C. Dissolution and winding up

1. DISSOLUTION

⦁ 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. (Article 1828, Civil Code)

Partnership not terminated until winding up is completed. On dissolution the partnership is not terminated, but continues until the winding up of partnership affairs is completed. (n) (Article 1829, Ibid.)

b. Grounds for dissolution

Grounds for dissolution: Dissolution is caused:
1) Without violation of the agreement between the partners:
a) By the termination of the definite term or particular undertaking specified in the agreement;
b) By the express will of any partner, who must act in good faith, when no definite term or particular is specified;
c) By the express will of all the partners who have not assigned their interests or suffered them to be charged for their separate debts, either before or after the termination of any specified term or particular undertaking;
d) By the expulsion of any partner from the business bona fide in accordance with such a power conferred by the agreement between the partners;
2) In contravention of the agreement between the partners, where the circumstances do not permit a dissolution under any other provision of this article, by the express will of any partner at any time;
3) By any event which makes it unlawful for the business of the partnership to be carried on or for the members to carry it on in partnership;
4) When a specific thing which a partner had promised to contribute to the partnership, perishes before the delivery; in any case by the loss of the thing, when the partner who contributed it having reserved the ownership thereof, has only transferred to the partnership the use or enjoyment of the same; but the partnership shall not be dissolved by the loss of the thing when it occurs after the partnership has acquired the ownership thereof;
5) By the death of any partner;
6) By the insolvency of any partner or of the partnership;
7) By the civil interdiction of any partner;
8) By decree of court under the following article. (1700a and 1701a) (Article 1830, Ibid.)

c. On the application

By or for a partner

On application by or for a partner the court shall decree a dissolution whenever:
1) A partner has been declared insane in any judicial proceeding or is shown to be of unsound mind;
2) A partner becomes in any other way incapable of performing his part of the partnership contract;
3) A partner has been guilty of such conduct as tends to affect prejudicially the carrying on of the business;
4) A partner wilfully or persistently commits a breach of the partnership agreement, or otherwise so conducts himself in matters relating to the partnership business that it is not reasonably practicable to carry on the business in partnership with him;
5) The business of the partnership can only be carried on at a loss;
6) Other circumstances render a dissolution equitable. (Article 1831, Ibid.)

Of the purchaser of a partner’s interest

On the application of the purchaser of a partner’s interest under Article 1813 or 1814:
1) After the termination of the specified term or particular undertaking;
2) At any time if the partnership was a partnership at will when the interest was assigned or when the charging order was issued. (Paragraph 2, Article 1831, Ibid.)

d. Effects of dissolution

Effects of dissolution: Except so far as may be necessary to wind up partnership affairs or to complete transactions begun but not then finished, dissolution terminates all authority of any partner to act for the partnership:
1) With respect to the partners:
a) When the dissolution is not by the act, insolvency or death of a partner; or
b) When the dissolution is by such act, insolvency or death of a partner, in cases where article 1833 so requires;
2) With respect to persons not partners, as declared in article 1834. (Article 1832, Ibid.)

e. Caused by the act, death or insolvency of a partner

General Rule: Where the dissolution is caused by the act, death or insolvency of a partner, each partner is liable to his co-partners for his share of any liability created by any partner acting for the partnership as if the partnership had not been dissolved.
Exception: … unless:
1) The dissolution being by act of any partner, the partner acting for the partnership had knowledge of the dissolution; or
2) The dissolution being by the death or insolvency of a partner, the partner acting for the partnership had knowledge or notice of the death or insolvency. (Article 1833, Ibid.)

f. Post-dissolution

After dissolution, a partner can bind the partnership, except as provided in the third paragraph of this article:
1) By any act appropriate for winding up partnership affairs or completing transactions unfinished at dissolution;
2) By any transaction which would bind the partnership if dissolution had not taken place, provided the other party to the transaction:
a) Had extended credit to the partnership prior to dissolution and had no knowledge or notice of the dissolution; or
b) Though he had not so extended credit, had nevertheless known of the partnership prior to dissolution, and, having no knowledge or notice of dissolution, the fact of dissolution had not been advertised in a newspaper of general circulation in the place (or in each place if more than one) at which the partnership business was regularly carried on.
The liability of a partner under the first paragraph, No. 2, shall be satisfied out of partnership assets alone when such partner had been prior to dissolution:
1) Unknown as a partner to the person with whom the contract is made; and
2) So far unknown and inactive in partnership affairs that the business reputation of the partnership could not be said to have been in any degree due to his connection with it.
The partnership is in no case bound by any act of a partner after dissolution:
1) Where the partnership is dissolved because it is unlawful to carry on the business, unless the act is appropriate for winding up partnership affairs; or
2) Where the partner has become insolvent; or
3) Where the partner has no authority to wind up partnership affairs; except by a transaction with one who:
a) Had extended credit to the partnership prior to dissolution and had no knowledge or notice of his want of authority; or
b) Had not extended credit to the partnership prior to dissolution, and, having no knowledge or notice of his want of authority, the fact of his want of authority has not been advertised in the manner provided for advertising the fact of dissolution in the first paragraph, No. 2 (b). (Paragraph 3, Article 1834, Ibid.)

⦁ Nothing in this article shall affect the liability under Article 1825 of any person who, after dissolution, represents himself or consents to another representing him as a partner in a partnership engaged in carrying business. (Paragraph 4, Article 1834, Ibid.)

Discharge of liability

Dissolution does not discharge existing liability. The dissolution of the partnership does not of itself discharge the existing liability of any partner. (Article 1835, Ibid.)

When a partner is discharged from liability. A partner is discharged from any existing liability upon dissolution of the partnership by an agreement to that effect between himself, the partnership creditor and the person or partnership continuing the business; and such agreement may be inferred from the course of dealing between the creditor having knowledge of the dissolution and the person or partnership continuing the business. (Paragraph 2, Article 1835, Ibid.)

Individual property of a deceased partner. The individual property of a deceased partner shall be liable for all obligations of the partnership incurred while he was a partner, but subject to the prior payment of his separate debts. (Paragraph 3, Article 1835, Ibid.)

2. WINDING UP

Rights of partners who have not wrongfully dissolved the partnership or legal representative of last surviving partner. Unless otherwise agreed, the partners who have not wrongfully dissolved the partnership or the legal representative of the last surviving partner, not insolvent, has the right to wind up the partnership affairs, provided, however, that any partner, his legal representative or his assignee, upon cause shown, may obtain winding up by the court. (Article 1836, Ibid.)

If dissolution caused, in any way, except contravention of a partnership agreement. When dissolution is caused in any way, except in contravention of the partnership agreement, each partner, as against his co-partners and all persons claiming through them in respect of their interests in the partnership, unless otherwise agreed, may have the partnership property applied to discharge its liabilities, and the surplus applied to pay in cash the net amount owing to the respective partners. (Article 1837, Ibid.

If dissolution is caused by expulsion of a partner. But if dissolution is caused by expulsion of a partner, bona fide under the partnership agreement and if the expelled partner is discharged from all partnership liabilities, either by payment or agreement under the second paragraph of Article 1835, he shall receive in cash only the net amount due him from the partnership. (Article 1837, Ibid.)

If dissolution contravenes partnership agreement. –

If dissolution contravenes partnership agreement: When dissolution is caused in contravention of the partnership agreement the rights of the partners shall be as follows:
1) Each partner who has not caused dissolution wrongfully shall have:
a) All the rights specified in the first paragraph of this article, and
b) The right, as against each partner who has caused the dissolution wrongfully, to damages breach of the agreement.
2) The partners who have not caused the dissolution wrongfully, if they all desire to continue the business in the same name either by themselves or jointly with others, may do so, during the agreed term for the partnership and for that purpose may possess the partnership property, provided they secure the payment by bond approved by the court, or pay any partner who has caused the dissolution wrongfully, the value of his interest in the partnership at the dissolution, less any damages recoverable under the second paragraph, No. 1 (b) of this article, and in like manner indemnify him against all present or future partnership liabilities.
3) A partner who has caused the dissolution wrongfully shall have:
a) If the business is not continued under the provisions of the second paragraph, No. 2, all the rights of a partner under the first paragraph, subject to liability for damages in the second paragraph, No. 1 (b), of this article.
b) If the business is continued under the second paragraph, No. 2, of this article, the right as against his co-partners and all claiming through them in respect of their interests in the partnership, to have the value of his interest in the partnership, less any damage caused to his co-partners by the dissolution, ascertained and paid to him in cash, or the payment secured by a bond approved by the court, and to be released from all existing liabilities of the partnership; but in ascertaining the value of the partner’s interest the value of the good-will of the business shall not be considered. (Paragraph 2, Article 1837, Ibid.)

If rescission is due to fraud or misrepresentation. –

Where a partnership contract is rescinded on the ground of the fraud or misrepresentation of one of the parties thereto, the party entitled to rescind is, without prejudice to any other right, entitled:
1) To a lien on, or right of retention of, the surplus of the partnership property after satisfying the partnership liabilities to third persons for any sum of money paid by him for the purchase of an interest in the partnership and for any capital or advances contributed by him;
2) To stand, after all liabilities to third persons have been satisfied, in the place of the creditors of the partnership for any payments made by him in respect of the partnership liabilities; and
3) To be indemnified by the person guilty of the fraud or making the representation against all debts and liabilities of the partnership. (Article 1838, Ibid.)

b. Rules in settling accounts between partners after dissolution

In settling accounts between the partners after dissolution, the following rules shall be observed, subject to any agreement to the contrary:
1) The assets of the partnership are:
a) The partnership property,
b) The contributions of the partners necessary for the payment of all the liabilities specified in No. 2.
2) The liabilities of the partnership shall rank in order of payment, as follows:
a) Those owing to creditors other than partners,
b) Those owing to partners other than for capital and profits,
c) Those owing to partners in respect of capital,
d) Those owing to partners in respect of profits.
3) The assets shall be applied in the order of their declaration in No. 1 of this article to the satisfaction of the liabilities.
4) The partners shall contribute, as provided by article 1797, the amount necessary to satisfy the liabilities.
5) An assignee for the benefit of creditors or any person appointed by the court shall have the right to enforce the contributions specified in the preceding number.
6) Any partner or his legal representative shall have the right to enforce the contributions specified in No. 4, to the extent of the amount which he has paid in excess of his share of the liability.
7) The individual property of a deceased partner shall be liable for the contributions specified in No. 4.
8) When partnership property and the individual properties of the partners are in possession of a court for distribution, partnership creditors shall have priority on partnership property and separate creditors on individual property, saving the rights of lien or secured creditors.
9) Where a partner has become insolvent or his estate is insolvent, the claims against his separate property shall rank in the following order:
a) Those owing to separate creditors;
b) Those owing to partnership creditors;
c) Those owing to partners by way of contribution. (Article 1839, Ibid.)

c. Creditors

In the following cases, creditors of the dissolved partnership are also creditors of the person or partnership continuing the business:
1) When any new partner is admitted into an existing partnership, or when any partner retires and assigns (or the representative of the deceased partner assigns) his rights in partnership property to two or more of the partners, or to one or more of the partners and one or more third persons, if the business is continued without liquidation of the partnership affairs;
2) When all but one partner retire and assign (or the representative of a deceased partner assigns) their rights in partnership property to the remaining partner, who continues the business without liquidation of partnership affairs, either alone or with others;
3) When any partner retires or dies and the business of the dissolved partnership is continued as set forth in Nos. 1 and 2 of this article, with the consent of the retired partners or the representative of the deceased partner, but without any assignment of his right in partnership property;
4) When all the partners or their representatives assign their rights in partnership property to one or more third persons who promise to pay the debts and who continue the business of the dissolved partnership;
5) When any partner wrongfully causes a dissolution and the remaining partners continue the business under the provisions of article 1837, second paragraph, No. 2, either alone or with others, and without liquidation of the partnership affairs;
6) When a partner is expelled and the remaining partners continue the business either alone or with others without liquidation of the partnership affairs. (Article 1840, Ibid.)

Liability of a third person becoming a partner. The liability of a third person becoming a partner in the partnership continuing the business, under this article, to the creditors of the dissolved partnership shall be satisfied out of the partnership property only, unless there is a stipulation to the contrary. (Paragraph 2, Article 1840, Ibid.)

If business is continued after dissolution. When the business of a partnership after dissolution is continued under any conditions set forth in this article the creditors of the dissolved partnership, as against the separate creditors of the retiring or deceased partner or the representative of the deceased partner, have a prior right to any claim of the retired partner or the representative of the deceased partner against the person or partnership continuing the business, on account of the retired or deceased partner’s interest in the dissolved partnership or on account of any consideration promised for such interest or for his right in partnership property. (Paragraph 3, Article 1840, Ibid.)

Nothing in this article shall be held to modify any right of creditors to set aside any assignment on the ground of fraud. (Paragraph 4, Article 1840, Ibid.)

Use of person or partnership continuing the business of the partnership name. The use by the person or partnership continuing the business of the partnership name, or the name of a deceased partner as part thereof, shall not of itself make the individual property of the deceased partner liable for any debts contracted by such person or partnership. (Paragraph 5, Article 1840, Ibid.)

d. Death or retirement of a partner and business is continued

⦁ When any partner retires or dies, and the business is continued under any of the conditions set forth in the preceding article, or in Article 1837, second paragraph, No. 2, without any settlement of accounts as between him or his estate and the person or partnership continuing the business, unless otherwise agreed, he or his legal representative as against such person or partnership may have the value of his interest at the date of dissolution ascertained, and shall receive as an ordinary creditor an amount equal to the value of his interest in the dissolved partnership with interest, or, at his option or at the option of his legal representative, in lieu of interest, the profits attributable to the use of his right in the property of the dissolved partnership; provided that the creditors of the dissolved partnership as against the separate creditors, or the representative of the retired or deceased partner, shall have priority on any claim arising under this article, as provided Article 1840, third paragraph. (Article 1841, Ibid.)

e. Right to account

⦁ The right to an account of his interest shall accrue to any partner, or his legal representative as against the winding up partners or the surviving partners or the person or partnership continuing the business, at the date of dissolution, in the absence of any agreement to the contrary. (Article 1842, Ibid.)

Disclaimer: All information herein is for educational and general information only intended for those preparing for the bar exam. These should not be taken as professional legal advice or opinion. Please consult a competent lawyer to address your specific concerns. Any statements or opinions of the author are solely his own and do not reflect that of any organization he may be connected.

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