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DISSOLUTION AND WINDING UP

ARTICLES 1828-1841 NCC

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. ( ARTICLE 1828 )

END OF PARTNERSHIP, 3 STAGES:

1. DISSOLUTION – change in the relation of partners caused by any partner ceasing to

be associated in the carrying on of a business; doesn’t mean business must cease to
exist for the partners. It designates the point in time when the partners cease to carry on
the business together. The partnership is not considered terminated, as it continues until
all or the winding up of partnership affairs is completed (Article 1829). This is the process
of WINDING UP or the settlement of affairs after dissolution.

2. WINDING UP – actual process of settling the partnership affairs after dissolution;

involves collection & distribution of partnership assets, payment of debts and
determination of the value of each partner’s interest in the partnership

3. TERMINATION – all partnership affairs are completely wound up and finally settled;
signifies end of partnership

EFFECTS OF DISSOLUTION.

❖ Those that are validly contracted have to be paid and cannot be avoided.
Obligations that are new cannot be contracted unless it is essential to winding up
partnership business.

(1) Partnership not terminated.

The dissolution of a partnership must not be understood in the absolute and strict sense
so that at the termination of the object for which it was created the partnership is
extinguished. (Testate Estate of Mota vs. Serra, 47 Phil. 464 [1926].) Dissolution does
not automatically result in the termination of the legal personality of the partnership, or

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the cessation of his business, 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.

After dissolution, the partnership as a business enterprise remains viable only for the
purpose of winding up its affairs. The principal significance of dissolution is that thereafter,
no new partnership business should be undertaken, but affairs should be liquidated and
distribution made to those entitled to the partners’ interest. (Crane, op. cit., 394; Testate
Estate of Mota vs. Serra, supra.)

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 bonafide in accordance with such
a power conferred by the agreement between the partners; Art. 1830215

(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;

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(3) By 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:

(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.

(1700a and 1701a)

ON APPLICATION BY OR FOR A PARTNER, THE COURT SHALL DECREE A

DISSOLUTION WHENEVER:

(1) partner has been declared insane in a judicial proceeding or is shown to be of unsound
mind. An action for dissolution at which time insanity is proven is allowed.

(2) a partner in any way becomes incapable of performing his part of the partnership
contract. This refers to any inability that will render a partner incapable (3) a partner has
been guilty of such conduct as tends to affect prejudicially the carrying on of the business.
This encompasses failure to act in the appropriate manner for the benefit of the
partnership or negligent actions.

(4) a partner willfully or persistently commits a breach of the partnership agreement or

otherwise conducts himself in matters relating to the partnership business that it is not
reasonably practicable to carry on the business of the partnership with him. Examples:
fraud or misuse of partnership assets

(5) the partnership can only be carried on at a loss

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(6) other circumstances that will render dissolution equitable. As opposed to prevailing
situation, dissolution is preferred

(7) on application of the purchaser of a partner’s interest under Articles 1813 and1814

(a) after termination of period or expiration of a particular undertaking, or

(2) at any time, if the partnership is one at will when the interest was assigned or charged.

IN THESE INSTANCES, dissolution comes into being upon finality of judgment in cases
where judicial intervention is had.

WHAT HAPPENS WHEN THERE IS DISSOLUTION

● Dissolution terminates all authority of a partner to act for the partnership.

● This means that the general agency between partners is automatically terminated.
● The partners cannot create any new obligation for the partnership and partners are
NOT LIABLE FOR LIABILITIES

EXCEPTIONS:

As between partners:

● The act is necessary to wind up partnership affairs

● It is necessary to complete transactions began but not then finished (Article 1832)
● When the dissolution is by act, insolvency or death (AID) of a partner (each partner
is liable to his co-partners for his share of liability as if the partnership had not been
dissolved

UNLESS

● dissolution be by act, the partner acting for the partnership had knowledge of the
dissolution
● dissolution being by death or insolvency, the partner acting had knowledge or
notice of the death or insolvency (Article 1833).

With respect to others or persons not partners, a partner can bind the partnership

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 ● In any act appropriate for winding up partnership affairs or completing
transactions unfinished at dissolution
● Any act which would bind the partnership if dissolution had not taken place,
PROVIDED, the other party to the transaction:

1. Had extended credit (previous creditor) to the partnership prior to

dissolution and had no knowledge or notice of dissolution
2. Though no credit (new creditor) is extended had nevertheless known of the
partnership prior to dissolution, and having no knowledge or notice of
dissolution, the fact of dissolution not having been advertised in a
newspaper of general circulation in the place at which partnership business
is carried out (Article 1834)

BUT in both instances, the liability of a partner under the provision shall be satisfied out
of partnership assets alone if such partner prior to dissolution is:

● unknown as a partner to the person with whom the contract is made

● so far unknown or 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.

Example: Known partner with no means to pay will use the others to settle their
share of liability.

BUT UNDER THE FOLLOWING, the partnership is not bound when:

1. the partnership is dissolved because it is unlawful to carry on the business

except when the act is appropriate for winding up
2. the partner acting has become insolvent
3. where the partner has no authority to wind-up partnership affairs except
by a transaction with one who must be connection with:
● Extends credit prior to dissolution and had no knowledge or notice of his want of
authority
● Had not extended credit prior to dissolution and having no knowledge or notice of
the want of authority, the fact of his want of authority has not been advertised in a
newspaper of general circulation in the place of business.

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 ❖ Nothing in Article 1834 shall affect the liability of any person under Article 1825 if
any person who after dissolution represents himself or consents to another
representing himself as a partner in a partnership engaged in carrying on the
business.

if a stranger represents himself after dissolution to be a partner although he is not

one, is still liable as a partner by estoppel.

❖ When is a partner considered as having no liability Under Article 1835, the

dissolution of the partnership does not of itself discharge the liabilities of any
partner.

The discharge is effective only upon agreement to such effect between the partner,
creditor and the person or partnership continuing the business, if any.

● The agreement can be one that is orally constituted as it can be inferred from the
course of the 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 partnership obligations incurred while a
partner, but subject to prior payment of his separate debts.

RIGHTS OF PARTNERS UPON DISSOLUTION

1. A partner can participate in the process of winding up, PROVIDED such partner
have not wrongfully dissolved the partnership. (Article 1836 CC)

Other persons authorized:

a. Person designated by agreement

b. Legal representative (executor/administrator) of last surviving partner, not insolvent
c. Receiver appointed by the court

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2. Right of a partner to application of partnership property on dissolution. (Article
1837 CC)

a. GR: Rights of each partner in dissolution w/o violation (not in contravention) to the
partnership:

1. To have partnership property applied to discharge the liabilities of the partnership

2. To have surplus, if any, applied to pay in cash the net amount owing to the respective
partners

XPN: unless otherwise agreed

If dissolution is caused by expulsion bona fide:

1. Expelled partner may be discharged from all liabilities either by payment / agreement
with him, the creditors and other partners

2. Can only receive in cash the net amount due him

If dissolution is proper, no partner is liable for any loss.

b. Rights when dissolution is in contravention

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 PARTNER WHO IS INNOCENT PARTNER WHO IS GUILTY

a. Have the partnership property a. If business is NOT CONTINUED:

applied as payment of its liabilities and
to receive in cash his share of the i. Have the partnership property applied
surplus to discharge liabilities and receive in
cash his share of the surplus less
b. Be indemnified for the damages damages caused by his wrongful
caused by the guilty partner dissolution
c. Continue business in the same name
b. If business is CONTINUED:
during the agreed term of partnership,
by themselves / jointly w/ others i. Have value of interest in the
d. Possess property should they decide partnership at the time of dissolution,
to continue business less damages

ii. Be released from all existing and

future liabilities

* value of GOODWILL will not be included as consequence of bad faith / action *

3. Right to Recission. (Article 1838 CC)

Rights of the injured partner:

1. RIGHT TO A LIEN on / retention of the surplus of partnership property after satisfying

liabilities for any sum of money paid / contributed by him

2. RIGHT TO SUBROGATION in the place of creditors after payment of liabilities

3. RIGHT TO INDEMNIFICATION by guilty partner against all debts and liabilities of the
partnership

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 RULES TO SETTLE ACCOUNTS AFTER DISSOLUTION

❖ The third person can go after the

If a partner’s authority is terminated among assets of the partnership
the partners but the partnership is bound
❖ If the assets of the partnership are
by the transaction.
not sufficient, the third person can
go after the separate assets of
each partner.
❖ 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 because in so far as the
partners are concerned, the
authority of the acting partner was
already terminated.

❖ The third person can go after the

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

❖ The partnership assets cannot be

If a partner’s authority is terminated among held to answer for the liability to
the partners and the partnership is not the third person.
bound by the transaction.
❖ 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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PRIORITY SYSTEM FOR DISTRIBUTION OF PARTNERSHIP PROPERTY / SETTLING
ACCOUNTS:
(Article 1839 CC)

● Partnership property (including

1. Assets of partnership: good will)
● Contributions of partners for
payment of all liabilities

● Owing to partnership creditors

2. Order of application of assets: ● Owing to partners other than for
capitals and profits such as loans
/ advances
● Owing for the return of capital
contributed by the partners
● If any asset is left, shall be
contributed as profits to partners
proportionally
● Capital contributions are
3. Loans and advances by partners: returnable only on dissolution
● Loans are payable at maturity
● Accumulated profits may be
withdrawn at any time by
majority’s consent
L & A = amounts paid into the
partnership in excess of a partner’s
capital contribution
● If assets are insufficient to repay
4. Capital contributed by partners: capital investments, the deficit is
a capital loss w/c requires
contribution
● Return of amount equivalent to
capital contribution of each
partner shall be increased by his
share of undistributed profits /
decreased by his share of net
losses
● Industrial:

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 GR: not entitled to any of firm
capital on dissolution
XPN: if there is an agreement
● Total capital contribution is not
equal to gross assets to be
distributed to the partners during
dissolution

● A partner / his legal rep (to the

5. Rights of partner where assets are extent of amount w/c he has paid
insufficient: in excess of his share of liability)
● Assignee, for the creditor’s
benefit
● Any person appointed by court:
- Will have the right to enforce the
contributions of the partners
- If any partner does not pay,
others will have to pay

REMEDY: can sue non-paying

partner for indemnification

● Liable for his share of

6. Liability of deceased partner’s contribution necessary to satisfy
individual property: the liabilities of the partnership
incurred while he was a partner

DOCTRINE OF MARSHALLING
7. Priority of payments: ASSETS:
● Partnership property – pay first
the partnership creditors
● Individual property – pay first
separate creditors

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 PRINCIPLE OF EQUITY:
8. Distribution of insolvent partner’s a. Owing to separate
property: creditors
b. Owing to partnership
creditors
c. Owing to partners thru
contribution

REMEDY OF SEPARATE CREDITOR:

Can execute against asset of the firm
only to the extent of the interest of the
partner in firm assets

PREFERENCES OF PARTNERSHIP CREDITORS (ARTICLE 1840)

1. A new partner is admitted into an existing partnership, or when any partner retires
and assigns (or the representative of the deceased partner assigns) his right to
partnership property to two or more partners/one or more of the partners/ one or more
third persons, if business is continued without liquidation of the partnership affairs

2. All but one partner retires or assigns (or the representative of the deceased partner
assigns) their rights in partnership property to the remaining partner without liquidation of
partnership affairs, either alone or with others

3. Partner retires/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 assignment of his right to partnership
property

4. All partners or their representatives assign their rights to partnership property to

one or more third persons who promise to pay debts and continue the business of the
dissolved partnership

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5. When a partner wrongfully dissolves the partnership and the remaining partners
continue the business under Article 1837, 2nd paragraph either alone or with others and
without liquidation of the partnership affairs

6. A partner is expelled and the remaining partners continue the business either alone
or with others without liquidation of partnership affairs.

GENERAL RULE: THE LIABILITY OF A THIRD PERSON BECOMING A PARTNER in

the partnership continuing the business under this article shall be satisfied out of
partnership property only.

EXCEPTION: there is a stipulation to the contrary.

❖ PREFERENCE is also given to creditors of the dissolved partnership as against

creditors of a retiring/deceased partner or his representative to any claim which
the retiring/deceased partner may have against the person partnership continuing
the business on account of said partner’s interest or on account of any
consideration promised for such interest or for his right to partnership property.
MEANING that is a partner retires/dies, his claim for the payment of his interest
cannot defeat the preference of partnership creditors.

❖ NOTHING in Article 1840 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. .

Rights of retiring, or of estate of deceased, partner when business is continued.

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 When the dissolution is caused by the retirement or death of a partner and the business
is continued without settlement of accounts, the retiring partner or the legal representative
of the deceased partner shall have the right:

(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);

(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
profi ts attributable to the use of his right.

❖ As provided in Article 1840, the creditors of a dissolved partnership have a prior

right as against the separate creditors of the retired or deceased partner.

❖ If the surviving partners (in case the dissolution is caused by the death of a
partner) continue the business without the consent of the deceased partner’s
estate, they do so without any risk to the estate; if the estate consents, it, in effect,
becomes a new partner and would be answerable for all debts and losses after the
death but only to the extent of the decedent’s share in the partnership’s assets.

BAR QUESTIONS AND ANSWERS

Conveyance of a Partner’s Share Dissolution (1998)

Dielle, Karlo and Una are general partners in a merchandising firm. Having
contributed equal amounts to the capital, they also agree on equal distribution of
whatever net profit is realized per fiscal period. After two years of operation,
however, Una conveys her whole interest in the partnership to Justine, without the
knowledge and consent of Dielle and Karlo.

SUGGESTED ANSWER:

No, a conveyance by a partner of his whole interest in a partnership does not of itself
dissolve the partnership in the absence of an agreement. (Art. 1813. Civil Code)
Dissolution of Partnership (1995)

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Pauline, Patricia and Priscilla formed a business partnership for the purpose of
engaging in neon advertising for a term of five (5) years. Pauline subsequently
assigned to Philip her interest in the partnership. When Patricia and Priscilla
learned of the assignment, they decided to dissolve the partnership before the
expiration of its term as they had an unproductive business relationship with Philip
in the past. On the other hand, unaware of the move of Patricia and Priscilla but
sensing their negative reaction to his acquisition of Pauline’s interest, Philip
simultaneously petitioned for the dissolution of the partnership.

1. Is the dissolution done by Patricia and Priscilla without the consent of Pauline
or Philip valid? Explain.

2. Does Philip have any right to petition for the dissolution of the partnership
before the expiration of its specified term? Explain.

SUGGESTED ANSWER:

1. Under Art. 1830 (1) (c) of the NCC, the dissolution by Patricia and Priscilla is valid and
did not violate the contract of partnership even though Pauline and Philip did not consent
thereto. The consent of Pauline is not necessary because she had already assigned her
interest to Philip. The consent of Philip is not also necessary because the assignment to
him of Pauline’s interest did not make him a partner, under Art, 1813 of the NCC.

ALTERNATIVE ANSWER:

Interpreting Art. 1830 (1) (c) to mean that if one of the partners had assigned his interest
in the partnership to another the remaining partners may not dissolve the partnership, the
dissolution by Patricia and Priscilla without the consent of Pauline or Philip is not valid.

SUGGESTED ANSWER:

2. No, Philip has no right to petition for dissolution because he does not have the standing
of a partner (Art. 1813 NCC).

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