G.R. No. 167379 - PRIMELINK PROPERTIES & DEVT. CORP., ET AL. v. MA.

CLARITA T. LAZATIN-MAGAT, ET AL.

Thus, under Article 1837 of the New Civil Code, the rights of the parties when
dissolution is caused in contravention of the partnership agreement are 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, less 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 co-partners 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 good-will of the business shall not be considered.

And under Article 1838 of the New Civil Code, 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 the partnership liabilities to third 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;

(2) To stand, after all liabilities to third 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; andcralawlibrary
(3) To be indemnified by the person guilty of the fraud or making the representation
against all debts and liabilities of the partnership.

The accounts between the parties after dissolution have to be settled as provided in
Article 1839 of the New Civil Code:

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.

PARTNERSHIP

Partnership, nature:

Within the context of Philippine law, a "partnership" is treated as an artificial being created by operation
of law with a legal personality separate and distinct from the partners thereof.  It proceeds from the
concept that persons may be allowed to pool their resources and funds to engage in the pursuit of a
common business objective without necessarily organizing themselves into a corporation, upon which
the law imposes a much higher form of regulation, limitation and standards. Philippine partnerships
operate under the concept of unlimited liability and unless otherwise agreed upon by the partners, each
one of them acts as manager and agent of the partnership and consequently, their acts bind the
partnership.cralaw

Partnership, governing law:

Unlike corporations whose governing law is a special law - the Corporation Code of the Philippines,
partnerships in the Philippines are governed by and covered under Articles 1767 to 1867 of the Civil
Code of the Philippines [circa 1950].  These are the provisions of law which govern all aspects of
partnerships - from their creation, formation, existence, operation and management to their dissolution
and liquidation, including the obligations of the partners to one another, to the public or third persons
and to the government.

Partnership, how formed; registration requirement:

Partnerships are required to be registered with the Securities and Exchange Commission [SEC]. 
Registration is done by filing the Articles of Partnership with the SEC.  The Articles of Partnership set
forth all the terms and conditions mutually agreed by the partners thereto.

More specifically, the documents required are as follows:

[1]  Proposed Articles of Partnership;

[2]  Name Verification Slip;

[3]  Bank Certificate of Deposit;

[4]  Alien Certificate of Registration, Special Investors Resident Visa or proof of other types of visa [in
case of foreigner];

[5]  Proof of Inward Remittance [in case of non-resident aliens].

It bears noting that corporations are not allowed by law to become partners in a partnership.

Partners, liability:
As a general rule, the liability of partners in a partnership organization is unlimited in the sense that the
partnership creditors may run after them for any and all of their assets and property in payment of the
partnership debts. Should one of the partners defray all liabilities of the partnership, he is entitled to be
reimbursed by the other partners for their respective shares therein.

In the case, however, of limited partnerships, the law allows the limitation of the liability of certain
partners to the extent of the amount contributed to the partnership.

Partnership, dissolution:

Philippine law allows the dissolution of partnership for any reason, provided such dissolution does not
amount to a breach of contract or is prejudicial to third parties.  The death of a partner or the
unauthorized transfer of ownership of his share in the partnership [in case there is a limitation to this
effect] results in the dissolution thereof.  In other words, any change in the composition of the
partnership, unless so allowed, will result in the dissolution thereof.  Consequently, the remaining
partners may form a new partnership with less or more partners.

A dissolution of a partnership generally occurs when one of the partners ceases to be a partner in the
firm. Dissolution is distinct from the termination of a partnership and the "winding up" of partnership
business. Although the term dissolution implies termination, dissolution is actually the beginning of the
process that ultimately terminates a partnership. It is, in essence, a change in the relationship between
the partners. Accordingly, if a partner resigns or if a partnership expels a partner, the partnership is
considered legally dissolved. Other causes of dissolution are the BANKRUPTCY or death of a partner, an
agreement of all partners to dissolve, or an event that makes the partnership business illegal. For
instance, if a partnership operates a gambling casino and gambling subsequently becomes illegal, the
partnership will be considered legally dissolved. In addition, a partner may withdraw from the
partnership and thereby cause a dissolution. If, however, the partner withdraws in violation of a
partnership agreement, the partner may be liable for damages as a result of the untimely or
unauthorized withdrawal.

After dissolution, the remaining partners may carry on the partnership business, but the partnership is
legally a new and different partnership. A partnership agreement may provide for a partner to leave the
partnership without dissolving the partnership but only if the departing partner's interests are bought by
the continuing partnership. Nevertheless, unless the partnership agreement states otherwise,
dissolution begins the process whereby the partnership's business will ultimately be wound up and
terminated.

Read more: Partnership - Dissolution - Agreement, Business, Legally, and Ultimately - JRank

Articles https://law.jrank.org/pages/9063/Partnership-Dissolution.html#ixzz6f4zHxiuB

2.    With respect to persons not partners (art 1834) -

 
a.        Partner continues to bind partnership even after dissolution in ff. cases:

(1)   Transactions in connection to winding up partnership affairs/completing transactions unfinished

(2)      Transactions which would bind partnership if not dissolved, when the other party/obligee:

(a)    Situation 1 -

i.     Had extended credit to partnership prior to dissolution &

ii.    Had no knowledge/notice of dissolution, or

(b)    Situation 2 -

i.   Did not extend credit to partnership

ii.    Had known partnership prior to dissolution

iii.   Had no knowledge/notice of dissolution/fact of dissolution not advertised in a newspaper of general

circulation in the place where partnership is regularly carried on

b.        Partner cannot bind the partnership anymore after dissolution:

(1)  Where dissolution is due to unlawfulness to carry on with business (except: winding up of

partnership affairs)

(2)  Where partner has become insolvent

 
(3)    Where partner unauthorized to wind up partnership affairs, except by transaction with one who:

(a)  Situation 1 -

i.    Had extended credit to partnership prior to dissolution &

ii.  Had no knowledge/notice of dissolution, or

(b)  Situation 2 -

i.    Did not extend credit to partnership prior to dissolution

ii.    Had known partnership prior to dissolution

iii.   Had no knowledge/notice of dissolution/fact of dissolution not advertised in a newspaper of general

circulation in the place where partnership is regularly carried on

B. DISCHARGE OF LIABILITY–

Dissolution does not discharge existing liability of partner, except by agreement between:

(1) partner himself

(2) person/partnership continuing the business

 
(3) partnership creditors

Rights of partner where dissolution not in contravention of agreement

1.    Apply partnership property to discharge liabilities of partnership

2.    Apply surplus, if any to pay in cash the net amount owed to partners

Rights of partner where dissolution in contravention of agreement

1.        Partner who did not cause dissolution wrongfully:

a.    Apply partnership property to discharge liabilities of partnership

b.    Apply surplus, if any to pay in cash the net amount owed to partners

c.    Indemnity for damages caused by partner guilty of wrongful dissolution

d.    Continue business in same name during agreed term

e.    Posses partnership property if business is continued

 
2.        Partner who wrongly caused dissolution:

a.    If business not continued by others - apply partnership property to discharge liabilities of partnership
& receive in cash his share of surplus less damages caused by his wrongful dissolution

b.    If business continued by others - have the value of his interest at time of dissolution ascertained and
paid in cash/secured by bond & be released from all existing/future partnership liabilities

Rights of injured partner where partnership contract is rescinded on ground of fraud/misrepresentation

by 1 party:

1.    Right to lien on surplus of partnership property after satisfying partnership liabilities

2.    Right to subrogation in place of creditors after payment of partnership liabilities

3.    Right of indemnification by guilty partner against all partnership debts & liabilities

C. SETTLEMENT OF ACCOUNTS BETWEEN PARTNERS

Assets of the partnership:

1.    Partnership property (including goodwill)

2.    Contributions of the partners

 

Order of Application of Assets:

1.    Partnership creditors

2.    Partners as creditors

3.    Partners as investors - return of capital contribution

4.    Partners as investors - share of profits if any

D. WHEN BUSINESS OF DISSOLVED PARTNERSHIP IS CONTINUED:

1.    Creditors of old partnership are also creditors of the new partnership which continues the business
of the old one w/o liquidation of the partnership affairs

2.    Creditors have an equitable lien on the consideration paid to the retiring /deceased partner by the
purchaser when retiring/deceased partner sold his interest w/o final settlement with creditors

3.        Rights if retiring/estate of deceased partner:

a.    To have the value of his interest ascertained as of the date of dissolution

 
b.    To receive as ordinary creditor the value of his share in the dissolved partnership with interest or
profits attributable to use of his right, at his option

Right to Account - may be exercised by:

1.    Winding up partner

2.    Surviving partner

3.    Person/partnership continuing the business

Manner of Winding Up

1.    Judicially

2.    Extrajudicially

Persons Authorized to Wind Up

1.    Partners designated by the agreement

2.    In absence of agreement, all partners who have not wrongfully dissolved the partnership
 

3.    Legal representative of last surviving partner

LIMITED PARTNERSHIP  

CHARACTERISTICS  

1.    Formed by compliance with statutory requirements

2.    One or more general partners control the business

3.    One or more general partners contribute to the capital and share in the profits but do not
participate in the management of the business and are not personally liable for partnership obligations
beyond their capital contributions

4.    May ask for the return of their capital contributions under conditions prescribed by law

5.    Partnership debts are paid out of common fund and the individual properties of general partners

DIFFERENCES BETWEEN GENERAL AND LIMiTED PARTNER/PARTNERSHIP

GENERAL

LIMITED

Personally liable for partnership obligations

Liability extends only to his capital contributions

When manner of mgt. not agreed upon, all gen partners have an equal right in the mgt. of the business

No participation in management

Contribute cash, property or industry

Contribute cash or property only, not industry

Proper party to proceedings by/against partnership

Not proper party to proceedings by/against partnership

Interest not assignable w/o consent of other partners

Interest is freely assignable

Name may appear in firm name

The firm name must be appended w/ “Ltd”

Prohibition against engaging in business

No prohibition against engaging in business

Retirement, death, insolvency, insanity of gen partner dissolves partnership

Does not have same effect; rights transferred to legal representative

REQUIREMENTS FOR FORMATION OF LIMITED PARTNERSHIP  

1.        Certificate of articles of the limited partnership must state the ff. matters:

a.    Name of partnership + word "ltd."

b.    Character of business

c.    Location of principal place of business

d.    Name/place of residence of members

e.    Term for partnership is to exist

f.     Amount of cash/value of property contributed

g.    Additional contributions

h.    Time agreed upon to return contribution of limited partner

i.      Sharing of profits/other compensation

j.      Right of limited partner (if given) to substitute an assignee

k.    Right to admit additional partners

l.      Right of limited partners (if given) to priority for contributions

m.   Right of remaining gen partners (if given) or continue business in case of death, insanity, retirement,
civil interdiction, insolvency

n.    Right of limited partner (if given) to demand/receive property/cash in return for contribution

2.    Certificate must be filed with the SEC

WHEN GENERAL PARTNER NEEDS CONSENT/RATIFICATION OF ALL LTD PARTNERS:

1.    Do any act in contravention of the certificate

2.    Do any act which would make it impossible to carry on the ordinary business of the partnership

3.    Confess judgement against partnership

 
4.    Possess partnership property/assign rights in specific partnership property other than for
partnership purposes

5.    Admit person as general partner

6.    Admit person as limited partner - unless authorized in certificate

7.    Continue business with partnership property on death, retirement, civil interdiction, insanity or
insolvency of gen partner unless authorized in certificate

SPECIFIC RIGHTS OF LIMITED PARTNERS:

1.    Right to have partnership books kept at principal place of business

2.    Right to inspect/copy books at reasonable hour

3.    Right to have on demand true and full info of all things affecting partnership

4.    Right to have formal account of partnership affairs whenever circumstances render it just and
reasonable

5.    Right to ask for dissolution and winding up by decree of court

6.    Right to receive share of profits/other compensation by way of income

 

7.    Right to receive return of contributions provided the partnership assets are in excess of all its
liabilities

LOAN AND OTHER BUSINESS TRANSACTIONS WITH LIMITED PARTNERSHIP

1.        Allowed

a.    Granting loans to partnership

b.    Transacting business with partnership

c.    Receiving pro rata share of partnership assets with general creditors if he is not also a general
partner

2.    Prohibited

a.    Receiving/holding partnership property as collateral security

b.    Receiving any payment, conveyance, release from liability if it will prejudice right of 3rd persons

REQUITES FOR RETURN OF CONTRIBUTION OF LIMITED PARTNER:

1.    All liabilities of partnership have been paid/if not yet paid, at least sufficient to cover them

2.    Consent of all members has been obtained

 

3.    Certificate is cancelled/amended as to set forth withdrawal /reduction of contribution

LIABILITY OF LIMITED PARTNER

AS CREDITOR

AS TRUSTEE

1.  Deficiency in contribution

Specific property stated as contributed but not yet contributed/wrongfully returned

2.  Unpaid contribution

Money/other property wrongfully paid/ conveyed to him on account of his contribution

DISSOLUTION OF LIMITED PARTNERSHIP

Priority in Distribution of Assets:

1.    Those due to creditors, including limited partners

2.    Those due to limited partners in respect of their share in profits/compensation

3.    Those due to limited partners of return of capital contributed

4.    Those due to general partner other than capital & profits

 

5.    Those due to general partner in respect to profits

6.    Those due to general partner for return of capital contributed

AMENDMENT/CANCELLATION OF CERTIFICATE

      Cancelled:

1. Partnership is dissolved other than by reason of expiry of term

1. All limited partners cease to be such

Amended:

1. Change in name of partnership, amount/character of contribution of ltd. partner

1. Substitution of ltd. partner

1. Admission of additional ltd. partner

 

1. Admission of gen. partner

1. Death, insolvency, insanity, civil interdiction of gen. partner & business is continued

1. Change in character of business

1. False/erroneous statement in certificate

1. Change in time as stated in the certificate for dissolution of partnership/return of contribution

1. Time is fixed for dissolution of partnership. Return of contribution if no orig. time specified

1. Change in other statement in certificate

When the partnership is at will, the dissolution of a firm may take place if any one of
the partners gives a notice in writing to the other partners stating his intention to
dissolve the firm.

Discuss and Record Entries for the

Dissolution of a Partnership
Partnerships dissolve. Sometime the decision is made to close the business. Sometimes there is a
bankruptcy. Partner negligence, retirement, death, poor cash flow, and change in business
practices are just some of the reasons for closing down.
Ethical Partnership Dissolution

In most dissolutions of a partnership, the business partners need to decide what

will happen to the partnership itself. A partnership may be dissolved, but that may
not end business operations. If the partnership’s business operations are to
continue, the partnership must decide what to do with its customers or clients,
particularly those primarily served by a partner leaving the business. An ethical
partnership will notify its customers and clients of the change and whether and
how the partnership is going to continue as a business under a new partnership
agreement. Partners who are unable to agree on how to notify their customers and
clients should look to the Uniform Partnership Act, Article 8, which outlines the
general obligations and duties of partners when a partnership is dissolved.

A partner’s duties and obligation upon dissolution describe what the departing
partner owes to the partnership and the other partners in duties of loyalty and care,
which are the basic fiduciary duties of a partner prior to dissolution, as outlined in
Section 409 of the Uniform Partnership Act. The one change upon dissolution is
that “each partner’s duty not to compete ends when the partnership dissolves.” The
Act states that “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.”1 This may not terminate the
partnership’s business operations, but the partner’s obligations under the dissolved
partnership agreement will end, regardless of how the remaining partners create a
new partnership.

The departure or removal of a partner or partners and the resulting creation of a

new partnership may be tricky, because all original partners owe each other the
duty of fairness and loyalty until the dissolution has been completed. All the
partners, departing or otherwise, are required to behave in a fashion that does not
hurt business operations and avoid putting their individual interests ahead of the
interests of the soon-to-be-dissolved partnership. Once the partnership has been
dissolved, the departing partners no longer have an obligation to their old business
partners.

Fundamentals of Partnership Dissolution

The liquidation or dissolution process for partnerships is similar to the liquidation
process for corporations. Over a period of time, the partnership’s non-cash assets
are converted to cash, creditors are paid to the extent possible, and remaining
funds, if any, are distributed to the partners. Partnership liquidations differ from
corporate liquidations in some respects, however:

1. General partners, as you may recall, have unlimited liability. Any general
partner may be asked to contribute additional funds to the partnership if its
assets are insufficient to satisfy creditors’ claims.
2. If a general partner does not make good on his or her deficit capital
balance, the remaining partners must absorb that deficit balance.
Absorption of the partner’s deficit balance gives the absorbing partner legal
recourse against the deficit partner.

Recording the Dissolution Process

As discussed above, the liquidation or dissolution of a partnership is synonymous

with closing the business. This may occur due to mutual partner agreement to sell
the business, the death of a partner, or bankruptcy. Before proceeding with
liquidation, the partnership should complete the accounting cycle for its final
operational period. This will require closing the books with only balance sheet
accounts remaining. Once that process has been completed, four steps remain in
the accounting for the liquidation, each requiring an accounting entry. They are:

 Step 1: Sell noncash assets for cash and recognize a gain or loss
on realization. Realization is the sale of noncash assets for cash.
 Step 2: Allocate the gain or loss from realization to the partners based on
their income ratios.
 Step 3: Pay partnership liabilities in cash.
 Step 4: Distribute any remaining cash to the partners on the basis of their
capital balances.

These steps must be performed in sequence. Partnerships must pay creditors prior
to distributing funds to partners. At liquidation, some partners may have a
deficiency in their capital accounts, or a debit balance.
Let’s consider an example. Football Partnership is liquidated; its balance sheet
after closing the books is shown in (Figure).
Balance Sheet for Football Partnership. (attribution: Copyright Rice University,
OpenStax, under CC BY-NC-SA 4.0 license)