Regulatory Framework from Business Transactions 2

Chapter 3: Dissolution and Winding Up

Three Final Stages of a Partnership: 3. By the express will of all the partners
who have not assigned their interests
A. Dissolution (Art. 1828) – Is the
or suffered them to be charged for
change in the relation of the partners
their separate debts, either before or
caused by any partner ceasing to be
after the termination of any specified
associated in the carrying on of the
term or particular undertaking.
business.
4. By the expulsion of any partner from
B. Winding Up - Is the process of settling
the business bona fide in accordance
the business or partnership affairs after
with such a power conferred by the
dissolution.
agreement between the partners.
C. Termination - Is the point in time after
all the partnership affairs are completely Causes of Judicial Dissolution (Art. 1831):
wound up and finally settled.
A. Dissolution by Judicial Decree on
Partnership not Terminated by Application by a Partner (ILIBOG):
Dissolution (Art. 1829): 1. Insanity
2. Business of the partnership can only
- The principal significance of dissolution
be carried on at a Loss.
is that, thereafter, no new partnership
3. Incapacity
business should be undertaken, but
4. Misconduct and persistent Breach of
affairs should be liquidated and
partnership agreement.
distribution made to those entitled to the
5. Other circumstances which render
partners’ interest.
dissolution equitable.
- The partnership continues until the
6. A partner has been Guilty of such
winding-up is completed. Thus,
conduct as tends to affect
dissolution refers to the change in the
prejudicially the carrying on of the
partnership relation and not the actual
business.
cessation of the partnership business.
B. Dissolution by Judicial Decree on
Causes of Extrajudicial Dissolution Application by a Purchases of a
(LIVIDUW) (Art. 1830): Partner’s Interest:
1. When the specified term or
A. Loss particular undertaking has been
B. Insolvency of any partner of the terminated.
partnership. 2. In case of a partnership at will, at any
C. In Violation of agreement. time when the interest was assigned
D. Civil Interdiction of any partner. or when the charging order was
E. Death of any partner. issued.
F. Unlawfulness of the business.
G. Without violation of the agreement Rules of Liability in Arts. 1832, 1833, and
between the partners. 1834:
1. By the termination of the definite
A. General Rule (Art. 1832) –
term or particular undertaking
Dissolution terminates all authority of
specified in the agreement.
the partners to act for the partnership.
2. By the express will of any partner,
who must act in good faith, when no
definite term or particular
undertaking is specified.

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Regulatory Framework from Business Transactions 2
Chapter 3: Dissolution and Winding Up

B. As among partners (Art. 1832 and 3. Dissolution by Insolvency or

1833): Death – Knowledge of or mere
- Question: If the partnership is made notice to the acting partner of the
liable, can the other partners ask for cause of dissolution will make him
reimbursement from the acting partner? solely liable.
- Applies only if there is partnership
liability.
- General Rule – The partners are still
bound to each other.
1. Dissolution not by Act,
Insolvency, or Death – Authority
of the any partner to bind other
partners is terminated immediately.

C. As to Third Persons:
- General Rule – The partnership is
liable.
1. Acts Binding on the
Partnership:
2. Dissolution is by an Act:
a. Transactions necessary for
- Knowledge of acting partner of the
winding-up.
cause of dissolution will make him
b. Transactions begun but not yet
solely liable.
finished as of the time of
- Notice to the acting partner of the
dissolution.
cause of dissolution is not sufficient
c. New business with innocent
to make him solely liable.
third persons:
i. Former client with no
knowledge or actual
notice of dissolution.
ii. New client who knows of
the partnership but has
no knowledge or notice
of
iii. dissolution and the fact
of dissolution not having
been published.
2. Acts not Binding on the
Partnership:
a. When dissolution is due to
unlawfulness of the business.
b. When the acting partner is
insolvent.

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 Regulatory Framework from Business Transactions 2
Chapter 3: Dissolution and Winding Up
c. Acting partner is not liquidating Right of Partner to Application of
partner except if the transaction Partnership Property on Dissolution (Art.
is with: 1837) – The right of the partners to have the
i. Former client who had partnership property applied to discharge
no knowledge or actual liabilities and the surplus, if any, distributed in
notice of the lack of cash to the respective partners, depends on
authority. whether the dissolution is caused without
ii. New client who has no violation of the partnership agreement or in
knowledge or notice of violation of the partnership agreement.
want of authority and
Rights where Dissolution not in
the fact of want of
Contravention of Agreement:
authority not having
been published. A. To have the partnership property applied
to discharge the liabilities of the
Rules in Discharging Liability upon
partnership.
Dissolution (Art. 1835) - Just because the
B. To have the surplus, if any, applied to pay
firm is dissolved does not automatically mean
in cash the net amount owing to the
that the existing liability of any partner is
respective partners.
discharged.
Rights where Dissolution in
How a Partner’s Liability is Discharged –
Contravention of Agreement:
There must be an agreement.
A. Innocent Partners:
Who must agree?
1. To have the partnership property
A. The partner concerned. applied for the payment of its
B. The other partners. liabilities and to receive in cash his
C. The creditors. share of the surplus.
2. To be indemnified for damages
Manner of Winding Up (Art. 1836):
caused by the partner guilty of
A. Extrajudicial Winding Up: wrongful dissolution.
1. The partners designated in the 3. To continue the business in the same
agreement. name during the agreed term of the
2. By the partners who have not partnership, by themselves jointly or
wrongfully dissolved the with others.
partnership. 4. To possess partnership property
3. By the legal representative of the last should they decide to continue the
surviving partner (when all the business, provided they secure the
partners are already dead), provided payment by bond approved by the
the last survivor was not insolvent. court, or pay any partner who has
B. Judicial Winding Up – Under the caused the dissolution wrongfully,
control and direction of the court, upon the value of his interest in the
proper cause that is shown to the court. partnership at the dissolution, less
any damages recoverable, and in like
manner indemnify him against all
present or future partnership
liabilities.

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 Regulatory Framework from Business Transactions 2
Chapter 3: Dissolution and Winding Up
B. Guilty Partners: 3. Then give to the partners their
1. If the business is not continued by capital.
the other partners, to have the 4. Lastly, the profits must be
partnership property applied to distributed.
discharge its liabilities and to receive
Dissolution of a Partnership by Change in
in cash his share of the surplus less
Membership (Art. 1840) – When a firm is
damages caused by his wrongful
dissolved either by the admission of a new partner into
dissolution.
an existing partnership, by the retirement or
2. If the business is continued: assignment of the rights of all but one partner
a. To have the value of his interest including their representatives if deceased, by the
in the partnership at the time of retirement or death of any partner, by the assignment
the dissolution ascertained and of the rights of all the partners, by any wrongful cause
paid in cash or secured by bond committed by any partner or by the expulsion of any
approved by court. partner and the business is continued without
b. To be released from all existing liquidation, the new partnership assumes the
obligation of the old partnership. Any change in
and future liabilities of the
membership dissolves a partnership and creates a new
partnership.
partnership. The liability of a third person who joins
Right to Annul Partnership Contract Due the new partnership shall be satisfied out of the
partnership property only.
to Fraud or Misrepresentation (Art. 1838)
– If one is induced by fraud or misrepresentation Rights of Creditors of Dissolved
to come a partner, the contract is voidable or Partnership which is Continued – The law
annullable. (Art. 1390) If the contract is makes the creditors of the dissolved partnership,
annulled, the injured partner is entitled to also creditors of the persons or partnership
restitution. (Art. 1398) continuing the business.
Rights of Injured Partner Where Rights of Retiring or Legal Representative
Partnership Contract is Annulled: of Deceased Partner when Business is
Continued without Liquidation (Art.
A. Right of lien or retention.
1841):
B. Right of subrogation.
C. Right of indemnification. A. To have the value of the interest of the
retiring partner or deceased partner in
Rules for Settling Accounts (Art. 1839)
the partnership ascertained as of the date
A. Assets of the Partnership: of dissolution. (i.e., date of retirement or
1. The partnership property including death)
goodwill. B. To receive thereafter, as an ordinary
2. The contributions of the partners, creditor, an amount equal to the value of
which are made to pay off the his share in the dissolved partnership
partnership liabilities. with interest, or, at his option, in lieu of
B. Order of Payment of Firm’s interest, the profits attributable to the
Liabilities/Order of Application of use of his right.
the Assets:
Accrual of a Partner’s Right to Account of
1. First give to creditors who are
his Interest (Art. 1842) - The right to demand
strangers, otherwise they may be
an accounting of the value of his interest (Art.
prejudiced.
1812) accrues to any partner or his legal
2. Then give to partners who are also
representative after dissolution in the absence of
creditors.
an agreement to the contrary.

Jimenez, Rodcliff D.