BUSINESS LAWS AND REGULATIONS

PARTNERSHIP
CHAPTER 3
DISSOLUTION AND WINDING UP

Art. 1828

Dissolution
● change in the relation of parties caused by any partner ceasing to be associated in the
carrying on of the business.

Final Stages of Partnership

1.Dissolution

2.Winding Up
● settling business affairs after dissolution.

3.Termination
● point in time after all partnership affairs have been wound up.

*Best evidence where partnership was not yet terminated but still in the winding up stage are
the unsold goods and uncollected receivables.

Retirement
● partner leaving the partnership (resignation or withdrawal).

Art. 1829

Winding up example:
● Selling the non-cash assets
● Collecting receivables
● Paying partnership creditors
● Distributing the remainder to the partners

Art. 1830

Causes of Dissolution
1. Without violation of the agreement
a. Termination of the definite term or particular undertaking
b. Express will of any partner
c. Express wil of all partners
d. Expulsion of any partner in good faith
2. In contravention of the agreement
3. Events which makes it unlawful
4. Specific thing promised to be contributed perishes before delivery

Contributio Lost Partnership Partnership

n Dissolved NOT Dissolved

Use or before delivery ✓

enjoyment
only

Use or after delivery ✓

enjoyment
only

Ownership before delivery ✓

Ownership after delivery ✓

*Owner bears the risk of loss

5. Death
6. Insolvency
● liability is greater than assets
7. Civil Interdiction
● restricting the offender's control over their property during the time of his sentence.
8. Decree of court

Kinds of Dissolution
1. Extrajudicial
2. Judicial

Art. 1831

Who can sue for judicial dissolution?

1. Partner
2. Purchaser of partner's interest

When shall a court decree a dissolution?

1.Application by/for a partner
a. Partner declared insane in any judicial proceeding
b. Partner is incapable of performing his part in partnership
c. Partner guilty of conduct that could affect the partnership business
d. Partner willfully commits breach of partnership agreement
e. Partnership business carried on at loss
f. Other circumstances

2.Application of the purchaser

● if the purchaser ask the court to dissolve the partnership.
Art. 1832

Partnership dissolved:
● any partner has no authority to act for the partnership

Art. 1833

*Dissolution caused by act, death, or insolvency of a partner, each partner is liable to his
co-partners for his share of any liability.

When partnership is liable even after withdrawal of one partner

● Other partners has no knowledge
● One/any partner has knowledge; transacted with a third person (partner w/o knowledge
can ask for reimbursement)
● Death/insolvency; one/any partner has knowledge; transacted w/ a third person who has
no knowledge about the death (partner not involve in the transaction can ask for
reimbursement)

Art. 1834

After dissolution, a partner can bind the partnership:

1. By act appropriate for winding-up partnership affairs
2. By any transaction w/c would bind the partnership if dissolution had not taken place,
provided that the other party had:
a. extended credit prior to dissolution, and had no knowledge/notice of dissolution
b. Even if he didn't extend credit, if he knew about the partnership before it ended
and wasn't informed about the dissolution, and if the dissolution wasn't publicly
announced in a widely circulated newspaper where the partnership operated

Liability of partners in 1st paragraph (no. 2)

● paid only out of the partnership assets if he is; unknown and inactive to the third person

Where partnership is not bound by any act after dissolution:

1. Unlawful to continue the business
2. Partner became insolvent
3. Partner has no authority to wind-up partnership affairs, except by a transaction stated in
paragraph 1 (nos. 1 and 2)

Art. 1835

*Dissolution does not of itself discharge the existing liability of any partner.
When partner's liability is discharged upon dissolution:
If the ff. agree
1. Partner
2. Other partners
3. Creditors

Property of a Deceased Partner

Which liability must first be paid?
1. Personal liability of the deceased
2. Partnership liability

Art. 1836

Kinds of Winding-Up

1.Extrajudicial Winding-Up
● liquidation done w/o court's intervention

Who can wind-up?

1. Liquidating partner/partners agreed by all
2. Partners who have not wrongfully dissolved the partnership
3. Legal representative of last surviving partner (not insolvent)

2.Judicial Winding-Up
done under court's control

Who can wind-up?

1. Person appointed by court

Art. 1837

Rights of Partners in case of Liquidation caused by VIOLATION or NON-VIOLATION of

Partnership Contract
1.Caused by VIOLATION
a. Have the partnership property applied to discharge the liabilities of the partnership
b. Have the surplus, if any, applied to pay in cash the net amount owing to the respective
partners

*Dissolution caused by expulsion (in good faith); expelled partner is discharged from all
partnership liability
- the expelled partner shall receive in cash only the net amount due him from the
partnership.
2.Caused by NON-VIOLATION
a. Rights of a partner who has NOT CAUSED dissolution wrongfully
● Have partnership property applied to partnership liability
● Have the surplus, applied to pay in cash the net amount owing to the partners
● To be indemnified for damages
● To continue the business in the same name either by themselves or jointly w/
others
b. Rights of a partner who WRONGFULLY caused the dissolution
● If business is NOT CONTINUED
- partnership property applied to partnership liability
- receive in cash his share of surplus less damages.

● If business is CONTINUED
- have the value of his interest less damages (value of the goodwill of the
business is not to be considered)
- to be released from all existing liabilities of the partnership

Art. 1838

Partner induced by fraud

● voidable

Rights of a partner entitled to rescind/(undo):

1. Right of lien/retention
● keep possession of property until certain obligations have been fulfilled

2. Subrogation
● change in creditor

3. Indemnification

Art. 1839

Settling accounts between partners after dissolution:

What are the assets of the partnership?

1. Partnership property
2. Partner's contribution for the payment of all liabilities

What are the liabilities of the partnership?

(Rank in order of payment)
Those owing to…
1. Creditors other than partners
 2. Partners other than for capital & profits
3. Partners in respect of capital
4. Partners in respect of profits

*Partners shall contribute an amount to satisfy liabilities.

*Assignee/person appointed by court have the right to enforce the contributions.

*Any partner/his legal representative has the right to enforce contribution if he has paid more
than his share of liability.

*Property in possession of court for distribution:

● Partnership Property
- partnership creditors
● Individual Property
- separate creditors

*When partner/his estate becomes insolvent, claims against his separate property rank in order:
1. Those owing to separate creditors
2. Partnership creditors
3. Partners by way of contribution

Required new contribution

● additional contribution if all partnership assets were exhausted while there is still a
liability

Who can enforce?

1. Assignee/any person appointed by court
2. Any partner/his legal representative

Art. 1840

Scenarios regarding the continuation of a business after a partnership has dissolved:

1. If a new partner joins an existing partnership, or when a partner leaves and assigns their
rights to others, and the business continues without settling partnership affairs, the
creditors of the dissolved partnership also become creditors of the new partnership.
2. If all but one partner leaves and assigns their rights to the remaining partner who
continues the business without settling the partnership's affairs, the same rule applies.
3. If a partner leaves or dies, and the business continues with the consent of the retired
partner or the representative of the deceased partner, the creditors of the dissolved
partnership remain creditors.
 4. If all partners or their representatives assign their rights to third parties who promise to
pay the debts and continue the business, the same creditors remain creditors.
5. If a partner wrongfully causes dissolution and the others continue the business, the
dissolved partnership's creditors have priority over the retiring or deceased partner's
creditors.
6. When a partner is expelled and the others continue the business without settling the
partnership's affairs, the dissolved partnership's creditors retain their rights.

*The liability of a third person becoming a partner in the new business is limited to the
partnership's assets unless there's a different agreement.

*Using the partnership name does not make the individual property of a deceased partner liable
for the new business's debts. This article doesn't change creditors' rights to challenge
assignments based on fraud.

Art. 1841

Rights of a partner who retires/dies and the business is continued w/o any settlement of
accounts:
1. Have the value of his interest at the date of dissolution
2. To receive as an ordinary creditor an amount equal to the value of his interest

Art. 1842

Who has the right to an account of his interest?

● Any partner/his legal representative

Who has an obligation to render an account?

● Winding-up partners
● Surviving partners
● Partner/partnership continuing the business