Dissolution and Winding Up

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. (n)
• Dissolution – change in the relation of
partners caused by any partner ceasing to
be associated in the carrying on of the
business; when the partners cease to carry
on the business together.

• Winding up – the process of settling the

business or partnership affairs after
dissolution.

• Termination – when all partnership affairs

are completely wound up and finally
settled; the end of the partnership life.
 Art. 1829. On dissolution the
partnership is not terminated, but
continues until the winding up of
partnership affairs is completed. (n)
Partnership not terminated by
dissolution.
• Dissolution is NOT its extinguishment;

• If there is dissolution, no new partnership

business should be undertaken;

• If there is dissolution, the partnership

continues until winding-up is completed;

• Dissolution is different from a mere

suspension in the conduct of its business or
operations;
 Art. 1830. 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)
Causes of Dissolution:

• Causes of dissolution is exclusive – there is

no other ground.

• (1) Dissolution without violation of the

agreement between partners (No. 1) or in
contravention of said agreement (No. 2).

• (2) Voluntary when caused by the will of

one or more or all of the partners (Nos. 1 & 2)
or involuntary when brought about
independently of the will of the partners or
by operation of law (Nos. 3, 4, 5, 6, 7 and 8).
• (3) Dissolution effected extrajudicially (Nos.
1 to 7) or judicially (by court decree) [No. 8,
in relation to Art. 1831]

• (4) Automatic dissolution of partnership.

• Once partnership is dissolved, the same

partners may form a new partnership to
continue the business under the same
terms.
4 Ways of Dissolution without Violation
of Partnership Agreement:

• 1. Termination of the definite term or a

particular undertaking;
• If partners continue the partnership after
termination of the definite term or
particular undertaking without making a
new agreement, the firm becomes a
partnership at will.

• 2. By the express will of any partner;

• At any time by and without the consent of
the co-partners provided exercised in
good faith.
• 3. By the express will of all the partners;

• Note – must be UNANIMOUS.

• (If dissolution is before termination of the
specified term or a particular undertaking);

• Consent of partner who have assigned

their interests or suffered them to be
charged for their separate debts is NOT
required;
• 4. By expulsion of any partner;

• Expulsion reduced number of partners;

• Expulsion must be:

 (a) exercised in good faith;
 (b) according to the power given to a
partner (per partners’ agreement);

• The power to expel may be vested in one

partner exclusively;
Dissolution Made Due to Contravention
of Partnership Agreement:

• Dissolution may be for any cause or reason:

 At any time, for any reason, without the
consent of his co-partners;
 Applies even though the partnership was
entered into for a definite term or
particular undertaking;

• Power of partner to dissolve partnership

always exists;
 Reason: Doctrine of delectus personae;
• Legal effects of dissolution:

 If exercised in good faith – NO liability on

the withdrawing partner;

 If exercised in bad faith or dissolution was

unjustified – withdrawing partner is liable for
damages; but he cannot be compelled to
remain in the partnership.
• Dissolution because business becomes
unlawful

 an involuntarily dissolution:
 Instances:
- When a law makes the continuance of
the business illegal;
- When there is war between countries
where partners are respective citizens;
- When it becomes unlawful for partners to
carry on together the business;
• A is a partner in a law firm. Later on, A is
appointed Judge of the Regional Trial Court;

• Under the law, a Judge of the Regional Trial

Court is prohibited from engaging in the
practice of law;

• Here, it would be unlawful for A to continue

as partner in the law firm. A’s appointment
dissolves the partnership of which he is a
member.
• Dissolution due to loss of specific thing.

 Effects of loss of specific thing:

 1) Loss before delivery –

 - Partnership is dissolved because there is
no contribution because the thing to be
contributed cannot be substituted with
another;
 - In effect, there is a failure of a partner to
fulfill his part of the obligation;
 2) Loss after delivery –

 - Partnership is not dissolved;

 - Since partnership acquires ownership of
the specific thing, it assumes the loss;
 - But partners may contribute additional
capital to save the partnership;
 3) Loss where only use or enjoyment
contributed –

 - Partnership is dissolved whether loss is

before or after delivery;
 - Partner who reserved ownership of the
thing bears the loss and is considered in
default with respect to his contribution;
• Dissolution due to death of any partner.
 General rule:
 - Surviving partners have no authority to
continue the business except so far is
necessary to wind up;
 - But partners may agree (on Partnership
agreement) that the death, withdrawal, or
admission of a partner will not effect a
dissolution;
 - Here, estate of deceased partner is not
liable for obligations contracted after
dissolution beyond the extent of his capital
or interest permitted to remain;
• Dissolution due to insolvency of any
partner or of partnership.

 Insolvent partner subjects his interest in

partnership to the right of his creditors;
 In case partnership’s assets have been
exhausted, the insolvent partner cannot
satisfy partnership obligations to its
creditors;
 An insolvent partner has no authority to act
for the partnership nor the other partners to
act for him (Art. 1833);
• Dissolution due to civil interdiction of any
partner.

 Civil interdiction deprives the offender

during the time of his sentence of right to
manage his property and dispose it by any
act or conveyance inter vivos;
 Partnership requires the capacity of the
partners;
 Convicted person with penalty of civil
interdiction (civil death) cannot validly give
consent;
 Art. 1831. 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.
 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. (n)
Grounds for dissolution by a Court decree:

• Court may order the dissolution of a

partnership after hearing on the
application either:

• (1) by a partner (in the cases mention in

paragraph 1, Nos. 1 to 6; or
• (2) by the purchaser or assignee of a
partner’s interest (under par. 2, Nos. 1 & 2).
• (1) On application by a partner:

• (a) Insanity –
 Why a ground?
 Insane person is incapacitated to enter
into a contract (Art. 1327 [2].)
 Needed – court’s declaration of insanity in
a prior judicial proceeding;
 If none – fact of partner’s unsound mind
must be duly proved;

• (b) Incapacity –
 incapacity must affect ability of a partner
to perform his duties as partner;
• (c) Misconduct and persistent breach of
partnership agreement –

 Reasons:
 - defeat and materially affect and obstruct
the purpose of partnership;

 Example of misconduct:
 - chronic drunkenness;
• (d) Business can be carried on only at a
loss –

 Court it may be order the dissolution of

partnership when it becomes apparent
that the business is unprofitable with no
reasonable prospects of success;

 Reason:
 - Partnership is organized for profit;
• (e) Other circumstances –

 Examples:
 - Abandonment of the business;
 - Fraud in the management of business;
 - Refusal without justifiable cause to do the
accounting of partnership affairs, etc.
• (2) On application by a purchaser of a
partner’s interest:

 Purchaser of a partner’s interest (under Art.

1813 or 1814) may apply for judicial
dissolution of a partnership;
• A, B and C formed a partnership for a term
of 5 years. On the 3rd year, C sold his entire
interest to D. Can D ask the court to
dissolve the partnership?
 No. D does not become a partner by virtue
of such sale and his only right is to receive
the profits to which C would otherwise be
entitled. Under Art. 1813, such sale did not
dissolve the partnership.
 But if after the 5th year, the partnership is
continued, D is entitled to ask for judicial
dissolution. The partnership as continued
may or may not be a partnership at will.
• Suppose:
• After the 5th year, partners continued the
partnership without express agreement,
thus, becoming a partnership at will;
• Then, D purchased C’s interest or was able
to secure a charging order from the court
against C - when partnership was already
a partnership at will.
• Can D ask for a judicial dissolution?

 Yes. Article 1831 (par. 2[2]) applies if in

continuing the business, a partnership at
will is created or the partnership is a
partnership at will from the beginning.
 Art. 1832. 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. (n)
Effect of dissolution on partner’s authority.

• GENERAL RULE:

• Partnership ceases and partner’s power of

representation is confined only to acts
incident to winding up or completing
transactions begun but not then finished;

• Thus, dissolution terminates the actual

authority of a partner to undertake new
business for the partnership;
• QUALIFICATIONS/EXCEPTIONS:

• (a) As regards and among partners:

 If dissolution is not by the act, insolvency, or

death of a partner – partner’s authority to
bind the partnership by a new contract is
immediately terminated;

 When dissolution is by such act, insolvency,

or partner’s death – the termination of
partner’s authority depends upon whether
or not partner had knowledge or notice of
the dissolution;
• (b) With respect to third persons:

 Partnership is generally bound by new

contract though the authority of acting
partner (which affects his co-partners) is
already deemed terminated;

 But innocent partners can recover from the

acting partner.
• A, B and C were partners in X & Co. Its term
of existence per articles of partnership
expired yesterday. Thus, it was dissolved.
Here, the dissolution was caused not by the
act, insolvency, or death of a partner;

• If today A enters into a new transaction (not

for winding up or to complete a transaction
begun but not yet finished) with D, A alone
assumes any liability under that contract;
• Reason – A’s authority to act for partnership
and to bind B and C was terminated as of
yesterday when partnership was dissolved;
• If the partnership is liable to D, B and C can
recover from A.
 Art. 1833. 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 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.
Right of partner to contribution from co-
partners.

• Dissolution here is caused by the act,

insolvency, or death of a partner;

• If a partner enters into a new contract with

3rd person after dissolution, the new
contract generally will bind the partners
and each of them is liable for his share of
any liability created by the acting partner
as if the partnership has not been
dissolved.
Authority of partners, as among themselves,
to act for the partnership.

• 2 Instances where partner’s authority (as it

affects his co-partners; not third persons) is
NOT deemed terminated:

• (1) Cause of dissolution is the act of a

partner and the acting partner had
knowledge of such dissolution;
• To protect remaining partner/s who might
continue to act for the partnership, having
no actual knowledge of the dissolution.
• (2) Cause of the dissolution is the death or
insolvency of a partner and acting partner
had knowledge or notice of the death or
insolvency.

• This discards the fiction that everybody is

presumed to have knowledge of death or
insolvency.
When a partner has knowledge or notice of a
fact.

• “A person has knowledge of a fact” –

 Means “not only when he has actual

knowledge thereof, but also when he has
knowledge of such other facts as in the
circumstances show bad faith”;
• “A person has notice of a fact” –

 Means when the person who claims the

benefit of the notice:

a. states the fact to such person; or

b. delivers thru mail or by other means of

communication a written statement of the
fact to such person or to a proper person at
his place of business or residence.
• A, B and C were partners. A informed B
that he (A) was resigning from the
partnership. The partnership was thus
dissolved by the act of A. C has no
knowledge of the dissolution;

• If partnership liability is incurred by a

contract entered into by C, then A and B
are bound to contribute their share of the
liability as if the partnership had not been
dissolved.
• If the contract was entered into by B
despite his knowledge of dissolution, A and
C can recover from B.
• So, only B will assume the entire liability.

• Suppose B learned of A’s resignation only

from C. Here, B had merely notice (as
distinguished from knowledge) of the
dissolution.
• Thus, A and C can be required to contribute
their share in the liability.
• If A died or had some insolvent, the
knowledge or notice on the part of B will
justify non-liability on the part of other
partners.

• Article 1833 applies only if the contract of the

partner binds the partnership. If the
partnership is not bound, only the acting
partner is personally liable.
 Art. 1834. 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).
 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. (n)
Partner’s power to bind dissolved a
partnership to third persons.
• While partnership has been dissolved, a
partner’s authority continues as regards 3rd
persons who subsequently extended credit
to partnership on the assumption that it is
still existing;
• Reason: Once formed, in the absence of
anything to indicate its termination, the
partnership is presumed to exist to protect
innocent third person;
• Thus, it is the duty partners to give notice of
the dissolution of the partnership.
Notice of dissolution to creditors.
• (1) As to persons who extended credit to
partnership prior to dissolution –
 They must have knowledge or notice of the
dissolution to relieve the partnership from
liability.

• (2) As to persons who had not extended

credit prior to its dissolution, but had known
of partnership’s existence –
 They are presumed to have knowledge or
notice of the dissolution as long as the fact
that the dissolution had been published in
the newspaper even if they did not actually
read the advertisement.
• (3) Where acting partner has no authority
to wind up partnership affairs –

 Notice of dissolution is unnecessary (per

third paragraph) except in case No. 3
where the partner has no authority to wind
up partnership affairs;

 3rd persons dealing with partner without

such authority are protected under the
same circumstances stated in par. 1, No.
(2)(a) and (b).
• (4) Where acting partner has become
insolvent –

 Right of partner who has no knowledge or

notice of the other partner’s insolvency to
bind the partnership – recognized under Art.
1833;

 Right of a third person to claim that his

contract with the partnership is valid, despite
its dissolution through insolvency of partner
with whom the contract was made – denied
under Art. 1834 (par. 3, No. 2)
Character of notice required.

• (1) As to prior dealers –

 Notice must be actual;

 Mere mailing of a letter to a former dealer
is insufficient to relieve the retiring partner
from subsequent liability, where the notice
was never received;
• A prior or former dealer is one who has
extended credit on the faith of the
partnership, through confidence in the
solvency and probity of the firm;

• Mere dealing with a firm on a cash basis

does not constitute one a prior dealer. One
who purchases goods from the supposed
partnership is not a prior dealer;
• (2) As to all others –

 Notice is an advertisement in a local

newspaper;
 Actual notification is not necessary;
 But requirement of newspaper notice
appears to exist only where 3rd party knew
of partnership prior to dissolution. If he did
not, he is NOT entitled to notice.
• T bought goods from a partnership. Then,
the partnership was dissolved. Notice of
the dissolution was advertised in the local
newspaper. Without the knowledge of
dissolution, T extended credit to the
supposed partnership at the request of one
of its members in a transaction that is not
necessary for liquidation of business.

• May T hold the partnership liable on the

transaction?
• No.
• Prior dealers must be given actual notice
of the dissolution of a partnership in order
to prevent the continuance of partnership
liability. T, however, is not a prior dealer.

• Thus, he is considered to have received

notice as a matter of law when the fact of
dissolution was advertised in the local
newspaper.
Dormant partner need not give notice.

• In 2nd paragraph, the liability of a partner

unknown as such to the person with whom
the contract is made or so far unknown
and inactive in partnership affairs shall be
satisfied out of partnership assets alone.
 Art. 1835. The dissolution of the
partnership does not of itself discharge
the existing liability of any partner.
 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.
 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. (n)
Effect of dissolution in partner’s existing
liability.

• A partner may be relieved from all existing

liabilities upon dissolution only by an
agreement to that effect between himself,
the partnership creditor, and the other
partners. The consent, however, of the
creditor and the other partners to the
novation may be implied from their
conduct.
Liability of estate of deceased partner.

• In Art. 1816, the individual property of a

deceased partner shall be liable for all
obligations of the partnership incurred
while he was a partner;

• Individual creditors of deceased partner

are to be preferred over partnership
creditors with respect to the separate
property of said deceased partner.
• If A, B and C are partners. When A retires,
all three (A, as well as B and C) continue to
be personally liable for partnership debts
existing at the time of A’s retirement;

• If A dies, his individual estate is available to

partnership creditors but subject to the
claims of A’s personal creditors;

• An agreement among A, B and C where B

and C promise to assume the partnership
debts does not release A, unless the
creditors assent to such substitution of
debtors, either by expressly or impliedly.