Dissolution and Winding Up

1828- Definition

Gregorio Ortega, Tomas Del Castillo and Benjamin Bacorro vs. CA, SEC and Joaquin Misa

Jesus Bito, Mariano Lozada, Gregorio Ortega, Tomas del Castillo and Benjamin Bacorro formed a law
firm “BITO, MISA & LOZADA” wherein, Bito and Lozada were senior partners and the rest as junior
partners.

Meanwhile Joaquin Misa sent a letter to herein petitioners of his intention to retire and withdraw from
the firm. Consequently, Misa filed with the SEC’s Securities Investigation and Clearing Department (SICD)
a petition for dissolution and liquidation of partnership. SEC En Banc held that the withdrawal of Misa
had dissolved the partnership of “BITO, MISA & LOZADA” and that , being a partnership at will, the law
firm could be dissolved by any partner at anytime, such as by his withdrawal therefrom, regardless of
good faith or bad faith, since no partner can be forced to continue in the partnership against his will. MR
denied as well as the petition of Misa for receivership.

During the pendency of the case before the CA and Upon the death of Bito and Lozada, Misa renew his
application for receivership but was opposed by other partners. CA affirmed SEC decision and denied the
application of Misa for receivership as it was unnecessary y as no suJcient proof had been shown to
indicate that the partnership assets were in any such danger of being lost, removed or materially
impaired.

Issue: W/N the withdrawal of Misa dissolved the partnership regardless of his good faith or bad faith.

Ruling: Yes

A partnership that does not fix its term is a partnership at will. That the law firm "Bito, Misa & Lozada,"
and now "Bito, Lozada, Ortega and Castillo," is indeed such a partnership.

Partnership at will. The birth and life of a partnership at will is predicated on the mutual desire and
consent of the partners. The right to choose with whom a person wishes to associate himself is the very
foundation and essence of that partnership. Its continued existence is, in turn, dependent on the
constancy of that mutual resolve, along with each partner's capability to give it, and the absence of a
cause for dissolution provided by the law itself. Verily, any one of the partners may, at his sole pleasure,
dictate a dissolution of the partnership at will. He must, however, act in good faith, not that the
attendance of bad faith can prevent the dissolution of the partnership but that it can result in a liability
for damages.

In passing, neither would the presence of a period for its specific duration or the statement of a
particular purpose for its creation prevent the dissolution of any partnership by an act or will of a
partner. Among partners, mutual agency arises and the doctrine of delectus personae allows them to
have the power, although not necessarily the right, to dissolve the partnership. An unjustified
dissolution by the partner can subject him to a possible action for damages.
Dissolution. The dissolution of a partnership is the change in the relation of the parties caused by any
partner ceasing to be associated in the carrying on, as might be distinguished from the winding up of,
the business. Upon its dissolution, the partnership continues and its legal personality is retained until
the complete winding up of its business culminating in its termination.

The term "retirement" must have been used in the articles, as we so hold, in a generic sense to mean
the dissociation by a partner, inclusive of resignation or withdrawal, from the partnership that thereby
dissolves it.

The withdrawal of Misa was spurred by "interpersonal conflict" among the partners. It would not be
right, to let any of the partners remain in the partnership under such an atmosphere of animosity;
certainly, not against their will. Indeed, for as long as the reason for withdrawal of a partner is not
contrary to the dictates of justice and fairness, nor for the purpose of unduly visiting harm and damage
upon the partnership, bad faith cannot be said to characterize the act. Bad faith, in the context here
used, is no different from its normal concept of a conscious and intentional design to do a wrongful act
for a dishonest purpose or moral obliquity.

Article 1829 - Duration of dissolution

Testate Estate of Lazaro Mota, et.al, vs. Salvador Serra

Plaintiffs and Salvador Serra entered into a contract of partnership for the construction and exploitation
of railroad line from the san Isidro and Palma centrals to Nandong. It was covenanted that the parties
should pay the capital in equal parts. Lazaro Mota was entrusted with the administration of the
partnership.

Meanwhile, Venancio Concepcion and Phil Whitaker bought from Serra the one half of the railroad line.
Thus, a deed was executed wherein Concepcion and Whitaker agreed that the partnership “Palma” and
“San Isisdro” formed by Serra, Mota, Vidaurrazaga should be dissolved and that the said partnership
agreement should be totally cancelled and of no force and effect whatever. However, since Whitaker
and Concepcion failed to pay Serra in full he therefore foreclosed the mortgaged upon the hacienda
which was adjudicated to him at the public sale.

Consequently, since Serra failed to pay his share upon the construction of the railroad line, they filed an
action to demand payment to that effect.

CFI dismissed the action in favor Serra

Issue: W/N Serra is liable to the plaintiffs

Dissolution.

Con: Any person, who has contracted a valid obligation with a partnership, is exempt from complying
with his obligation by the mere fact of the dissolution of the partnership

Ruling: YES. By virtue of the contract between Phil. C. Whitaker and Venancio Concepcion, by common
consent, they have decided to dissolve the partnership between the "Hacienda Palma" and "Hacienda
San Isidro," thus cancelling the contract of partnership
Dissolution of a partnership must not be understood in the absolute and strict sense so that at the
termination of the object for which it was created the partnership is extinguished, pending the winding
up of some incidents and obligations of the partnership, but in such case, the partnership will be
reputed as existing until the juridical relations arising out of the contract are dissolved.

The dissolution of a Crm does not relieve any of its members from liability for existing obligations,
although it does save them from new obligations to which they have not expressly or impliedly
assented, and any of them may be discharged from old obligations by novation or other form of release.
It is often said that a partnership continues, even after dissolution, for the purpose of winding up its
affairs.

Therefore, Serra should pay his obligations to the plaintiffs as the same were not extinguished upon the
dissolution of the partnership.

Novation. In order to give novation its legal effect, the law requires that the creditor should consent to
the substitution of a new debtor. This consent must be given expressly for the reason that, since
novation extinguishes the personality of the Crst debtor who is to be substituted by a new one, it implies
on the part of the creditor a waiver of the right that he had before the novation which waiver must be
express under the principle that renuntiatio non praesumitor, recognized by the law in declaring that a
waiver of right may not be performed unless the will to waive is indisputably shown by him who holds
the right.

The fact that Phil. C. Whitaker and Venancio Concepcion were willing to assume the defendant's
obligation to the plaintiffs is of no avail, if the latter have no expressly consented to the substitution of
the Crst debtor. Neither can the letter be considered as proof of the consent of the plaintiffs to the
substitution of the debtor, because that letter written by plaintiffs to Phil. C. Whitaker and Venancio is
for Messrs. Phil. C. Whitaker and Venancio Concepcion, to bear the cost of the repairs and maintenance
of the railroad line and of the construction of whatever addition there into might be necessary.

Expromission vs. Delegation. The two forms of this novation, also impliedly recognized by article 1206
which employs the word 'delagate,' as applied to the debt, are the expromission and the delegation.
Between these, there is a marked difference of meaning and, as a consequence, a logical difference of
requisite and another clear difference as to their effects, of which we shall speak later.

In the expromission, the initiative of the change does not emanate from the debtor and may be made
even without his consent, since it consist in a third person assuming his obligation; it logically requires
the consent of this third man and of the creditor and of this last requisite lies the difference between
novation and payment, as the latter can be effected by a third person even against the will of the
creditor, whereas in the former case it cannot.

In the delegation, the debtor offers and the creditor accepts a third person who consents to the
substitution so that the intervention and the consent of these three persons are necessary and they are
respectively known as delegante, delegatario, and delegado. It must be noted that the consent need not
be given simultaneously and that it may be given afterwards, as for example, that of the creditor
delegatario to the proposition of the debtor accepted by the delegado.
Delegation notably differs from the mere indication made by the debtor that a third person shall pay the
debt; in this case, there is no novation and the former is not acquitted of his obligation and his relations
with the third person are regulated by the rules of agency.

Article 1839 - Rules in settling accounts between partners after dissolution

1. Gregorio Magdusa, et.al v. Gerundio Albaran, et.al
Gregorio Magdusa and Gerundio Albaran together with various other persons, had verbally formed a
partnership de facto, for the sale of general merchandise in Surigao to which Magdusa contributed 2K as
capital while the others contributed their labor, under the condition that out of the net profits of the
business, 25% would be added to the original capital, and the remaining 75% would be divided among
the members in proportion to the length of service of each.

Consequently, Albaran and others expressed their desire to withdraw from the partnership. Thereafter
Magdusa made a computation to determine the value of the partners' shares to that date. Now,
demands were made upon Magdusa for payment but the latter merely refused the same.

Hence, Magdusa and the other partners filed a complaint before the CFI. CFi dismiss. CA reversed and
ordered Magdusa to pay the appellees.

Issue: W/N appellant may be held liable in his personal capacity for his partners’ share upon the
dissolution of the partnership.

Ruling: No. A partner's share cannot be returned without first dissolving and liquidating the partnership,
for the return is dependent on the discharge of the creditors, whose claims enjoy preference over those
of the partners; and it is self-evident that all members of the partnership are interested in its assets and
business, and are entitled to be heard in the matter of the firm's liquidation and the distribution of its
property. The liquidation is not signed by the other members of the partnership besides appellees and
appellant; it does not appear that they have approved, authorized, or ratified the same; and, therefore,
it is not binding upon them. At the very least, they are entitled to be heard upon its correctness.

In addition, unless a proper accounting and liquidation of the partnership affairs is first had, the capital
shares of the appellees, as retiring partners, canot be repaid, for the firm's outside creditors have
preference over the assets of the enterprise, and the firm's property cannot be diminished to their
prejudice.

Cannot be held liable in his personal capacity. Finally, the appellant cannot be held liable in his personal
capacity for the payment of partners' shares, for he does not hold them except as manager of, or trustee
for, the partnership. It is the latter that must refund their shares to the retiring partners. Since not all
the members of the partnership have been impleaded, no judgment for refund can be rendered, and
the action should have been dismissed

2. Luzviminda J. Villareal, Diogenes Villareal And Carmelito Jose, Petitioners, vs. Donaldo Efren C.
Ramirez And Spouses Cesar G. Ramirez Jr. And Carmelita C. Ramirez, G.R. No. 144214, July 14, 2003

Petitioners Luzviminda Villareal, Carmelito Jose and Jesus Jose formed a partnership with a capital of
P750,000 for the operation of a restaurant and catering business under the name "Aquarius Food House
and Catering Services." Donaldo. Ramirez joined them a partner in the business wherein his capital
contribution was paid by his parents.

Meanwhile, Jose withdrew from the partnership and his capital contribution was refunded to him in
cash. Consequently, without prior knowledge of Ramirez and his parents, the Villareals closed down the
restaurant, allegedly because of increased rental. The restaurant furniture and equipment were
deposited in the house of the Ramirezes for storage.

Thereafter, respondent spouses wrote the Villareals, saying that they were no longer interested in
continuing their partnership or in reopening the restaurant, and that they were accepting the latter's
offer to return their capital contribution and demanded the return of their one-third equity in the
partnership. However, their demands left unheeded.

Hence, they filed a complaint for collection of sum of money from petitioners before the RTC. Granted.
Affirmed by CA.

Issue: W/N petitioners are liable to Ramirezes for the latter’s share in the partnership.

Ruling: No. Respondents have no right to demand from petitioners the return of their equity share. The
partnership has a juridical personality separate and distinct from that of each of the partners." Since the
capital was contributed to the partnership, not to petitioners, it is the partnership that must refund the
equity of the retiring partners.

What must be returned?

Before the partners can be paid their shares, the creditors of the partnership must first be compensated.
After all the creditors have been paid, whatever is left of the partnership assets becomes available for
the payment of the partners' shares. In the present case, the exact amount of refund equivalent to
respondents' one-third share in the partnership cannot yet be determined until all the partnership
assets have been liquidated — in other words, sold and converted to cash — and all partnership
creditors, if any, paid.

No guarantee to return the whole capital. Generally, in the pursuit of a partnership business, its capital
is either increased by profits earned or decreased by losses sustained. It does not remain static and
unaffected by the changing fortunes of the business. In the present case, the financial statements
presented before the trial court showed that the business had made meager profits. However, notable
therefrom is the omission of any provision for the depreciation of the furniture and the equipment.
Properly taking these non-cash items into account will show that the partnership was actually sustaining
substantial losses, which consequently decreased the capital of the partnership.

The delivery of the store furniture and equipment to private respondents was for the purpose of
storage. They were unaware that the restaurant would no longer be reopened by petitioners. Hence,
the former cannot be faulted for not disposing of the stored items to recover their capital investment

1840
Laguna Transportation Co. vs. SSS

Laguna Transportation Co., an unregistered partnership, commenced its operation as a common carrier
business in 1949. Consequently, in 1956 the partnership was converted into a corporation by registering
its articles of incorporation with the SEC.

Laguna Transportation filed before the CFI a petition to declare that Laguna Transportation is not bound
to register as a member of SSS and therefore, it is not obliged to pay to the latter the contributions
required under the Social Security Act.

It argued that, since it was registered as a corporation with the Securities and Exchange Commission
only in 1956, it must be considered to have been in operation when it was conferred with a juridical
personality separate and distinct from the persons composing it. CFI denied. Hence this petition.

Issue: W/N the corporation cannot be made liable for the debts incurred by the unregistered
partnership.

Ruling: No, the registered corporation could be made liable for the debts incurred by the unregistered
partnership. There was no mention whatsoever is made either in the pleadings or in the stipulation of
facts that the lines and equipment of the unregistered partnership had been sold and transferred to the
corporation. This omission, clearly indicates that there was, in fact, no transfer of interest, but a mere
change in the form of the organization of the employer engaged in the transportation business, i.e.,
from an unregistered partnership to that of a corporation.

Moreover, where a corporation was formed by, and consisted of members of a partnership whose
business and property was conveyed and transferred to the corporation for the purpose of continuing
its business, in payment for which corporate capital stock was issued, such corporation is presumed to
have assumed partnership debts, and is prima facie liable therefor. The reason for this rule is that the
members of the partnership may be said to have simply put a new coat, or taken on a corporate cloak,
and the corporation is a mere continuation of the partnership.

1842

Emilio Emnace vs. CA

Emilio Emnace, Vicente Tabanao and Jacinto Divinagracia were partners in a business concern known as
Ma. Nelma Fishing Industry. Consequently, Divinagracia withdraw from the partnership, thus they
decided to dissolve their partnership and executed an agreement of partition and distribution of the
partnership properties among them. Among the assets to be distributed were 5 fishing boats, 6 vehicles,
2 parcels of land and cash deposits in BPI and Prudential Bank.

It was alleged that throughout the existence of the partnership, and even after Tabanao’s untimely
demise, Emnace failed to submit to Tabanao’s heirs any statement of assets and liabilities of the
partnership, and to render an accounting of the partnership finances.

Hence, herein respondents filed an action for accounting, payment of shares, division of assets and
damages against Emnace before the RTC. RTC granted the petition as affirmed by CA.
Issue: W/N the right of the partners for accounting has been prescribed

Pet’s con: respondents' right to inquire into the business affairs of the partnership accrued in 1986,
prescribing four (4) years thereafter.

Ruling: No. The prescription had not even begun. The partnership, although dissolved, continues to exist
and its legal personality is retained, at which time it completes the winding up of its affairs, including the
partitioning and distribution of the net partnership assets to the partners. For as long as the partnership
exists, any of the partners may demand an accounting of the partnership's business. Prescription of the
said right starts to run only upon the dissolution of the partnership when the final accounting is done.

In the present case, since there has been no final accounting made until the institution of this action, the
said action is not barred by prescription.

Venue. An action for accounting, asking that the assets of the partnership be accounted for, sold and
distributed according to the agreement of the partners is a personal action which under the Rules of
Court, may be commenced and tried where the defendent resides or may be found or where the
plaintiffs reside, at the election of the latter. The fact that the some of the assets of the partnership are
real property does not materially change the nature of the action. It is an action in personam because it
is an action against a person for the performance of a personal duty on his part, and not an action in
rem where the action is against the thing itself. It is only incidental that part of the assets of the
partnership subject to accounting or under liquidation happen to be real property.

Limited Partnership

Art. 1843. Definition

Campos Rueda vs. Pacific Commercial

Campos-Rueda is a limited partnership that has an outstanding debt to Pacific Commercial for not less
than 1M pesos. Consequently, the partnership voluntarily filed an application for a judicial decree
adjudging itself insolvent which was opposed by Pacific.

The trial court denied the petition on the ground that it was not proven, nor alleged, that the members
of the aforesaid firm were insolvent at the time the application was filed and that it cannot be adjudged
insolvent so long as the partners are not alleged and proven to be insolvent.

Hence, this petition.

Issue: W/N a limited partnership, such as the appellee, which has failed to pay its obligations with three
creditors for more than thirty days, may be held to have committed an act of insolvency, and thereby be
adjudged insolvent against its will.

Ruling: Yes. Limited Partnership has a personality distinct from that of its members, therefore it must
suffer the rights and obligations.
If, as in the instant case, the limited partnership of Campos Rueda & Co. failed to pay its obligations with
three creditors for a period of more than thirty days, which failure constitutes, under our Insolvency
Law, one of the acts of bankrupt upon which an adjudication of involuntary insolvency can be
predicated, this partnership must suffer the consequences of such a failure, and must be adjudged
insolvent.

Therefore, it having been proven that the partnership Campos Rueda & Co. failed for more than thirty
days to pay its obligations to the petitioners, the Pacific Commercial Co., the Asiatic Petroleum Co., and
the International Banking Corporation, therefore, Campos-Rueda have the right to a judicial decree
declaring the involuntary insolvency of said partnership.

Liability of Limited Partner. the liability of the limited partners for the obligations and losses of the
partnership is limited to the amounts paid or promised to be paid into the common fund except when a
limited partner should have included his name or consented to its inclusion in the firm name

Art. 1844. Requisites

Teck Seing & Co., LTD, Santiago o Chung vs. Pacific Commercial

Pacific Commercial and 3 others, the creditors of Teck Seing filed a motion to declare of Tek Seing as
insolvent and to furnish an inventory of the individual partners’ properties. The trial judge first granted
the motion, but, subsequently, denied it on the instance of Teck Seing. Hence this petition.

Creditor’s contention: The partnership contract of Teck Seing established a general partnership and
therefore, partners may be held liable to the obligation of the partnership.

Issue: Is Teck Seing a general or a limited partnership.

Ruling: To establish a limited partnership there must be, at least one general partner and the name of
at least one of the general partners must appear in the firm name.

But neither of these requirements have been fulfilled.

Intention of the partners. The intention of the persons making up Teck Seing & Co., Ltd. was to establish
a partnership which they erroneously denominated a limited partnership. If this was their purpose, all
subterfuges resorted to in order to evade liability for possible losses, while assuming their enjoyment of
the advantages to be derived from the relation must be disregarded. The partners who have 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.

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.

Liability. As the law makes all the member of the general copartnership liable personally
and in solidum with all their property for the results of the transaction made in the name
and for the account of the partnership and as the Insolvency Law, makes all the property
of the partnership as well as all the separate property of each of the partners liable, the
partners and the partnership Tek Seing shall be jointly liable to the obligations incurred
by the partnership. Thus, personal properties of the partners shall satisfy the remaining
obligation after the partnership assets has been exhausted or in case the partnership
becomes insolvent as in the present case.