PAT REVIEWER
For March 16 to March 21: Chapter 3 Dissolution and Winding-up to Chapter 4 on limited partnership
 DISSOLUTION is a change of relation
causing by partners ceasing to be associated in
carrying on the business
 WINDING UP is actual process of settling the
partnership business or affairs after dissolution
which involves collection and distribution of
assets, payment of debts, determination of the
value of each partner’s interest in the
partnership, defending claims against the firm
 TERMINATION exist when all partnership
affairs are wound up completely which
signifies the end of partnership life
Effect of Dissolution - partnership is not yet terminated
it continues until the winding up is terminated
Effect on Partners – as to previous obligations does not
relieve the partners for existing obligations
As to new obligations, spares the partners to obligations
which they did not assent
Dissolution does not automatically terminate the legal
personality of partnership and instant cessation of
business
After dissolution, the business remains only for the
purpose of winding up of affairs, no new partnership
should be undertaken but affairs should be liquidated
and distribution made to those entitled to partners’
interest.
TYPES OF DISSOLUTION
EXTRAJUDICIAL
 Without violation of agreement of parties
-Expiration of term or particular undertaking
-if contract continues after the period it turns
out to be partnership by will of parties
 By Express will of any partner, who must in
good faith when no definite term or particular
undertaking is specified
-a partner who withdraws where such conduct
is not allowed, cannot hinder his withdrawal
but is liable for damages
-Unanimous agreement may be done by
partners to terminate the partnership even
before the period; majority vote cannot suffice.
 By express will of 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
-Consent of partners who have assigned their
interest or suffered them to be charged for their
separate debts is not required to effect
dissolution without breach of partnership
agreement; not given right to voice in the
dissolution
A. By the expulsion of any partner from the
business bona fide in accordance with such a
power conferred by the agreement between
partners
-must be in good faith otherwise the expelled
partner can claim for damages
B. In contravention of the agreement between partners,
where the circumstances do not permit the disslolution
under provision of this article; by the express will or any
partner at any time;
-a partner can seek for dissolution with or without
justifiable cause but liable for damages;
C.By any event that makes it unlawful for the business
partnership to be carried on
D. In case of loss of a thing
-In which a partner had promise to contribute to the
parternship, perishes before delivery;
-When the partner contribute only usufruct of the
property
Reason: because the partner failed to give his
contribution, if loss after delivery the firm bears the loss
This refers only to specific things
The failure to provide may be waived by the partners
E. Death of a partner
-Automatically dissolves the partnership as here is
reduction of numbers
F. Civil Interdiction
-deprives the partner to manage his property and dispose
the same
G. Insolvency of the partner
-must be adjudged by the court
-insolvency makes the partner incapable of paying his
liabilities in case partnership assets have been exhausted
H. By decree of court order
-decree must be final order by the court
JUDICIAL DISSOLUTION
-dissolution decreed by court based on the following
grounds:
-partner commits misconduct or breach of agreement by
A. partner willfully or persistently commits a breach of
the partnership agreement or otherwise conducts himself
in a matter relating to the partnership business that is not
reasonably practicable to carry on business with him
Guilty of conduct to affect prejudicially the carrying of
business
B.A partner has been insane or of unconscious mind –
must declared insane in a judicial proceeding
C.A partner becomes incapable of performing his part in
the partnership
Incapacity- affects the carrying of business by the
partner is a ground
D. Business partnership can only be carried out at a loss Dissolution

Reason: purpose of partnership for profit -to be indeminified

-to have partnership property applied to liabilities
E. Other circumstances that render the dissolution -possess the property should they continue with the
equitable business
-to receive in cash his share of surplus
Example: abandonment -to continue the business in the same name

EFFECTS OF DISSOLUTION RIGHTS OF THE PARTNER WHO HAS

As to authority of partner to act for the partnership
Gen rule: terminates the authority of all partners
a. Acts necessary to wind up affairs
b. Actions to complete transactions begun but not
finished
Qualifications to general rule:
With respect to partners:
A. Dissolution is not by Act, Insolvency or Death
B. Dissolution not by Act, Insolvency or Death –
authority of partners to act for partnership is not
deemed terminated. Each partner is liable to his
co-partners
Exception to B:
-the cause of dissolution is act of partner and acting
partner has knowledge of the dissolution;
-the cause of the death is death or insolvency of partner
and acting had knowledge of a parther.
WRONGFULLY CAUSED DISSOLUTION
When business is not continued by other partners:
-to have partnership property applied to liabilities
-to receive his cash his share of surplus less damages
caused by his wrongful dissolution
Business continued:
-to have the value of his interest in the partnership at the
time of dissolution, surplus less damages
-to be released from future liabilities
GOODWILL
Advantage it has for the establishment or from the
patronage of customers above its value and capital
-In bad faith partners do not enjoy this value
PARTNER’S LIEN
Right of every partner claiming through them in respect
to of their interests as partners. To have the partnership
property applied to discharge existing liabilities

With respect to third persons: RIGHT OF THE INNOCENT PARTNERS TO

CONTINUE
Partnership is generally bound although authority of
partner is terminated but the innocent partners can Innocent partners may continue but for a new
recover to guilty partner partnership

When partnership is not bound to partnership after RIGHTS OF A PARTNER WHERE

dissolution PARTNERSHIP CONTRACT IS RESCINDED ON
THE GROUND OF FRAUD OR
-partnership is unlawful to carry MISREPRESENTATION
-where the acting partner in the transaction is insolvent;
-partner is unauthorized to wind up; -Right of subrogation
-Right of indemnification
DISSOLUTION ORDINARILY DOES NOT -Right of retention
DISCHARGE THE EXISTING LIABILITIES
MANNER OF WINDING UP
General Rule: dissolution does not discharge the liability
Extrajudical – without intervention of court
Exception: if there is agreement to that effect between Judicial – under control and direction of court
himself, partnership creditor and the person or
partnership continuting the business PERSONS AUTHORIZED TO WIND UP

DEATH OF A PARTER -Partners designated by the agreement

- in the absence of agreement, all partners who have
The individual property of a deceased partner shall be wrongfully dissolved the partnership
liable to all obligations incurred while he was a partner -legal representative of the last surviving partners

RIGHTS OF THE PARTNER AFTER RULES IN SETTLING THE ACCOUNTS

DISSOLUTION BETWEEN PARTNERS AFTER DISSOLUTION

A. When dissolution is not in contravention of the Determine the assets of the partnership which are as
partnership agreement follows
-Have partnership property applied to discharge -partership property
liabilities; -contributions of the partners necessary for the payment
of all liabilities
-Receive in cash his share of surplus
Payment of liabilities in winding up in the following
B. When dissolution is contravention of agreement order
 -In good faith partners who have not caused the

-those owing to the creditors other than partners

-those owing to the partners other than for capital or
profits
-those owing to the partners in respect of capital and
profits

PERSONS SHALL CONTRIBUTE AMOUNT

NECESSARY TO SATISFY THE LIABILITIES

-an assignee for the benefit of creditors or any person

appointed by court
-any partner or legal representative shall have the right
to enforce the contributions in excess of his share in
liability

Property of deceased partner shall be liable for the

contributions

Partnership creditors shall have priority on partnership

property and separate creditors on individual property
saving the rights of lien or secured creditors

WHERE A PARTNER OR HIS ESTATE

BECOMES INSOLVENT ORDER:

-Those owing to separate creditors

-Those owing to partnership creditors
-Anything left to the partners by way of contribution

LIMITED PARTNERS NOT LIABLE

RETURN OF PARTNER’S SHARE IS

DEPENDENT ON DISCHARGE OF CREDITORS:

A partner’s share cannot be returned without first

dissolving and liquidating

RULE WHEN THERE ARE CLAIMS OVER

PARTNERSHIP ASSETS AND CLAIMS OVER
INDIVIDUAL PROPERTIES OF PARTNERS,
WHICH ARE IN CUSTODY OF COURT FOR
DISTRIBUTION

Partnership creditors are preferred with regard to

partnership property
Individual creditors are preferred with respect to
individual properties

RULE IN CASE OF INSOLVENCY OF A

PARTNER OR HIS ESTATE IN CASE OF DEATH

-Separate creditors
-Partnership creditors
-Partners who have contribution

INSTANCES WHEN CREDITOR OF OLD

PARTNERSHIP CONTINUES TO BE CREDITOR
OF NEW PARTNERSHIP

-When any new partner is admitted or when a partner

retires or assigns his rights in partnership property to 2
or more partners or 1 or more partners or more third
persons’

-When all but 1 partner retire or assign continues the

business without liquidation
-When any partner retires or dies and the business the
business is continued
-When all partners or their representatives assign their
rights to 1 or more third persons
-When any partner wrongfully causes a dissolution and
the remaining partners continue
-When a partner is expelled