Chapter 3 – Dissolution and Winding Up

Upon the dissolution of partnership, does it mean that the partner’s liability is discharged?

Article 1835, Paragraph 1:

The dissolution of the partnership does not of itself discharge the existing liability of any partner.

Stages in the life of a partnership:

1. Dissolution
2. Winding Up
3. Termination

General Rule: The dissolution of the partnership does not of itself discharge the existing liability of any partner.

Article 1835, Paragraph 2:

A partner is discharged from any existing liability upon dissolution of the partnership by an agreement to
that effect between himself, the partnership creditor and the person or partnership continuing the business; and
such agreement may be inferred from the course of dealing between the creditor having knowledge of the
dissolution and the person or partnership continuing the business.

Partner’s liability is discharged:

1. The partner;
2. The other partners; and
3. The creditors

Is the deceased partner discharged from his liability?

Article 1835, Paragraph 3:

The individual property of a deceased partner shall be liable for all obligations of the partnership incurred
while he was a partner but subject to the prior payment of his separate debts.

Personal property priority:

1. Personal creditors
2. Partnership creditors

Example:

The partnership of X, Y, and Z was dissolved due to the death of Z. A is a partnership creditor prior to
dissolution, while B is the personal creditor of Z. Is the separate property of Z liable to A?

Yes, however the separate liability to B must first be paid and thereafter, any remaining property of Z will be
available to satisfy his share in the partnership liability to A that was incurred prior to dissolution.

Article 1836:
 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.

Kinds of Winding-Up or Liquidation:

1. Extrajudicial
Who will wind-up?
a. The liquidating partner or partners as agreed upon by all of the partners;
b. The partners who have not wrongfully dissolved the partnership; or
c. The legal representative of the last surviving partner who is not solvent

2. Judicial
Who will wind-up?
a. The person appointed by court
Good evening everyone! I will be discussing Articles 1835 and 1836 under Chapter III which is about Dissolution and
Winding-Up.

To start with, we first have to answer the question:

“Upon the dissolution of partnership, does it mean that the partner’s liability is discharged?”

Kapag ba nagkaroon ng dissolution of partnership, hindi na kailangan bayaran ng mga partners ang utang nito?

The answer is no.

Based on Article 1835, Paragraph 1:

The dissolution of the partnership does not of itself discharge the existing liability of any partner.

Kung mapapansin natin, ang tinutukoy sa article na ito ay dissolution of the partnership. At mahalaga na malaman
natin ang pagkakaiba nito dahil mayroon tayong tinatawag na three final stages in the life of a partnership.

1. The first stage is dissolution, wherein it merely pertains to the change in the relationship of the partners
caused by any partner ceasing to be associated in the carrying on of the business.

Ano ba ang mga dahilan kung bakit nagkakaroon ng dissolution of the partnership?
According to Article 1830, it can happen when the term of the partnership already expired, by the express
will of any partner, by the death or insolvency of any partner and other reasons as enumerated.

2. However, even after a partnership is dissolved, it still continues to exist and its legal personality is retained.
Meaning to say, a partnership will only be terminated after the second stage is which is winding up or the
process of settling the business affairs of a partnership after dissolution.

Ano naman ang nangyayari kapag nagkakaroon ng winding-up of the partnership?

During this stage, the partnership will have to sell its assets in order to pay for its outstanding liabilities and if
ever there are any assets left it will be later on distributed to the partners as well.

3. After that, we can finally say that a partnership is at the third stage which is termination or when the
partnership completely ceases to exist.

In other words, when a partnership is dissolved, the general rule is that the partners still have the responsibility to
pay for its existing debts before it can be completely terminated.

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However, there are exceptions to this.

Based on Article 1835, Paragraph 2:

A partner is discharged from any existing liability upon dissolution of the partnership by an agreement to
that effect between himself, the partnership creditor and the person or partnership continuing the business; and
such agreement may be inferred from the course of dealing between the creditor having knowledge of the
dissolution and the person or partnership continuing the business.

Sa madaling salita, may mga pagkakataon naman na ang isang partner ay hindi na kailangan pang makihati sa
pagbabayad ng mga utang ng partnership pagkatapos nitong dumaan sa dissolution.

And this happens when there is an agreement between:

 1. The partner concerned or the retiring partner;
2. The other partners or the continuing partners; and
3. The creditors

But such agreement does not necessarily have to be express as it can also be implied from the conducts of the
creditor and other partners.

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To continue with the discussion, we have another question to answer:

“Upon the dissolution of partnership, does it mean that the deceased partner’s liability is discharged?”

Kapag ba nagkaroon ng dissolution of the partnership, hindi na kailangang bayaran ng partner na namatay na ang
utang nito?

Again, the answer is no.

Based on Article 1835, Paragraph 3:

The individual property of a deceased partner shall be liable for all obligations of the partnership incurred
while he was a partner but subject to the prior payment of his separate debts.

Kung kanina sinasabi natin na, kinakailangang ibenta ng partnership ang mga assets nito para mabayaran ang mga
natitira nitong liabilities. May mga pagkakataon naman na hindi ito nagiging sapat. Kaya kahit ang personal
property ng mga general partners, buhay man sila o patay, ay pwede ring magamit bilang pambayad sa mga utang
ng partnership.

However, the consideration is that, when it comes to personal property, the first priority of payment must be the
personal creditor of the partner followed only by the partnership creditor.

And for us to understand it better, let us have an example:

The partnership of X, Y, and Z was dissolved due to the death of Z. A is a partnership creditor prior to
dissolution, while B is the personal creditor of Z. Is the separate property of Z liable to A?

Magagamit din ba na pambayad utang kay partnership creditor A ang personal property ni deceased partner Z?

Yes. However, the separate liability to B must first be paid and thereafter, any remaining property of Z will be
available to satisfy his share in the partnership liability to A that was incurred prior to dissolution.

Sa madaling salita, gamitin muna ang personal property ni Z pambayad sa personal creditor niya na si B at kung may
matitira pa, tsaka naman bayaran ang utang niya kay partnership creditor na si A.

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Now that we are done with the discussion of Article 1835, the next part will be:

Based on Article 1836:

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.

Pinapaliwanag lamang nito na mayroong dalawang pamamaraan kung paano nagkakaroon ng winding-up or
liquidation of the partnership:
 1. Isa na rito ang extrajudicial, kung saan nangyayari ang liquidation sa pamamagitan ng kasunduan sa pagitan
ng mga partners.
2. Habang ang isa pa ay judicial, kung saan nangyayari naman ang liquidation sa tulong ng korte.

And for these two kinds, there are different persons in charge of winding-up or settling the affairs of the partnership
after dissolution and they are otherwise known as liquidating partners.

Under extrajudicial liquidation, the persons who will wind-up are the following:

1. The liquidating partner or partners as designated upon by all of the partners;

2. In the absence of an agreement, the partners who have not dissolved the partnership in bad faith; or
3. The legal representative of the last surviving partner who must be solvent

As for the judicial liquidation, the person who will wind-up is the partner that will be appointed by the court.

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For the summary of the discussion:

Under Article 1835:

Paragraph 1 – A partner will remain liable even after dissolution.

Paragraph 2 – A partner can be relieved from partnership liability when there is an agreement between himself, the
other partners and creditors.

Paragraph 3 – The personal property of a deceased partner must first pay personal creditor followed only by the
partnership creditor.

While Article 1836:

For extrajudicial liquidation, which happens without court intervention, those who will wind up are the liquidating
partner, partner in good faith or the solvent legal representative of last surviving partner.

While for judicial liquidation, which happens with court intervention, the partner appointed by the court will wind-
up.