Effects of Rescission

Article 1838. If the contract of partnership is rescinded on the grounds of fraud or misrepresentation of one
of the parties thereto, the party entitled to rescind is, without prejudice to any other right, entitled:

1. To a lien on, or right of retention of, the surplus of the partnership property after satisfying the
partnership liabilities to third persons for any sum of money paid by him for the purchase of an interest
in the partnership and for any capital or advances contributed by him;
2. To stand, after all liabilities to third persons have been satisfied , in the place of the creditors of the
partnership for any payments made by him in respect of the partnership liabilities; and
3. To be indemnified by the person guilty of the fraud or making the representation against all debts and
liabilities of the partnership. (n)

Right of partner to rescind contract of partnership.

If one is induced by fraud or misrepresentation to become a partner, the contract is voidable or

annullable.

If the contract is annulled, the injured partner is entitled to restitution. Here, the fraud or
misrepresentation vitiates consent. However, until the partnership contract is annulled by a proper action in court,
the partnership relations exist and the defrauded partner is liable for all obligations to third persons.

Rights of injured partner where partnership contract rescinded.

1. Right to a lien on, or retention of, the surplus of partnership property after satisfying partnership
liabilities for any sum of money paid or contributed by him;
2. Right to subrogation in place of partnership creditors after payment of partnership liabilities; and
3. Right of indemnification by the guilty partner against all debts and liabilities of the partnership.

It is to be noted that the rights of the partner entitled to rescind are without prejudice to any other rights
under other provisions of law.

Article 1839. In settling accounts between the partners after dissolution, the following rules shall be
observed, subject to any agreement to the contrary:

(1) The assets of the partnership are:

(a) The partnership property,

(b) The contributions of the partners necessary for the payment of all the liabilities specified in No.
2.

(2) The liabilities of the partnership shall rank in order of payment, as follows:

(a) Those owing to creditors other than partners,

(b) Those owing to partners other than for capital and profits,

(c) Those owing to partners in respect of capital,

(d) Those owing to partners in respect of profits.

(3) The assets shall be applied in the order of their declaration in No. 1 of this article to the satisfaction of the
liabilities.

(4) The partners shall contribute, as provided by article 1797, the amount necessary to satisfy the liabilities.

(5) 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.

(6) 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.

(7) The individual property of a deceased partner shall be liable for the contributions specified in No. 4.
(8) When partnership property and the individual properties of the partners are in possession of a court for
distribution, partnership creditors shall have priority on partnership property and separate creditors on individual
property, saving the rights of lien or secured creditors.

(9) Where a partner has become insolvent or his estate is insolvent, the claims against his separate property shall
rank in the following order:

(a) Those owing to separate creditors;

(b) Those owing to partnership creditors;

(c) Those owing to partners by way of contribution. (n)

Liquidation and distribution of assets of dissolved partnership.

The process of winding up, where the business of the dissolved partnership is not continued, consists in
liquidating partnership property (turning it into cash), paying outstanding debts, collecting outstanding receivables,
distributing the proceeds, and any other actions required to bring partnership business to a close. Until the
partnership accounts are determined, it cannot be determined how much any of the partners is entitled, if
at all.

Partners severally have the implied authority to sell partnership property and to collect obligations due to
the partnership. These powers may be delegated to one (1) or more of their number as liquidating partner or
partners. (Crane, op. cit., pp. 476-477.)

Distribution of surplus of assets to partners.

The law, however, does not require a partnership to convert all its assets into cash before making
a distribution to the partners. It is within the power of the court to order a distribution of its assets in cash,
property, or a combination of both.

(1) Property which may be made available for distribution includes, in addition to the partnership property,
contributions which may be collected from the partners so far as may be necessary for the payment of partnership
obligations to creditors and to partners. (Crane, op. cit., pp. 476-477.)

(2) A partner has a right to have debts owing to the partnership from his co-partners deducted from their
respective shares. This right is called “equitable lien” or “quasi-lien” in American law. It exists only when the affairs
of the partnership are rounded up and the shares of the partners are computed after dissolution.

(3) Each partner is entitled to a share in the surplus property of the partnership, if any, in proportion to his
interest in the partnership. (see Art. 1812.) This rule is called the “partner’s lien law” in American law.

Rules in settling accounts between partners after dissolution.

Article 1839 sets forth a priority system for the distribution of partnership property (see Art. 1810.) and
individual property when a partnership is dissolved to those entitled thereto.

The following rules as to distribution are subject to variation by agreement of the partners, either in their
original partnership agreement or in a dissolution agreement (Ibid.), subject to the rights of partnership creditors.
No category can receive any proceeds until each higher category has been paid in full.

(1) Assets of the partnership. — They are:

(a) Partnership property (including goodwill); and

(b) Contributions of the partners necessary for the payment of all liabilities in accordance with Article
1797.

(2) Order of application of the assets. — The partnership assets shall be applied to the satisfaction of the liabilities
of the partnership in the following order:

(a) First, those owing to partnership creditors;

(b) Second, those owing to partners other than for capital and profits such as loans given by the partners or
advances for business expenses;
(c) Third, those owing for the return of the capital contributed by the partners; and

(d) Finally, if any partnership assets remain, they are distributed as profits to the partners in the proportion in
which profits are to be shared.

(3) Loans and advances made by partners. — Loans and advances made by partners to the partnership are
sometimes made by partners to the partnership during its existence.

(a.) They are not capital. Nor are undivided profits, unless otherwise agreed. Capital contributions are returnable
only on dissolution, but loans are payable at maturity and accumulated profits may be withdrawn at any time by
consent of a majority. (Babb and Martin, op. cit., p. 240.)

(b.) Amounts paid into the partnership in excess of a partner’s agreed capital contributions constitute loans or
advances which draw interest on which they are made. Accumulated profits do not draw interest, as they are not
regarded as loans and advances merely because they are left with the fi rm. (Ibid., p. 248.)

(4) Capital contributed by partners. — Capital represents a debt of the firm to the contributing partners.

(a.) If, on dissolution, partnership assets are insufficient to repay capital investments, the deficit is a capital loss
which requires contribution like any other loss. (Ibid.) The return of the amount equivalent to the capital
contribution of each partner shall be increased by his share of undistributed profits or decreased by his share of
net losses.

(b.) The total capital contribution of the partners is not equivalent to the gross assets to be distributed to the
partners at the time of the dissolution of partnership. It may be impaired or become unavailable for distribution or
return to the partners because of losses sustained by the partnership.

(c.) A partner who furnishes no capital but contributes merely his skill and services is not entitled to any part of the
firm capital on dissolution in the absence of agreement. He must look for his compensation to his share of the
profits remaining after repayment of the capital to the contributors. (Ibid., op. cit., p. 96, citing Mosely vs. Taylor,
173 N.C. 286.)

(5) Right of a partner where assets insufficient. — If the assets enumerated in No. 1 are insufficient (i.e., there is
an overall loss), the deficit is a capital loss which requires contribution like any other loss.

(a.) Any partner or his legal representative (to the extent of the amount which he has paid in excess of his share of
the liability), or any assignee for the benefit of creditors or any person appointed by the court, shall have the right
to enforce the contributions of the partners provided in Article 1797.

(b.) If any of the partners does not pay his share of the loss, the remaining partners have to pay but they can sue
the non-paying partner for indemnification.

(6) Liability of deceased partner’s individual property. — The individual property of a deceased partner shall be
liable for his share of the contributions necessary to satisfy the liabilities of the partnership incurred while he was a
partner. (Arts. 1816, 1835, par. 3.)

(7) Priority to payment of partnership creditors/partners’ creditors. — When partnership property and the individual
properties of the partners are in possession of the court for distribution, partnership creditors shall first be paid
from partnership property and separate creditors from the individual properties of the partners. Neither class of
creditors is allowed to trespass on the fund belonging to the other until the claims of that other shall have been
satisfied. (40 Am. Jur. 402-403.)

Stated otherwise, the general rule is: “Partnership assets to partnership creditors, individual assets to individual
creditors; anything left from either goes to the other.” It involves the ranking of assets in a certain order toward the
payment of outstanding debts. This rule is known as the doctrine of the marshalling of assets. In an American
case, it was held that the United States does not have the right to be paid its income taxes due from individual
partners out of the assets of a bankrupt fi rm in preference to the claim of partnership creditors. (United States vs.
Kauffman, 267 U.S. 408, cited by Teller, p. 120.) In line with the rule is the second paragraph of Article 1835.

Suppose one is a creditor of all the partners solidarily on a transaction independent of the partnership, may he,
under the bankruptcy law, share pari passu with the partnership creditors in its assets? No. This is so even though
both the partnership and its members are in bankruptcy. Having secured priority over the fi rm creditors against
the individual property of the fi rm members, the creditors are relegated to a secondary position to the fi rm
creditors, since the claim is not based on a fi rm obligation. (In re Nashville Laundry Co., 240 Fed. 795, cited in
Teller, p. 120.) Furthermore, partnership is regarded as a legal entity separate and distinct from its members.

(8) Distribution of property of insolvent partner. — If a partner is insolvent, his individual property shall be
distributed as follows:
(a) First, to those owing to separate creditors;

(b) Then, to those owing to partnership creditors; and

(c) Lastly, to those owing to partners by way of contribution.

The preference of the individual creditors of a partner in the distribution of his separate estate results, as a
principle of equity, from the preference of partnership creditors in the partnership funds. The separate creditor of
an individual partner can execute against the assets of the fi rm only to the extent of the interest of the partner in
the fi rm assets, which is nothing more than a right to any surplus remaining after fi rm creditors have been paid.
(Teller, op. cit., p. 121.)

EXAMPLES: (1) A, B, and C, are partners. A contributed P150,000.00, B P100,000.00, and C, P50,000.00. On
dissolution, the assets of the partnership amounted to P500,000.00. The partnership owes D the amount of
P70,000.00, E, P50,000.00, and A, P20,000.00.

(2) The accounts of the partnership shall be settled as follows:

(a) D and E, who are partnership creditors, shall be paid first the total sum of P120,000.00, leaving a balance of
P380,000.00;

(b) Then, A, who is also a creditor, will be paid his credit of P20,000.00, leaving a balance of P360,000.00;

(c) Afterwards, the contributions of A, B, and C to the partnership capital shall be returned to them in the total sum
of P300,000.00, thereby leaving a balance of P60,000.00;

(d) The balance of P60,000.00 constitutes the profit which shall be divided among A, B, and C (unless there is an
agreement to the contrary [Art. 1839, 1st par.] which, however, cannot prejudice the rights of third persons) in
proportion to their capital contributions. Therefore, A is entitled to 3/6 or P30,000.00, B, 2/6 or P20,000.00 and C,
1/6 or P10,000.00.

(3) Suppose, in the same example, the liabilities of the partnership amount to P560,000.00. The partnership
assets, then shall be exhausted to satisfy these liabilities thereby leaving an unpaid balance of P60,000.00. The
partners shall then contribute to the loss, in the absence of an agreement to the contrary, in accordance with their
capital contributions. Consequently, A is liable out of his separate property in the amount of P30,000.00, B,
P20,000.00, and C, P10,000.00.

These contributions which are necessary to pay the liabilities of the partnership are considered partnership assets
(No. 1[b].) and any assignee for the benefit of creditors and any person appointed by the court may enforce the
contributions.

In case C paid the whole amount of P60,000.00, then, he has a right to recover the amount which he has paid in
excess of his share of the liability from A, P30,000.00 and from B, P20,000.00.

(4) If B is already dead, his estate is still liable for the contributions needed to pay off the partnership obligations
provided they were incurred while he was still a partner.

(5) Suppose now that under Nos. 1 and 2 above, C owes F P40,000.00. Following the rule that partnership
creditors have preference regarding partnership property, only the share of C in the amount of P10,000.00 can be
used to pay his debt to F and the unpaid balance of P30,000.00 must be taken from the individual property, if any,
of C.

(6) Suppose again, that the partnership debts amount to P560,000.00 as in No. 3. So, C is still liable out of his
separate property to partnership creditors in the amount of P10,000.00. His separate property amounts to
P45,000.00. In this case, his assets shall first be applied to pay his debt of P40,000.00 to F and the balance of
P5,000.00 to pay part of his debt of P10,000.00 still owing to partnership creditors in accordance with the rule that
regarding individual properties, individual creditors are preferred.

Effects of continuation of the business

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

(1) When any new partner is admitted into an existing partnership, or when any partner retires and assigns (or the
representative of the deceased partner assigns) his rights in partnership property to two or more of the partners,
or to one or more of the partners and one or more third persons, if the business is continued without liquidation of
the partnership affairs;
(2) When all but one partner retire and assign (or the representative of a deceased partner assigns) their rights in
partnership property to the remaining partner, who continues the business without liquidation of partnership
affairs, either alone or with others;

(3) When any partner retires or dies and the business of the dissolved partnership is continued as set forth in Nos.
1 and 2 of this article, with the consent of the retired partners or the representative of the deceased partner, but
without any assignment of his right in partnership property;

(4) When all the partners or their representatives assign their rights in partnership property to one or more third
persons who promise to pay the debts and who continue the business of the dissolved partnership;

(5) When any partner wrongfully causes a dissolution and the remaining partners continue the business under the
provisions of article 1837, second paragraph, No. 2, either alone or with others, and without liquidation of the
partnership affairs;

(6) When a partner is expelled and the remaining partners continue the business either alone or with others
without liquidation of the partnership affairs.

The liability of a third person becoming a partner in the partnership continuing the business, under this article, to
the creditors of the dissolved partnership shall be satisfied out of the partnership property only, unless there is a
stipulation to the contrary.

When the business of a partnership after dissolution is continued under any conditions set forth in this article the
creditors of the dissolved partnership, as against the separate creditors of the retiring or deceased partner or the
representative of the deceased partner, have a prior right to any claim of the retired partner or the representative
of the deceased partner against the person or partnership continuing the business, on account of the retired or
deceased partner's interest in the dissolved partnership or on account of any consideration promised for such
interest or for his right in partnership property.

Nothing in this article shall be held to modify any right of creditors to set aside any assignment on the ground of
fraud. The use by the person or partnership continuing the business of the partnership name, or the name of a
deceased partner as part thereof, shall not of itself make the individual property of the deceased partner liable for
any debts contracted by such person or partnership. (n)

Dissolution of a partnership by change in membership.

(1.) Causes. — The change in the relation of the partners resulting in the dissolution of the partnership
may take place when a new partner is admitted; or when a partner retires; or dies; or when a
partner withdraws; or is expelled from the partnership; or when the other partners assign their
rights to the sole remaining partner (Bernardo vs. Pascual, 109 Phil. 936 [1960].); or when all the
partners assign their rights in partnership property to third persons.

Any change in membership dissolves a partnership and creates a new one.

(2.) Continuation of partnership without liquidation. — A partnership dissolved by any of these happenings
need not undergo the procedure relating to dissolution and winding of its business affairs. The
remaining partners (and/or new partners) may elect to continue the business of the old
partnership without interruption by simply taking over the business enterprise owned by the
preceding partner and continuing the use of the old name. The rights and obligations of the partners
as among themselves in case of such continuation are set forth in Article 1837.

As the partnership is the result of a contract, a change in the parties to the contract necessarily results in a
new contract. Hence, a change in membership of a partnership creates a new partnership upon the
continuation of the business by the partners.

Rights of creditors of dissolved partnership which is continued.

Article 1840 deals with the rights of creditors when the partnership is dissolved by a change of
membership and its business is continued (Art. 1837[2].) by a former partner, either alone or with new
partners, without liquidation of partnership affairs.

(1.) Equal rights of dissolved and new partnership creditors. — In such case, the law makes the creditors
of the dissolved partnership also creditors of the persons or partnership continuing the business. In other
words, both classes of creditors, the old and the new, are treated alike, being given equal rights in
partnership property. The purpose of the law is to maintain the preferential rights of the old creditors to the
partnership property as against the separate creditors of the partners. It is immaterial to determine under
which one or more of the six (6) cases mentioned in Article 1840 the dissolution falls — the creditors of
 the old partnership are also the creditors of the new partnership which continues the business of the old
one without liquidation of the partnership affairs. (Yu vs. National Labor Relations Commission, 224 SCRA
75 [1993].)

EXAMPLE:

Assume that C is admitted as a new partner into the existing partnership of A and B.

Technically, the old firm of A and B is dissolved and a new fi rm composed of A, B, and C is formed. C will not be
individually liable for the debts of the old fi rm. His investment, however, constituting a part of the fi rm assets, will
be equally available to both creditors of the old and creditors of the new fi rm. (par. 2; Art. 1826.)

Various other changes in membership effect a technical dissolution, yet justice dictates that the two sets of
creditors involved, those of the old and those of the new fi rm, be treated on an equal basis.

A note to Uniform Partnership Act provides: “Where there is a continuous business carried on first by A, B, and C,
and then by A, B, C, and D, or by B and C, or by B and D, or by C and D, or by B, C, and D, without liquidation of
the affairs of the dissolved partnership of A, B, and C, both justice and business convenience require that all
creditors of the business, irrespective of the exact groupings of the owners at the time their respective claims had
their origin, should be treated alike, all being given an equal claim on the property embarked in the business.”
(Babb & Martin, op. cit., p. 265.)

(2) Liability of persons continuing business. — Note that under paragraph 2, the liability of the new or
incoming partners shall be satisfied out of partnership property only unless there is a stipulation to the contrary.
(Art. 1826.)

Note that paragraph 1, No. 4, applies only when the third person continuing the business of the dissolved
partnership promises to pay the debts of the partnership. Otherwise, creditors of the dissolved partnership have
no claim on the person or partnership continuing the business or its property unless the assignment can be set
aside as a fraud on creditors under paragraph 4.

EXAMPLE: If A, B, and C, partners, sell the partnership business to D, and if D promises to pay the debts and to
continue the business, the creditors of the dissolved partnership of A, B, and C are also the creditors of D. (Ibid.,
op. cit., pp. 265-266.)

(3) Prior right of dissolved partnership creditors as against purchaser. — When a retiring or deceased
partner has sold his interest in the partnership without a final settlement with creditors of the partnership, such
creditors have an equitable lien on the consideration paid to the retiring or deceased partner by the purchaser
thereof. This lien comes ahead of the claims of the separate creditors of the retired or deceased partner.
Application of the rule set forth in paragraph 3 does and sometimes leave the retiring or deceased partner with a
continuing liability the exact duration of which is not specified except that it shall apply only in favor of those
creditors at the time of the retirement or death of a partner. (Barrett & Seago, op. cit., p. 480.)

Continuation of dissolved partnership business by another company.

(1.) When corporation deemed a mere continuation of prior partnership. — The weight of authority supports
the view that where a corporation was formed by, and consisted of, members of a partnership whose
business and property was conveyed and Art. 1840 267 transferred to the corporation for the purpose of
continuing its business, in payment for which corporate capital stock was issued, such corporation is
presumed to have assumed partnership debts and is prima facie liable therefor.

The reason for the rule is that the members of the partnership may be said to have simply put a new coat, or
taken on a corporate cloak, and the corporation is a mere continuation of the partnership. (Laguna Transportation
Co., Inc. vs. Social Security System, 107 Phil. 833 [1960].)

(2.) When obligations of company bought out considered assumed by vendee. — In some cases, when one
company buys out another and continues the business of the latter company, the buyer may be said to
assume the obligations of the company bought out when said obligations are not of considerable amount
or value especially when incurred in the ordinary course, and when the business of the latter is continued.

However, when said obligation is of extraordinary value, and the company was bought out not to continue its
business but to stop its operation in order to eliminate competition, it cannot be said that the vendee assumed all
the obligations of the rival company. (Phil. Air Lines, Inc. vs. Balinguit, 99 Phil. 486 [1956].)

Exemption from liability of individual property of deceased partner.

(1) Debts incurred by person or partnership continuing business. — The last paragraph of Article 1840 primarily
deals with the exemption from liability to creditors of a dissolved partnership of the individual property of the
deceased partner for debts contracted by the person or partnership which continues the business using the
partnership name or the name of the deceased partner as part thereof. What the law contemplates is a hold-over
situation preparatory to formal reorganization.

(2) Commercial partnership continued after dissolution. — Article 1840 treats more of a commercial partnership
with a goodwill to protect rather than a professional partnership (see Art. 1767, par. 2.) with no saleable goodwill
but whose reputation depends on the personal qualifications of its individual members. (In the Matter of the
Petition for Authority to Continue Use of the Firm Name “Sycip, Salazar, etc.’’/”Ozaeta, Romulo, etc.,’’ 92 SCRA 1
[1979].)

As a general rule, upon the dissolution of a commercial partnership, the succeeding partners or parties have the
right to carry on the business under the old name, in the absence of stipulation forbidding it, since the name of a
commercial partnership is a partnership asset inseparable from the goodwill of the fi rm. On the other hand, a
professional partnership the reputation of which depends on the individual skill of the members, such as
partnerships of attorneys or physicians, has no goodwill to be distributed as a firm asset on its dissolution,
however intrinsically valuable such skill and reputation may be, especially where there is no provision in the
partnership agreement relating to goodwill as an asset. (Ibid., citing 60 Am. Jur. 2d 115.)

Article 1841. When any partner retires or dies, and the business is continued under any of the conditions set forth
in the preceding article, or in article 1837, second paragraph, No. 2, without any settlement of accounts as
between him or his estate and the person or partnership continuing the business, unless otherwise agreed, he or
his legal representative as against such person or partnership may have the value of his interest at the date of
dissolution ascertained, and shall receive as an ordinary creditor an amount equal to the value of his interest in
the dissolved partnership with interest, or, at his option or at the option of his legal representative, in lieu of
interest, the profits attributable to the use of his right in the property of the dissolved partnership; provided that the
creditors of the dissolved partnership as against the separate creditors, or the representative of the retired or
deceased partner, shall have priority on any claim arising under this article, as provided article 1840, third
paragraph. (n)

Rights of retiring, or of estate of deceased, partner when business is continued.

The business of the partnership is not always terminated after dissolution. This is true where the business
has been profitable and some of the partner’s may wish to continue the business rather than liquidate it. When the
dissolution is caused by the retirement or death of a partner and the business is continued without settlement of
accounts, the retiring partner or the legal representative of the deceased partner shall have the right:

(1) To have the value of the interest of the retiring partner or deceased partner in the partnership ascertained as of
the date of dissolution (i.e., date of retirement or death); and

(2) To receive thereafter, as an ordinary creditor, an amount equal to the value of his share in the dissolved
partnership with interest, or, at his option, in lieu of interest, the profits attributable to the use of his right.

As provided in Article 1840, the creditors of a dissolved partnership have a prior right as against the separate
creditors of the retired or deceased partner.

If the surviving partners (in case the dissolution is caused by the death of a partner) continue the business without
the consent of the deceased partner’s estate, they do so without any risk to the estate; if the estate consents, it, in
effect, becomes a new partner and would be answerable for all debts and losses after the death but only to the
extent of the decedent’s share in the partnership’s assets.

EXAMPLE:

A, B, and C are partners in X & Co. which is indebted to D in the amount of P50,000.00. Later on, X & Co. was
dissolved by reason of the withdrawal of C. The business was continued by A and B without any settlement of
account between A and B, on the one hand, and C, on the other.

C or his legal representative has the right to have the value of his interest in the partnership ascertained and paid
to him. Assuming that the interest of C has been ascertained to be P30,000.00, D has priority over the claim of C,
his legal representative, or his separate creditor.

Prescription of Action

Article 1144. The following actions must be brought within ten years from the time the right of action accrues:

1) Upon a written contract;

(2) Upon an obligation created by law;

(3) Upon a judgment. (n)

Article 1153. The period for prescription of actions to demand accounting runs from the day the persons who
should render the same cease in their functions.

The period for the action arising from the result of the accounting runs from the date when said result was
recognized by agreement of the interested parties. (1972)

Benjamin Yu vs. National Labor Relations Commission (NLRC)

FACTS:
Petitioner Yu was hired as the Assistant General Manager of Jade Mountain Products Company Limited
primarily responsible for the overall operations of marble quarrying and export business of said
partnership. He was hired by a virtue of a Partnership Resolution in 1985 with a monthly salary of
P4,000.00. Initially he received only half of his stipulated monthly salary and was promised by the
partners that the balance would be paid upon securing additional operating funds from abroad. However,
in 1988 without his knowledge the general partners as well as one of the limited partners sold and
transferred their interest to Willy Co and Emmanuel Zapanta. Thus the new major partners decided to
transfer the firm’s main office but opted to continue the operation of the old partnership under its old
firm name and with all its employees and workers except for the petitioner. Upon knowing of the
changes in the partnership, petitioner went to the new main office to meet the new partners and demand
the payment of his unpaid salaries, but the latter refused to pay him and instead informed him that since
he bought the business from the original partners, it was for him to decide whether or not he was
responsible for the obligations of the old partnership including petitioners unpaid salaries. Hence,
petitioner was dismissed from said partnership.

ISSUES:
1. Whether the partnership which had hired the petitioner as Asst. General Manager had been
extinguished and replaced by a new partnership composed of Willy Co and Emmanuel Zapanta.
2. Whether petitioner could assert his rights under his employment contract as against the new
partnership

HELD:
1. Yes. The legal effect of the changes in the membership of the partnership was the dissolution
of the old partnership which had hired the petitioner in 1984 and the emergence of the new firm
composed of Willy Co and Emmanuel Zapanta in 1988. This is based on the following provisions:
Art. 1828. The dissolution of partnership is the change in the relation of the partners caused by any
partner ceasing to be associated in the carrying on as a distinguished from the winding up of the
business.
Art. 1830. Dissolution is caused:
1. without violation of the agreement between the partners;
b. by the express will of any partner, who must act in good faith, when no definite term or
particular undertaking is specified.
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;

However, the legal consequence of dissolution of a partnership do not automatically result in the
termination of the legal personality of the old partnership as according to Art. 1829, “ on dissolution of
the partnership is not terminated, but continues until the winding up of the partnership affairs is
completed. The new partnership simply continued the operations of the old partnership under its old firm
name without winding up the business affairs of the old partnership.

2. Yes. Under Art. 1840, creditors of the old partnership are also creditors of the new
partnership which continued the business of former without liquidation of the partnership affairs. Thus,
creditor of the old Jade Mountain, such as the petitioner is entitled to enforce his claim for unpaid
salaries, as well as other claims relating to his employment with the old partnership against the new Jade
Mountain.