A partner is a co-owner w/ his partners of specific partnership property, but the rules on co-

ownership do not necessarily apply. The legal incidents of this tenancy in partnership are
Art. 1810. The property rights of a partner are: distinctively characteristic of the partnership relation. They are as follows:
1.) His rights in specific partnership property; Equal right of possession – Ordinarily, a partner has an equal right to possess specific partnership
2.) His interest in the partnership; and property for partnership purposes. None of the partners can possess and use the specific
3.) His right to participate in the management. partnership property other than for partnership purposes w/o the consent of the other partners.
Should any of them use the property for his own benefit, he must account, like a stranger, to the
Extent of property rights of a partner others for the profits derived therefrom or the value of his wrongful possession or occupation. A
Principal rights – partner wrongfully excluded from possession of partnership property by a co-partner has a right
1.) Rights in specific partnership property; to formal account and may even apply for a judicial decree of dissolution.
2.) Interest in partnership; On the death of a partner, his right in specific partnership property vests in the surviving partners.
3.) Right to participate in management. By agreement, the right to possess specific partnership property may be surrendered. In the
absence of special agreement, however, neither partner separately owns, or has the exclusive
RELATED RIGHTS – right of possession of any partnership property or any proportional part thereof. Each has
1.) Right to reimbursement for amounts advanced to partnership and to indemnification for dominion over the entire partnership property.
risks in consequence of management (art. 1796). The possession of partnership property by one partner is the possession of all until his possession
2.) Right of access and inspection of partnership books (art. 1805). becomes adverse. A partner cannot initiate title byadverse possession until and unless he makes
3.) Right to true and full information of all things affecting partnership (art. 1806). an adverse claim.
4.) Right to formal account of partnership affairs under certain circumstances (art. 1809).
Right not assignable – A partner cannot separately assign his right to specific partnership
5.) Right to have partnership dissolved also under certain conditions (arts. 1830-1831).
property but all of them can assign their rights in the same property.
Reasons for non-assignability:
Partnership property and partnership Partnership capital 1.) It prevents interference by outsiders in partnership affairs;
capital distinguished Partnership 2.) It protects the right of other partners and partnership creditors to have partnership assets
property applied to firm debts;
Changes in value Variable: its value may Constant: it remains 3.) It is often impossible to determine the extent of a partner’s beneficial interest in a
vary from day to day w/ unchanged as the particular partnership asset.
changes in market amount is fixed by
value. agreement of the Reason for impossibility: Each partner, having a beneficial interest in the partnership property
partners, and is not considered as a whole, has a beneficial interest in each part.
affected by fluctuations Where, however, none of the above reasons apply, an authorized assignment by a partner of his
in the value of the right in specific partnership property is void, but it may be regarded as a valid assignment of the
partnership property, partner’s interest in the partnership.
although it may be The law allows a retiring partner to assign his rights in partnership property to the partner(s)
increased and continuing the business.
decreased by Right limited to share of what remains after partnership debts have been paid – Strictly speaking,
unanimous consent of no particular partnership property or any specific or an aliquot part thereof can be considered
the partners. the separate or individual property of any partner. The whole of partnership property belongs to
Assets included Includes not only the The aggregate of the the partnership considered as a juridical person, and a partner has no interest in it but his share of
original capital individual contributions what remains after all partnership debts are paid.
contributions, but all made by the partners in Consequently, specific partnership property is not subject to attachment, execution,
property subsequently establishing or garnishment, or injunction, w/o the consent of all the partners except on a claim against the
acquired on account of continuing the partnership.
the partnership or w/ partnership. For the same reason that the property belongs to the partnership, the partners cannot claim any
partnership funds, right under the homestead or exemption laws when it is attached for partnership debts. But a
including partnership partner’s interest in the partnership itself may be levied upon by a judgment creditor because it is
name and goodwill. actually his property, by means of a “charging order.”
The right of the partners to specific partnership property is not subject to legal support since the
The incidents of this co-ownership are such that: property belongs to the partnership and not to the partners. But their interest in the partnership is.
1.) A partner, subject to the provisions of this Title and to any agreement between the The method of reaching a judgment debtor’s interest in partnership property is specifically set
partners, has an equal right with his partners to possess specific partnership property forth in art. 1814.
for partnership purposes; but he has no right to possess such property for any other
purpose without the consent of his partners; Art. 1812. A partner’s interest in the partnership is his share of the profits and surplus.
2.) A partner’s right in specific partnership property is not assignable except in connection
with the assignment of rights of all the partners in the same property; EMPHASIZE!
3.) A partner’s right in specific partnership property is not subject to attachment or Nature of partner’s interest in the partnership
execution, except on a claim against the partnership. When partnership property is Share of the profits and surplus – The partner’s interest in the partnership consists of his share in
attached for a partnership debt the partners, or any of them, or the representatives of theundistributed profits during the life of the partnership as a going concern and his share in the
a deceased partner, cannot claim any right under the homestead or exemption laws;
undistributed surplus after its dissolution.
4.) A partner’s right in specific partnership property is not subject to legal support under art.
291. Profits: the excess of returns over expenditure in a transaction or series of transactions; or the net
income of the partnership for a given period of time.
Nature of a partner’s right in specific partnership property
Art. 1811 contemplates tangible property but not intangible things.
Surplus: the assets of the partnership after partnership debts and liabilities are paid and settled
and the rights of the partners among themselves are adjusted. It is the excess of assets over
liabilities. If the liabilities are more than the assets, the difference represents the extent of the loss.
Extent of the partner’s interest – The interest in surplus alone w/c remains after the firm’s debts
have been paid and the equities between the partner and his co-partners have been adjusted
and the partner’s share has been ascertained and set apart.
Partner’s interest not a debt due from partnership – A partner is not a creditor of the partnership
for the amount of his share.
Art. 1813. A conveyance by a partner of his whole interest in the partnership does not of itself
dissolve the partnership, or, against the other partners in the absence of agreement, entitle the
assignee, during the continuance of the partnership, to interfere in the management or
administration of the partnership business or affairs, or to require any information or account of
partnership transactions, or to inspect the partnership books; but it merely entitles the assignee to
receive in accordance with his contract the profits to which the assigning partner would
otherwise be entitled. However, in case of fraud in the management of the partnership, the
assignee may avail himself of the usual remedies.
In case of dissolution of the partnership, the assignee is entitled to receive his assignor’s interest
and may require an account from the date only of the last account agreed to by all the partners.
Effect of assignment of partner’s whole interest in partnership
A partner’s right in specific partnership property is not assignable but he may assign his interest in
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the partnership to any of his co-partners or to a 3 person irrespective of the consent of the other
partners, in the absence of agreement to the contrary.
Rights withheld from assignee –
1.) To interfere in the management;
2.) To require any information or account;
3.) To inspect any of the partnership books.
Nature of partnership relation – The legal effect of such a conveyance is the same as that of a
partner associating another in his share or interest. Remember delectus personarum. No-one can
be compelled to be partners w/ someone else. The assignment does not divest the assignor of his
status and rights as a partner nor operate as a dissolution. The law, however, provides the non-
assigning partners w/ a ground for dissolving the partnership if they so desire.
Remedy of other partners
Dissolution of partnership not intended – Many partnership agreements are made merely as
security for loans, the assigning partner never intending to destroy the partnership relation. If the
assigning partner neglects his duties after assignment, the other partners may dissolve the
partnership under art. 1830(1,c).
Dissolution of partnership intended – A partner’s conveyance of his interest in the partnership
operates as a dissolution of the partnership only when it is clear that the parties contemplated
and intended the entire withdrawal from the partnership of such partner and the termination of
the partnership as between the partners.
Rights of assignee of partner’s interest
1.) To receive in accordance w/ his contract the profits accruing to the assigning partner;
2.) To avail himself of the usual remedies provided by law in the event of fraud in the
management;
3.) To receive the assignor’s interest in case of dissolution;
4.) To require an account of partnership affairs, but only in case the partnership is dissolved,
and such account shall cover the period from the date only of the last account
agreed to by all partners.
The purchaser of a partner’s interest may apply to the court for dissolution after the termination of
the specified term or undertaking or at any time if the partnership is one at will.
Art. 1814. Without prejudice to the preferred rights of partnership creditors under art. 1827, on due
application to a competent court by any judgment creditor of a partner, the court which entered
the judgment, or any other court, may charge the interest of the debtor partner with payment of
the unsatisfied amount of such judgment debt with interest thereon; and may then or later
appoint a receiver of his share of the profits, and of any other money due or to fall due to him in
respect of the partnership, and make all other orders, directions, accounts and inquiries which
the debtor partner might have made, or which circumstances of the case may require.
The interest charged may be redeemed at any time before foreclosure, or in any case of a sale
being directed by the court, may be purchased without thereby causing a dissolution:
1.) With separate property, by any one or more of the partners; or
2.) With partnership property, by any one or more of the partners with the consent of all the
partners whose interest are not so charged or sold.
Nothing in this Title shall be held to deprive a partner of his right, if any, under the exemption
laws, as regards his interest in the partnership.
EMPHASIZE! Remedies of separate judgment creditor of a partner
Application for a “charging order” after securing judgment on his credit – While a separate
creditor of a partner cannot attach or levy upon specific partnership property for the satisfaction
of his credit because partnership assets are reserved for partnership creditors, he can secure a
judgment on his credit and then apply to the proper court for a “charging order”, subjecting the
interest of the debtor partner in the partnership w/ the payment of the unsatisfied amount of
such judgment w/ interest thereon w/ the least interference w/ the partnership business and the
rights of the other partners. By virtue of the charging order, any amount or portion thereof w/c
the partnership would otherwise pay to the debtor-partner should instead be given to the
judgment creditor.
This remedy, however, is w/o prejudice to the preferred rights of partnership creditors whose
claims should be satisfied first.
Availability of other remedies – Art. 1814 have made this an exclusive remedy so that a writ of
execution will not be proper. However, if the judgment debt remains unsatisfied, the court may
resort to other courses of action notwithstanding the issuance of the charging order.
Redemption or purchase of interest charged
Redemptioner – The interest of the debtor-partner so charged may be redeemed or purchased
w/ the separate property of any one or more of the partners, or w/ partnership property but w/
the consent of all the partners whose interests are not so charged or sold.
Redemption price – The value of the partner’s interest in the partnership has no bearing on the
redemption price w/c is likely to be lower since it will be dependent on the amount of the
unsatisfied judgment debt.
Right of redeeming non-debtor partner – The redeeming non-debtor partner does not acquire
absolute ownership over the debtor-partner’s interest but holds it in trust for him consistent w/
principles of fiduciary relationship.
Rights of partner under exemption laws
Under art. 1811, a partner cannot claim any right under the homestead laws or exemption laws
when specific partnership property is attached for partnership debt.
W/ respect, however, to the partner’s interest in the partnership as distinguished from his interest
in specific partnership property, the partner may avail himself of the exemption laws after
partnership debts have been paid. A partner’s interest or share in the partnership property is
really his property.
SECTION 3 – OBLIGATIONS OF THE PARTNERS WITH REGARD TO THIRD PERSONS
Art. 1815. Every partnership shall operate under a firm name, which may or may not include the
name of one or more of the partners.
Those who, not being members of the partnership, include their names in the firm name, shall be
subject to the liability of a partner.
Requirement of a firm name
Meaning of word “firm”: The name, title, or style under which a company transacts business; a
partnership pf two or more persons; a commercial house. In its common acceptation, the term
implies a partnership. The term is also used as synonymous with “company,” “house,” and
“concern.”
Importance of having a firm name – A partnership must have a firm name under which it will
operate. A firm name is necessary to distinguish the partnership which has a distinct and
separate juridical personality from the individuals composing the partnership and from other
partnerships and entites.
Right of partners to choose firm name – The partners enjoy the utmost freedom in the selection of
the partnership name. As a general rule, they may adopt any firm name desired.
Use of misleading name – The partners cannot use a name that is identical or deceptively
confusingly similar to that of any existing partnership or corporation or to any other name already
protected by law or is patently deceptive, confusing or contrary to existing laws, as to mislead
the public by passing itself off as another partnership or corporation, or its goods or services as
those of such other company.
Use of names of deceased partners – Ruling of SC in Ozaeta, Romulo, etc. abandoned. Rule 3.02
of the Code of Professional Responsibility provides that the continued use of the name of a
deceased partner is permissible provided that the firm indicates in all its communications that
said partner is deceased.
Liability for inclusion of name in firm name
Persons who, not being partners, include their names in the firm name do not acquire the rights
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of a partner but shall be subject to the liability of a partner insofar as 3 persons without notice
are concerned. Such persons become partners by estoppel.
Art. 1815 does not cover the case of a limited partner who allows his name to be included in the
firm name, or of a person continuing the business of a partnership after dissolution, who uses the
name of the dissolved partnership or the name of a deceased partner as part thereof.
Art. 1816. All partners, including industrial ones, shall be liable pro rata with all their property and
after all the partnership assets have been exhausted, for the contracts which may be entered
into in the name and for the account of the partnership. However, any partner may enter into a
separate obligation to perform a partnership contract.
EMPHASIZE!
Liability for contractual obligations of the partnership
Partnership liability – Partners are principals to the other partners and agents for them and the
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partnership. They are liable to 3 persons who have dealt with one of them in the same way that
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a principal is liable to 3 persons who have dealt with an agent. The general rule is that a partner
has the right to make all partners liable for contracts he makes for the partnership in the name
and for the account of the partnership.
Individual liability – A partner, however, may assume a separate undertaking in his name with a
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3 party to perform a partnership contract or make himself solidarily liable on a partnership
contract. In such case, the partner is personally bound by his contract even if only the
partnership is shown to have derived benefits from it.
Nature of individual liability of partners
Pro rata – Equally or jointly, not proportionately. Pro rating is based on the number of partners and
not on the amount of their contributions to the common fund, subject to adjustment among the
partners.
Subsidiary or secondary – It is subsidiary or secondary because the partners become personally
liable only after all the partnership assets have been exhausted. Thus, the partners are liable as
guarantors in favor of partnership creditors to the extent that the asets of the firm are not
sufficient to meet its obligations. They may be joined as party defendants in the same action
against the partnership subject to their right to prior exhaustion of partnership property.
Even the industrial partner who, ordinarily, is not liable for losses would have to pay but, of course,
he can recover the amount he has paid from the capitalist partners unless there is an agreement
to the contrary.
Distinction between a liability and a loss
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The inability of a partnership to pay debt to a 3 party at a particular time does not necessarily
mean that the partnership business, as a whole, has been operated at a loss. The partnership
may have outstanding credits which for the moment may be unavailable for the payment of
debts, but which eventually may be realized upon and yield profits more sufficient to cover all
losses. Article 1816 refers to “liabilities” while Article 1767 speaks of “losses.” There is, therefore, no
conflict between the two articles.
The exemption of the industrial partner to pay losses relates exclusively to the settlement of the
partnership affairs among the partners themselves and has nothing to do with the liabilities of the
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partners to 3 persons. An industrial partner is not exempted from liability to 3 persons for the
debts of the partnership.
No distinction between obligations and losses
During the existence of a partnership, the gains or the losses are set off, and the difference is
either in favor of or against the concern. As to the industrialpartner, it is not a matter of striking a
balance from time to time, but one of the final adjustment of assets and liabilities. As long as
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there is property belonging to the partnership, obligations in favor of 3 persons are covered by
the primary and direct responsibility of the partnership.
The question arises when the assets of the partnership are exhausted and it becomes necessary
to enforce the subsidiary liability of the private property of the partners. In this case, such
obligations constitute the extreme losses in the liquidation of the partnership.
Art. 1817. Any stipulation against the liability laid down in the preceding article shall be void,
except as among partners.
Stipulation against liability
A stipulation among the partners contrary to the pro rata and subsidiary liability expressly
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imposed by Article 1816 is void and of no effect insofar as it affects the rights of 3 persons. It is
valid and enforceable only as among the partners.
Art. 1818. Every partner is an agent of the partnership for the purpose of its business, and the act
of every partner, including the execution in the partnership name of any instrument, for
apparently carrying on in the usual way the business of the partnership of which he is a member,
binds the partnership, unless the partner so acting has in fact no authority to act for the
partnership in the particular matter, and the person with whom he is dealing has knowledge of
the fact that he has no such authority.
An act of a partner which is not apparently for carrying on of the business of the partnership in the
usual way does not bind the partnership unless authorized by the other partners.
Except when authorized by the other partners or unless they have abandoned the business, one
or more but less than all the partners have no authority to:
1.) Assign the partnership property in trust for creditors or on the assignee’s promise to pay
the debts of the partnership;
2.) Dispose of the goodwill of the business;
3.) Do any other act which would make it impossible to carry on the ordinary business of a
partnership;
4.) Confess a judgment;
5.) Enter into a compromise concerning a partnership claim or liability;
6.) Submit a partnership claim or liability to arbitration;
7.) Renounce a claim of the partnership.
No act of a partner in contravention of a restriction on authority shall bind the partnership to
persons having knowledge of the restriction.
EMPHASIZE!
Power of partner as agent of partnership
In the absence of an agreement to the contrary, all partners have equal rights in the
management and conduct of the partnership business.
As among themselves – When a partner performs an act within the scope of his actual, implied,
or apparent authority, he is not only a principal as to himself, but is also for all purposes, an agent
as to his co-partners or to the partnership, considered as a group. Principle of mutual agency.
As to third persons – Limitations upon the authority of any one of the partners are not binding
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upon innocent 3 persons dealing with the partnership who have the right to assume that every
general partner has power to bind the partnership especially those partners acting with
ostensible authority, by whatever is proper for the transaction in the ordinary and usual manner
of the business of the partnership.
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No duty to make inquiries as to acting partner’s authority – 3 persons are not bound, in entering
a contract with any of the partners, to ascertain whether or not the partner with whom the
transaction is made has the consent of the other partners. His knowledge is enough that he is
contracting with a partner.
Presumption that acting partner has authority to bind partnership – There is a general presumption Where the title to real property is in the name of one or more or all the partners, or in a third
that each individual partner is an agent of the firm and that he has authority to bind the firm in person in trust for the partnership, a conveyance executed by a partner in the partnership name,
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carrying on the partnership transactions. The presumption is sufficient to permit 3 persons to hold or in his name, passes the equitable interest of the partnership, provided the act is one within the
the firm liable on transactions entered into by any one of the members of the firm acting authority of the partner under the provisions of the first paragraph of Article 1818.
apparently in its behalf and within the scope of his authority. Where the title to real property is in the names of all the partners a conveyance executed by all
No right to assume that acting partner has unlimited authority – The apparent scope of the the partners passes all their rights in such property.
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partner’s authority is the whole scope of the partnership’s customary business. However, 3 DE-EMPHASIZE!
parties should not assume that a partner has unlimited authority. Generally, a partner has no
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Title Deed Signatory Effect Exception
authority to do the cats enumerated in the 3 paragraph of Article 1818. When a 3 party deals
with a partner who has no express, implied, or apparent authority, the partnership is not liable for ABC & ABC & A or B or C Passes legal If act does not
his acts unless the other partners ratify his acts or are estopped from asserting the partner’s lack Co. Co. title bind partnership
of authority. under Art. 1818.
Liability of partnership for acts of partners
The acts of a partner mentioned in Article 1818 may be grouped into three:
1.) Acts for apparently carrying on in the usual way the business of the partnership (par. 1) –
ABC & ABC & A, B, and C Passes legal No exception
Every partner is an agent and may execute such acts with binding affect on the
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partnership even if he has in fact no authority unless the 3 person has knowledge of
such lack of authority. There are two requisites in order that the partnership will not be
liable:
ABC & A or B or A or B or C Passes W/o authority
a.) The partner so acting has in fact no authority; and
Co. C equitable knowledge
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b.) The 3 person knows that the acting partner has no authority.
Usual way: usual for the particular partnership or usual for similar partnerships.
Actually, the acts mentioned in No. 1 refer only to acts of administration. A,B or A,C or B,C Passes title W/o authority
2.) Acts of strict dominion (pars. 2 and 3) – For acts which are not apparently for carrying on knowledge
in the usual way of business of the partnership, the partnership is not bound, unless
authorized by all the other partners or unless they have abandoned the business. The
general rule is that powers not specifically delegated in a partnership agreement are
presumed to be withheld. Paragraph 3 gives instances of acts generally outside the
implied power of a partner and constitute limitations to the authority to bind 1 or more or all or ABC & Co. or in Passes W/o authority
partnership. trustee his name equitable under art. 1818
3.) Acts in contravention of a restriction on authority (par. 4) – The partnership is interest
not liable to third persons having actual or presumptive knowledge of the restrictions,
whether or not the acts are for apparently carrying on in the usual way the business
of the partnership. On the other hand, persons not having such notice have a right to
assume that the authority of a partner is co-extensive with the business transacted by
the firm.
A, B and C A, B, and C Passes legal title
Liability of partner acting without authority
As a general rule, the particular partner who undertakes to bind his co-partners by a contract
without authority is himself personally liable on such contract. If this doesn’t make sense, ok lang. “de-emphasize” naman eh! ☺
Such partner binds himself no matter in what name he contracts. The fact that he attempts to
bind his co-partners and does not succeed does not avoid his own act. He cannot be admitted
to say that he was not authorized to make a contract, as he is estopped to deny its effect or
validity. Effects of conveyance of real property belonging to the partnership
The ownership of real estate is prima facie that indicated by the muniment of title. Ordinarily, title
Art. 1819. Where title to real property is in the partnership name, any partner may convey title to to real property or interest therein belonging to the partnership is registered in the partnership
such property by a conveyance executed in the partnership name; but the partnership may name. However, for one reason or another, the title to the property is not held by the partnership,
recover such property unless the partner’s act binds the partnership under the provisions of the although as between the partners there is no question that it is a partnership property. The
first paragraph of article 1818, or unless such property has been conveyed by the grantee or a presumption is that, property purchased with partnership funds belongs to the partnership unless
person claiming through such grantee to a holder for value without the knowledge that the a contrary intent is shown.
partner, in making the conveyance, has exceeded his authority. Article 1819 gives the legal effects of the conveyance of real property belonging to the
Where title to real property is in the name of the partnership, a conveyance executed by a partnership depending in whose name it is registered and in whose name it is conveyed. Under
partner, in his own name, passes the equitable interest of the partnership, provided the act is one
the article, the real property may be registered or owned in the name of:
within the authority of the partner under the provisions of the first paragraph of article 1818.
1.) The partnership (pars. 1,2);
Where title to real property is in the name of one or more but not all the partners, and therecord
2.) One or more but not all the partners (par. 3);
does not disclose the right of the partnership, the partners in whose name the title stands may rd
convey title to such property, but the partnership may recover such property if the partners’ act 3.) One or more or all the partners, or in a 3 person in trust for the partnership (par. 4);
4.) All the partners (par. 5).
does not bind the partnership under the provisions of the first paragraph of Article 1818, unless the
purchaser or his assignee, is a holder for value, without knowledge. It will be noticed that under paragraphs 1, 3 and 5, what is conveyed is title or ownership,
while under paragraphs 2 and 4, what is conveyed is merely equitable interest. “Conveyance”
interpreted to include a mortgage. Thus, the right to mortgage is included in the right to convey
(unlike in agency).
Innocent purchasers without notice
Regardless of the fact that one partner cannot convey partnership realty without the
concurrence of his co-partners, it is fundamental that innocent purchasers without notice may
be protected.
Where the legal title is in the partner making the conveyance, although the equitable title is in
the firm, a purchaser without notice may acquire a valid title, since he has the right to presume
that possession or interest of the partnership is subordinate to and not inconsistent with the record
title.
A conveyance by a partner of partnership property in the partnership name even without
authority, cannot be recovered by the partnership where it has been conveyed by the grantee
to a holder for value and without notice or knowledge that the partner, in making the
conveyance, had exceeded his authority.
The purchaser need not have either actual or constructive notice of any trust or other condition
limiting the authority of the partner making the conveyance.
Authorization or ratification of conveyance
A conveyance of partnership realty by one partner may be authorized by his co-partners, or
when made without authority, may be ratified by them. Such authority or ratification must
affirmatively appear, for the authority of one partner to make and acknowledge a deed for the
partnership will not be presumed.
After the lapse of many years, authority or ratification will be presumed.
Authority may also be implied from the nature of the partnership business. Where a firm is
engaged in the business of buying and selling real estate, the contract is valid.
Other partners will also be bound if there is subsequent adoption of the act.
Ratification may be inferred from the presence of the other partners at the execution and
delivery, or from their acting under it or knowingly taking the benefits arising therefrom.
Art. 1820. An admission or representation made by any partner concerning partnership affairs
within the scope of his authority in accordance with this Title is evidence against the partnership.
EMPHASIZE!
Effects of admission by a partner
As a general rule, a person is not bound by the act, admission, statement, or agreement of
another of which he has no knowledge or to which he has not given his consent except by virtue
of a particular relation between them.
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But admissions by a party as testified to by a 3 person are admissible in evidence against him in
litigation. Admissions by another are received against a party if the former is acting in the
capacity of agent of the latter. Thus, under Article 1820, the admission of a partner made during
the existence of the partnership are binding against the partnership (and co-partners) when such
admissions refer to a matter concerning partnership affairs and made within the scope of his
authority. But when a partner makes no admissions for himself only without purporting to act for
the partnership, he alone shall be chargeable with his admissions.
After dissolution, admission made by a partner will bind the co-partners if connected with the
winding up of partnership affairs.
Existence of partnership must be proved
Before the partnership can be charged with the admissions of a partner under Article 1820, the
partnership relation must be shown and proof of that fact must be made by evidence other than
the admission itself.
However, admissions and declarations made in the presence of the person to be charged are
admissible to prove the existence of the partnership.
An admission made by a partner who was no longer a partner at the time of the declaration is
not admissible in evidence against the partnership.
Art. 1821. Notice to any partner of any matter relating to partnership affairs, and the knowledge of
the partner acting in the particular matter, acquired while a partner or then present to his mind,
and the knowledge of any other partner who reasonably could and should have communicated
it to the acting partner, operate as notice to or knowledge of the partnership except in case of a
fraud on the partnership, committed by or with the consent of that partner.
DE-EMPHASIZE!
Notice to, or knowledge of, a partner of matter affecting partnership affairs
Notice to, or knowledge of, any partner of any matter relating to partnership affairs, operates as
a notice to or knowledge of the partnership except in case of fraud.
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A 3 person desiring to give notice to a partnership of some matter pertaining to the partnership
business need not communicate with all the partners. If notice is delivered to a partner, that is an
effective communication to the partnership notwithstanding the failure of the partner to
communicate such notice or knowledge to his co-partners.
Cases of knowledge of a partner
1.) Knowledge of the partner acting in the particular matter acquired while a partner;
2.) Knowledge of the partner acting in the particular matter then present to his mind; and
3.) Knowledge of any other partner who reasonably could and should have communicated
it to the acting partner.
Art. 1822. Where, by any wrongful act or omission of any partner acting in the ordinary course of
the business of the partnership or with the authority of his co-partners, loss or injury is caused to
any person, not being a partner in the partnership, or any penalty is incurred, the partnership is
liable therefore to the same extent as the partner so acting or omitting to act.
Art. 1823. The partnership is bound to make good the loss:
1.) Where one partner acting within the scope of his apparent authority receives money or
property of a third person and misapplied it; and
2.) Where the partnership in the course of its business receives money or property of a third
person and the money or property so received is misapplied by any partner while it is
in the custody of the partnership.
Art. 1824. All partners are liable solidarily with the partnership for everything chargeable to
the partnership under Articles 1822 and 1823.
1822-4: EMPHASIZE!
Liability arising from partner’s tort or breach of trust
Nature of liability – The above 3 articles provide for the solidary liability of the partners and the
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partnership to 3 persons for the wrongful act or omission or breach of trust of a partner acting
within the scope of the firm’s business or with the authority of his co-partners. This is true even
though the other partners did not participate in, or ratify, or had no knowledge of the act or
omission.
This liability of the partners is different from their liability for contractual obligations as defined in
Article 1816. Here, it is solidary, while in Article 1816, it is joint and subsidiary. Furthermore, while the
liability in Article 1816 refers to partnership obligations, this article covers the liability of the
partnership arising from the wrongful acts or omissions of any partner. The act or omission is called
tort when it does not constitute a crime or felony punishable by law.
In workmen’s compensation cases, the liability of business partners arising from compensable
injury or death of an employee should be solidary.
Reason for imposition of wider liability – Public policy. The rule of respondeat superior (vicarious
liability) applies.
The obligation is solidary because the law protects him who, in good faith, relied upon the
authority of a partner, whether such authority is real or apparent.
Injured party may proceed against partnership or any partner – Since the partners are liable
solidarily, the party aggrieved has his election to sue the firm or to sue one or more of its
members. He may even single out for suit a partner who, personally, was in no wise involved in
the commission of the tort or breach of trust.
Requisites for liability:
1.) The partner must be guilty of a wrongful act or omission; and
2.) He must be acting in the ordinary course of business, or with the authority of his co-
partners even if the act is unconnected with the business.
The partnership is not liable if the partner acted on his own and not for the benefit of the
partnership in the course of some transaction not connected with the partnership business.
A non-acting partner in a partnership engaged in a lawful business is not criminally liable for the
criminal acts of another partner but he is criminally liable if the partnership is involved in an
unlawful enterprise with his knowledge or consent.
Criminal liability of partnership – Partnership liability under Article 1822 does not extend to
criminal liability where the wrongdoing is regarded as individual in character.
But where the crime is statutory, especially where it involves a fine rather than imprisonment,
even criminal liability may be imposed.
Misapplication of money or property of a third person
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Under article 1823, the partnership is liable for any losses suffered by a 3 person whose money or
property is misappropriated by a partner who received it within the scope of his authority or by
any other partner after it was received by the partnership in the ordinary course of business while
in its custody.
Art. 1825. When a person, by words spoken or written or by conduct, represents himself, or
consents to another representing him to anyone, as a partner in an existing partnership or with
one or more persons not actual partners, he is liable to any such persons to whom such
representation has been made, who has, on the faith of such representation given credit to the
actual or apparent partnership, and if he has made such representation or consented to its being
made in a public manner he is liable to such person, whether the representation has or has not
been made or communicated to such person so giving credit by or with the knowledge of the
apparent partner making the representation or consenting to its being made:
1.) When a partnership liability results, he is liable as though he were an actual member of
the partnership;
2.) When no partnership liability results, he is liable pro rata with the other persons, if any, so
consenting to the contract or representation as to incur liability, otherwise separately.
When a person has been thus represented to be a partner in an existing partnership, or with
one or more persons not actual partners, he is an agent of the persons consenting to such
representation to bind them to the same extent and in the same manner as though he were a
partner in fact, with respect to persons who rely upon the representation. When all the members
of the existing partnership consent to the representation, a partnership act or obligation results;
but in all other cases it is the joint act or obligation of the person acting and the persons
consenting to the representation.
EMPHASIZE! COMMENTARY (not so much codal)
Important: Difference between partner by estoppel and partnership by estoppel.
Partner by estoppel; partnership by estoppel
Meaning and effect of estoppel – Estoppel is a bar which precludes a person from denying or
asserting anything contrary to that which has been established as the truth by his own deed or
representation, either express or implied. Through estoppel, an admission or representation is
rendered conclusive upon the person making it and cannot be denied or disapproved as
against the person relying thereon.
When person a partner by estoppel – A person not a partner may become a partner by estoppel
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and thus be held liable to 3 persons as if he were a partner, when by words or by conduct he:
1.) Directly represents himself to anyone as a partner in an existing partnership or in a non-
existing partnership (with one or more persons not actual partners). By the person
himself; or
2.) Indirectly represents himself by consenting to another representing him as a partner in
an existing partnership or in an non-existing partnership. By his consent or with his
knowledge.
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To hold the party liable, the 3 person must prove:
1.) The misrepresentation; and
2.) That a bona fide reliance by him upon it caused him injury.
When partnership liability results – If all the actual partners consented to the representation, then
the liability of the person who represented himself to be a partner or who consented to such
representation and the actual partners is considered a partnership liability. This is a case of
partnership by estoppel. The person becomes an agent of the partnership and his act or
obligation that of the partnership.
When liability pro rata – When there is no existing partnership and all those represented as
partners consented to the representation, or not all of the partners of an existing partnership
consented to the representation, then, the liability of the person who represented himself to be a
partner or who consented to his being represented as partner, and all those who made and
consented to such representation, is joint or pro rata.
When liability separate – When there is no existing partnership and not all but only some of those
represented as partners consented to the representation, or none of the partners in an existing
partnership consented to such representation, then the liability will be separate – that of the
person who represented himself as a partner or who consented to his being represented as a
partner, and those who made and consented to the representation, or that only of the person
who represented himself as partner.
Estoppel does not create partnership – Only liability is created.
Liability as partners may arise contrary to their intentions – The question of liability is not what the
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parties intended by their contract but whether 3 persons had a right to rely on their joint credit.
One who is deemed to be liable as a partner by reason of estoppel does not thereby obtain full
rights as a partner.
Application of estoppel as between partners – The doctrine of estoppel has no application as
between actual partners. Partners become such by agreement and not by estoppel. It is true
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that a single partner may become liable to 3 persons beyond the limits fixed by the partnership
agreement by holding out as partners to an extent greater than that specified in the partnership
agreement. As between the partners, such an action might be the basis for a dissolution of the
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partnership but it would apply primarily to 3 persons who had acted on the representations to
their detriment.
Application of estoppel as to third parties – It is in this area that the doctrine of estoppel has been
applied.
Applicability of general provisions on partnership – If the law recognizes a defectively organized
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partnership as de facto as far as 3 persons are concerned, for purposes of its de facto
existence, it should have such attribute of a partnership as domicile. Although it has no legal
standing or juridical personality, it is a partnership de facto and the general provisions of the Civil
Code applicable to partnerships apply to it.
Elements to establish liability as a partner on ground of estoppel
1.) Proof by plaintiff that he was individually aware of the defendant’s representations as to
his being a partner or that such representations were made by others and not denied
or refuted by the defendant;
2.) Reliance on such representations by the plaintiff; and
3.) Lack of any denial or refutation of the statements by the defendant.
Liability as general partners of persons who assume to act as a corporation
The law makes liable as general partners all persons who assume to act as a corporation and
may include persons who attempt but fail to form a corporation and who carry on business
under the corporate name. A de facto partnership among them is created. Only the active
members of the unsuccessfully attempted corporation should be liable as general partners.
Subscribers to stocks who take no part in the supposed corporation are not personally liable.
Art. 1826. A person admitted as a partner into an existing partnership is liable for all the
obligations of the partnership arising before his admission as though he had been a partner when
such obligations were incurred, except that this liability shall be satisfied only out of partnership
property, unless there is a stipulation to the contrary.
Liability of incoming partner for partnership obligations
Limited to his share in partnership property for existing obligations – When a partner is admitted
as a partner into an existing partnership, he is liable for all obligations existing at the time of his
admission as though he was already a partner when such obligations were incurred. For such
obligations, his liability is limited to his share in the partnership property, unless there is a stipulation
to the contrary.
Extends to his separate property for subsequent obligations – Those who were already partners at
the time when the obligations were incurred are liable with their separate property. For all the
obligations accruing subsequent to the admission of the new partner, all the partners are liable
with their separate properties.
Rights of existing and subsequent creditors
Existing and subsequent creditors have equal rights as against partnership property and separate
property of the previously existing members of the partnership while only subsequent creditors
have rights against the separate estate of the newly admitted partner. Where business is
continued – Where there is one continuous business, all the creditors of the partnership,
irrespective of the times when they became creditors and the exact combinations of persons
owning the business should have equal rights in property employed in the business.
Where incoming partner has assumed obligation of retiring partner – If an incoming partner has
assumed the obligation of the retiring partner as one of the terms of the contract by which he
was admitted into the firm, he is liable directly to the old partnership creditors if the assumption
was made primarily to benefit the firm creditors (stipulation pour autrui).
Reason for rule making the new partner liable – New partner partakes also of the benefits of the
partnership property and an established business. He has every means of obtaining full
knowledge of the debts of the partnership and protecting himself because he may insist on the
liquidation or settlement of existing partnership debts. On the other hand, these means are not
afforded the creditor.
Liability of outgoing partner / incoming partner
Contract made before retirement or withdrawal – Where a partner gives notice of his retirement
or withdrawal from the partnership, he is freed from any liability on contracts entered into
thereafter, but his liability on existing incomplete contracts continues. Thus, he is liable for goods
sold and delivered after his retirement or withdrawal and notice thereof, if the same was
pursuant to a contract made before such retirement or withdrawal.
Performance after admission of new partner – In the case of an incoming partner, he is not
personally liable for the existing partnership obligations unless there is a stipulation to the contrary.
But he is liable for goods delivered to the partnership after his admission to it, where the goods so
delivered are in the performance of a contract made before his admission. The result is that both
the retiring and the incoming persons are liable for the debt created by delivery of such goods.
Art. 1827. The creditors of the partnership shall be preferred to those of each partner as regards
the partnership property. Without prejudice to this right, the private creditors of each partner may
ask the attachment and public sale of the share of the latter in the partnership assets.
Preference of partnership creditors in partnership property
With respect to partnership assets, the partnership creditors are entitled to priority of payment.
The rule applies only in the event of the disposition of partnership property among its creditors to
pay partnership debts. The partners may deal with partnership property in the usual course of
business as they see fit.
Remedy of private creditors of a partner
Without prejudice to the right of preference of partnership creditors, the, the creditors of each
partner may ask for the attachment and public sale of the share of the latter in the partnership
assets. Such share really belongs to the partner. The purchaser at the public sale does not
become a partner.
CHAPTER 3. DISSOLUTION AND WINDING UP
Sources of provisions: Uniform Partnership Act
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.
EMPHASIZE: EFFECTS.
Effects of change in membership of a partnership
1.) Dissolution of existing partnership and formation of a new one – Any change in the
membership of a partnership produces technically an immediate dissolution of the
existing partnership relation, and the formation of a new one, although common
business usage speaks of the admission of a partner to a firm and regards the firm as
subsisting so long as the course of its business is not materially interrupted.
2.) Transformation of all partners into incoming partners – All persons forming the new
partnership upon admission of a new person are technically “incoming partners” even
though the same business had theretofore been conducted by the others through the
medium of partnership.
3.) Continuance by remaining partners of partnership as before – The change in the relation
of the partners will dissolve the partnership but will not disturb the continuance by the
remaining partners or by the existing and new partners of the business as before.
Dissolution, winding up, and termination defined
Dissolution: The change in the relation of the partners caused by any partner ceasing to be
associated in the carrying on of the business. It is that point in time when the partners cease to
carry on the business together. It represents the demise of a partnership.
Winding up: The process of settling the business or partnership affairs after dissolution.
Termination: That point in time when all partnership affairs are completely wound up and finally
settled. It signifies the end of the partnership life.
Art. 1829. On dissolution the partnership is not terminated, but continues until the winding up of
partnership affairs is completed.
EMPHASIZE!
Effects of dissolution
1.) Partnership not terminated – Dissolution does not automatically result in the termination of
the legal personality of the partnership, nor the relations of the partners among
themselves who remain as co-partners until the partnership is terminated.
2.) Partnership continues for a limited purpose – After dissolution, a partnership is considered
as maintaining a limited existence for the purpose of making good all outstanding
engagements, of taking and settling all accounts, and collecting all the property,
means and assets of the partnership existing at the time of its dissolution for the benefit
of all interested.
3.) Transaction of new business prohibited – Upon dissolution, no new partnership business
should be undertaken, but affairs should be liquidated and distribution made to those
entitled to the partners’ interest.
It is only after winding up is accomplished that the existence of the partnership is terminated.
Thus, dissolution refers to the change in partnership relation and not the actual cessation of the
partnership business. It is not necessarily followed by a winding up of partnership affairs.
Dissolution of a partnership must be distinguished from a mere suspension in the conduct of its
business or operation.
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 article, 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
out on or for the members to carry it on in partnership;
4.) When a specific thing, a partner had promised to contribute to the partnership, perishes
before the delivery; in any case by the loss of the thing, when the partner who
contributed it having reserved the 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.
EMPHASIZE!
Causes of dissolution
Statutory enumeration exclusive – Articles 1830 and 1831 provide for the causes of dissolution.
Other causes are provided in Article 1840.
Under Article 1830, extrajudicial dissolution may be caused without violation of the agreement
between the partners (No. 1) or in contravention of said agreement (No. 2). It may be voluntary
when caused by the will of one or more or all of the partners (Nos. 1 and 2) or involuntary when
brought about independently of the will of the partners or by operation of law (Nos. 3, 4, 5, 6, 7
and 8).
The voluntary dissolution of partnership may be effected extrajudicially (Nos. 1 to 7) or judicially,
that is, by decree of court. (No. 8, in relation to Art. 1831.) It will be observed that the causes
provided in Article 1830 result in the automatic dissolution of the partnership.
The statutory enumeration of the causes of dissolution precludes dissolution for any other cause.
Effect of sale or assignment by one partner of his entire interest in the partnership to a third person
– It does not ipso facto bring about the dissolution of the partnership. That it produces dissolution
may be inferred, however, from the definition of dissolution under Article 1828. But the dissolution
created in such case is only technical, and not actual, i.e., only in the sense that his connection
with the partnership is terminated.
In practice, the SEC accepts for registration amended articles of partnership together with the
deed of sale of the interest of the withdrawing partner.
Dissolution effected without violation of partnership agreement
There are 4 ways by which a partnership may be dissolved without violation of the partnership
agreement:
1.) Termination of the definite term or particular undertaking – After the expiration of the term
of particular undertaking, the partnership is automatically dissolved. If after said
expiration, they continue w/o making a new agreement, a partnership at will is
created.
2.) By the express will of any partner – A partnership at will may be dissolved at any time by
any partner w/o the consent of his co-partners w/o breach of contract, provided, the
said partner acts in good faith. If there is bad faith, the dissolution is wrongful and the
dissolving partner will be liable for damages.
3.) By the express will of all the partners – No particular form of agreement is necessary to
dissolve a partnership by consent. Such
dissolution may be accomplished either by an express agreement or by words and acts
implying an intention to dissolve. The agreement to dissolve before the termination of
term/particular undertaking must be unanimous. But those who have assigned their
interests or have suffered them to be charged for their separate debts, do not get to
vote.
4.) By expulsion of any partner – The expulsion must be made in good faith, and strictly in
accordance with the power conferred by the agreement between the partners. The
partner expelled in bad faith can claim damages.
Dissolution effected in contravention of partnership agreement
Dissolution may be for any cause or reason – Any partner may cause the dissolution of the
partnership at any time w/o consent of his co-partners for any reason which he deems sufficient
by expressly withdrawing therefrom even though the partnership was entered into for a definite
term or particular undertaking. Dissolution of such partnership is, however, a contravention of the
agreement.
The legal effects of this dissolution are liad down in article 1837, par. 2, Nos. 1, 2 and 3.
Power of dissolution always exists – There is no such thing as an indissoluble partnership in the
sense that there is always the power of dissolution. The doctrine of delectus personae allows the
partners to have the power, although not necessarily the right, to dissolve the partnership. An
unjustified dissolution by a partner can subject him to a possible action for damages.
Business becomes unlawful
Dissolution may be caused involuntarily when a supervening event makes the business itself of
the partnership unlawful or makes it unlawful for the partners to carry it on together. A partnership
must have a lawful object or purpose.
Loss of specific thing
The provision refers only to specific things. When the thing to be contributed is not specific,
Articles 1786 (par. 1) and 1788 shall govern.
Loss before delivery – Partnership is dissolved because there is no contribution inasmuch as the
thing to be contributed cannot be substituted with another. There is here a failure of a partner to
fulfill his part of the obligation.
Loss after delivery – Partnership not dissolved but it assumes the loss of the thing having acquired
ownership thereof. The partners may contribute additional capital to save the venture.
Loss where only the use or enjoyment contributed – Loss before or after delivery dissolves the
partnership because in either case, the partner cannot fulfill his undertaking to make available
the use of the specific thing contributed. Here, the contributing partner bears the loss since he
retains ownership and, therefore, he is considered in default with respect to his contribution.
Upon dissolution, the partners may demand for an accounting and liquidation.
The mere failure by a partner to contribute his share of capital does not prevent the existence of
a firm. Such failure may be waived by the others.
Death of any partner
The deceased partner ceases to be associated in the carrying on of the business; hence, the
ipso facto dissolution of the partnership by his death by operation of law. The surviving partners
have no authority to continue the business except as provided in Article 1833.
Status of partnership – Subsequent legal status of partnership is that of a partnership in liquidation,
and the only rights inherited by the heirs are those resulting from said liquidation. Before
liquidation is made, it is impossible to determine the share of the deceased partner.
Liquidation of its affairs – The liquidation is entrusted to the surviving partners, or to liquidators
appointed by them and not the administrator or executor of the deceased partner.
Continuation of business without liquidation – A clause in the articles of partnership providing for
the continuance of the firm notwithstanding the death of one of the partners is legal.
By common agreement, the surviving partners and the heirs of the deceased may decide to
continue the partnership. But they become liable to the old creditors of the firm.
Insolvency of any partner or of partnership
The insolvency of the partner or of the partnership must be adjudged by a court.
The insolvency of a partner subjects his interest in the partnership to the right of his creditors and
makes it impossible for him to satisfy with his property partnership obligations to its creditors in the
event that partnership assets have been exhausted. Thus, by his insolvency, its credit is impaired.
An insolvent partner has no authority to act for the partnership not the other partners to act for
him.
The insolvency of the partnership renders its property in the hands of the partners liable for the
satisfaction of partnership obligations resulting in their inability to continue the business, which
practically amounts to a dissolution. But the reconveyance by the assignee of the properties of
the partnership pursuant to an order of the court after the termination of the insolvency
proceedings involving the partnership has the effect of restoring the partnership to its status quo.
Civil interdiction of any partner
A partnership requires the capacity of the partners. A person under civil interdiction cannot
validly give consent, as his capacity to act is limited thereby.
Civil interdiction deprives the offender during the time of his sentence of the right to manage his
property and dispose of such property by any act or anyconveyance inter vivos. One who is w/o
capacity to manage his own property should not be allowed to manage partnership property.
Right to expel a partner
In the absence of an express agreement to that effect, there exists no right or power of any
member, or even a majority of the members, to expel all other members of the firm at will. Nor
can they at will forfeit the share or interest of a member and compel him to quit the firm, even
paying what is due him.
Partner guilty of extreme and gross faults – Mere derelictions do not ipso facto forfeit his right to
the common property or assets of the partnership. There may be, however, extreme and gross
faults which would work a forfeiture, especially where there was an extreme emergency for him
to perform his duty, and to be prompt and faithful.
Industrial partners, engaging in business for himself – The law authorizes the capitalist partners to
exclude an industrial partner who engages in business for himself w/o express permission of the
partnership.
Power expressly given by agreement – A power of expulsion may be expressly given by
agreement. But the power is not validly exercised if it is shown to have been exercised unfairly
and w/o regard to the general interest of the partnership.
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 partner’s interest under Article 1813 or 1814:
1.) After the 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.
EMPHASIZE!
Judicial determination as to dissolutionEvents which make it impossible to carry on the business
as intended may have such serious effect that the partnership ought to be dissolved by decree
of the court. Such events as unlawfulness, death, or insolvency of a partner are certain and
unequivocal. Their occurrence and effect is not a matter of dispute or doubt.
On the other hand, the facts may be so far open to dispute as to make a necessary judicial
determination as to dissolution rather than allow them to be the occasion for automatic
dissolution by operation of law. Among the facts or acts which will warrant a dissolution by
st
judicial decree are those enumerated in the 1 paragraph of article 1831.
Grounds for dissolution by decree of court
Dissolution of a partnership may be decreed judicially on application, either (1) by a partner in
the cases mentioned in paragraph 1, Nos. 1-6; or (2) by the purchaser or assignee of a partner’s
interest under paragraph 2, Nos. 1 and 2.
On application by a partner:
Insanity – The partner may have been previously declared insane in a judicial proceeding;
otherwise, the fact of his being of unsound mind must be duly proved.
Incapacity – This refers to incapacity other than insanity. The incapacity must be lasting from
which the prospect of recovery is remote. If the disability is merely temporary, there is no fit
ground to decree a dissolution.
Misconduct and persistent breach of partnership agreement – like incapacity, conduct
prejudicial to the carrying on of the business and persistent breach of the partnership agreement
are grounds for judicial dissolution, for they defeat and materially affect and obstruct the
purpose of the partnership.
Again, temporary grievances, etc., will not suffice. But courts can order dissolution over petty
arguments when these are continuous and to such an extent that all confidence and
cooperation is gone.
Business can be carried on only at a loss – Since the purpose of the partnership is the carrying of
a business for profit, it may be dissolved by decree of court when it becomes apparent that it is
unprofitable with no reasonable prospects of success.
A court is authorized to decree a dissolution notwithstanding that the partnership has been
making profit where it appears at the time of the application that the business can only be
carried on at a loss.
Other circumstances – Examples of circumstances which render a dissolution equitable are
abandonment of the business, fraud in the management of the business, refusal w/o justifiable
cause to render accounting of partnership affairs, etc.
On application by a purchaser of a partner’s interest – In either of the two cases mentioned in the
last paragraph, a purchaser of a partner’s interest under Article 1813 or 1814 may apply for
judicial dissolution of a partnership.
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 partners,
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 or a partner, in
cases where Article 1833 so requires;
2.) With respect to persons not partners, as declared in Article 1834.
Effect of dissolution on authority of partner
General rule – Upon dissolution, the partnership ceases to be an on-going concern and the
partner’s power of representation is confined only to acts incident to winding up or completing
transactions begun but not then finished.
The event of dissolution terminates the actual authority of a partner to undertake new business
for the partnership.
Qualifications to the rule:
Insofar as the partners themselves are concerned, the authority of any partner to bind the
partnership by a new contract is immediately terminated when the dissolution is not by the act,
insolvency, or death of a partner. When the dissolution is by such act, insolvency, or death, the
termination of authority depends upon whether or not the partner had knowledge or notice of
the dissolution as provided in Article 1833.
With respect to third persons, the partnership is generally bound by the new contract although
the authority of the acting partner as it effects his co-partners is already deemed terminated.
However, the innocent partners may recover from the acting partner.
Art. 1833. Where the dissolution is caused by the act, death or insolvency 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:
1.) The dissolution being the act of any partner, the partner acting for the partnership had
knowledge of the dissolution; or
2.) The dissolution being by the death or insolvency of a partner, the partner acting for the
partnership had knowledge or notice of the death or insolvency.
NEVER MIND THIS!
Right of partner to contribution from co-partners
The above article speaks of dissolution caused by act, insolvency, or death of a partner. Where a
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partner enters into a new contract with a 3 person after dissolution, partners generally bound.
Authority of partners inter se to act for the partnership
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The authority of a partner as it affects his co-partners (not 3 persons) is deemed terminated
except in Nos. 1 and 2 of 1833.
Knowledge or notice of cause of dissolution
Dissolution by death or insolvency – When partner dead or bankrupt and other partner did not
know it when he entered into transaction, he may call on other partners to contribute.
Dissolution by court decree or resulting from unlawfulness – No problem exists in these cases. If by
court decree, all partners have actual notice of dissolution. If due to unlawfulness, general rules
governing actions arising out of illegal transactions apply.
When a partner has knowledge or notice of a fact
Uniform Partnership Act:
Knowledge: Not only actual but also knowledge of such other facts as in the circumstances show
bad faith.
Notice: When the person who claims the benefit of the notice:
1.) States the fact to such person; or
2.) Delivers through the mail or by other means of communication, a written statement of
the fact or to a proper person at his place of business or residence.
Art. 1834. After dissolution, a partner can bind the partnership except as provided in the third
paragraph of this article:
1.) By any act appropriate for winding up partnership affairs or completing transactions
unfinished at dissolution; or
2.) By any transaction which would bind the partnership if dissolution had not taken place,
provided the other party to the transaction:
a.) Had extended credit to the partnership prior to dissolution and had no
knowledge or notice of the dissolution; or
b.) Though he had not so extended credit, had nevertheless known of the
partnership prior to dissolution, and, having no knowledge or notice of
dissolution, the fact of dissolution had not been advertised in a newspaper
of general circulation in the place (or in each place if more than one) at
which the partnership business was regularly carried on.
The liability of a partner under the first paragraph, No. 2, shall be satisfied out of partnership assets
alone when such partner had been prior to dissolution:
1.) Unknown as a partner to the person with whom the contract is made; and
2.) So far unknown and inactive in partnership affairs that the business reputation of the
partnership could not be said to have been in any degree due to his connection
with it.
The partnership is in no case bound by any act of a partner after dissolution:
1.) Where the partnership is dissolved because it is unlawful to carry on the business, unless
the act is appropriate for winding up partnership affairs; or
2.) Where the partner has become insolvent; or
3.) Where the partner has no authority to wind up partnership affairs, except by a transaction
with one who –
a.) Had extended credit to the partnership prior to dissolution and had no
knowledge or notice of his want of authority; or
b.) Had not extended credit to the partnership prior to dissolution, and, having no
knowledge or notice of his want of authority, the fact of his want of authority
has not been advertised in the manner provided for advertising the fact of
dissolution in the first paragraph, No. 2.
Nothing in this article shall effect the liability under Article 1825 of any person who after
dissolution represents himself or consents to another representing him as a partner in a
partnership engaged in carrying in business.
NOT NECESSARILY CODAL BUT COMMENTARY IMPT.
Power of partners to bind dissolved partnership to third persons
Article 1834 enumerates the cases when a partner continues to bind the partnership even after
dissolution (par. 1, Nos. 1 and 2) and the case when he cannot bind the partnership after
dissolution (par. 3, Nos. 1, 2 and 3).
Where there is no notice to third persons of dissolution – Upon dissolution of the partnership, as
between themselves, the power of one partner to act and bind the others is effectively
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terminated. But the authority of a partner may apparently continue as regards 3 persons on the
assumption that the partnership is still existing. Since a partnership once established is, in the
absence of anything to indicate its termination, presumed to exist, the law, for the protection of
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innocent 3 persons, imposes upon partners the duty of giving notice of the dissolution of the
partnership.
Where there is actual or constructive knowledge by third persons of dissolution – The measure of
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the right of 3 persons who continue to deal with a dissolved partnership depends upon the
questionof whether they knew or should have known of the fact of dissolution. If they did, the
validity of their transactions is governed by the question whether those transactions were
necessary to liquidate the partnership affairs.
Notice of dissolution to creditors
As to persons who extended credit to partnership prior to dissolution – Must have knowledge or
notice of the dissolution to relieve partnership from liability.
As to persons who had not extended credit prior to dissolution but had known of partnership’s
existence – Fact that dissolution had been published in the newspaper sufficient even if they did
not actually read the advertisement.
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Where acting partner has no authority to wind up partnership affairs – under the 3 paragraph,
notice of dissolution is unnecessary except in case No. 3, where the partner has no authority to
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wind up partnership affairs. 3 persons dealing with the partner w/o such authority are protected
under the same circumstances mentioned in paragraph 1, No. 2 (a) and (b).
Where acting partner has become insolvent – Innocent partner (did not know of other partner’s
insolvency) is protected in his continued right to make binding partnership agreements, but no
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similar protection is extended to a 3 person who innocently contracts with an insolvent partner
because it is incumbent upon him to know the status of the insolvent partner.
Where dissolution caused by death of a partner – Death is not considered to be notice per se
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whether as to surviving partner or as to 3 persons.
Character of notice required
The character of notice required to relieve a retiring partner or the representatives of a
deceased partner from subsequent liability on partnership obligations varies in accordance with
the class of persons required to be notified.
As to prior dealers – Notice must be actual. mere mailing of a letter is insufficient if notice
never received. Furthermore, there is no duty on the part of the prior dealer to inquire into the
question of retirement. That the retirement was mentioned in a newspaper is insufficient.
A prior or former dealer is one who has extended credit on the faith of the partnership. Mere
dealing with the firm on a cash basis does not constitute one as a prior dealer.
As to all others – Actual notification not necessary. Advertisement in local newspaper enough. It
should be noted, however, that the requirement of newspaper notice appears to exist only
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where the 3 party knew of the partnership prior to dissolution. If not, he is entitled to no notice
whatsoever.
Dormant partner need not give noticeSince dormant partner never known or held out to be a
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partner, 3 persons, not having dealt with the partnership in reliance upon the membership of the
dormant partner, are not entitled to notice of his withdrawal.
Partnership by estoppel after dissolution
Article 1834 (last par.) touches upon the subject of partnership be estoppel (Art. 1825), since a
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partnership is held to exist as to 3 persons though it does not exist as a going concern so far as
the partners themselves are concerned. The situation differs from a partnership by estoppel,
however, in that a partnership did once exist and liability is based on its continuance as a matter
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of law as far as 3 persons are concerned. A partnership by estoppel involves a holding out by
parties as partners when, in fact, they are not partners.
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.
Effect of dissolution on partner’s existing liability
The dissolution of a partnership does not of itself discharge the existing liability of a partner.
A partner may be relieved from all existing liabilities upon dissolution only by an agreement to
that effect between himself, the partnership creditor, and the other partners. The consent,
however, of the creditor and the other partners to the novation may be implied from their
conduct.
Liability of estate of deceased partner
In accordance with Article 1816, the individual property of a deceased partner shall be liable for
all obligations of the partnership incurred while he was a partner. Note that the individual
creditors of the deceased partner are to be preferred over partnership creditors with respect to
the separate property of said deceased partner.
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. Manner of winding up
The manner of winding up of the dissolved partnership may be done either:
1.) Judicially – Under the control and direction of the proper court upon cause shown by
any partner, his legal representative, or his assignee.
2.) Extrajudicially – By the partners themselves w/o intervention of the court.
Nature of action for liquidation
An action for the liquidation of a partnership is a personal one; hence, it may be brought in the
place of residence of either the plaintiff or the defendant.
Persons authorized to wind up
1.) The partners designated by agreement;
2.) In the absence of such agreement, all the partners who have not wrongfully dissolved the
partnership; or
3.) The legal representative (executor or administrator) of the last surviving partner (when all
the partners are already dead), not insolvent.
4.) Court-appointed receiver.
Survivor’s right and duty to liquidate
When a member of a partnership dies, the duty of liquidating its affairs devolves upon the
surviving member(s) of the firm, not upon the legal representative of the deceased partner. The
latter has no right to interfere so long as the surviving partner proceeds in good faith.

Powers of liquidating partner
1.) Make new contracts – For the purpose of winding up the partnership, a liquidating
partner is sole agent of the partnership, but merely for that one specific purpose. He
cannot make new contracts w/o express authority.
2.) Raise money to pay partnership debts – For the purpose of winding up the concern,
however, the liquidating partner may bind the partnership by borrowing money to
meet its accruing liabilities, and may sell its real estate to raise money to pay its debts.
3.) Incur obligations to complete existing contracts or preserve partnership assets – A
liquidating partner has power to incur obligations necessary to the completion of
existing contracts, and to incur debts or other obligations necessary for the reasonable
preservation of partnership assets or in procuring a favorable market for their disposal.
4.) Incur expenses necessary in the conduct of litigation – He has power to employ an
attorney when necessary for winding up of affairs.
Art. 1837. When dissolution is caused in any way, except in contravention of the partnership
agreement, each partner, as against his co-partners and all persons claiming through them
inrespect of their interests in the partnership, unless otherwise agreed, may have the partnership
property applied to discharge its liabilities, and the surplus applied to pay in cash the net amount
owing to the respective partners. But if dissolution is caused by expulsion of a partner, bona fide
under the partnership agreement and if the expelled partner is discharged from all partnership
liabilities, either by payment or agreement under the second paragraph of Article 1835, he shall
receive in cash only the net amount due him from the partnership.
When dissolution is caused in contravention of the partnership agreement the rights of the
partners shall be as follows:
1.) Each partner who has not caused dissolution wrongfully shall have:
a.) All the rights specified in the first paragraph of this article, and
b.) The right, as against each partner who has caused the dissolution wrongfully,
to damages for breach of the agreement.
2.) The partners who have not caused the dissolution wrongfully, if they all desire to continue
the business in the same name either by themselves or jointly with others, may do
so, during the agreed term for the partnership and for that purpose may possess
the partnership property, provided they secure the payment by bond approved by
the court, or pay to any partner who has caused the dissolution wrongfully, the
value of his interest in the partnership at the dissolution, loss any damages
recoverable under the second paragraph, No. 1 (b) of this article, and in like
manner indemnify him against all present or future partnership liabilities.
3.) A partner who has caused the dissolution wrongfully shall have:
a.) If the business is not continued under the provisions of the second paragraph,
No. 2, all the rights of a partner under the first paragraph, subject to liability
for damages in the second paragraph, No. 1(b), of this article.
b.) If the business is continued under the second paragraph, No. 2, of this article,
the right as against his copartners and all claiming through them in respect
of their interests in the partnership, to have the value of his interest in the
partnership, less any damage caused to his co-partners by the dissolution,
ascertained and paid to him in cash, or the payment secured by a bond
approved by the court, and to be released from all existing liabilities
of the partnership; but in ascertaining the value of the partner’s interest the value
of the goodwill of the business shall not be considered.
DEINS DA DAW ‘TO!
Right of partner to application of partnership property on dissolution
The objectives of article 1837 are, in the main, to provide for the payment of the partner who
leaves the firm, and to indemnify him against existing or possible future liability. A partner’s lien is
created.
Rights where dissolution not in contravention of agreement
1.) To have partnership property applied to discharge the liabilities of the partnership; and
2.) To have the surplus, if any, applied to pay in cash the net amount owing to the
respective partners.
Rights where dissolution in contravention of agreement
Rights of partner who has not caused the dissolution wrongfully:
1.) To have partnership property applied for the payment of its liabilities and to receive in
cash his share of the surplus;
2.) To be indemnified for damages caused by the partner guilty of wrongful dissolution;
3.) To continue the business in the same name during the agreed term of the partnership,
by themselves or jointly with others; and
4.) To possess partnership property should they decide to continue the business.
Rights of partner who has wrongfully caused the dissolution:
1.) If business not continued by the other partners: to have the partnership property applied
to discharge its liabilities and to receive in cash his share of the surplus less damages
caused by his wrongful dissolution.
2.) If the business is continued:
a.) To have the value of his interest in the partnership at the time of the
dissolution, less any damage caused by the dissolution to his co-partners,
ascertained and paid in cash or secured by bond approved by the court;
and
b.) To be released from all existing and future liabilities of the partnership.
Goodwill of a business: The advantage which it has from its establishment or from the patronage
of its customers, over and above the mere value of its property and capital.
Goodwill as part of partnership assets – Good will of partnership, if of money value, is usually
considered part of the property and assets of the firm, in the absence of a contract to the
contrary.
Firm name as part of goodwill – The name of a firm is an important part of the good will and its
use may be protected accordingly.
Existence of a saleable goodwill – The goodwill of a business is a proper subject of sale. However,
a saleable goodwill can exist only in a commercial partnership (not in a professional one).
Art. 1838. Where a partnership contract is rescinded on the ground of the fraud or
misrepresentation of one of the parties thereto, the party entitled to rescind is, without prejudice
to any other right, entitled:
1.) To a lien on, or right of retention of, the surplus of the partnership property after satisfying
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the partnership liabilities to 3 persons for any sum of money paid by him for the
purchase of an interest in the partnership and for any capital or advances contributed
by him;
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2.) To stand, after all liabilities to 3 persons have been satisfied, in the place of the creditors
of the partnership for any payments made by him in respect of the partnership
liabilities; and
3.) To be indemnified by the person guilty of fraud or making the representation against all
debts and liabilities of the partnership.
DEINS NA DIN ‘TO!
Right of partner to rescind contract of partnership
If one is induced by fraud or misrepresentation to become a partner, the contract is voidable or
annullable.
If the contract is annulled, the injured party is entitled to restitution. Here, the fraud or
misrepresentation vitiates consent. However, until the partnership contract is annulled by a
proper action in court, the partnership relations exist and the defrauded partner is liable for all
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obligations to 3 persons.
Rights of injured partner where partnership contract rescinded
1.) Right of lien on, or retention of, the surplus of partnership property after satisfying
partnership liabilities for any sum of money paid or contributed by him;
2.) Right to subrogation in place of partnership creditors after payment of partnership
liabilities; and
3.) Right of indemnification by the guilty partner against all debts and liabilities of the
partnership.
Art. 1839. In settling accounts between the partners after dissolution, the following rules shall be
observed, subject to any agreement to the contrary:
1.) The assets of the partnership are:
 a.) The partnership property,
b.) The contributions of the partners necessary for the payment of all the liabilities
specified in No. 2.
2.) The liabilities of the partnership shall rank in order of payment, as follows:
a.) Those owing to creditors other than partners,
b.) Those owing to partners other than for capital and profits,
c.) Those owing to partners in respect of capital,
d.) Those owing to partners in respect of profits.
3.) The assets shall be applied in the order of their declaration in No. 1 of this article to the
satisfaction of the liabilities.
4.) The partners shall contribute, as provided by Article 1797, the amount necessary to satisfy
the liabilities.
5.) An assignee for the benefit of creditors or any person appointed by the court shall have
the right to enforce the contributions specified in the preceding number.
6.) Any partner or his legal representative shall have the right to enforce the contributions
specified in No. 4, to the extent of the amount which he has paid in excess of his share
of the liability.
7.) The individual property of a deceased partner shall be liable for the contributions
specified in No. 4.
8.) When partnership property and the individual properties of the partners are in possession
of a court for distribution, partnership creditors shall have priority on partnership
property and separate creditors on individual property, saving the rights of lien or
secured creditors.
9.) Where a partner has become insolvent or his estate is insolvent, the claims against his
separate property shall rank in the following order:
a.) Those owing to separate creditors;
b.) Those owing to partnership creditors;
c.) Those owing to partners by way of contribution.
KNOW THE RULES ON SETTLING ACCOUNTS. “It’s long but it is simple”
Liquidation and distribution of assets of dissolved partnership
The process of winding up, where the business of the dissolved partnership is not continued,
consists in reducing the property to cash and distributing the proceeds. The property must be
liquidated and distributed. Partners severally have the implied authority to sell partnership
property and to collect obligations due to the partnership. These powers may be delegated to
one or more of their number as liquidating partner or partners.
The law, however, does not require a partnership to convert all its assets into cash before making
a distribution to the partners. It is within the power of the court to order a distribution of its assets in
cash, property, or a combination of both.
Property which may be made available for distribution includes, in addition to the partnership
property, contributions which may be collected from the partners so far as may be necessary for
the payment of partnership obligations to creditors and to partners.
A partner has a right to have debts owing to the partnership from his co-partners deducted from
their respective shares. This right is called “equitable lien” or “quasi lien.” It exists only when the
affairs of the partnership are rounded up and the shares of the partners are computed after
dissolution.
Rules in settling accounts between partners after dissolution
Article 1839 sets forth a priority system for the distribution of partnership property (see Art. 1810)
and individual property when a partnership is dissolved.
The following rules are subject to variation by agreement of the partners.
Assets of the partnership:
1.) Partnership property (including good will); and
2.) Contributions of the partners necessary for the payment of all liabilities in accordance
with Article 1797.
Order of application of the assets:
1.) Those owing to partnership creditors;
2.) Those owing to partners other than for capital and profits such as loans given by the
partners or advances for business expenses;
3.) Those owing for the return of the capital contributed by the partners; and
4.) The share of the profits, if any, due to each partner.
Loans and advances made by partners to the partnership are not capital. Nor are they
undivided profit, unless otherwise agreed. Capital contributions are returnable only on dissolution,
but loans are payable at maturity and accumulated profits may be withdrawn at any time by
consent of a majority.
Amounts paid into the partnership in excess of a partner’s agreed capital contributions constitute
loans or advances which draw interest on which they were made. Accumulated profits do not
draw interest, as they are not regarded as loans and advances merely because they are left with
the firm.
Capital contributed by partners – Capital represents a debt of the firm to the contributing
partners. If, on dissolution, partnership assets are insufficient to repay capital investments, the
deficit is a capital loss which requires contribution like any other loss. The return of the amount
equivalent to the capital contribution of each partner shall be increased by his share of
undistributed profits or decreased by his share of net losses. A partner who furnishes no capital
but contributes merely his skill and services is not entitled to any part of the firm capital on
dissolution in the absence of agreement. He must look for his compensation to his share of the
profits remaining after repayment of the capital to the contributors.
Right of a partner where assets insufficient – If the assets enumerated in No. 1 are insufficient, the
deficit is a capital loss which requires contribution like any other loss. Any partner or his legal
representative, or any assignee for the benefit of the creditors or any person appointed by the
court, shall have the right to enforce the contributions. If any partner does not pay his share, the
others will pay but they can sue the non-paying partner for indemnification.
Liability of deceased partner’s individual property – The individual property of a deceased
partner shall be liable for his share of the contributions necessary to satisfy the liabilities of the
partnership incurred while he was a partner.
Priority to payment of partnership creditors/partners’ creditors – Doctrine of marshaling of assets:
Partnership assets to partnership creditors. Individual assets to individual creditors. Anything left
from either goes to the other.
Distribution of property of insolvent partner – If a partner is insolvent, his individual property shall
be distributed as follows:
1.) To those owing to separate creditors;
2.) To those owing to partnership creditors; and
3.) To those owing to partners by way of contribution.
Art. 1840. In the following cases creditors of the dissolved partnership are also creditors of the
person of partnership continuing the business:
1.) When any new partner is admitted into an existing partnership, or when any partner
retires and assigns (or the representative of the deceased partner assigns) his rights in
partnership property to two or more of the partners, or to one or more of the partners
and one or more third persons, if the business is continued without liquidation of the
partnership affairs;
2.) When all but one partner retire and assign (or the representative of a deceased partner
assigns) their rights in partnership property to the remaining partner, who continues the
business without liquidation of partnership affairs, either alone or with others;
3.) When any partner retires or dies and the business of the dissolved partnership is
continued as set forth in Nos. 1 and 2 of this article, with the consent of the retired
partners or the representative of the deceased partner, but without any assignment of
his right in partnership property;
4.) When all the partners or their representatives assign their rights in
partnership property to one or more third persons who promise to pay the debts and who
continue the business of the dissolved partnership;
5.) When any partner wrongfully causes a dissolution and the remaining partners continue
the business under the provisions of Article 1837, second paragraph, No. 2, either alone
or with others, and without liquidation of partnership affairs;
6.) When a partner is expelled and the remaining partners continue the business either alone
or with others without liquidation of the partnership affairs.
The liability of a third person becoming a partner in the partnership continuing the business, under
this article, to the creditors of the dissolved partnership shall be satisfied out of the partnership
property only, unless there is a stipulation to the contrary.
When the business of a partnership after dissolution is continued under any conditions set forth in
this article the creditors of the dissolved partnership, as against the separate creditors of the
retiring or deceased partner, have a prior right to any claim of the retired partner or the
representative of the deceased partner against the person or partnership continuing the business,
on account of the retired or deceased partner’s interest in the dissolved partnership or on
account of any consideration promised for such interest of for his right in partnership property.
Nothing in this article shall be held to modify any right of creditors to set aside any assignment on
the ground of fraud.
The use by the person or partnership continuing the business of the partnership name, or the
name of a deceased partner as part thereof, shall not of itself make the individual property of the
deceased partner liable for any debts contracted by such person or partnership.
NOT REALLY CODAL BUT COMMENTARY!
Dissolution of a partnership by change in membership
Causes:
1.) New partner is admitted;
2.) Partner retires;
3.) Partner dies;
4.) Partner withdraws;
5.) Partner is expelled from partnership;
6.) Other partners assign their rights to sole remaining partner;
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7.) All the partners assign their rights in partnership property to 3 persons.
Any change in membership dissolves a partnership and creates a new one.
Continuation of partnership without liquidation – A partnership dissolved by any of these
happenings need not undergo the procedure relating to dissolution and winding up of its
business affairs. The remaining partners (and/or new partners) may elect to continue the business
of the old partnership w/o interruption by simply taking over the business enterprise owned by the
preceding partner and continuing the use of the old name. The rights and obligations of the
partners as among themselves in case of such continuation are set forth in Article 1837. It is,
however, technically considered a new partnership.
Rights of creditors of dissolved partnership which is continued
This article deals with the rights of creditors when the partnership is dissolved by a change of
membership and its business is continued.
Equal rights of dissolved and new partnership creditors – The creditors of the old partnership are
also the creditors of the new partnership which continues the business of the old one w/o
liquidation of partnership affairs.
Liability of persons continuing business – Note that under par. 2, the liability of the new or
incoming partners shall be satisfied out of partnership property only unless there is a stipulation to
the contrary.
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Note that par. 1, No. 4, applies only when the 3 person continuing the business promises to pay
the debts of the partnership. Otherwise, creditors of the dissolved partnership have no claim on
the person or partnership continuing the business or its property unless the assignment can be set
aside as a fraud on creditors under par. 4.
Prior right of dissolved partnership creditors as against purchaser – When a retiring or deceased
partner has sold his interest in the partnership w/o a final settlement with creditors of the
partnership, such creditors have an equitable lien on the consideration paid to the retiring or
deceased partner by the purchaser thereof. This lien comes ahead of the claims of the separate
creditors of the retired or deceased partner.
Continuation of dissolved partnership business by another company
When corporation deemed a mere continuation of prior partnership – Where a corporation was
formed by, and consisted of, members of a partnership whose business and property was
conveyed and transferred to the corporation for the purpose of continuing business, in payment
for which corporate capital stock was issued, such corporation is presumed to have assumed
partnership debts and is prima facie liable therefor.
When obligations of company bought out considered assumed by vendee – When said
obligations are not of considerable amount or value especially when incurred in the ordinary
course, and when the business of the latter is continued. (NOT when the obligation is of
extraordinary value, and the company was bought out to eliminate competition – not to
continue business.) Exemption from liability of individual property of deceased partner
The last paragraph of Article 1840 primarily deals with the exemption from liability to creditors of a
dissolved partnership of the individual property of the deceased partner for debts contracted by
the person or partnership which continues eth business using the partnership name or name of
the deceased partner as part thereof. What the law contemplates is a hold-over situation
preparatory to formal reorganization.
It treats more of a commercial partnership with a good will to protect rather than a professional
partnership with no saleable good will.
Art. 1841. When any partner retires or dies, and the business is continued under any of the
conditions set forth in the preceding article, or in Article 1837, second paragraph, No. 2, without
any settlement of accounts as between him or his estate and the person or partnership
continuing the business, unless otherwise agreed, he or his legal representative as against such
person or partnership may have the value of his interest at the date of dissolution ascertained,
and shall receive as an ordinary creditor an amount equal to the value of his interest in the
dissolved partnership with interest, or at his option or at the option of his legal representative, in
lieu of interest, the profits attributable to the use of his right in the property of the dissolved
partnership; provided that the creditors of the dissolved partnership as against the separate
creditors, or the representative of the retired or deceased partner, shall have priority on any
claim arising under this article, as provided by Article 1840, third paragraph.
Rights of retiring, or of estate of deceased, partner when business continued
1.) To have the value of the interest of the retiring partner or deceased partner in the
partnership ascertained as of the date of dissolution (i.e. date of retirement or death);
and
2.) To receive thereafter, as an ordinary creditor, an amount equal to the value of his share
in the dissolved partnership with interest, or, at his option, in lieu of interest, the profits
attributable to the use of his right.
Art. 1842. The right to an account of his interest shall accrue to any partner, or his legal
representative as against the winding up partners or the surviving partners or the person or
partnership continuing the business, at the date of dissolution, in the absence of any agreement
to the contrary.
EMPHASIZE!
Accrual and prescription of a partner’s right to account of his interest
The right to demand an accounting of the value of his interest accrues to any partner or his legal
representative after dissolution in the absence of an agreement to the contrary.
Prescription beings to run only upon the dissolution of the partnership when the final accounting
is done. Under Articles 1806, 1807, and 1809, the right to demand an accounting exists as long as
the partnership exists.
Person liable to render an account
1.) The winding up partner;
2.) The surviving partner; or
3.) The person or partnership continuing the business.
Liquidation necessary for determination of partner’s share
Share of the profits – The profits of a business cannot be determined by taking into account the
result of one particular transaction instead of all the transactions had. Hence, the need for a
general liquidation before a member of a partnership may claim a specific sum as his share of
the profits.
When there is lack of evidence to ascertain the profits for a given period of time, the average will
be used of the time prior or subsequent thereto for which there exists evidence.
Share in the partnership – A partner’s share cannot be returned w/o first dissolving and liquidating
the partnership, for the firm’s outside creditors have preference over the assets of the enterprise
and the firm’s property cannot be diminished to their prejudice.
No specific amounts or properties may be adjudicated to the heir or legal representative of the
deceased partner w/o the liquidation being first terminated.
When liquidation not required
As a general rule, when a partnership is dissolved, a partner or his legal representative is entitled
to the payment of what may be due after a liquidation. But no liquidation is necessary when
there is already a settlement or an agreement as to what he shall receive.