DISSOLUTION, WINDING UP,

TERMINATION AND LIMITED

PARTNERSHIP

Chamcham
 DISSOLUTION

■ 1828 – change in the relation of the partners

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

■ 1828- must be distinguished from winding up

 DISSOLUTION : STRICT
AND TECHNICAL SENSE

■ Any change, caused by retirement or death

of a partner

■ Change caused by admission of new

members
 DISSOLUTION
■ The acquisition of 82% of the PP interest by
new partners coupled with the retirement or
withdrawal of the partners who had originally
owned the 82% interest was enough to
constitute a new partnership (Yu v. NLRC, 223
SCRA 75 [1993])
 EFFECT OF DISSOLUTION
■ Change in relations will dissolve the PP BUT

■ Will NOT disturb the continuance by

remaining partners or by existing new
partners of the business as before

■ PP is not terminated but continues until

winding up of PP affairs (1829)
DISSOLUTION – change in the relation of the
Partners caused by any partner ceasing to
Associated in the carrying on (1828)

WINDING UP- settling business or

partnership affairs

TERMINATION – all partnership affairs are

wound up and finally settled. END of partnership
life
 Kinds of Dissolution

■ Extra-Judicial (1830)

■ Judicial (1830#8 & 1831)

EXTRAJUDICIAL
DISSOLUTION
 Extra Judicial

■ Without violating the PP agreement

■ With violation of the PP agreement

 Extra-Judicial: Without
Violation
■ Termination of term or particular
undertaking

■ Express will of the partner who is in

good faith when no term or specific
undertaking
 Extra-Judicial: Without
Violation
■ 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 undertaking

■ Expulsion of any partner bona fide in

accordance with such power conferred by
agreement of the partners
 Extra-Judicial: With
Violation
■ A PP exists for a particular term or
undertaking

■ Before the period or undertaking, a partner,

without the consent of the other partners,
dissolves the PP for any reason
 Effects of Dissolution
with violation
■ 1837: Innocent partner’s rights

■ Have partnership property applied

for payment of its liabilities and to
receive in cash his share of the
surplus

■ To be indemnified for damages

caused by guilty partner
 Effects of Dissolution
with violation
■ 1837: Innocent partner’s rights

■ To continue the business in the

same name during the agreed
term, by themselves or with others
■ To possess partnership property if

they choose to continue the

business (1837)
 Effects of Dissolution
with violation
■ Guilty partner’s rights

■ If the business is not continued -

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 act
 Effects of Dissolution with
violation
Guilty partner’s rights

■ If the business is continued, (a) to

have the value of his interest LESS
damages caused by the dissolution;
and (b) to be released from all
existing and future liabilities of the
partnership
 Other Grounds for
Extrajudicial Dissolution
 Business becomes unlawful

■ Supervening event makes the business

unlawful

■ Example: a partner in a firm is appointed as

judge. He can no longer engage in private
practice of law. Hence, the partnership is
dissolved by his resignation
 Loss of thing to be contributed
■ Loss before delivery – borne by the partner,
dissolves the PP

■ Loss after delivery – PP is not dissolved but PP

bears the loss

■ Loss where only use is contributed – dissolves the

PP because partner cannot make good his
contribution
 Death of a partner

■ A dead partner ceases to be associated

in the carrying of the business, hence
the ipso facto dissolution

■ The status of the PP upon death is a PP

in liquidation
 Death of a partner

■ Partners can stipulate that upon

death of a partner, the PP
business shall continue (Goquiolay
v. Sycip, 108 Phil 947)
 Insolvency of a partner

■ Since the partner is insolvent, his

interest is subject to the right of
creditors

■ Insolvent partner cannot act for the PP

nor the other partners to act for him
 Civil Interdiction of a partner

■ A partnership requires the capacity of

the partners.

■ A partner under civil interdiction cannot

validly give his consent (1327) and his
capacity is limited thereby
JUDICIAL DISSOLUTION
 Who may file an application
for judicial dissolution?

■ A partner of any person acting for the

partner

■ Assignee of a partner's interest

 Application by a partner or
his representative: Grounds
(1831)

■ Partner is declared insane in any

judicial proceeding or is of
unsound mind

■ Partner becomes incapable of

performing his part of the
partnership contract
 Application by a partner or his
representative: Grounds
(1831)
■ Partner is guilty of any act which
tends to affect prejudicially the
carrying on of the business

■ Partner willfully or persistently

commits breach of the PP agreement
 Application by a partner or his
representative: Grounds
(1831)
■ Business can only be carried out
at a loss

■ Other circumstances making

dissolution equitable
 Application by assignee of
partner's interest (1831)
■ After the termination of the term or the
specified undertaking

■ At any time if the PP was a PP at will when

the interest was assigned or a charging
order was issued
Effects of dissolution
■ Partner cannot act on behalf of the PP
E X C E P T: w i n d u p o r c o m p l e t e
transactions (1834)

■ Partner who knew of dissolution or

death or insolvency of a partner
cannot hold other partners liable for
any liability created by his act (1834)
■ Partner can still bind the partnership if
■ Winding up

■ Any transaction which would bind the

partnership if there was no dissolution provided
(a) other party gave credit despite knowledge of
dissolution OR (b) other party did not give credit
but did not know of dissolution since said fact
was not advertised in a newspaper of general
circulation
■ No discharge liability of a partner
UNLESS there is an agreement to
that effect between the partner,
the partnership creditor and the
partnership continuing business
(1835)
■ If dissolution is without contravention
of the agreement, partnership property
may be used to discharge partnership
liability then apply the balance to net
amount owing the partners (1837)
■ A partnership is not terminated by the mere fact of
dissolution pending the winding up of some
incidents and obligations of the partnership. The
dissolution of the firm does not relieve its members
of liability from existing obligations. A partnership
continues even after dissolution, for the purpose of
winding up its affairs (Testate estate of Mota v.
Serre, 47 Phil 464)
■ When the business is continued after
dissolution without liquidation of
partnership affairs, the old creditors of
the dissolved partnership are also
creditors of the new partnership (Yu v.
NLRC, 224 SCRA 75)
 Tocao v. CA, 342 SCRA 20
■ The best evidence of the existence of
a partnership, which is not yet
terminated (although in the winding
up stage) are the unsold goods and
uncollected receivables. A mere falling
out or misunderstanding between the
partners does not convert the
partnership into a sham organization –
the partnership exists until dissolved
under the law.
 Tocao v. CA, 342 SCRA 20

■ Even if one partner had effected her own

withdrawal from the partnership and
considered herself as having ceased to be
associated with the partnership in the
carrying on of the business, the partnership
was not terminated thereby.
 Settling of accounts between
partners after dissolution
■ Those owing to creditors other than
partners
■ Those owing to partners other than
capital or profits
■ Those owing to partners in respect of
capital
■ Those owing to partners in respect of
profits
 LIMITED
PARTNERSHIP
 Main distinction with
General Partners
■ General Partner becomes liable with his
personal property after PP assets are
exhausted

■ Limited Partner is only liable to the extent

of his contributions
 Main distinction with
General Partners
■ A limited partner does not participate in the
control of the business

■ His name does not appear in the PP name.

If his name appears, he becomes liable as a
general partner
 Concept (1843)
■ Limited partnership is one formed by 2 or
more persons under the provisions of the
following article, having as members one
or more limited partners. The limited
partners as such shall not be bound by the
obligations of the partnership.
 How to Form a Limited
Partnership (1844)

■ The certificate or articles which states the

matters provided in 1844 must be signed
and sworn to by the partners

■ Such certificate must be filed for record in

the SEC
 Characteristics of a
Limited Partnership

■ It is formed by complying with

1844

■ 1 or more general partners control

the business & are personally liable
to the creditors (1848,1850)
 Characteristics of a
Limited Partnership

■ 1 or more limited partners contribute to the

capital and share in the profits but do not
participate in the management and are NOT
personally liable for partnership obligations
beyond the amount of their capital
contributions (1845,1848,1856)
 Characteristics of a
Limited Partnership
■ The limited partners may ask for a return of
their capital contributions under the
conditions prescribed by law (1844[h], 1857)

■ The partnership debts are paid out of a

common fund and the individual properties
of the general partners
 General PP v. Limited PP

Partners are personally Limited partners’ liability

liable for partnership i s l i m i t e d t o c a p i t a l
obligations contribution

All general partners have Limited partner has no

an = right to manage share in management

Partner may contribute P a r t n e r m a y o n l y

money, property or contribute cash or
industry property, not services
 General PP v. Limited PP
General partner is a Limited partner is not a
proper party inproper party in
proceedings by or vs proceeding by or vs the
the PP PP
Partner’s interest may L i m i t e d p a r t n e r ’ s
not be assigned so as i n t e r e s t i s f r e e l y
to make assignee a a s s i g n a b l e , w i t h
partner without other’s acquisition of rights
consent
 General PP v. Limited PP
Name may appear in G e n e r a l l y , n a m e
the firm name cannot appear

Retirement, death, No such effect since

insanity or insolvency his executor becomes
dissolves the PP a limited partner to
sell his estate
Prohibition against T h e r e i s n o s u c h
engaging in business prohibition
 Rights of a Limited Partner
■ To contribute cash or property but
NOT services (1845)

■ Have the PP books kept at the

principal place of business of the PP,
inspect and copy them at a
reasonable hour (1851)
 Rights of a Limited Partner
■ H ave o n d e m a n d t r u e a n d fu l l
information of all things affecting the
PP and a formal account of PP affairs
(1851)

■ Have dissolution and winding up by

decree of court (1851)
 Rights of a Limited Partner

■ Receive a share of the profits or other

compensation by way of income
(1856)

■ Receive return of his contribution if

partnership assets are in excess of
liabilities (1857)
 Rights of a Limited Partner

■ Be a general partner at the same

time as long as this is stated in
certificate filed with SEC (1853)

■ Loan money to and transact other

business with the PP (1854)
 Rights of a Limited Partner

■ Receive a pro rata share of the assets, unless

he is also a general creditor (1854)

■ Assign his interest in the partnership, either

to an ordinary assignee or a substituted
limited partner (1859)
 Rights of a Limited Partner
■ If he dies, his executor shall have
rights of the limited partner to
settle the estate and such power
deceased had to make his
assignee a substituted limited
partner (1861)
 Obligations of a Limited
Partner
■ Liable for loss due to false
statement in the certificate when
he knew the falsity of the
statement at the time he signed
the certificate or after he signed
but within a period possible for him
to amend or cancel the certificate
before the loss (1847)
 Obligations of a Limited
Partner

■ Liable to the same extent as a

general partner if he takes part in
the management of the business
(1848)
 Obligations of a Limited
Partner

■ To be held liable for (a) the difference

between his contribution he actually made
and that stated in the certificate, and (b)
any unpaid contribution which he agreed in
the certificate to make in the future at the
time and on the condition stated in the
certificate (1858)
 Obligations of a Limited
Partner
■ To b e h e l d a s t r u s t e e o f t h e
partnership for (a) specific property
stated in the certificate as his
contribution but not actually
contributed or wrongfully returned to
him, and (b) money or other property
wrongfully paid or conveyed to him on
account of his contribution (1858)
 Obligations of a Limited
Partner
■ Upon application to a court of
competent jurisdiction, to have his
creditor hold his interest liable for
any unsatisfied amount of the claim
(1862)
 Prohibitions on a Limited
Partner
■ GENERAL RULE: The surname of a limited
partner shall not appear in the firm name

■ EXCEPTIONS:
■ (a) it is also the surname of a general

partner;
■ (b) before the limited partner became

such the business had been carried on

under a name in which his surname
appeared (1846)
 Prohibitions on a Limited
Partner
■ He cannot hold as collateral any PP property
to secure his claim against the PP
■ He cannot receive from a general partner
any payment, conveyance, or release from
liability if the PP assets are not enough to
discharge partnership liabilities to persons
not claiming as general or limited partners
(1854)
BAR QUESTIONS ON
PARTNERSHIP
 Partners engaging in another
business (2001)
■ QUESTION: A and B formed a partnership to
run a car repair shop. A contributed capital
while B contributed his labor and industry. A
opened a coffee shop, B opened a car
accessories store. May they engage in said
businesses? Why?
REVIEW

Prohibited Acts
■ Industrial partner – cannot engage in
business for himself unless with the
consent of the PP; otherwise, capitalist
partners may exclude him from the PP
or avail of the benefits which he may
have obtained plus damages in either
case (1789)
REVIEW

Prohibited Acts

■ Capitalist partner – cannot engage in

the same business as the partnership
unless the PP consents; otherwise, he
shall bring all his earnings to the
common fund and shall personally
bear the losses (1808)
 Partners engaging in another
business (2001)

■ ANSWER: A as a capitalist partner may

engage in a business different from that of
the partnership (coffee shop) while B an
industrial partner cannot engage in any
other business (1789, 1808)
 Conveyance of whole
interest, effect (1998)
■ QUESTION: A, B and C are general
partners who contributed equal amounts to
the capital and who agreed on equal
distribution of profits per fiscal period. After
2 years, C conveys her whole interest to D
without the consent and knowledge of A and
B.
 Conveyance of whole
interest, effect (1998)

■ (a) is the partnership dissolved

■ (b) what are the rights of D if she wants to
participate in the management and the distribution
of the P360,000 profit realized after she purchased
C’s interest?
REVIEW

When whole interest in the

PP is conveyed: 1813
■ Does not by itself dissolve the PP
■ Does not entitle assignee to interfere in
management, to require information or
to inspect PP books
■ Entitles assignee to profits
■ In case of fraud in management,
assignee may avail of the usual remedies
 Conveyance of whole
interest, effect (1998)
■ ANSWER: (A) Conveyance by C
to D of her whole interest did not
dissolve the partnership absent any
agreement
 Conveyance of whole
interest, effect (1998)
■ (B) D does not have the right to interfere in
management, to require information or to
inspect PP books. It is only in case of fraud
in management, that D may avail of the
usual remedies. However, D is entitled to
the P360,000 profit.
 Conveyance of whole interest &
dissolution (1995)
■ Question: A, B & C formed a partnership
for 5 years to engage in neon advertising.
A assigned her rights to D. B&C dissolved
the partnership before the end of the term
when they learned of the assignment. D
likewise filed a petition for dissolution.
 Conveyance of whole interest
& dissolution (1995)
■ Is the dissolution done by B&C
without the consent of A nor D
valid?
■ Will the petition filed by D

prosper?
REVIEW

Extra-Judicial Dissolution
(1830)
■ Without violation of the agreement
■ Express will of 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 undertaking
 REVIEW

Judicial Dissolution
(1831)

■ On application BY or FOR a
partner, based on any of the
following grounds:
 Conveyance of whole interest
& dissolution (1995)
■ ANSWER: (a) the dissolution by B&C
without the consent of A nor D is valid under
1830. Since A has conveyed her interest,
she need not be informed of the dissolution.
D as assignee is not entitled to know since
the assignment to D did not make him a
partner.
 Conveyance of whole interest
& dissolution (1995)

■ (b) the petition filed by D will

not prosper because he is not a
partner and does not act on
behalf of any partner.
 Effect of death of a
partner (1997)
❑ Stating briefly the thesis to support
your answer, will the death of a
partner terminate the partnership?
REVIEW

Other grounds for

extrajudicial dissolution: Death
of a partner
■ A dead partner ceases to be
associated in the carrying of the
business, hence the ipso facto
dissolution

■ The status of the PP upon death is a

PP in liquidation
 Effect of death of a
partner (1997)

■ Yes, under Article 1830, paragraph 5 of

the Civil Code, the death of a partner
shall cause the extra-judicial
dissolution of the partnership.
 Effects of dissolution
(1993)
■ QUESTION: A, B & C formed a partnership for
the purpose of contracting with the government in
the construction of bridges. On June 30, 1992,
the bridge was turned over to the government.
On August 30, 1992, D a supplier of materials
sued A for collection. A moved to dismiss on the
ground that it is A,B&C that is liable. D alleged
that A,B & C is already dissolved. Will you dismiss
the complaint against B if you were the judge?
 REVIEW

General Effects of
Dissolution
■ Does not discharge liability of a
partner UNLESS there is an
agreement to that effect between
the partner, the partnership
creditor and the partnership
continuing business (1835)
 Effects of dissolution
(1993)
■ ANSWER: No, I will not dismiss the case
against A because dissolution does not
discharge the liability of a partner UNLESS
there is an agreement to that effect between
the partner, the partnership creditor and the
partnership continuing business. A is liable
to the extent of his pro rata share of 1/3 of
the amount due D.
 Persons who cannot form
partnerships (1994)

■ QUESTIONS: Can a husband and a wife

form a limited partnership to engage in real
estate business, with the wife being the
limited partner?
 Persons who cannot form
partnerships (1994)
■ Can 2 corporations organize a general
partnership under the Civil Code?

■ Can a corporation and an individual form a

general partnership?
REVIEW

Parties must have legal capacity

to contract: Disqualified parties
■ Unemancipated minors
■ Insane or demented persons
■ Deaf-mutes who do not know how to write
■ Persons who are suffering from civil interdiction
■ Incompetents who are under guardianship
■ 1782 – persons who are prohibited from
giving each other any donation or advantage
cannot enter into universal partnership
 REVIEW

Universal Partnerships

■ Spouses cannot enter into a universal

partnership but may enter into a
particular partnership. The marriage did
not dissolve the limited partnership. What the
law prohibits is for them to enter into
universal partnership since this would be a
circumvention of the prohibition against
donation (CIR v. Suter, 27 SCRA 152)
REVIEW

Parties must have legal

capacity to contract

■ Partnerships may be partners in another

partnership
■ Corporations cannot be partners but
may engage in joint ventures where
the business of the venture is in line
with the business authorized by the
charter (J.M. Tuazon v. Bolanos, 95 Phil
106)
 Persons who cannot form
partnerships (1994)

■ ANSWER: (a) Yes, husband and

wife may form a limited partnership
since spouses are only prohibited to
form universal partnerships.
 Persons who cannot form
partnerships (1994)
■ (b) No, according to jurisprudence,
a corporation is prohibited from
forming a partnership but may only
engage in joint ventures. Hence,
two corporations cannot form a
partnership.
 Persons who cannot form
partnerships (1994)
■ (c) No, according to jurisprudence, a
corporation is prohibited from forming a
partnership but may only engage in
joint ventures. Hence, a corporation
and an individual cannot form a
partnership