Dissolution and Winding Up

What are the three final stages of partnership?

The three final stages of partnership are: 1) dissolution; 2) winding up; and 3) termination.

When does the four years prescription period of the right of a partner to demand an accounting
of the partnership business to run?

As long as the partnership exists, any of the partners may demand an accounting of the
partnership business. Prescription of the said right starts to run only upon the dissolution of the
partnership when the final accounting is done. (Emnace vs. Court of Appeals, G.R.No. 126334,
November 23, 2001)

Define dissolution of partnership

It 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.

Is a partnership terminated after dissolution?

On dissolution, the partnership is not terminated, but continues until the winding up of the
partnership.

What are the kinds of dissolution?

1. Extrajudicial
2. Judicial

Causes of extrajudicial dissolution.

The causes for extrajudicial dissolution are:

1. Without violation of the agreement between the partners

a. By the termination of the definite term or particular undertaking in the specified
agreement
b. By the express will of any partner, who must act in good faith, when no particular term
or undertaking is specified;
c. By the express will of all the partners who have not assigned their interests or suffered
them to be charged from their separate debts, either before or after the 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 parties, when the partners do not permit
dissolution under any provision of the article, by the express will of the 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 the 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 and 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 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 the decree of court under the following article.

What are the grounds for judicial dissolution?

On application by of 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 have of
unsound mine;
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 tend to affect prejudicially the carrying on of
the business
4. A partner willfully or persistently commits a breach of the partnership agreement, or
otherwise so conducts himself in matters relating to the partnership business that is nit
reasonably practicable to carry on the business in partnership with him;
5. The business of the partnership can only be carried on the loss
6. Other circumstances render dissolution equitable;
7. On application of the purchaser of a partnership’s interest under Article 1813 or 1814,
after termination of the specified term or particular undertaking; or at any time if the
partnership.

What are the effects of the dissolution as to partner’s authority to act for the partnership?

The general rule is that dissolution terminates all authority of any partner to act for the
partnership.

Is the rule on termination of all authority of a partner as an effect of dissolution absolute?

A partner can still act for the partnership in the following instances
 1. Acts necessary to wind up partnership affairs; and
2. Acts necessary to complete transactions begun but unfinished.

Insofar as the partners are concerned, what are the qualifications to the general rule
regarding the effect of dissolution?

The qualifications are:

1. When dissolution is not by act, insolvency or death of a partner, dissolution terminates

the actual authority of a partner to undertake new business in the partnership.
2. When dissolution is by act, insolvency or death of a partner, authority of a partner interest
to act for the partnership is not deemed terminated. Thus, each partner is liable to his co-
partners for the share of any liability created by any partner acting for the partnership as
if the partnership has not been dissolved. This rule is subject to the following exceptions.

a. the cause of the dissolution is the act of a partner and the acting partner had
knowledge of such dissolution; and
b. the cause of dissolution is the death or insolvency of any partner and the acting
partner had knowledge or notice of such dissolution.

Insofar as third person are concerned.

When a partnership is not bound to third person after dissolution

a. Acts appropriate for winding up partnership affairs
b. Act for competing unfinished transactions;
c. Completely new transaction which would bind the partnership if dissolution had not
taken place provided the other party is in good faith, meaning;
i. Previous creditor (had previously extended credit) and he had no knowledge
or notice of the dissolution
ii. Not a previous creditor and the fact of dissolution had not been published in
a newspaper of general circulation.

When a partnership is not bound to third persons after dissolution.

a. Where partnership was dissolved because it was unlawful to carry on the business,
except when the act is for winding up;
b. When the acting partner in the transaction become insolvent
c. Where the partner is unauthorized to wind up, except if the transaction is with third
persons in good faith
d. Where act is not appropriate for winding up or for completing unfinished transactions
e. Completely new transaction which would bind the partnership if dissolution had not
taken place with third persons in bad faith.

Who has the right or duty to wind up or liquidate partnership affairs?

If the winding up or liquidation of partnership affairs is judicial, the right or duty to wind up or
liquidate partnership affairs devolves upon the partner or legal representative or assignee
designated by the court (Art. 1836, NCC). If it is extrajudicial, the right or duty devolves upon a
managing partner. But where there is no managing partner, or even where there is, he dies, then
the right or duty devolves upon the partners who have not wrongfully dissolved the partnership
or the legal representative of the last surviving partner, not insolvent.

Limited Partnership

A limited partnership is one formed by two or more persons under the provisions of Article 1844
of the Civil Code, having as members one or more general partners and one or more limited
partners. The limited partners as such shall not be bound by the obligations of the partnership.

May a limited partner contribute the same things that a general partner may contribute?

No. A limited partner in a limited partnership cannot contribute mere industry or services. (Civil
Code, Art. 1845)

What are the requirements for the formation of a limited partnership?

In forming a limited partnership, the following requirements must be complied with.

1. The certificate of articles of limited partnership stating the matters enumerated in Art.
1844 of the Civil Code which must be subscribed and sworn to; and
2. Such certificate must be filed for record in the Office of the Securities and Exchange
Commission.

Is the execution of a certificate of limited partnership required?

Yes. A prime requisite to the formation of a limited partnership, under Article 1844, is the
execution of the prescribed certificate. This document, as a rule, must contain the matters
enumerated in said article. Thus, a limited partnership cannot be constituted orally.

How is Certificate of Limited Partnership amended?

In the following cases, a certificate shall be amended.

a. There is a change in the name of the partnership or in the amount or the character in the
contribution of a limited partner.
b. A person is substituted as a limited partner
c. An additional limited partner is admitted
d. A person is admitted as a general partner
e. A general partner retires, dies, or becomes insolvent or insane, or is sentenced to civil
interdiction and the business is continued under Article 1860;
f. There is a change in the character of the business of the partnership;
g. There is false or erroneous statement in the certificate;
h. There is a change in the time as stated in the certificate for the dissolution of the
partnership or for the return of the contribution;
i. A time is fixed for the dissolution of the partnership, or the return of the partnership, or
the return of the partnership, no time having been specified in the certificate
j. The members desire to make a change in any other statement in the certificate inorder
that it shall accurately represent the agreement among them.

The certificate must be signed and sworn by all members, and an amendment substituting a
limited partner or adding a limited general partner shall be signed also by the member to be
substituted or added, and when a limited partner is to be substituted, the amendment shall
also be signed by the assigning limited partner

The cancellation or amendment must be recorded in the SEC.

Can a limited partner be held liable for partnership obligations?

A limited partner cannot be held liable for partnership obligations. However, if his surname
appears in the partnership or firm name or he participates in the management or control of
the business, he can be held liable.

Enumerate the rights of a limited partner

1. To require the partnership books be kept at the principal place of business in the
partnership
2. To inspect and copy at a reasonable hour partnership books or any of them
3. To demand true and full information affecting the partnership
4. To demand formal account of partnership affairs whenever circumstances render it just
and reasonable
5. To ask for dissolution and winding up by decree in court
6. To receive a share of the profits or other compensation by way of income
7. To receive return of his contribution provided the partnership assets are in excess of all
its liabilities.

Enumerate the liability of a limited partner

1. A limited partner’s liability for unpaid contributions are the following

a. For the difference between his contribution as actually made and that stated in the
certificate as actually made; and
 b. For any unpaid contribution which he agreed in the certificate to make in the future
at the time and on the conditions stated in the certificate
2. A limited partner is considered as trustee for the partnership for:
a. Specific property stated in the certificate as contributed by him but which he had not
contributed
b. Specific property of the partnership which had been wrongfully returned to him
c. Money wrongfully paid or conveyed to him on account of his contribution
d. Other property wrongfully paid or conveyed to him on account of his contribution.

References:

Hector S. De Leon.2016. The Law on Partnerships and Private Corporations