LAW ON PARTNERSHIP

MODULE 2
DISSOLUTION AND WINDING UP

LEARNING OUTCOMES
At the end of this module, you are expected to:
A. Define and comprehend the concepts of dissolution, winding up and
termination ;
B. Determine the rules on partnership after dissolution;
C. Differentiate the modes of winding up a partnership;
D. Discuss the concept of limited partnership; and
E. Enumerate and identify the different rights of the partners in a limited
partnership
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MODULE 2
Concept of Dissolution, Winding up and Termination

 Dissolution is the change in the relation of the partners caused by any partner
ceasing to be associated in the carrying on of the business.

 Winding up is the process of settling the business or affairs of the partnership after
dissolution

 Termination refers to the point when all the business or affairs of the partnership are
completely wound up

Causes of Dissolution

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:

1) of any partner, who must act in good faith, when no definite term or
particular undertaking is specified; or

2) 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.

C. by the expulsion of any partner from the business bona fi de in accordance

with such a power conferred by the agreement between the partners.

2. In contravention of the agreement between the partners by the express will of any
partner at any time.

3. When any event which makes it unlawful for the business of the partnership to be
carried on or for the members to carry it on in partnership.
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4. in the following cases of loss:
A. in any case by the loss of the thing, when the partner who contributed it having
reserved the ownership thereof; or

B. when a specific thing, a partner had promised to contribute to the partnership,

perishes before the delivery.

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 cases:

A. on application by or for a partner to dissolve the partnership 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.

B. On the application of the purchaser of a partner’s interest:

1. After the termination of the specifi ed 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.
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Rules on liability of the partners and partnership for acts of a partners after
dissolution.

1. If a partner’s authority is terminated among the partners (or such partner has no
authority to act) but the partnership is bound by the transaction.
A. the third person can go after the assets of the partnership.
B. if the assets of the partnership are not sufficient, the third person can go
after the separate assets of each partner.
C. thereafter, the other partners can go after the acting partner to recover
the amount they paid out of their separate assets and to demand the
return of the amount paid out of the partnership assets. This is so
because in so far as the partners are concerned, the authority of the
acting partner was already terminated.

2. If a partner’s authority is not terminated among the partners and the partnership
is bound by the transaction.
A. the third person can go after the assets of the partnership.
B. if the assets of the partnership are not sufficient, the third person can go
after the separate assets of each partner.

C. thereafter, the other partners cannot go after the acting partner for
recovery because after all the authority of the latter was not terminated
among all the partners. Here,, the partnership and the partners are liable
as if there had been no dissolution of the firm.
3. if a partner’s authority is terminated among the partners and the partnership is
not bound by the transaction.
A. the partnership assets cannot be held to answer for the liability to the
third person.
B. the acting partner alone is liable to the third person with whom he
contracted and he cannot call on the other partners to share in the
payment.
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4. if a partner’s authority is not terminated among the partners, but the partnership is
not bound by the transaction. This may occur for instance, when a partnership dis-
solved by reason of the death of a partner and the acting partner has no knowledge of
such death. Then such acting partner enters into a new transaction with a previous
creditor who had notice or knowledge of the dissolution of the partnership by reason
of such death.

Examples:

1. Madrid, Acosta, Platon, Lovina and Espina are partners in MAPLE enterprises which is
engaged in trading dry goods. Madrid is the manager. Espina dies. Madrid knows of
the death of Espina but he still purchases goods form Romero, a creditor who had
granted credit to MAPLE before dissolution. Romero was not aware of the dissolution
of the MAPLE enterprises by reason of death of Espina.

A. since Madrid knows of the death of Espina, then his authority is already
terminated among the partners.

B. with respect to Romero who is a previous creditor, since he was not specially
notified of the dissolution, MAPLE is bound by the purchase made by Madrid.
In this case, Romero can go after the assets of MAPLE. If MAPLE’s assets are not
sufficient, then he can go after the separate assets of all the partners, including
those of Espina. Thereafter, Acosta, Platon, Lovina and the legal representative
of Espina can go after Madrid for indemnity. This is so because among the
partners, Madrid’s authority to enter into a new transaction was terminated by
reason of his knowledge of the death of Espina.

2. in the above example, if madrid was not aware of the death of Espina, then his
authority was not yet terminated among the partners. Accordingly, he can call on his
partners and on Espina’s legal representative for the contribution from the partner’s
separate assets if MAPLE’s assets are not sufficient to pay the liability to Romero. The
partners shall be liable as if MAPLE has not been dissolved.
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3. With respect to No. 1, if Romero was specially notified of the dissolution, then only
Madrid will be liable to Romero. Madrid cannot call on the other partners and
Espina’s legal representative to share in the payment.

4. If there was no publication of the dissolution but Romero has not read it, Romero as a
previous creditor is deemed to be without notice or knowledge. Accordingly, MAPLE is
liable to Romero. If Romero is a new creditor, MAPLE will not be liable to him because
he is not entitled to a special attention. The mere publication of the dissolution of
MAPLE is sufficient notice to him.

Rules on existing liability of a partner upon dissolution

1. The dissolution of the partnership does not of itself discharge the existing liability
of any partner.

2. A partner is discharged from any existing liability upon the dissolution of the
partnership by the agreement of the following:
A. the partner himself;
B. the partnership creditor; and
C. the person continuing the business.
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.

3. 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.
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Modes of Winding up Partnership Affairs

1. Extra –Judicially (without intervention of the court)

A. by the partner or partners designated by the agreement.
B. if none was designated:
1) by the partner or partners who have not wrongfully dissolved the
partnership.
2) if all the partners are dead, the legal representative of the last surviving
partner who was not insolvent.

2. Judicially
Under the direction and control of the court, upon proper cause shown by
any partner, his legal representative or assignee.

The appointee of the court should be a surviving partner, not the legal
representative of the deceased partner who was not insolvent except when he
was the last surviving partner.
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Limited Partnership
A limited partnership is a partnership which has one or more general partners
and one or more limited partners. The limited partners as such shall not be bound by
the obligations of the partnership except up to the extent of their contribution.

Rights and liabilities of a general partner in a limited partnership.

1. Rights
A general partner shall have the rights and powers of a general partner
in a partnership without limited partners.

2. Liabilities
A general partner shall be subject to all the restrictions and liabilities of
a partner in a partnership without limited partners.

Restrictions of a general partner

A general partner or all of the general partners have no authority to
perform the following acts without written consent or ratification of all the
limited partners:
A. Do any act in contravention of the certificate;
B. Do any act which would make it impossible to carry on the ordinary
business of the partnership
C. Confess a judgment against the partnership;
D. Possess partnership property, or assign their rights in specific
partnership property, for other than a partnership purpose;
E. Admit a person as a general partner;
F. Admit a person as a limited partner, unless the right to do so is given in
the certificate;
G. Continue the business with partnership property on the death,
retirement, insanity, civil interdiction or insolvency of a general
partner, unless the right so to do is given in the certificate.
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Obligations of a limited partner
1. Not to allow the inclusion of his surname in the partnership name
A. Exceptions
1) if It is also the surname of a general partner.
2) the business had been carried on under a name in which his surname
appeared Prior to the time when the limited partner
B. Effect if a limited partner allows the inclusion of his surname in the partnership
name
He is liable as a general partner to partnership creditors who extend
credit to the partnership without actual knowledge that he is not a general
partner.

2. To be liable as a general partner if he takes part in the control of the business.

3. To be liable to the partnership for the following:
A. For the difference between his contribution as actually made and that stated in
the certificate
B. For any unpaid contribution which he agreed in the certificate to make in the
future at the time and on the conditions stated in the certificate

4. To hold as a trustee for the partnership the following:

A. Specific property stated in the certificate as contributed by him, but which was
not contributed
B. Specific property which has been wrongfully returned to him.
C. Money or other property wrongfully paid or conveyed to him on account of
his contribution.
5. To be liable to the partnership after he has rightfully received the return in
whole or in part of the capital of his contribution, for any sum not in excess of
such return with interest, necessary to discharge its liabilities to all creditors
who extend credit or whose claims arose before such return.
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6. Not to receive or hold as collateral security any partnership property on ac-
count of his claims for loan granted to or other business transaction with the
partnership.

Rights of a Limited Partner

1. to have the partnership books kept at the principal place of business of the
partnership.
2. to inspect and copy the partnership books or any of them at a reasonable time.
3. to have on demand true and full information of all things affecting the
partnership
4. to Have on demand a formal account of partnership affairs whenever
circumstances render it just and reasonable
5. to Have dissolution and winding up by decree of court.
6. to receive a share of the profits or other compensation by way of income
stipulated in the certificate. This right however, however is subject to the
condition that after such payment is made, whether from property of the
partnership or that of a general partner, the partnership assets are in excess of
all liabilities of the partnership except liabilities to limited partners on account
of their contributions and to general partners.
7. to receive the return of his contribution provided partnership assets exceed the
liabilities.
8. to loan money to the partnership.
9. to transact business with the partnership.
10. to receive on account of resulting claims against the partnership, with general
creditors, a pro rata share of the assets.
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Activity 1
1. There are different causes of dissolution of a partnership under the law. Give at least 2
different scenarios wherein a partnership has been dissolved under the causes
dissolution as provided for by law. (10 points)
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2. Why do we need to distinguish general partnership from limited partnership?

(10 points)
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Activity 2
1. Create your own partnership by filling in the details of the Articles of Partnership.
Please see attached document. (10 points)

2. Refer to the preceding number. What kind of partnership has been formed? Explain
your answer (10 points)
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