CHAPTER 2: OBLIGATIONS OF THE PARTNERS

RULES ON DIVISION OF PROFIT AND LOSS

PROFITS LOSSES

WITH AGREEMENT According to agreement According to agreement

WITHOUT AGREEMENT ● Share of capital partner in ● Industrial partner shall not

the profits and losses
shall be in proportion to
his capital contribution.
● Industrial partner shall
first receive a just and
equitable share of the
profits, and thereafter,
each capitalist partner
shall share in the profits.
● Capitalist-industrial
partner shall first receive
a just and equitable share
in the profits in his
capacity as industrial
partner, then in his
capacity as capitalist
partner, shall share in the
profits in proportion to his
capital contribution.
share in the losses.
● If only sharing of the
partners in the profits has
been agreed upon, it
should also apply to
share of losses
● If no profit sharing
stipulated - share in the
losses should be
proportion to his capital
contribution.
● losses shall be divided
among the partners
including the
capitalist-partner in his
capacity as capitalist
partner, according to the
ratio of their capital
contribution and shall not
share in his capacity as
industrial partner.

★ Any stipulation which excludes one or more partners from any share in the profits and losses is
VOID, except one which exempts an industrial partner from losses because the law provides that he
shall not be liable therefore.

DESIGNATION OF SHARE IN THE PROFITS AND LOSSES BY A THIRD PERSON OR

BY A PARTNER

1. If entrusted by the partners to a third person

- Binding upon the partners and may be impugned only when it is manifestly inequitable. However,
even if such designation by a third person is manifestly inequitable, it can no longer be impugned:
a. By a partner who has begun to execute it
b. By any partner if three months had already lapsed from the time he obtained knowledge thereof.

2. If entrusted to one of the partners

- Designation is void because it cannot be entrusted to one of the partners. Accordingly, the profits
and losses shall be divided among the partners as if there was no stipulation thereon.

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RIGHTS AND OBLIGATIONS WITH RESPECT TO MANAGEMENT
Type of Manager Scope of Power Revocation

Partner is granted as manager in
the articles of partnership
May execute ALL acts
despite the opposition of
his partners unless he acts
in bad faith
- with just or lawful cause
can be revoked by vote of the
partners owning the controlling
interest
- without just or lawful cause
can be revoked only with the
consent of ALL the partners
because such revocation=novation
of the partnership’s articles

Partner has been appointed
manager after the constitution of
the partnership
May execute all the acts
but in case of opposition,
the partner owning the
control interest may resort
to voting for his removal
as manager
May be removed with or without
just or lawful cause by the vote of
partners owning the controlling
interest

Two or more partners have been
intrusted with the management of
the partnership without
specification of their respective
duties/without a stipulation that one
of them shall not act without the
consent of all the others
Each manager may
separately execute acts of
administration
IN CASE OF OPPOSITION:
Decision of the majority of the
managing partners shall prevail
TIE: vote of the managing partners
owning the controlling interest
shall prevail

Stipulated that none of the Concurrence or consent of

managing partners shall act without ALL shall be necessary for
the consent of the others the validity of the acts

Absence or disability of
any one of them cannot be
alleged

Manner of management has not All partners are managers
been agreed
Whatever any one of them
may do alone shall bind
the partnership
IN CASE OF OPPOSITION:
Decision of majority—prevails
TIE: decision of partners owning
the controlling interest—prevails

RIGHT OF PARTNERS TO ENGAGE IN BUSINESS

INDUSTRIAL PARTNER CAPITALIST PARTNERS

● An industrial partner cannot engage in
business for himself unless the partnership
expressly permits him to do so.
● Applies even if the business is of a kind
different from the partnership business.
● can engage in other business different from
the partnership business—even without the
consent of other
● cannot engage in the same business unless
there is a stipulation—reason: deemed
unfairly competing with the partnership
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 - This is because the partnership is the
owner of the services of the industrial
partner, which is his contribution to the
common fund of the partnership.
Effect if the industrial partner engages without
the express permission of the partnership
● The capitalist partners may either:
- Exclude him from the partnership, with a
right to, damages
- Avail themselves of the benefits obtained
from the business he engaged in, with a
right to damages.
business
Effect if CP engages in the same kind of
business without a stipulation allowing him to
engage in that business
● CP shall bring to the common fund any
accruing profits from his transaction
● He shall bear all the losses
- loss in his own business
- loss in the partnership business

RULES ON SHARING OF PARTNERSHIP LIABILITIES TO THIRD PERSONS

NATURE OF LIABILITY
a. Pro rata
- The liability of the partnership shall be equally divided among the partners.
- The sharing should be equal because the liability is imposed on all the partners including an
industrial partner whose proportionate share cannot be determined in the absence of a profit and
loss sharing agreement since he has no capital contribution.

b. Subsidiary
- Each partner shall be liable with his separate property after all the assets of the partnership have
been exhausted.

PARTNERS LIABLE
All general partners whether:
a. capitalist partner
b. industrial partner.

STATUS OF STIPULATION EXEMPTING A PARTNER FROM PRO RATA AND SUBSIDIARY

LIABILITY AFTER THE EXHAUSTION OF PARTNERSHIP ASSETS
a. Void as to third persons.
b. Valid among the partners.

The stipulation, however, will not totally exempt a partner because his contribution will still be
subject to the payment of partnership liabilities. This is to reconcile Art. 1817 with Art. 1799 which
declares void any stipulation excluding a partner from losses, except in the case of an industrial partner.

Accordingly, if there is such stipulation, the liabilities shall be paid as follows:

a. The assets of the partnership shall first be used to pay the liabilities.
b. If the partnership assets are not sufficient, the liability shall be paid equally from the separate
assets of the partners including any industrial partner.
c. Thereafter, the partners not exempted from pro rata and subsidiary liability shall reimburse
according to the partners' profit and loss sharing agreement or in the ratio of their capital
contribution, whichever is applicable, to the following partners the amount paid by them:
1. Industrial partner whom the law exempts from losses.
2. General partners exempted from pro rata and subsidiary liability.

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REQUIREMENT TO OPERATE UNDER FIRM NAME
● A partnership shall operate under a firm name, which may or may not include the name of one or
more of the partners.
● Not being members of the partnership who include their names in the firm name - shall be subject to
the liability of a partner. This is intended to protect third persons who transact business with the
partnership believing that he is a partner. Such person, however, does not have the rights of a
partner.
● The use by a partnership of the name of a deceased person is allowed provided the consent of his
or her estate has been given.

OBLIGATIONS OF PARTNERS
1. CONTRIBUTION OF CAPITAL
To contribute equally to the capital of the partnership unless there is a stipulation to the contrary

2. CONTRIBUTION OF PROPERTY = DTDAF

a. To deliver to the partnership at the time it was constituted or on the date stipulated the property
he has promised to contribute.
b. To take care of the property before its delivery to the partnership with the diligence of a good
father of a family as a rule.
c. To be liable for damages in case of default.
d. To answer for eviction in case the partnership is deprived of the specific or determinate thing he
has contributed to the partnership.
e. To be liable for the fruits of the thing from the time they should have been delivered without the
need of any demand.

3. CONTRIBUTION OF MONEY = DID

a. To deliver to the partnership at the time it was constituted or on the date stipulated the money he
has promised to contribute.
b. To pay interest on the amount he had promised to contribute from the time he should have
complied with his obligation.
c. To pay damages suffered by the partnership by reason of the default.

4. AMOUNT APPROPRIATED = RID

a. To reimburse to the partnership the amount that he has taken from the partnership coffers
b. To pay interest on the amount he had converted for his own use from the time of conversion.
c. To pay the damages suffered by the partnership by reason of the conversion.

5. OBLIGATION TO CONTRIBUTE ADDITIONAL CAPITAL = AI

a. To contribute additional share to the capital in case of an imminent loss of the business of the
partnership, except:
1. If he is an industrial partner, or
2. If there is an agreement to the contrary.
b. To sell his interest to the other partners if he refuses to contribute such additional capital

6. OBLIGATION OF A PARTNER WHO HAS RECEIVED HIS SHARE OF THE PARTNERSHIP CREDIT
- To bring to the partnership capital his share of a partnership credit which he has received in whole
or in part even if he may have given his receipt only if the following requisites are present:
a. The other partners have not collected their shares, and

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 b. The debtor becomes insolvent after the partner has received the payment.

7. OBLIGATION TO PAY DAMAGES TO THE PARTNERSHIP

● To pay to the partnership for damages suffered by it through his fault.
● He cannot compensate them with the profits and benefits which he may have earned for the
partnership by his industry. However, the courts may equitably lessen this responsibility if
through the partner's extraordinary efforts in other activities of the partnership, unusual profits
have been realized.

8. OBLIGATION TO BEAR RISK FOR PROPERTY CONTRIBUTED

WHO BEARS THE RISK OF LOSS THINGS CONTRIBUTED

BY PARTNERSHIP fungible things or those that cannot be kept

without deteriorating

things contributed to be sold

things brought & appraised in the inventory unless

stipulated

BY PARTNERS Specific and determinate things that are not

fungible

Contributed to the partnership for only their use

and fruits

9. OBLIGATION TO RENDER INFORMATION

● To render on demand true and full information of all things affecting the partnership to:
a. Any partner
b. Legal representative of any deceased partner
c. Legal representative of any partner under legal disability.

10. OBLIGATION TO ACCOUNT

● To account to the partnership for any benefit, and hold as trustee for it any profits, derived by him
without the consent of the partners from any transaction connected with the formation, conduct, or
liquidation of the partnership or from use by him of its property.

11. LIABILITY OF A NEWLY-ADMITTED PARTNER FOR OBLIGATIONS OF THE PARTNERSHIP

a. Obligations existing at the time of his admission
● Liable but only to the extent of his contribution except if there is an agreement that his
liability shall extend to his separate property.
b. Obligations incurred after his admission
● Liable like the other partners pro rata with their separate property after the partnership
assets have been exhausted.

RIGHTS OF PARTNERS
1. TO ASSOCIATE ANOTHER PERSON WITH HIM IN HIS SHARE.
● The share referred to is the partner's share of the profits.
● The associate shall not be admitted into the partnership without the consent of all the partners,
even if the partner having an associate should be a manager.

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2. TO HAVE ACCESS TO AND INSPECT AND COPY THE PARTNERSHIP BOOKS AT REASONABLE
HOURS.
● The partnership book shall be kept at the principal place of business of the partnership, subject to
any agreement between the partners.

3. TO HAVE A FORMAL ACCOUNT OF PARTNERSHIP AFFAIRS:

a. If he is wrongfully excluded from the partnership business or possession of its property by his
co-partners.
b. If the right exists under the terms of any agreement.
c. With respect to benefits or profits derived by a partner without the consent of the partners from any
transaction connected with the formation, conduct, or liquidation of the partnership or from use by
him of its property.
d. Whenever other circumstances render it just and reasonable.

4. PROPERTY RIGHTS OF A PARTNER

a. His rights in specific partnership property
● A partner is co-owner with his partners of specific partnership property.
● This special form of co-ownership is called tenancy in partnership, where each partner is a
co-owner of the entire partnership property and not the sole owner of any part of it. Such
co-ownership has the following incidents:
1) A partner, except as provided by law and as agreed upon by the partners, has an
equal_right with his partners to possess specific partnership property for partnership
purposes; however, he has no right to possess such property for any other purpose without
the consent of his partners.
2) The right is not assignable except in connection with the assignment of rights of all the
partners in the same property.
3) The right is not subject to attachment or execution except on a claim against the
partnership.
- When a partnership property is attached for partnership debt, the partners, or any of
them, or the representatives of a deceased partner, cannot claim any right under the
homestead or exemption laws.
4) The right is not subject to legal support.

b. His interest in the partnership

1) A partner's interest in the partnership is his share of the profits and surplus.
2) He may convey his whole interest in the partnership.
a. The conveyance does not cause the dissolution of the partnership.
b. The assignee does not become a partner. Accordingly, he has no right:
(1) To interfere in the management of the business.
(2) To require any information of partnership transactions.
(3) To inspect partnership books.
The assignee's rights shall be limited to the following:
(1) To receive the profits to which the assigning partner would otherwise be entitled.
(2) To avail himself of the usual remedies in case of fraud in management.
(3) In case the partnership is dissolved, to require an account from the date only of
the last account agreed to by all the partners.
3) A partner's interest in the partnership may be attached for his separate debts, subject to the
preference for partnership creditors.
● However, the partner may avail himself of the exemption laws as against his separate
creditors after the partnership debts have been paid.

c. His right to participate in management.

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APPLICATION OF PAYMENT WHEN A PERSON OWES SEPARATE
DEMANDABLE DEBTS TO THE PARTNERSHIP AND TO THE PARTNER
AUTHORIZED TO RECEIVE PAYMENT
1. If the partner authorized to receive payment issues the receipt for the partnership, payment shall be
applied to the partnership credit.
2. If the partner authorized to receive payment issues his own receipt, payment shall be applied to the
two credits proportionately
There shall be no proportionate application, i.e., payment shall be applied to the partner's
credit in its entirety in any of the following cases:
a. The debt is owed to a partner not authorized to receive payment.
b. The debt to the partnership is not yet due.
c. The debt owed to the partner authorized to receive payment is more onerous to the debtor
and the latter exercises his right to apply the payment to such debt.

OBLIGATIONS OF THE PARTNERSHIP TO THE PARTNERS

1. To pay to the partner any amounts he may have disbursed for the partnership with interest from the
time the expenses were made.
2. To pay for the obligations which a partner may have contracted in good faith in the interest of the
partnership business.
3. To answer for risks in consequence of its management.

OBLIGATIONS OF PARTNERSHIP FOR WRONGFUL ACTS OF PARTNER/S

● The partnership shall be solidarily liable with all the partners in the following cases.
1. For loss or injury caused to a third person or any penalty is incurred by reason of the 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.
2. Where one partner acting within the scope of his apparent authority receives money or property of a
third person and misapplies it.
3. Where the partnership in the course of the business receives money or property of a third person
and such money or property is misapplied by any partner while it is in the custody of the partnership.

★ The solidary liability as may be noted from the foregoing rules, applies only if the act of the partner
is done in the ordinary course of business, or with actual or apparent authority.

LIABILITY OF PARTNERSHIP TO THIRD PERSONS FOR ACTS OF

PARTNERS
1. WHEN PARTNERSHIP IS BOUND
a. If the partner is authorized to act for the partnership, the partnership is bound whether or not the
act is for apparently carrying on in the usual way the business of the partnership.
b. If the partner is not authorized to act for the partnership, the partnership is bound if:
1) The act is for apparently carrying on in the usual way the business of the partnership, an
2) The third person has no knowledge of the partner's lack of authority.

2.WHEN PARTNERSHIP NOT BOUND

a. When, although the act is for apparently carrying on in the usual way the business of the
partnership, the partner is not authorized to act for the partnership and the third person has

7
 knowledge of the partner's lack of authority. (Art. 1818)
b. When the partner is not authorized to act for the partnership and the act is not for apparently
carrying on in the usual way the business of the partnership.
● It is immaterial whether the third person has knowledge or not of the partner's lack of
authority.

ACTS NOT CONSIDERED FOR APPARENTLY CARRYING ON

● The following are acts which are not for apparently carrying on in the usual way the business of
the partnership and may not be performed by a partner unless he is authorized by all the other
partners, or the other partners have abandoned the business:
1. Assignment of partnership property in trust for creditors or on the assignee's promise to
pay the debts of the partnership.
2. Disposition of the goodwill of the business.
3. Acts which would make it impossible to carry on the ordinary business of the partnership.
4. Confession of judgment.
5. Entering into a compromise concerning a partnership claim or liability.
6. Submission of a partnership claim or liability to arbitration.
7. Renunciation of a claim of the partnership.

RULES ON CONVEYANCE OF REAL PROPERTY BY A PARTNER OR THE

PARTNERS
Title to real property is in the name of
the partnership and the conveyance is
executed by a partner in the name of
the partnership without authority.
CONVEYANCE PASSES TITLE BUT PARTNERSHIP CAN
RECOVER IF:
- If the act is not for apparently carrying on in the usual
way of the business of the partnership, or
- The third person has knowledge of the partner's lack
of authority.

MAY NOT RECOVER IF:

● When the real property has been conveyed by the
grantee to a holder for value without knowledge that
the partner, in making the conveyance, had
exceeded his authority.

Title is in the name of 1 or more but
not all of the partners but the record
does not disclose the right of the
partnership and the conveyance is
executed without authority in the name
of the partner or partners in whose
name the title stands
CONVEYANCE PASSES TITLE BUT PARTNERSHIP CAN
RECOVER IF:
- If the act is not for apparently carrying on in the usual
way of the business of the partnership, or
- The third person has knowledge of the partner's lack
of authority.

Title is in the name of the partnership
and the conveyance is executed by a
partner in his own name without
authority
CONVEYANCE DOES NOT PASS TITLE BUT ONLY
EQUITABLE INTEREST IF:
- Act is apparently for carrying on in the usual way the
business of the partnership
- 3rd person has no knowledge of the partner’s lack of
authority in making the conveyance
UNLESS:
● The act is not for apparently carrying on in the usual
way the business of the partnership, or
● The 3rd person has knowledge of the partner's lack
of authority.

8
 Equitable interest means all the beneficial interests in the property like
the use thereof and its fruits, but not the title.

Title is in the name of 1 or more or all ● Conveyance will only pass equitable interest
the partners, or in a third person in
trust for the partnership and the
conveyance is executed by a partner in
the name of the partnership or in his
name without authority

Title is in the name of all the partners ● Conveyance will pass title and all their rights in the
and the conveyance is executed by all property because all the partners gave their consent
the partners in their names to the transaction.

EFFECT OF ADMISSION OR REPRESENTATION OF A PARTNER

● Such admission or representation is evidence against the partnership if the following requisites are
present:
1. The admission or representation must concern partnership affairs.
2. It must be made within the scope of the authority of the partner making the admission or
representation.
3. It must be made during the existence of the partnership.
4. The existence of the partnership must be shown by evidence other than by such admission or
representation.

EFFECT OF NOTICE TO AND KNOWLEDGE OF A PARTNER

1. NOTICE TO A PARTNER
● Notice to any partner relating to partnership affairs is notice to the partnership.
● Thus, if summons is served upon a partner in a case against the partnership, the same is a notice to
the partnership and binding against it.

2. KNOWLEDGE OF A PARTNER
a. Knowledge of a partner acting on the particular matter
● Such knowledge is also knowledge of the partnership if he acquired the same:
1) While already a partner, or
2) Before his admission to the partnership, provided the same was still present to his. mind,
i.e., he still remembered it.
b. Knowledge of any other partner (or a partner not acting on the particular matter)
● Such knowledge is also knowledge of the partnership provided the following
requisites are present:
1) He acquired the same while already a partner
2) He could and should have reasonable communicated the same to the partner acting on the
particular matter.

3. WHEN NOTICE OR KNOWLEDGE NOT BINDING ON THE PARTNERSHIP

● Notice to or knowledge of a partner is not notice or knowledge of the partnership in case of fraud on
the partnership:
a. Committed by the partner having notice or knowledge.
b. Consented to by such partner having notice or knowledge.

PREFERENCE OF PARTNERSHIP CREDITORS IN PARTNERSHIP ASSETS

OVER PRIVATE CREDITOR OF A PARTNER
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 ● In the payment of the liabilities of the partnership and those of the private debts of a partner,
preference shall be as follows:
1) Partnership creditors shall be paid first out of partnership assets.
2) Thereafter, a partner's separate creditor shall be paid out of the share of the partner owing him if
there is an excess (i.e., partnership assets are more than the partnership liabilities). The separate
creditor may ask for the attachment and public sale of the share of the partner in the partnership
assets for his claim but without prejudice to the preferential right of partnership creditors thereto.
3) If the share of the debtor partner in the remaining assets is not enough to settle his private debts,
his private creditor can go after the partner's separate assets over which he (private creditor) has
preference.

CHAPTER 3: DISSOLUTION AND WINDING UP

1. DISSOLUTION - This refers to the change in the relation of the partners caused by any partner
ceasing to be associated in the carrying on of the business.
2. WINDING UP - This is the process of settling the business or affairs of the partnership after
dissolution.
3. TERMINATION - This 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 of 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.
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
undertaking.
c. 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, by the express will of any partner at
anytime. (partnership at will)
● The withdrawing partner can be held liable for damages.

3) When any event makes it unlawful for the business of the partnership to be carried on or for the
members to carry it on in partnership.

4) In the following cases of loss:

a. Loss before or after delivery of property where the partner contributed only its use or enjoyment, he
having reserved the ownership thereof.
● The partner who owns the property bears the loss.
b. Loss before delivery of specific thing, which a partner had promised to contribute to the partnership.
● If the loss occurs after delivery, the partnership is not dissolved. The partnership, being
already the owner, bears the loss.

5) By the death of any partner.

6) By the insolvency of any partner or of the partnership.

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7) By the civil interdiction of any partner. (Art. 1930)

8) By decree of court in the following cases:

a. On the application by or for a partner (i.e., a partner or his legal representative files the application)
to dissolve the partnership whenever:
➔ A partner has been declared insane in any judicial proceeding or is shown to be of unsound
mind.
➔ A partner becomes in any way incapable of performing his part of the partnership contract.
(permanent)
➔ A partner has been guilty of such conduct as tends to affect prejudicially the carrying on of
the business.
➔ 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.
➔ The business of the partnership can only be carried on at a loss.
➔ Other circumstances render a dissolution equitable..
b. On the application of the purchaser of a partner's interest.
1. After the termination of the specific term.or particular undertaking.
2. At any time when the partnership was a partnership at will when the interest was assigned or
the charging order was issued.

EFFECT OF DISSOLUTION ON AUTHORITY OF A PARTNER

● Dissolution terminates all authority of any partner to act for the partnership, except with
respect to the following:
1) Acts to wind up partnership affairs.
2) Acts to complete transactions begun before dissolution.
● This applies to wholly or partly executory contracts.
● In the above cases, the act of the partner binds the partnership. If the assets of the
partnership are not sufficient to pay the liabilities; the partners can be held liable to the
extent of their separate properties.

When authority of a partner to IF THE CAUSE OF DISSOLUTION IS THE:

enter into new transactions is 1. Act, insolvency or death of a partner (such as by the
TERMINATED among the expiration of the term for which the partnership was
partners
constituted or by decree of court).
● Notice or knowledge of the acting partner of the cause
of dissolution is immaterial.
2. Act of a partner and the partner who entered into the new
transaction had knowledge of the dissolution.
3. Insolvency or death of a partner and the partner who entered
into the new transaction had notice or knowledge of such
insolvency or death.

When authority of a partner to IF THE CAUSE OF DISSOLUTION IS THE:

enter into new transaction is NOT 1. Act of a partner and the acting partner had no knowledge of
TERMINATED among the the dissolution.
partners 2. Insolvency or death of a partner and the acting partner had
no notice or knowledge of such insolvency or death.

11
When the act of a partner after
dissolution BINDS the
partnership
When the act of a partner after
dissolution DOES NOT BIND the
1. When the act is necessary for winding up of partnership affairs.
2. When the act is necessary to complete transactions begun before
dissolution.
3. In case of a new transaction or business in the following cases:
a. If the other party to the transaction had extended credit to the
partnership before dissolution i.e., a previous creditor) and he
had no knowledge or notice of the dissolution.
● previous crediton is entitled to a special attention;
hence, he must be specially notified of the dissolution.
Mere publication of the dissolution is not notice to him.
However, he will be bound by the dissolution if he had
read the publication if there was one or had obtained
knowledge of the dissolution in some other manner.
Without such notice or knowledge, the partnership will
be bound by the transaction.
b. If the other party to the transaction had not so extended
credit before dissolution (i.e., a new creditor) but had
nevertheless known of the partnership before dissolution, and
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 business is regularly
carried on.
● New creditor is not entitled to a special attention;
hence, mere publication of the dissolution is
constructive notice to him although he had not read it.
So if there was no publication and he had not come to
learn of the dissolution in some other manner, he will
not be bound by the dissolution. The partnership will
thus be liable to him.
● In the above cases [No. 3(a) and (b)], a partner is not
liable with his separate property after the exhaustion
of partnership assets:
1. He is unknown as a partner to the person with
whom the contract is made
2. He is 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.
4. Where although the partner has no authority to wind up
partnership affairs, the other party to the transaction is:
a. One who had extended credit to the partnership before
dissolution, and he had no notice or knowledge of the
partner's lack of authority.
b. One who had not so extended credit before dissolution and
having no notice or knowledge of the partner's lack of
authority, the fact of want of authority has not been advertised
in a newspaper of general circulation in the place at which
the business is conducted.
1. Where the partnership is dissolved because it is unlawful to carry
on the business, unless the act is appropriate for winding up
12
partnership partnership affairs.

2. Where the acting partner is insolvent.

3. Where the partner had no authority to wind up partnership affairs,

except with innocent third persons (Old creditors & New creditors)

4. Where a partner's authority is already terminated among the

partners and the third person had actual or constructive. knowledge,
as the case may be, of the dissolution of the firm.

SUMMARY OF RULES ON LIABILITY OF THE PARTNERS AND THE

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.
TERMINATED & BOUND
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.
NOT TERMINATED & BOUND
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 (or has no authority to act for the
partnership) and the partnership is not bound by
the transaction.
TERMINATED & NOT BOUND
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.

4) If a partner's authority is not terminated among
the partners, but the partnership is not bound by
the transaction.
NOT TERMINATED AND NOT BOUND
● This may occur for instance, when a
partnership is dissolved 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.
● This situation seems not to be covered by
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 the provisions of partnership.

RULES ON EXISTING LIABILITY OF A PARTNER UPON DISSOLUTION (ART.

1835)
1. The dissolution does not of itself discharge the partner's liability.
2. A partner is discharged from any existing liability upon dissolution by the agreement of the following:
a. The partner himself
b. The partnership creditor
c. The person continuing the business.
● Such agreement may be inferred from the course of dealing between the partnership
creditor having knowledge of the dissolution and the person or partnership continuing
the business.
3. The individual property of a deceased partner (i.e., his estate) shall be liable for obligations of the
partnership while he was a partner, but subject to the prior payment of his separate debts.

Who may wind up partnership affairs

1) EXTRA-JUDICIALLY a. By the partner or partners designated by the agreement.
(OUTSIDE COURT)
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
(IN COURT) 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.

Application of partnership property and other rights of partners on

dissolution
Dissolution WITHOUT
CONTRAVENTION of the
partnership agreement
Each partner shall have the following rights:
a. To have the partnership property applied to discharge the
liabilities of the partnership.

b. To have the surplus, if any, applied to pay in cash the net

amount owing to the respective partners.

However, if the cause of dissolution is the bona fide expulsion of a

partner and the expelled partner is discharged from all partnership
liabilities, either by payment or the agreement of the expelled partner,
the partnership creditor. and the person continuing the business, he
shall receive in cash only the net amount due him from the partnership.

Dissolution IN a. Rights of partner who has not caused the dissolution wrongfully

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CONTRAVENTION of the 1) To have the partnership property applied to discharge the
partnership agreement liabilities of the partnership.
2) To have the surplus, if any, applied to pay in cash the net
amount owing to the respective partners.
3) To be indemnified for damages Jrom the partner who has
caused the wrongful dissolution of the. Partnership:
4) To continue the business of the partnership in the same name,
either by themselves or jointly with others, and for that purpose
possess partnership property provided that:
a) They pay the partner who has caused the wrongful
dissolution of the partnership the value of his interest in
the partnership less damages; or
b) They secure its payment by a bond approved by the
court.

b. Rights of partner who has caused the dissolution wrongfully

1) If the business is not continued
a) To have the partnership property applied to discharge the
liabilities of the partnership.
b) To receive his share in the surplus, less damages
suffered by the other partners by reason of his having
caused the wrongful dissolution of the partnership.
2) If the business is continued
a) To have the value of his interest in the partnership less
damages paid to him in cash or have its payment
secured by a bond approved by the court.
● In ascertaining the value of the such partner's
interest, the value of the goodwill shall not be
included.
b) To be released from all existing liabilities of the
partnership.

Rescission of partnership contract

1. GROUNDS FOR RESCISSION
a. Fraud
b. Misrepresentation to enter into the partnership contract.

2. RIGHTS OF PARTNERS WHO WAS INDUCED BY FRAUD OR MISREPRESENTATION

a. Right of LIEN ON, or retention of, the surplus of the partnership property, after the satisfaction of
partnership liabilities for any sum of money paid by him to the partnership by way of capital or
advances. (lien = keeping possession of property of a person w/ debt)
b. Right of SUBROGATION in place of partnership creditors for any payment made by him for
partnership liabilities.
c. Right of INDEMNIFICATION from the person guilty of fraud or misrepresentation against all debts
of the partnership.

LIQUIDATION OF DISSOLVED PARTNERSHIP

LIQUIDATION = the sale of the assets of the partnership, the payment of its liabilities, and the distribution
of the remaining cash or other property to the partners.

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ORDER OF PAYMENT OF PARTNERSHIP LIABILITIES
a. Owing to the creditors other than partners.
b. Owing to partners other than for capital and profits.
c. Owing to partners in respect of capital.
d. Owing to partners in respect of profits.

ASSETS OF THE PARTNERSHIP

The following are the assets of the partnership to be applied in the order they are declared for the
payment of the liabilities in the order of their payment:
a. Partnership property.
b. The contributions of the partners necessary for the payment of such liabilities.
1) The contributions shall be in accordance with the rules on the division of profits and
losses.
2) The individual property of a deceased partner shall be liable for such contributions.
3) The following may enforce payment of the contributions
a) An assignee for the benefit of creditors.
b) Any person appointed by the court.
c) Any partner or his legal representative to the extent of the amount which he paid in
excess of his share of the liability.

PRIORITY IN THE PAYMENT OF LIABILITIES IF PARTNERSHIP PROPERTY AND THE INDIVIDUAL

PROPERTY OF THE PARTNERS ARE IN POSSESSION OF THE COURT FOR DISTRIBUTION

Subject to the rights of lien or of secured creditors, the priority in payment of the liabilities shall be as
follows:
a. Partnership creditors for partnership property.
b. Separate creditors for individual property.

PRIORITY OF CLAIMS AGAINST SEPARATE PROPERTY OF A DEBTOR WHO IS INSOLVENT OR

WHOSE ESTATE IS INSOLVENT
a. Those owing to separate creditors.
b. Those owing to partnership creditors.
c. Those owing to partners by way of contribution.

WHEN LIABILITIES OF DISSOLVED PARTNERSHIP ARE ALSO LIABILITIES OF

THE PERSON OR PARTNERSHIP CONTINUING THE BUSINESS
1. When a new partner is admitted into an existing partnership.
● His liability for the obligations of the dissolved partnership shall be satisfied out of
partnership property only, unless there is a contrary stipulation.

2. When a partner retires and assigns (or the representative of a deceased partner assigns) his rights
in partnership property to two or more partners, or to one or more of the partners and one or more
third persons.

3. 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.

4. When any partner retires or dies and the business of the dissolved partnership is continued, with the
consent of the retired partner or the representative of the deceased partner, but without any
assignment of his right in specific partnership property.

5. 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 dissolved partnership.
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 6. When any partner wrongfully causes the dissolution of the partnership and the remaining partners
continue the business without liquidation of partnership affairs.

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

ABOUT A PARTNER WHO RETIRES OR THE LEGAL REPRESENTATIVE OF A

DECEASED PARTNER
Rights of partner who retires or the legal representative of a deceased partner if business is
continued without settlement of accounts
1. To have the value of the interest of the retiring or deceased partner ascertained as of the date of
dissolution.
2. To receive as ordinary creditor an amount equal to value of his interest in the dissolved
partnership with interest, or at his option, in lieu of the interest on such value, the profits
attributable to the use of his right in the property of the dissolved partnership.

Preference of partnership creditors

● Partnership creditors enjoy a prior right as against the separate creditors of a retiring or deceased
partner with respect to the claim of a retiring partner or of a deceased partner's legal
representative.

Right to accounting
● Any partner or the legal representative of a deceased partner has a right to an accounting of his
interest against the following:
1. Winding up partners.
2. The surviving partners.
3. The person or partnership continuing the business.

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