CIVIL CODE OF THE PHILIPPINES Art.

1839
DISSOLUTION AND WINDING UP
Art. 1828.
1. Dissolution concept
Dissolution is the change in the relation of the
partners caused by any partner ceasing to be
associated in the carrying on of the business. It
is different from the winding-up of the business
[Art. 1828]. It does not terminate the
partnership, which continues until the winding
up of partnership affairs is completed [Art.
1829].
Yu vs NLRC
ISSUE:
Whether the partnership which had hired petitioner Yu as Assistant General Manager had been
extinguished and replaced by a new partnership composed of Willy Co and Emmanuel Zapanta

HELD:

Yes, the partnership which hired Yu was extinguished and replaced by a new partnership.

In the case at bar, just about all of the partners had sold their partnership interests (amounting to 82% of
the total partnership interest) to Mr. Willy Co and Emmanuel Zapanta. The record does not show what
happened to the remaining 18% of the original partnership interest. The acquisition of 82% of the
partnership interest by new partners, coupled with the retirement or withdrawal of the partners who had
originally owned such 82% interest, was enough to constitute a new partnership

In the ordinary course of events, the legal personality of the expiring partnership persists for the limited
purpose of winding up and closing of the affairs of the partnership.

In other words, the new partnership simply took over the business enterprise owned by the preceding
partnership, and continued using the old name of Jade Mountain Products Company Limited, without
winding up the business affairs of the old partnership, paying off its debts, liquidating and distributing its net
assets, and then re-assembling the said assets or most of them and opening a new business enterprise.

The new partnership itself which continued the business of the old, dissolved, one, are liable for the
debts of the preceding partnership

Winding up is the actual process of settling the

partnership business or affairs after dissolution.
It involves collection and distribution of
 CIVIL CODE OF THE PHILIPPINES Art. 1839
partnership assets, payment of debts, and
determination of the value of the interest of the
partners in the partnership.
Termination is the point in time when all
partnership affairs are completely wound up
and finally settled. It signifies the end of the
partnership life [De Leon (2010)].
Idos vs CA
ISSUE:
Whether or not the partnership is dissolved. (NO)
1. NO. Even if the parties agreed to dissolve the partnership, such agreement did
not automatically put an end to the partnership, since they still had to sell the
goods on hand and collect the receivables from debtors. In short, they were still
in the process of winding up, or the process of settling business affairs after
dissolution, when he check in question was issued.

Upon dissolution, the partnership is not terminated, but continues until the winding up
of partnership affairs is completed. The best evidence of the existence of the
partnership which was not yet terminated were the unsold goods and
uncollected receivables, which were present in this case.
These final stages in the life of a partnership are recognized under the Civil Code that explicitly declares that upon
dissolution, the partnership is not terminated, to wit:

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.

Art. 1829. On dissolution the partnership is not terminated, but continues until the winding up of
partnership affairs is completed. (Emphasis supplied.)

The best evidence of the existence of the partnership, which was not yet terminated (though in the winding up stage), were
the unsold goods and uncollected receivables, which were presented to the trial court. Since the partnership has not been
terminated, the petitioner and private complainant remained as co-partners. The check was thus issued by the petitioner to
complainant, as would a partner to another, and not as payment from a debtor to a creditor.

2. Best evidence of winding up stage

Tocao vs CA - "The best evidence of the existence of the partnership, which was not
yet terminated (though in the winding up stage), were the unsold goods and
uncollected receivables, which were presented to the trial court. Since the partnership
has not been terminated, the petitioner and private complainant remained as co-
partners. x x x."
 CIVIL CODE OF THE PHILIPPINES Art. 1839
The winding up of partnership affairs has not yet been undertaken by the
partnership.1âwphi1 This is manifest in petitioners’ claim for stocks that had been
entrusted to private respondent in the pursuit of the partnership business.
3. Effect of dissolution of the partners
WITH RESPECT TO PARTNERS
The authority of partners to act for the
partnership is terminated, with respect to
partners:
(1) When the dissolution is not by the act,
insolvency or death of a partner; or
(2) When the dissolution is by such act,
insolvency or death, when the partner
acting for the partnership has knowledge or
notice of the cause [Arts. 1832 and 1833].
In other cases, each partner is still liable for his
share in the liability created by the partner
acting for the partnership [Art. 1833].
4. Effect of dissolution of membership
(2)Dissolution Caused by A-I-D
Art. 1833 speaks of dissolution caused by A-I-D, and the effects on the partners as
among themselves, if a partnership liability is incurred (that is, if the ftrm is STILL
BOUND). (NOTE: If the ftrm is not bound, see Art. 1834, where only the partner acting
is liable.)
5. Causes of dissolution of partnership
Two Kinds of Causes for Dissolution
Dissolution may be caused:
(a) On the one hand by:
A — act (like withdrawing of a partner) I
— insolvency
D — death
(b)On the other hand by other things, like TERMINATION of the
period.
Roxas vs maglana - Under Article 1830, par. 2 of the Civil Code, even if there is a specified term,
one partner can cause its dissolution by expressly withdrawing even before the expiration of the
period, with or without justifiable cause. Of course, if the cause is not justified or no cause was
given, the withdrawing partner is liable for damages but in no case can he be compelled to remain
in the firm. With his withdrawal, the number of members is decreased, hence, the dissolution. And
in whatever way he may view the situation, the conclusion is inevitable that Rojas and Maglana
shall be guided in the liquidation of the partnership by the provisions of its duly registered Articles of
Co-Partnership; that is, all profits and losses of the partnership shall be divided "share and share
alike" between the partners.

Bearneza vs dequilla - The partnership having been dissolved by the death of

Perpetua Bearneza, its subsequent legal status was that of a
partnership in liquidation, and the only rights inherited by her
 CIVIL CODE OF THE PHILIPPINES Art. 1839
testamentary heir, the herein plaintiff, were those resulting from the
said liquidation in favor of the deceased partner, and nothing more.

6. Liability of widrawing partner

Yu vs NLRC -What is important for present purposes is that, under the above described situation, not only the retiring
partners (Rhodora Bendal, et al.) but also the new partnership itself which continued the business of the old, dissolved, one,
are liable for the debts of the preceding partnership. In Singson, et al. v. Isabela Saw Mill, et al,  the Court held that under
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facts very similar to those in the case at bar, a withdrawing partner remains liable to a third party creditor of the old
partnership.  The liability of the new partnership, upon the other hand, in the set of circumstances obtaining in the case at
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bar, is established in Article 1840 of the Civil Code which reads as follows:

Art. 1840. In the following cases creditors of the dissolved partnership are also creditors of the person or partnership
continuing the business:

Time of dissolution when reckoned The occurrence of events which precipitate the legal
consequence of dissolution of a partnership do not, however, automatically result in the termination of the legal personality
of the old partnership. Article 1829 of the Civil Code states that:

[o]n dissolution the partnership is not terminated, but continues until the winding up of partnership affairs is completed.
In other words, the new partnership simply took over the business enterprise owned by the preceeding partnership, and
continued using the old name of Jade Mountain Products Company Limited, without winding up the business affairs of the
old partnership, paying off its debts, liquidating and distributing its net assets, and then re-assembling the said assets or
most of them and opening a new business enterprise.
7. Effect of dissolution
EFFECTS OF DISSOLUTION
ON AUTHORITY OF THE PARTNERS
In general, upon dissolution, the authority of the
partners to represent the partnership is
confined only to acts necessary to:
(1) Wind up partnership affairs; or
(2) Complete transactions begun but not then
finished [Art. 1832, par. 1].
WITH RESPECT TO PARTNERS
The authority of partners to act for the
partnership is terminated, with respect to
partners:
(1) When the dissolution is not by the act,
insolvency or death of a partner; or
(2) When the dissolution is by such act,
insolvency or death, when the partner
acting for the partnership has knowledge or
notice of the cause [Arts. 1832 and 1833].
In other cases, each partner is still liable for his
share in the liability created by the partner
acting for the partnership [Art. 1833].
WITH RESPECT TO THIRD PERSONS
With respect to persons not partners:
(1) After dissolution, a partner can bind the
partnership by any act appropriate for:
(a) Winding up partnership affairs; or
 CIVIL CODE OF THE PHILIPPINES Art. 1839
(b) Completing transactions unfinished at
dissolution.
(2) He can also bind it by any transaction which
would bind the partnership as 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 thereof; or
(b) Had not so extended credit but had
known of the partnership prior to
dissolution, and having no knowledge
or notice of dissolution, the fact 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 [Art. 1834, par. 1].
Note the character of the notice required:
(1) As to persons who extended credit to the
partnership prior to dissolution, notice must
be actual.
(2) As to persons who merely knew of the
existence of the partnership, publication in a
newspaper of general circulation in the
place of business of the partnership is
sufficient.

8. General rule on effect of dissolution; exception

9. Existing liability of partner
General rule: exception
10. Death of partner
Lota vs tolentino - ISSUE:
Whether or not, after the death of the defendant Benigno Tolentino on November
22, 1939, plaintiff's action for accounting and liquidation of the partnership formed in
1918 between Urbano Lota and Benigno Tolentino, of which the latter was the
industrial and managing partner, may be continued against the heirs of Benigno
Tolentino.

RULING:
Applying the decision in the case of Po Yeng Cheo vs. Lim Ka Yam, 44 Phil. 172, the
court ruled that it is well settled that when a member of a mercantile partnership dies,
the duty of liquidating its affairs devolves upon the surviving member, or members, of
the firm, not upon the legal representatives of the deceased partner. And the same
rule must be equally applicable to a civil partnership clothed with the form of a
commercial association.

11. Kinds of winding up

(a)Extrajudicially —
1)by the partners who have not wrongfully dissolved the partnership
 CIVIL CODE OF THE PHILIPPINES Art. 1839
2)or by the legal representative of the last surviving partner (when all the partners are
already dead), provided the last survivor was not insolvent.
NOTE:
Where the managing partners of the partnership has the necessary authority to
liquidate its affairs under its article of co-partnership, he may sell the partnership
properties even AFTER the life of the partnership has already expired since he as
manager, is empowered to wind up the business affairs of the partnership. (Ng Cho
Cio, et al. v. Ng Diong and Hodges, L-14832, Jan. 28, 1961).
(b)Judicially —
Under the control and direction of the court, upon proper cause that is shown to the
court.
[NOTE: Here the person to wind up must be ap- pointed by the court. And said
appointee should not be the legal representative of a deceased partner but should be
instead a surviving partner. (Po Yeng Cheo v. Lim Ka Yam, 44 Phil. 172).]

[NOTE: The petition, however, for a judicial winding up can be done by any partner, his
legal representative, or his assignee. (Art. 1836, 2nd part).]
12. Persons authorize to wind-up
WHO MAY WIND UP
The following partners have the right to wind up
the partnership affairs:
(1) Those designated in an agreement;
(2) Those who have not wrongfully dissolved
the partnership; or
(3) The legal representative of the last surviving
partner, who was not insolvent.
Any partner or his legal representative or
assignee may obtain winding up by the court,
upon cause shown [Art. 1836].
13. Causes of dissolution article 1837

Dissolution may be caused:

(a) although the partnership contract is NOT VIOLATED
(Example: death, or arrival of term) (The rights of part-
ners are governed by the FIRST PARAGRAPH of this
article.)
(b) because the partnership contract is VIOLATED
Example: Deliberate withdrawal of a partner al-
though the period of the ftrm has not yet expired, thus
causing damage to the ftrm.
(NOTE: The rights of the partners here are
governed BUT the SECOND PARAGRAPH of this article.)
 CIVIL CODE OF THE PHILIPPINES Art. 1839
14. Goodwill of partnership- rest the probability that its old customers will continue
their custom and will recommend the partnership to others, making the latter new
customers. It may also include the advantages which may be derived from the
partners holding themselves out as carrying on the business identified with the name
of a particular firm.
15. Dissolution by reason of expulsion of partner -
Partner Wrongfully Excluded
When a partner is excluded wrongfully, he should be con- sidered as the innocent
partner, and the others as the guilty partners. It is now said that other partners
“must account not only for what is due to him at the date of the dissolution

but also for damages or for his share of the proftts realized from the appropriation of
the partnership business and good will. (Of course), it is otherwise if the excluded
partner had substantially broken the partnership agreement.” (Schnitzer
v. Josephthal, 1923, 122 Misc. 15, 202 N.Y.S. 77). Indeed, he has a pecuniary interest in
every existing contract that was incomplete and in the trade name of the co-
partnership and assets at the time he was wrongfully expelled. (See Halfou- baum v.
Miss, 1936, 248 App. Div. 901, 290, N.Y.S. 708).
16. Rescission of partnership contract -
17. Rights of parties entitled to annul/when partnership s rescinded on the ground of
fraud or deceit
(1)Rescission or annulment of Partnership Contract
(a)Although the law here uses the term “rescind,” the proper technical term that
should have been used is “annulled,” in view of the “fraud or misrepresentation.”
(b)The “fraud or misrepresentation” here vitiates the consent whereby the contract of
partnership had been entered into, hence, it is really “dolo causante.”

(2)Three Rights
The Article speaks of 3 rights (without prejudice to his other rights under other legal
provisions):
(a)right of LIEN or RETENTION
(b)right of SUBROGATION
(c)right of INDEMNIFICATION
18. Rule of preference in the payment of the partnership liabilities
Order of Payment of Firm’s Liabilities
(a) First give to creditors (who are strangers), otherwise
they may be prejudiced.
(b) Then give to partners who are also creditors (they
should be placed in a subordinate position to outside
creditors for otherwise they may prefer their own
interests).
[NOTE: Example of credits owing to partners which
are neither capital nor proftts, are those for reimburse-
ment of business expenses. (See Geist v. Burnstine,
1940, Misc. 19 N.Y. 2d 76).]
CIVIL CODE OF THE PHILIPPINES Art. 1839
(c) Then give to the partners their capital.
 (NOTE: Capital should be given ahead of proftt
for it is only the surplus proftt over capital that
should be considered as the gain or the profit of
the ftrm.)
[NOTE: An industrial partner, who has not
con- tributed money or property at all is, in the
absence of stipulation, not entitled to participate
in the capital. He shares in the proftts, however.
(See Hunter v. Allen, 1944, 147 P. 2d 213).]
(d) Lastly, the proftts must be distributed.
[NOTE: If, during the liquidation of a ftrm, the
proftts for a certain period of time cannot be
exactly determined because no evidence or
insufftcient evidence thereof is available, the court
should determine the profit for the period by
ftnding the average proftts during the period
BEFORE and AFTER the period of time in question.
(See De la Rosa v. Ortega Go-Cotay, 48 Phil. 605).]

19. When assets not sufficient to satisfy firm’s liabilities

20. Order of payment in winding-up
ORDER OF APPLICATION OF ASSETS
The partnership liabilities shall rank, in order of
payment, as follows:
(1) Those owing to creditors other than
partners;
(2) Those owing to partners other than for
capital and profits;
(3) Those owing to partners in respect of
capital;
(4) Those owing to partners in respect of profits
[Art. 1839(2)].
21. Liability of a new partner
Bernardo vs pascual - PARTNERSHIP IN LUMBER CONCESSIONS; LIABILITY OF PARTNER WHO
ACQUIRES INTERESTS OF CO-PARTNERS. — A partner in a lumber concession who acquires the
interests of his co-partners becomes the sole concessionaire and becomes liable to all creditors of the
partnership (Art. 1840, New Civil Code).

22. Right to demand accounting of partners interest

23. Prescriptive period for a demand for accounting
(1)When Right to Account Accrues
(a)See Arts. 1807 and 1809 which also deal with the duty to account. Under the
present Article (1842), the right

to demand the account accrues at the date of dissolution in the absence of any
contrary agreement.
(b)Note that the legal representative of a partner is also, under Art. 1842, entitled
to the accounting.

(2)Possible Defendants
The action can be against:
(a)the winding up partners;
(b)the surviving partners;
(c)the person or partnership continuing the business.
Emnace vs CA - The three (3) final stages of a partnership are: (1) dissolution; (2) winding-up;
and (3) termination. 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.

The SC found that prescription had not even begun to run in the absence of a final accounting.

Article 1842 of the Civil Code provides:

The right to an account of his interest shall accrue to any partner, or his legal representative as
against the winding up partners or the surviving partners or the person or partnership continuing the
business, at the date of dissolution, in the absence of any agreement to the contrary.

The provision states that the right to demand an accounting accrues at the date of dissolution in the
absence of any agreement to the contrary. When a final accounting is made, it is only then that
prescription begins to run. In the case at bar, no final accounting has been made, and that is
precisely what respondents are seeking in their action before the trial court, since petitioner has
failed or refused to render an accounting of the partnership’s business and assets. Hence, the said
action is not barred by prescription.