DEFINITION OF DISSOLUTION

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 as distinguished from
the winding up of the business; partnership is not terminated but continues until the
winding up of partnership affairs is completed.

- Does not automatically terminate the legal personality or relation of the partners.

- Limited existence: settling accounts and collection of assets and properties of the
partnership for the benefit of all interested (viable only for winding up of its affairs).

- No new business transactions.

Change in the membership and formation of a new one:

1. Retirement 2. Death

3. Admission of new members- a sub-partner can be an actual partner if all other

partners gave their consent.

Dissolution vs. Winding up vs. Termination (Article 1829)

“Dissolution,” “Winding up,” and “Termination” should not be confused because they
are distinct terms in law. Dissolution “designates the point in time when the partners
cease to carry on the business together: termination is the point in time when all
partnership affairs are wound up; winding up is the process of settling partnership
affairs after dissolution.”

Causes of Dissolution (Article 1830)

1. Without violation of the agreement between the partners

a. By termination of the definite term/particular undertaking specified in the
agreement
b. By the express will of any partner, who must act in good faith, when no definite
term or particular undertaking is specified
c. By the express will of all the partners who have not assigned their
interest/charged them for their separate debts, either before or after the termination
of any specified term or particular undertaking
d. By the bona fide expulsion of any partner from the business in accordance with
power conferred by the agreement.
-caused by acting against the rule: (1) Industrialist partner- any business, (2)
Capitalist partner- business in line with the nature of business of the partnership.
2. In contravention of the agreement between the partners, where the
circumstances do not permit a dissolution under any other provision of this article,
by the express will of any partner at any time.
- Entering into a prohibited contract
- Sole distributorship- no partner shall solely distribute of any products sold by the
partnership. Any partner not involved in such contract can go for dissolution. This is
by virtue of Delectus personae.
- Delectus personae= gives the partners power to dissolve partnership.
3. By any event which makes it unlawful for business to be carried on/for the
members to carry it on for the partnership.
- Law firm or a partnership with lawyers- A partner who is appointed as a judge
cannot anymore practice law in the partnership because being a judge/ lawyer is a
full-time position. The lawyer has to leave the firm. Because of it, the partnership is
now dissolved. The partners need to settle the partnership’s obligations and
continue the law firm without the partner judge.
- In case of war, the partner should not help the civilians of the country they have
war with. If a partner belongs to such country, they are now treated as enemies,
therefore, the business becomes unlawful, the partnership is now dissolved.
- When there is law prohibiting such business- example: before, shabu is legal and
it is the business of the partnership. But after some time, the Congress passed a
law prohibiting the use of shabu, then the partnership now becomes illegal
(unlawful), and it needs to be dissolved.
4. Loss of specific thing promised by partner before its delivery.
- If the thing is lost after delivery to the partnership, then such loss of a thing is born
by the partnership (owner bears the risk). EXCEPTION: If use of such thing is
contributed, which in any case, whether lost before or after delivery of such thing to
the property, the partner is liable to the partners of interest and damages and there
is a dissolution of the partnership.
- If it is a generic thing, there is no dissolution.
5. Death of any partner- If there is a stipulation of continuation, the partnership’s
name remain with the name of the deceased partner, especially if the partnership’s
name acquired goodwill/ reputation.
6. Insolvency of a partner (ajudge)/partnership- judgment
- Insolvent partner has no authority to act for the partnership nor the other partners
to act for him.
- You have to prove that such partner is insolvent by securing a judgment or a
decision declaring that partner as insolvent.
7. Civil interdiction of any partner- cannot consent
- Deprives offender during sentence of the right to manage, dispose, or convey
property.
- Civil interdiction is a penalty imposed upon a person guilty of a crime. Occurrence
of civil interdiction means that the partnership is dissolved.
8. Decree of court under Article 1831 (Grounds of dissolution by
judgment/decree of court)
Who may file?
1. Upon application by or for a partner
2. Upon application by purchaser of partner’s interest (associate or assignee)

Upon application by or for a partner

1. Partner declared insane in any judicial proceeding or shown to be of unsound
mind. – medical records/ history of confinement
2. Incapacity of partner to perform his part of the partnership contract.
- Incapacity (can also be a physical incapacity), must be permanent (lasting). When
he fails to fulfill his duties, it affects the partnership.
3. Partner guilty of conduct prejudicial to business of partnership.
4. Willful or persistent breach of partnership agreement or conduct which makes it
reasonably impracticable to carry on partnership with him. – Minor disagreements
are normal. Serious misconduct to the point that the business is affected- file for
dissolution from the court.
5. Business can only be carried on at a loss.
- when it is apparent that it is unprofitable with no reasonable prospect of success
6. Other circumstances which render dissolution equitable.

- (1) abandonment of business, (2) fraud in management, (3) refusal without

justifiable cause to render accounting of partnership affairs

Upon application by purchaser of partner’s interest

1. After termination of specified term/particular undertaking
2. Anytime* if partnership at will when interest was assigned/charging order issued

*the question is “when”

- A, B, C- term at 10 years- at year 7, C sold his interest to D.
Q1: Can D ask for dissolution at year 9? At year 11?
Ans: No, because an assignee can only ask for dissolution from the court after
termination of specifies term. At year 11, of course, D can now ask for dissolution.
Q2: If C, instead, sold his share to D at year 11, can D immediately ask for
dissolution?
Ans: Yes, because it is a partnership at will now and can be dissolved at any time.
EFFECTS OF DISSOLUTION
A. Authority of Partner to Bind the Partnership

- GR: Authority of partners to bind partnership is terminated.

- Exception: (1) To wind up partnership affairs, (2) To complete unfinished
transactions.

QUALIFICATIONS:

With respect to partners

a. Authority of partners to bind partnership by new contract is immediately

terminated when dissolution is not due to ACT, DEATH or INSOLVENCY (ADI) of a
partner (art 1833);- authority of partners is not immediately terminated EXCEPT if it
is the expiration of term or accomplishment of particular undertaking.
b. If due to ADI, partners are liable as if partnership not dissolved, EXCEPT:
- If cause is ACT of partner, acting partner must have knowledge of such
dissolution
- If cause is DEATH or INSOLVENCY, acting partner must have
knowledge/notice
- In ADI there is no presumption of knowledge, therefore all partners are liable and if
partnership is dissolved because of ADI, all the partners are liable as if the
partnership is not dissolved.
Example: A, B, C- A informed B that he (A) was withdrawing. ABC was dissolved. C
incurred liability without knowledge. All are liable. What should A do to exempt him
from liability?
-Suppose B was the one who incurred liability. A and C can recover because B is in
bad faith so he is the only one liable.
- Suppose B learned of resignation from C. All are liable. There is NOTICE not
knowledge to B.
With respect to persons not partners (Art.1834)
a. Partner continues to bind partnership even after dissolution in ff. cases:
i. Transactions in connection to winding up partnership affairs/completing unfinished
transactions
ii. Transactions which would bind partnership if not dissolved, when the other
party/obligee:
Situation 1- (1) Had extended credit to partnership prior to dissolution, (2)
Had no knowledge/notice of dissolution, or
Situation 2- (1) Did not extend credit to partnership, (2) Had known partnership
prior to dissolution, (3) Had no knowledge/notice of dissolution/fact of dissolution
not advertised in a newspaper of general circulation in the place where partnership
is regularly carried on
b. The liability of a partner shall be satisfied out of partnership assets alone when
such partner had been prior to dissolution: (1) Unknown as a partner (secret
partner) to the person with whom the contract is made, (2) So far unknown and
inactive in partnership affairs (dormant partner) that the business reputation of the
partnership could not be said to have been in any degree due to his connection
with it.
*both partners are not liable in their separate properties because they cannot
affect the business reputation. They are only liable out of the partnership assets.
b. Partner cannot bind the partnership anymore after dissolution:
1. Where dissolution is due to unlawfulness to carry on with business (except:
winding up of partnership affairs)
2. Where partner has become insolvent
3. Where partner unauthorized to wind up partnership affairs, except by transaction
with one who:
Situation 1- (1) Had extended credit to partnership prior to dissolution and,
(2) Had no knowledge/notice of dissolution
Situation 2- (1) Did not extend credit to partnership, (2) Had known partnership
prior to dissolution, (3) Had no knowledge/notice of dissolution/fact of dissolution
not advertised in a newspaper of general circulation in the place where partnership
is regularly carried on
*Nothing in this article shall affect the liability of any person who, after dissolution,
represents himself or consents to another representing him as a partner in a
partnership engaged in carrying business. (Estoppel)
Partner cannot bind the partnership anymore after dissolution: Where

B. DISCHARGE OF LIABILITY

Dissolution does not discharge existing liability of partner, except by agreement

between:

- Partner and himself

- Person/partnership continuing the business partnership
- Partnership creditors

*Agreement may be inferred from the course of

dealing between creditor (with knowledge) and the
person/ partnership continuing the business.

*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 creditors
over partnership creditors.

RIGHTS OF PARTNER WHERE DISSOLUTION NOT IN CONTRAVENTION OF

AGREEMENT:

1. Apply partnership property to discharge liabilities of partnership

2. Apply surplus, if any to pay in cash the net amount owed to partners

RIGHTS OF PARTNER WHERE DISSOLUTION IN CONTRAVENTION OF

AGREEMENT:

1. Partner who did not cause dissolution wrongfully: (in good faith)
- Apply partnership property to discharge liabilities of the partnership
- Apply surplus, if any to pay in cash the net amount owed to partners
- Indemnity for damages caused by partner guilty of wrongful dissolution
- Continue business in same name during agreed term
- Possess partnership property if business is continued
2. Partner who wrongly caused dissolution:
- If business not continued by others - apply partnership property to discharge
liabilities of partnership & receive in cash his share of surplus less damages caused
by his wrongful dissolution
- If business continued by others - have the value of his interest at time of
dissolution ascertained and paid in cash/secured by bond & be released from all
existing/future partnership liabilities

RIGHTS OF INJURED PARTNER WHERE PARTNERSHIP CONTRACT IS

RESCINDED ON GROUND OF FRAUD/MISREPRESENTATION BY 1 PARTY:

- Right to lien on surplus of partnership property after satisfying partnership

liabilities
- Right to subrogation in place of creditors after payment of partnership liabilities
-Right of indemnification by guilty partner against all partnership debts & liabilities

*When a partner is induced by fraud or misrepresentation to become a partner,

contract is annullable. If partnership contract is pending for annulment- the
partnership still exists.
*Until the partnership contract is annulled by a court action, the partnership exist
and the defrauded (injured) partner is liable for all obligations to third persons.
Hence, such rights is available.

C. SETTLEMENT OF ACCOUNTS BETWEEN PARTNERS ASSETS OF THE

PARTNERSHIP (1839)

1. Assets of the Partnership (order of application)

a. Partnership property (including goodwill)

b. Contributions of the partners

2. Order of application of assets to liabilities
1. Partnership creditors
2. Partners as creditors
3. Partners as investors- return of capital contribution
4. Partners as investors- share of profits if any

Other Rules:
- The partners shall contribute, as provided by Article 1797 (profit sharing), the
amount necessary to satisfy the liabilities.
- An assignee for the benefit of creditors or any person appointed by the court shall
have the right to enforce the contributions specified in the preceding number.

- Any partner or his legal representative shall have the right to enforce the
contributions specified in No. 4 to the extent of the amount which he has paid in
excess of his share of the liability.

- The individual property of a deceased partner shall be liable for the contributions
specified in No. 4.

- When the partnership property and the individual properties of the partners are in
 possession of a court for distribution, partnership creditors shall have the priority on
partnership property and separate creditors on individual property, saving the rights
of lien or secured creditors.

- When a partner has become insolvent or his estate is insolvent, the claims
against his separate property shall rank in the ff. order:

1. Those owing to separate creditors

2. Those owing to partnership creditors

3. Those owing to partners by way of contribution

D. WHEN BUSINESS OF DISSOLVED PARTNERSHIP IS CONTINUED

1. Creditors of old partnership are also creditors of the new partnership which
continues the business of the old one w/o liquidation of the partnership affairs
e.g., A and B; + C; C is not individually liable for previous debts.
2. Partnership creditors have an equitable lien on the consideration paid to the
retiring /deceased partner by the purchaser when retiring/deceased partner sold his
interest w/o final settlement with creditors
3. Rights if retiring/estate of deceased partner:
- To have the value of his interest ascertained as of the date of dissolution
- To receive as ordinary creditor the value of his share in the dissolved partnership
with interest or profits attributable to use of his right, at his option

Persons Authorized to Wind Up

1. Partners designated by the agreement

2. In absence of agreement, all partners who have not wrongfully
dissolved the partnership

3. Legal representative of last surviving partner

*Judicially or extra-judicially (liquidation)

*Court may appoint receiver to wind up partnership affairs.

- Even a partnership is dissolved, it still has a juridical personality; no new business transactions (only
those that are necessary for the winding up of the partnership’s affairs).
- Violation in the agreement- any partner can ask for dissolution.
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