CHAPTER 3

DISSOLUTION AND WINDING UP

Art. 1828
- Talks about one of the stages of partnership, Dissolution

- Dissolution:  is the change in the relation of the partners caused by any partner
causing to be associated in the carrying on of the business.
 the point of time the partners cease to carry on the business together
 Represents the Demise of a partnership

- Winding up:  the process of settling the partnership affairs after dissolution
 It is considered as the final step after dissolution in the termination of the
partnership.
 Involves paying of partnership’s debts, distribution of partnership assets, and
collecting assets previously demandable.

- Termination:  the point in time after all the partnership affairs have been wound up
 the end of the partnership life

Art. 1829
- The rule on the dissolution of the partnership is that it is not terminated BUT continues
until the winding up of partnership affairs is COMPLETED.

- Dissolution of the partnership doesn’t automatically result to the:

 Termination of the legal personality of the business
 Cessation of the business

- Dissolution is also different with mere suspension in the business’ operations.

- It is also not necessarily followed by a winding up of partnership affairs.

Art. 1830
- There are 2 kinds of dissolution: Extrajudicial and Judicial dissolution

- Causes of Extrajudicial dissolution:

1. A partnership may be dissolved WITHOUT VIOLATION of the partnership agreement
in 4 ways:

A. termination of
a. definite term
b. specific undertaking

- partnership is automatically dissolved once that the partners did not extend the
term or continue the undertaking.

- Here, if the firm is continued w/o making a new agreement, it becomes a

partnership at will

B. Express will of any partner may dissolve the partnership even w/o the consent of all
the other partners, PROVIDED that he acts in good faith.

- Each partner has the power and the right to terminate partnership at any time.

***NOTE: if acted in bad faith, the dissolution is wrongful.

C. Express will of all partners

- The agreement to dissolve must be unanimous
- EXCEPT: those who have assigned or cause their interest to be charged, their
consent isn’t enough to effect a dissolution UNLESS there’s a Breach of
contract)

D. Expulsion of a partner in good faith

***NOTE: If expelled in bad faith, can claim damages.

2. In CONTRAVENTION of the agreement between the partners

 a partner expressly withdrawing despite an agreement (like term or undertaking).
 Said partner is liable for damages

3. UNLAWFULNESS of the business which is also an involuntary cause of dissolution

 A partnership must have a lawful object or purpose.
 The partners may continue the partnership if they will change the nature of their
business
 4. LOSS OF THE THING which only pertains to the specific thing
a. If a specific thing promised as contribution is lost before delivery

b. If only the usufruct of thing is contributed, and the thing is lost before or after
delivery, then the partnership is dissolved.

***A partnership is not dissolved if the loss of the thing occurred after the delivery

5. DEATH of any partner

 Refers to the Ipso Facto dissolution of the partnership by his death

 there is automatic dissolution, but no automatic termination

 However, if there were stipulations made by the partners wherein the death,
withdrawal, or admission will not dissolve the partnership.

 When the partnership is dissolved by the death of a partner, its subsequent status is
a partnership in liquidation.
- The heirs of the deceased partner may only inherit rights that result from the
liquidation in favor of the deceased partner. However, that certain rights of the
deceased partner are impossible to determine before the liquidation.

- The liquidation is entrusted to the surviving partners not to the administrator of

the deceased partner.

- Continuation of business even w/o liquidation is legal since there is a clause in

the articles of co-partnership that provides for the continuation of the
partnership.

*** A dissolution by death of any partner may be considered as:

a) Partial dissolution – business is continued by other partners

b) Total dissolution – firm is terminated

6. INSOLVENCY of any partner or of the partnership

a) Any partner – Insolvent partner has no right to act for the partnership
nor the others to act for him.
 b) Of the partnership -

7. CIVIL INTERDICTION of any partner

 A person under civil interdiction cannot validly give consent

 Civil Interdiction – the offender is deprive of the right to manage and dispose
property by any act or conveyance inter vivos.

8. By DECREE OF COURT – a cause of judicially dissolution

***NOTE: The partners cannot decrease or limit the causes of dissolution.

Art. 1831
- Enumerates the grounds for Judicial dissolution:

ON APPLICATION BY OR FOR A PARTNER (DISSOLUTION by JUDICIAL DECREE

WHEN ALOWED):
(I, UM, I-PP, C, PB, BL, OC)

1. INSANITY - Partner declared “insane” in any judicial proceeding or is shown to be of

UNSOUND MIND
- Insane person is not capable of giving consent and thus, incapacitated to enter a contract.

2. Partner becomes INCAPABLE of performing his part of the partnership contract

3. partner has been guilty of such CONDUCT as tends to affect prejudicially the business

4. partners PERSISTENT BREACH of agreement

5. the business of the partnership can only be denied on at a loss

6. Other circumstances which render dissolution equitable

IN CASE OF PURCHASER of PARTNERS INTEREST

1. after the termination of the specified term or particular undertaking

 2. DISSOLVED AT ANY TIME, if the partnership was a “partnership at will” when the
interest was assigned or when the charging ordered was issued

* proof as to the existence of the firm must first be given

* even if a partner has not yet been previously declared insane by the court, dissolution may be
asked, if the insanity is duly proved in court

* in a suit for dissolution, the court may appoint a RECEIVER at its discretion

Art. 1832
- Pertains to the effects of the dissolution

- GENERAL RULE: When the partnership is dissolved, a partner can no longer bind the
partnership. All the authority of the partners to undertake new business is terminated.

- EXCEPTION: If the dissolution is necessary for winding up business affairs or to

complete any unfinished transactions at dissolution

DISSOLUTION CAUSED by A-I-D (Act, Insolvency, Death of any partner)

- RULE: Partnership is STILL BOUND – as to each partner

- GENERAL RULE  where the dissolution is caused by the ACT, INSOLVENCY or

DEATH of a partner, each partner is liable to his co-partners for his share of any liability
created by any partner acting for the partnership

- EXCEPTION: - individual liabilities

1. if dissolution by ACT
 the partner acting for the partnership HAD KNOWLEDGE of the
dissolution OR

2. if dissolution by DEATH or INSOLVENCY

 the partner acting for the partnership HAD “knowledge or notice” of the
death or insolvency

* only the partner acting assumes liability