CHAPTER THREE: DISSOLUTION AND WINDING UP
Stages of Partnership
(1) Dissolution, which means change in the formation of the partnership, be it disassociation,
withdrawal, cessation, and incapacity of any of the partners who form part of the
partnership;
(2) Winding Up, which pertains to the liquidation activities of the partnership to settle its
external obligations to third persons prior to the distribution or partitioning of the excess
net assets after all the obligations have been extinguished; and
(3) Termination, which pertains to the moment when the partnership has already paid its
creditors and partitioned remaining net assets, if any, among the partners
Note: The juridical personality of the partnership remains up to the time of winding up activity
Kinds of Dissolution
(1) Extrajudicial Dissolution
The partnership dissolves upon the following: A) the partnership has reached its expiry date
provided the fact that it comes with a fixed term. B) the partnership has accomplished its
purpose especially if it is formed for a particular undertaking. C) if any of the partners want
to discontinue it provided that they have acted in good faith. D) By means of expulsion of any
of the partners. E) even in the event when a partners decides to rescind the partnership
despite no clear and justifiable reasons were given provided, however that the same person
shall be liable for indemnity suffered by co-partners. F) when the partnership activity has
become illegal by virtue of a newly-implemented law. G) If the same commits illegal
activities or crimes. H) if the partner delivers a property or its usufruct alone to the
partnership but suddenly, it is lost prior to delivery. The same thing applies with a usufruct
being delivered but it is lost after the delivery. And lastly, upon the insolvency of the partner
or the partnership.
(2) Judicial Dissolution
The partnership can be dissolved by the honorable court with the following grounds; Insanity,
Incapacity, Guilt of such conduct, Persistent beach of arrangements of any of the partner and
also, if the unprofitable operation of the partnership persists.
ILLUSTRATION: For Dissolution
A) Marcus, Lucas, Darius and Cyrus formed a partnership and they named it as “the Dobre
Brothers”. During the fruitful operation of the company, Marcus has appeared to have an
unsound mind due to, allegedly, excessive use of drugs. The court, with sufficient
evidences, has proven such insanity on the side of Marcus hence, the court has finally
granted the request of the remaining brothers who prayed for the immediate dissolution.
B) Using the same illustration, let us say that the brothers had not yet filed a case but they
observed material reduction in sales over the past two years since Marcus started
engaging into illegal drugs. The effect of such substance abuse caused Marcus’ tardiness
and inefficiency. The operation strongly relied on him in the past as he was the managing
over the next years. This event leads to the case filing of the brothers before the court which
supports the dissolution of the company.
General rule, Subsequent to dissolution, none of the partners can no longer bind the partnership
with external transactions except for:
-Transactions related to liquidation activities like selling fixed assets in exchange of cash
-To complete unfinished transaction with third parties which existed before the partnership
dissolves.
-Contract of sales even after the dissolution provided the fact that the contracting party in such
contract is an established supplier or creditor of the partnership even before the dissolution
-The transaction subsequent to dissolution remains binding to the partnership if the dissolved par
Tner the remaining co-partners about the former’s cessation to be part of the company.
Note: If the partnership property is not enough to satisfy its creditors, the partners are required to
contribute additional financing.
The remedy of the partners who added funds for the creditors’ claims is to ask reimbursement
from co-partners who wrongfully causes the dissolution, plus damages.
Priority of the partnership in settling accounts
(1) Partnership Creditors
(2) Partners who provide loans for the partnership
(3) Partitioning of shares with respect to partners’ capital (industrial partner is excluded)
(4) Lastly, as to profit if there is
Priority in settling accounts when properties are in possession of the court
(1) Partnership Creditors
(2) Separate Creditors of any of the partners
Priority in settling accounts if in the case of an insolvent partner
(1) Partner’s personal Creditors
(2) Partnership creditors
(3) With respect to the partner’s shares
Right to an account of interest accrues to a partner or his legal representative while the obligation
to carry such demand is to be carried out by (1) the liquidating partners (2) Surviving partners or
(3) Persons or partnership who continue the business conduct, of the same name, of the same
business activity and of the same place of operation.