IRS CPA REVIEW

Iloilo City and Leganes, Iloilo

REGULATORY FRAMEWORK FOR BUSINESS TRANSACTIONS

LAW ON PARTNERSHIP

DISSOLUTION AND WINDING-UP

1. Definitions of dissolution, winding-up and termination

Dissolution is the change in the relation of the partners caused by any partner
ceasing to be associated in carrying out the business.

Winding-up is the process of settling business affairs after dissolution.

Termination is the point in time after all the partnership affairs have been
wound up.

On dissolution, the partnership is not terminated, but continues until the

winding up of partnership affairs is completed. The partnership maintains a
limited existence for the purpose of collecting all the property and assets and
settling all accounts.

2. Causes of automatic dissolution of a partnership

Dissolution is caused:

a. Without violation of the agreement

1) By termination of the term or particular undertaking;

2) By express will of any partner, acting in good faith, when no definite
term or particular undertaking is specified;
3) By express will of all the partners;
4) By expulsion of any partner

b. In violation of partnership agreement;

c. If the business becomes unlawful to be carried on or for the members to
carry it on in partnership;
d. Loss of a specific thing contributed to the partnership;
e. Death of any partner;
f. Insolvency;
g. Civil interdiction of any partner;
h. By decree of court under Article 1831

Art. 1831 is about grounds for judicial dissolution of a partnership. The

decision of the court would render the partnership automatically dissolved.

3. Causes for judicial dissolution of a partnership

On application by or for a partner the court shall decree a dissolution

whenever:

a. Insanity of a partner;
b. Incapacity of a partner;
c. Partner has been guilty of such conduct as tends to affect prejudicially the
carrying on the business;
d. Willful violation of agreement;
e. Business can be carried on only at loss.

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4. Partnership liability if dissolution is caused by the act, insolvency or death of a
partner

If the partnership is dissolved by the act, insolvency or death of partner, each

partner is liable to his co-partners for his share of any liability created by any
partner acting for the partnership as if the partnership had not been dissolved
unless:

a. If by the act of a partner, the acting partner had knowledge of the

dissolution;
b. If by death or insolvency of a partner, the partner acting for the partnership
had knowledge or notice of the death or insolvency.

5. Dissolution does not discharge the existing liability of a partner

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

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.

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.

6. Rights of partners in case of violation of partnership contract

Rights of the innocent partners:

a. To sell partnership property;

b. To discharge all partnership obligation;
c. If there is owing, divide among the partners;
d. Remaining partners can continue the business;
e. Innocent partners can ask for damages.

Rights of the guilty partners:

a. To sell partnership property;

b. To discharge all partnership obligation;
c. If there is owing, divide among the partners.

Guilty partners are liable for damages and cannot continue the business.

7. Order of preference in case of partnership liquidation

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

a. Those owing to creditors other than partners (outside creditors),

b. Those owing to partners other than for capital and profits (inside creditors),
c. Those owing to partners in respect of capital.
d. Those owing to partners in respect of profits.

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8. Distribution of an individual property of an insolvent partner

The order of preference in the case of a partner has become insolvent or his
estate is insolvent, with respect to his separate properties, is as follows:

a. Those owing to separate creditors;

b. Those owing to partnership creditors;
c. Those owing to partners by way of contribution

9. Partnership assets

The assets of the partnership are:

a. The partnership property,

b. The contributions of the partners necessary for the payment of all liabilities.

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