Pedro M. Santos Jr.

Weekly Summary
2004-32159 Atty. San Juan

Lesson 22 – Dissolution and Winding Up

1. Differentiating Dissolution, Winding Up, and Termination

a. Dissolution: the change in the relation of the partners caused by any partner ceasing to
be associated in the carrying on (Art. 1828)
b. Winding up: Process of settling business affairs after dissolution
c. Termination: point when all partnership affairs have been wound up

2. Causes of Dissolution
a. Without violating the agreement
i. Termination of definite term
ii. Achievement of particular undertaking
iii. Express will of any partner if partnership is at will
iv. Expulsion of any partner
b. In violation of the agreement – at will of any partner (may be liable for damages)
c. By operation of law (Force majeure/not by will)
i. Loss of specific thing promised
ii. Business becomes unlawful
iii. Death, insolvency, or civil interdiction of a partner
iv. Insolvency of the partnership
d. By court decree
i. Partner is declared insane/of unsound mind
ii. Partner becomes incapacitated to perform partnership contract
iii. Partner is guilty of conduct prejudicial to partnership business
iv. Partners commits a breach of the partnership agreement
v. Business can only be carried on at a loss
vi. Other equitable circumstances
vii. On application of the purchaser of a partner’s interest
1. After termination of the term
2. After completion of undertaking
3. At any time, if partnership at will

3. Effects of Dissolution
a. General rule: Dissolution terminates all authority of any partner to act for the partnership.
i. Exception 1: Acts that may be necessary to wind up partnership affairs. (Art. 1832,
1834 (1))
ii. Exception 2: When dissolution is by the act, insolvency, or death of a partner, a
new contract entered into by a partner will bind the other partners (i.e., good
faith, the authority subsists).
1. Exception to the exception: this authority is terminated if the acting
partner had knowledge of that the partnership was dissolved by the act
of one partner or that it was dissolved by the death or insolvency of a
partner. (Bad faith)
 iii. Exception 3: Transactions that would bind the partnership if dissolution had not
taken place, provided the other party to the transaction extended credit to the
partnership and did not know of the dissolution, or did not extend credit but was
not notified of the dissolution nevertheless. (Art. 1834 (2))

4. Right to Wind Up: 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. (Art. 1836)

5. Settlement of Accounts (Apply rules in Arts. 1797-1799, 1827)

a. Dissolution is not caused in contravention of the partnership agreement: Each partner
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. (Art. 1837)
b. Dissolution is caused in contravention of the partnership agreement: Apply Art. 1837 as
follows:
i. If no desire to continue the business, the partners who have not caused
dissolution wrongfully are entitled to surplus and damages from partners who
caused the dissolution wrongfully
ii. If the partners who have not caused dissolution wrongfully desire to continue the
partnership, they may possess the partnership property and buy out the partners
who caused dissolution wrongfully (pay the value of interest less damages)
iii. Partners who have caused dissolution wrongfully
1. If business will not be continued, entitled to surplus less damages
2. If business will be continued, entitled to value of his interest less
damages

6. Rescission
a. Party entitled to rescind is entitled to: (Art. 1838.)
i. Right to retain surplus after paying liabilities
ii. Stand in the place of creditors for any payments made by him in respect of
liabilities
iii. Be indemnified by the person guilty of fraud
b. Rules in settlement of accounts
i. Assets = property + contributions to pay liabilities
ii. Liabilities, in order or payment priority:
1. owing to creditors other than partners
2. owing to partners other than for capital and profits
3. owing to partners in respect of capital
4. owing to partners in respect of profits
iii. When partner is insolvent, his separate property shall be liable in the following
order of priority:
1. Separate creditors
2. Partnership creditors
3. Partners, by way of contribution

7. Effect of Continuation of the Business

a. Creditors of the dissolved partnership are also creditors of the person/partnership
continuing the business when there is no liquidation of partnership.
b. Liability of new partners shall be satisfied out of partnership property only unless there is
contrary stipulation.