the partners are considered to have a community of
interest over all the properties and the business of the
partnership, including the services to be rendered by
each partner, as well as in the income. In fact, the law
gives each partner a right to demand a formal accounting
of the affairs of the partnership should he be unjustly
excluded in the affairs or property of the partnership.
Correlating this setup with the risk- and-return
tradeoff, the risk is big insofar as liability to third
persons is concerned. You may probably earn more in
being a partner, but you may also stand to lose more if
the business incurs losses and incurs claims from
creditors or claims due to liability to third persons.
As to
being a creditor, the return on investment is quite
conservative. The creditor can only rely on the interest
of the amount he extended as loan. Moreover, interest
that could be charged must comply with the standard that
it should not be too much or “unconscionable.”
In other
words, the return in relation to the risk assumed by the
creditor is probably almost equal. The problem, really,
is when the issue of recovery is transcended and has to
be brought to court. The remedy is to sue the
partnership and the partners.
This is
not really simple because the partnership is to be sued
separately from the partners (although in the same
action). Moreover, some people like to file a criminal
case of estafa rather than an ordinary collection case.
But you cannot send an artificial person to jail now,
can you? This is the reason why having sufficient
security on your credit is wise. You can just go after
the securities rather than the person or entity.
On
another point, the investor will be allowed to share in
the profits of the business usually up to a specific
number of years or until his investment is not pulled
out yet. This means that his potential to earn income is
better compared with a mere creditor.
The
question that usually crops up is, can he get back the
money or property he had put in? Yes, but only if the
business or the partnership has the means to do so. In
other words, an investor is in the middle of the meter
insofar as return- and-risk tradeoff is concerned.
The
discussions above are some of the basic legal
implications in ordinary business transactions. We must
always remember that all business transactions are
principally governed by trust. However, it is prudent to
ask first for some expert or legal advice. Avoiding
litigation is always the cheapest way to transact a
business.
If you
do not wholly trust the person you are dealing with, do
not enter into a partnership. Be a creditor at the least
and make sure that your money has sufficient security.
But of course, everything has a risk. Even government
securities are not risk-tight. But hey, life is not as
exciting without hazards, is it?
Key word
here, ladies and gentlemen, is avoidance. You can avoid
expensive and unnecessary litigation—by simply “asking.”
****
Atty. Carlo Cariño is a training consultant and a
professor in business law. He attended the 9th RFP
Program. He may be contacted at carmalaw@gmail.com.
Join the 11th RFP Program (July 5 to August 23, 2008).
Visit www.rfp-philippines.com or inquire at info@rfp-philippines.com/Tel.
No. 634-2204. |
