LAW 3

TThS, 4:30-5:30 III. UNLAWFULNESS OF THE BUSINESS

09 August 2012 (Thursday) - Doctrine of Supervening Illegality
Atty. Maan Grace A. Baguioen - If unlawful from the very start, the
partnership never had a juridical
DISSOLUTION AND WINDING UP personality

Dissolution (A.1828) IV. LOSS

- Change in the relation of the partners caused by any 1. Of a specific thing promised as contribution
partner ceasing to be associated in the carrying on of - Not generic things [genus does not
the business; perish]
- A.1829: on dissolution the partnership is not - Before delivery: dissolution; no
terminated but continues until winding up contribution made by the partner
- After delivery: no dissolution;
Winding up partnership bears the risk of loss
- Process of settling business affairs after dissolution 2. Of the use of a specific thing promised as
- Examples: contribution
1. Payment of previous obligations - Whether before or after delivery:
2. Collection of assets previously demandable dissolution [there is nothing to
3. Even new business, if needed to wind up, i.e. use/enjoy]
contract with demolition company
V. DEATH OF ANY PARTNER
Termination - Whether known or unknown, causes
- Point in time after all partnership affairs have been automatic dissolution
wound up - Status of firm: partnership in liquidation

CAUSES OF DISSOLUTION VI. INSOLVENCY OF A PARTNER/PARTNERSHIP

A.1830: Extrajudicial dissolution [except no.8]
A.1831: Judicial dissolution
A.1840: Other causes
4 Categories of Causes:
1. Act of the parties not in violation of their agreement
2. Act of parties in violation of their agreement
3. Operation of law
4. Court decree
A.1830
1. Extrajudicial dissolution without violation of agreement
2. Extrajudicial dissolution in contravention of agreement
1-2. voluntary [caused by will of 1/more/all of the partners]
3-8. involuntary [brought independently of the will of the
partners/operation of law]
I. CAUSES NOT IN VIOLATION OF THEIR
AGREEMENT
1. Termination of the definite period/specific
undertaking
- Contract is the aw between the parties
- If partnership continues, becomes
partnership at will
2. Express will of a partner who must act in
good faith when there is no definite
term/specific undertaking
- If in bad faith: dissolution, liability for
damages
3. Express will of all partners except a) those
who have been assigned, or b) those who
have been charged
- Dissolution by implied mutual consent
- One buys out the interest of all the
others
4. Expulsion in good faith of a member
- If in bad faith: dissolution [apparent
lack of confidence], without prejudice to
liability for damages
II. CAUSES IN VIOLATION OF THEIR AGREEMENT
- Specified term
- Partner may expressly withdraw even
before the expiration of the period, with or
without justifiable cause
- If without justifiable cause, not compelled to
remain in the firm but liable for damages
[enforced against partnership shares after
winding up]
- Insolvency: no need for judicial declaration,
just that the assets are less than liabilities
VII. CIVIL INTERDICTION OF ANY PARTNER
- Civil interdiction: “Civil death”
- Deprives offender during the time of his
sentence of the rights of
a. Parental authority/guardianship
b. Marital authority
c. Right to manage property
d. Right to dispose of property by any act
or conveyance inter vivos
VIII. DECREE OF COURT UNDER A.1831
- There must be a final judgment
- Suit for dissolution
- proof as to existence of partnership must
first be given
- Who can sue:
a. 1st par. [6 causes] – any partner
b. 2nd par. – purchaser of the partner’s
interest, provided:
1. The period has expired
2. That when the interest was
assigned/charged, it was a
partnership at will
1st Paragraph [6 causes]
1. Insanity
- Reason: incapacity to contract
- Insanity must be duly proven [judicial
declaration]
2. Incapability of performing one’s part in the
partnership contract
- Ex. Entry into government service; long term
stay abroad
3. Prejudicial conduct/
4. Persistent breach of agreement
- Must go to the essence of the partnership
agreement; productive of serious and
permanent injury
- Ex. Inveterate drunkenness; unjustified refusal
for accounting; failure to hold regular
meetings/hear grievances
5. Business may only be carried on at a loss
6. Other circumstances that render a dissolution
equitable
- Abandonment of business; fraud in management
of business
Time of judicial dissolution: at the time the judicial decree
becomes a final judgment
OTHER CAUSES [A.1840]
1. New partner is admitted
2. Partner retires/dies/withdraws/is expelled
3. Other partners assign rights to sole remaining
partner
4. All partners assign rights to third persons
EFFECTS OF DISSOLUTION
GENERAL RULE: [A.1832]
A partner can no longer bind the partnership.
Effect of dissolution caused by AID
Act [withdrawal, abandonment, retirement]
Insolvency
Death
- GR: all partners are still bound to each other
- EXC:
1. If acting partner had knowledge, if dissolution is by act
2. If acting partner had knowledge or notice, if dissolution
is by death/insolvency
Example: A, B, C = X and Co.
a. A resigned
- Dissolution
- If B has knowledge of resignation, and entered into new
transaction with D [innocent customer], X and Co. still
liable
- D may go after the individual assets of A, B, C
- A and C has right of recovery as against B
b. A died/became insolvent
- Even mere notice will suffice because death/insolvency
is more ordinary than an act
EXCEPTION: [A.1834]
Instances when a partner can bind the partnership after
dissolution:
- Partnership liability is created
1. Business is for winding up
2. Business is to complete unfinished transactions
3. Completely new business with third parties considered
as innocent:
a. Previous creditor with actual knowledge of
dissolution
b. New creditor with knowledge or notice of
dissolution
- Presumption of knowledge due to publication of
dissolution decree
Instances when a partner CANNOT bind the partnership
1. In all cases not mentioned in A.1834
- Ex. New business with 3 rd parties who are in bad
faith
2. When the firm was dissolved because it was unlawful to
carry out the business
3. Where the acting partner has become insolvent
4. Where the acting partner is unauthorized to wind up
DISCHARGE OF LIABILITY
A.1835: Dissolution does not of itself discharge the existing
liability of any partner, except by agreement between:
1. The partner himself [partner concerned]
2. The other partners/partnership continuing the
business
3. Partnership creditors
*Nos.2-3: May be inferred from the course of dealing
between them.
Rights of a partner where dissolution is not in contravention
of the agreement:
1. Apply partnership property to discharge the
liabilities of the partnership
2. Apply surplus, if any, to pay in cash the net amount
owed to partners
Rights of a partner where dissolution is in contravention of
the agreement:
A. Partner who did not cause the dissolution wrongfully:
1. Apply partnership property to discharge the
liabilities of the partnership
2. Apply surplus, if any, to pay in cash the net amount
owed to partners
3. Indemnity for damages caused by partner guilty of
wrongful dissolution
4. Continue the business in the same name during the
agreed term
5. Possess partnership property if business is
continued
B. Partner who wrongfully caused dissolution:
1. If business NOT continued by others
a. Apply partnership property to discharge the
liabilities of the partnership
b. Receive in cash his share of surplus less
damages caused by his wrongful dissolution
2. If business continued by others
a. Have the value of his interest at the time of
the dissolution ascertained and paid in
cash/secured by bond
b. Be released from all existing/future
partnership liabilities
Rights of injured partner where partnership contract is
rescinded on the ground of misrepresentation by one party:
1. Right of lien on surplus of partnership property after
satisfying partnership liabilities
2. Right to subrogation in place of creditors after
payment of partnership liabilities
3. Right of indemnity by guilty partners against all
partnership debts and liabilities
SETTLEMENT OF ACCOUNTS BETWEEN PARTNERS
Assets of the partnership:
1. Partnership property, including goodwill
2. Contribution of partners
Order of application of assets:
1. Partnership creditors
2. Partners as creditors
3. Partners as investors [return of capital contribution]
4. Partners as investors [share of profits of
partnership]
Partners authorized to wind up:
1. Partners designated by agreement
2. In the absence of designated partner, all partners not
guilty of wrongfully dissolving the partnership
3. Legal representative of last surviving partner
Effects when the business of the dissolved partnership is
continued:
1. The creditors of the old partnership are also
creditors of the new partnership which continues
the business of the old one without liquidation of
partnership affairs
2. Creditors have an equitable lien on the
consideration paid to the retiring/deceased partner
by the purchaser when the retiring/deceased
partner sold his interest without final settlement
with creditors
3. Rights of retiring partner/estate of deceased
partner:
a. To have the value of his interest ascertained as
of the date of dissolution;
b. To receive as ordinary creditor the value of his
share in the dissolved partnership with interest,
or profits attributable to the use of his rights, at
his option