I.

DISSOLUTION AND WINDING UP

1. Definition of Terms (Art. 1828)

Art. 1828: The dissolution of a partnership is the change in

the relation of the partners caused by any partner ceasing
to be associated in the carrying on as distinguished from
the winding up of the business.

3 STAGES OF TERMINATION OF PARTNERSHIP:

Dissolution change in the relation of the partners

caused by any partner ceasing to be associated in
the carrying on of the business

Winding up the process of settling business affairs

after dissolution

Termination that point in time after all the

partnership affairs have been wound up

Art. 1829: On dissolution the partnership is not

terminated, but continues until the winding up of
partnership affairs is completed.

2. Causes of Dissolution (Arts. 1830, 1831)

Art. 1830: Dissolution is caused:

(1)Without violation of the agreement between the

partners:

(a) by the termination of the definite term or

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 interests or suffered them to be
charged for their separate debts, either before or
after the termination of any specified term or
particular undertaking;

(d)by the expulsion of any partner from the business

bona fide in accordance with such a power
conferred by the agreement between the
partners;

(2)In contravention of the agreement between the

partners, where the circumstances do not permit a
dissolution under any other provision of this articles, by
the express will of any partner at any time,
(3)By any event which makes it unlawful for the business
of the partnership to be carried on or for the members
to carry it on in partnership;

(4)When a specific thing, which a partner had promised to

contribute to the partnership, perishes before the
delivery; in any case by any loss of the thing, when the
partner who contributed it having reserved ownership
thereof, has only transferred to the partnership the use
or enjoyment of the same; but the partnership shall not
be dissolved by the loss of the thing when it occurs
after the partnership has acquired the ownership
thereof;

(5)By the death of any partner;

(6)By the insolvency of any partner or of the partnership;

(7)By the civil interdiction of any partner;

(8)By decree of court under the following article.

Paragraphs 1-7 refer to extra-judicial dissolution, out of

court. Paragraph 8, in relation to article 1831 cites the
causes for judicial dissolution.
No. 1 No Violation of Agreement

(a) termination of a partnership at will

(b)by the express will of a partner in good faith - if a

partner is in bad faith, there is still dissolution but the
partner may be liable for damages

(c) Express will of all partners, except those who assigned

or whose interests have been charged

(d)Expulsion of one partner in good faith if bad faith,

partnership is still dissolved without prejudice to liability
for damages

No. 2 Violation of the Agreement

- refers to a partnership with a fixed term and one partner

withdraws before the end of the period, with or without
justifiable cause

- if there is no cause, the withdrawing partner may be

liable for damages but the partnership will still be
dissolved

No. 3 Unlawfulness of the Business

- if the business later on becomes unlawful, it follows that

the firm will not be allowed to carry on

- but if the business was unlawful from the very

beginning, the partnership never existed

No. 4 Loss
(a) if a specific thing promised as contribution is lost
BEFORE delivery the firm is dissolved because the
partner has not given his contribution

(b) if only the use of a specific thing is contributed, and it is

LOST BEFORE or AFTER delivery to the firm the naked
owner reserved ownership, the loss is borne by him so it
is as if he had not contributed anything

No. 5 Death of any partner

No. 6 Insolvency of any partner or the partnership

- no need for judicial declaration; it is enough that the

assets are less than the liabilities

- the partnership or partners must be solvent and have

the financial ability to meet the demands of their
creditors

No. 7 Civil interdiction of any partner

- this is still death; civil death, results in incapacity to

enter into dispositions of property inter vivos

Art. 1831: On application by or for a partner the court shall

decree a dissolution whenever:

(1)A partner has been declared insane in any judicial

proceeding or is shown to be of unsound mind;

(2)A partner becomes in any other way incapable of

performing his part of the partnership contract;

(3)A partner has been guilty of such conduct as tends to

affect prejudicially the carrying on of the business;

(4)A partner willfully or persistently commits a breach of

the partnership agreement, or otherwise so conducts
himself in matters relating to the partnership business
that it is not reasonably practicable to carry on the
business in partnership with him;

(5)The business of the partnership can only be carried on

at a loss;

(6)Other circumstances render a dissolution equitable;

On the application of the purchaser of a partners interest

under article 1813 or 1814:

(1)After termination of the specified term or particular

undertaking;

(2)At any time if the partnership was a partnership at will

when the interest was assigned or when the charging
order was issued.
- for judicial dissolution, a final court decree of dissolution
is required; and in the application for judicial dissolution,
the existence of the firm must first be proven

WHO CAN SUE FOR DISSOLUTION:

a partner for any 6 causes given in the first

paragraph

purchaser of a partners interest

No. 1 Insanity

- the presumption is that every person is of sound mind;

to defeat that presumption, insanity must be proven

- for purposes of dissolution, the insanity may be

judicially decreed in a separate proceeding or proven in
the very same case for dissolution; in both cases, proof
of insanity is required

- an insane person has no capacity to contract

No. 2 Incapability to perform part

- disability of a partner or when one partner enters

government service prohibiting him from participating in
the firm or he needs to go abroad for a very long time

No. 3 & 4 Prejudicial conduct or persistent breach

of the agreement

- when managers fail to hold regular meetings as

provided for in the agreement, fail to make reform or
hear grievances, and fail to give proper financial
reports, an action for dissolution would prosper; the
same rule applies if accounting is unjustifiably refused

No. 5 Business is at a loss

No. 6 Other circumstances

- when partners cannot make an important business

decision because there is an impasse

3. Effects of Dissolution (Art. 1835)

Art. 1832: Except so far as may be necessary to wind up

partnership affairs or to complete transactions begun but
not then finished, dissolution terminates all authority of
any partner to act for the partnership:

(1)With respect to the partner:

(a) When the dissolution is not by the act, insolvency

or death of a partner; or

(b)When the dissolution is by such act, insolvency or

death of a partner, in cases where article 1833 so
requires;
(2)With respect to persons not partners, as declared in
article 1834.

GENERAL RULE: When a firm is dissolved, the partners can

no longer bind the partnership.

EXCEPTIONS:

Acts necessary to wind up partnership affairs

Acts necessary to complete transactions begun but

not yet finished

Transactions entered into with third persons who are

in good faith: (1) previous creditors who had no
knowledge or notice of the dissolution; or (2)
ordinary creditors who knew of the existence of the
partnership but the fact of the dissolution was not
published in a newspaper of general circulation

When the dissolution is caused by an act and the

partner acting for the partnership had no knowledge
of such dissolution

When the dissolution is caused by the death or

insolvency and the partner acting for the partnership
had no knowledge or notice of the death or
insolvency

WHEN IS A PARTNERSHIP NOT BOUND TO THIRD

PERSONS AFTER DISSOLUTION?

Partnership is dissolved because it is unlawful to

carry on the business UNLESS it is for winding up

Partner that acted in the transaction has become

insolvent

Partner has no authority to wind up partnership

affairs, EXCEPT with respect to transactions
entered into with third persons in good faith

a. Rights and Liabilities of Partners after

Dissolution

Dissolution without violation of the agreement

(Art. 1837, par. 1):

- all partners have the right to apply partnership

properties to the payment of partnership liabilities
and collect the surplus
 Dissolution in contravention of the agreement
(Art. 1837, par. 2):

- Innocent partners can:

apply partnership properties to the payment

of partnership liabilities and collect the
surplus

collect indemnification for damages from

the guilty partner

continue the business under the same name

possess partnership property PROVIDED

they secure the payment by bond or pay to
the guilty partner the value of his interest
less damages recoverable, and PROVIDED
FURTHER that they indemnify him against
all present or future partnership liabilities

- Guilty partners:

If business is not continued:

o Apply partnership properties to the

payment of partnership liabilities and
collect the surplus less damages he
must pay the innocent partners

If business is continued:

o To be paid the value of his interest

less the value of the goodwill of the
business, or its payment be secured
by a bond

o To be discharged from all existing

liabilities of the partnership

Rescission because of Fraud or Misrepresentation

(Art. 1838) -- rights of innocent partners:

Right of lien or retention

Right of subrogation

Right of indemnification for damages

DISCHARGE OF LIABILITY:

Art. 1835: 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.

HOW A PARTNERS LIABILITY DISCHARGED: there must

be an agreement executed between the partner
concerned, the other partners and the creditors.

EXAMPLE: A, B and C are partners. A dies. Are As

separate properties liable for his share of the
partnership obligations incurred while he was still a
partner?

Yes. But his individual creditors are to be preferred in his

separate properties.

4. Winding Up (Art. 1836)

Art. 1836: Unless otherwise agreed, the partners who have
not wrongfully dissolved the partnership or the legal
representative of the last surviving partner, not insolvent,
has the right to wind up the partnership affairs, provided,
however, that any partner, his legal representative or his
assignee, upon cause shown, may obtain winding up by
the court.

2 KINDS OF WINDING UP:

Extrajudicial by innocent partners or the legal

representative of the last surviving partner who must
be solvent

Judicial

5. Liquidation and Settling of Accounts

ORDER OF ASSETS TO BE APPLIED

partnership property
additional contributions made by partners to cover the
liabilities

ORDER OF LIABILITIES TO BE PAID

those owing to creditors who are not partners
those owing to partners who are creditors other than for
capital or profits
those owing to partners as regards capital
 those owing to partners as regards profits

ORDER OF CLAIMS AGAINST THE SEPARATE PROPERTY OF

INSOLVENT PARTNER
those owing to separate creditors
those owing to partnership creditors
those owing to partners by way of contribution