M

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D DISSOLUTION &
U WINDING UP
L
E
4

LAW 2 BUSINESS LAW AND REGULATIONS

 DEFINITION OF TERMS

Dissolution, winding up and termination, concept

1. Dissolution – change in the relation of the partners caused by

any partner ceasing to be associated in the carrying of the
business. (Art. 1828)

2. Winding up – is the process of settling the business or affairs

of the partnership after dissolution. (Art. 1829)

3. Termination – refers to the point when all business or affairs

of the partnership are completely wound up.
 DISSOLUTION - CAUSES

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.
 DISSOLUTION - CAUSES

Causes of dissolution

2. In contravention of the agreement between the partners, by the

express will of any partner at any time.
 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. By the death of any partner.

5. By the insolvency of any partner or of the partnership.

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

 DISSOLUTION - CAUSES

Causes of dissolution

7. 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.
 DISSOLUTION - CAUSES
Causes of dissolution

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:
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 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) The business of the partnership can only be carried

on at a loss.
 DISSOLUTION - CAUSES

Causes of dissolution

8. By decree of court in the following cases:

5) 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.

6) Other circumstances render a dissolution equitable.

(Art. 1831)
 DISSOLUTION - CAUSES

Causes of dissolution

8. By decree of court in the following cases:

b. On the application of the purchaser of a partner’s interest.
1) After the termination of the specific term or
particular undertaking.

2) Ay any time when the partnership was a partnership

at will when the interest was assigned or the
changing order was issued. (Art. 1831)
 DISSOLUTION – EFFECT ON PARTNER’S AUTHORITY

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 the 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. (Arts. 1832, 1833, 1834 and 1839)
 DISSOLUTION – EFFECT ON PARTNER’S AUTHORITY

When authority of a partner to enter into new transactions is

terminated among the partners (Arts. 1832, 1833, 1834)
1. If the cause of the dissolution is not by the act, insolvency or
death of a partner.
 Notice or knowledge of the acting partner of the cause of
dissolution is immaterial.

2. If the cause of dissolution is the act of a partner and the partner

who entered into a new transaction had knowledge of the
dissolution.

3. If the cause of dissolution is the insolvency or death of a

partner and the partner who entered into a new transaction had
notice or knowledge of such insolvency or death.
 DISSOLUTION – EFFECT ON PARTNER’S AUTHORITY

When authority of a partner to enter into new transactions is not

terminated among the partners (Art. 1832)

1. If the cause of dissolution is the act of a partner and the acting

partner had no knowledge of the dissolution.

2. If the cause of dissolution is the insolvency or death of a

partner and the acting partner had no notice or knowledge of
such insolvency or death.
 ACT AFTER DISSOLUTION – WILL IT BIND THE PARTNERSHIP?

When authority of a partner after dissolution binds the partnership

(Art. 1834)
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
dissolution.
 A previous creditor 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.
ACT AFTER DISSOLUTION – WILL IT BIND THE PARTNERSHIP?

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.
ACT AFTER DISSOLUTION – WILL IT BIND THE PARTNERSHIP?

A 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 cases (No. 3a and 3b), a partner is not liable with

his separate property after the exhaustion of the partnership assets:
a. If he is unknown as a partner to the person with whom the
contract is made, and
b. So far 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.
ACT AFTER DISSOLUTION – WILL IT BIND THE PARTNERSHIP?

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 (i.e., previous creditor), and he had no notice
or knowledge of the partner’s lack of authority.

b. One who had not so extended credit before dissolution

(i.e., new creditor) 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 (or in each place if more
than one) at which the business is conducted.
Except for the subject matter of the notice or
knowledge which is the lack of authority of the partner to
wind up, the explanation for No. 4 (a) and (b) is similar to
No. 3 (a) and (b), first paragraph.
 ACT AFTER DISSOLUTION – WILL IT BIND THE PARTNERSHIP?

When authority of a partner after dissolution does not bind the

partnership (Art. 1834)
1. Where the partnership is dissolved because it is unlawful to
carry on the business, unless the act is appropriate for winding
up 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.
(Please refer to No. 4(a) and (b) of the immediately
preceding topic).

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.
 LIABILITY OF PARTNERS & PARTNERSHIP
FOR ACTS AFTER DISSOLUTION

Summary of rules on liability of the partners and the partnership

for acts of 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.
LIABILITY OF PARTNERS & PARTNERSHIP
FOR ACTS AFTER DISSOLUTION (EXAMPLE)

1. M, A, P, L, and E are partners in MAPLE Co. which is

engaged in trading dry goods. M is the manager. E dies. M
knows of the death of E but the still purchases good from R, a
creditor who had granted credit to MAPLE before dissolution.
R was not aware of the dissolution of MAPLE by reason of
death of E.
a. Since M knows the death of E, then his authority of
already terminated among the partners.
b. With respect to R who is a previous creditor, since he was
not specially notified of the dissolution, MAPLE is bound
by the purchase made by M.
In this case, R can go after the assets of MAPLE. If
MAPLE’s assets are not sufficient, he can go after the
separate assets of all partners including those of E.
Thereafter, A, P, L and the legal representative of E can go
after M for indemnity. This is so because among the partners,
M’s authority to enter into a new transaction was terminated
 LIABILITY OF PARTNERS & PARTNERSHIP
FOR ACTS AFTER DISSOLUTION

Summary of rules on liability of the partners and the partnership

for acts of partners after dissolution.
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.
LIABILITY OF PARTNERS & PARTNERSHIP
FOR ACTS AFTER DISSOLUTION (EXAMPLE)

2. In the example of MAPLE, if M was not aware of the death of

E, then his authority was not yet terminated among the
partners. Accordingly, he can call on his partners and on E’s
legal representative for contribution from partner’s separate
assets if MAPLE’s assets are not sufficient to pay the liability
to R. The partners shall be liable as if MAPLE has not been
dissolved.
 LIABILITY OF PARTNERS & PARTNERSHIP
FOR ACTS AFTER DISSOLUTION

Summary of rules on liability of the partners and the partnership

for acts of partners after dissolution.
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.
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 the cannot call on the other
partners to share in the payment.
LIABILITY OF PARTNERS & PARTNERSHIP
FOR ACTS AFTER DISSOLUTION (EXAMPLE)

3. With respect to number 1, if R was specially notified of the

dissolution, then only M will be liable to R. M cannot call on
the other partners and E’s legal representative to share in
payment.
 LIABILITY OF PARTNERS & PARTNERSHIP
FOR ACTS AFTER DISSOLUTION

Summary of rules on liability of the partners and the partnership

for acts of partners after dissolution.
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 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 the provisions
of partnership. However, the author respectfully submits that the
transaction does not bind either the partnership or the acting
partner by reason of the bad faith of the third person in view of
Art. 1931 on Agency. Thus, if the third person had knowledge of
the dissolution of the partnership (which is the principal), then he
is considered in bad faith and will not the protected by law.
LIABILITY OF PARTNERS & PARTNERSHIP
FOR ACTS AFTER DISSOLUTION (EXAMPLE)

4. If there was a publication of the dissolution but R has not read

it, R as a previous creditor, is deemed to be without knowledge
or notice. Accordingly, MAPLE is liable to R. If R 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.
 WILL A PARTNER’S LIABILITY BE DISCHARGED UPON DISSOLUTION?

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; and
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 with he was a
partner, but subject to the prior payment of his separate debts.
 WINDING UP RESPONSIBILITIES
Who may wind up partnership affairs? (Art. 1836)
1. Extra-judicially
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.
 RIGHTS OF PARTNERS UPON DISSOLUTION
Application of partnership property and other rights of partners on
dissolution (Art. 1837)
1. 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 to

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 discharge 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.
RIGHTS OF PARTNERS UPON DISSOLUTION
2. Dissolution in contravention of the partnership agreement.
a. Rights of partner who has not caused the dissolution
wrongfully.
1) To have the partnership property applied to discharge
the 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 from 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:
RIGHTS OF PARTNERS UPON DISSOLUTION
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.

RIGHTS OF PARTNERS UPON DISSOLUTION
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. (value of
goodwill shall not be included in ascertaining the
value of partner’s interest).
b) To be released from all existing liabilities of the
partnership.
 GROUNDS AND RIGHTS IN CASE OF RESCISSION
OF PARTNERSHIP CONTRACT

Rescission of partnership contract (Art. 1838)

1. Grounds of rescission
a. Fraud; or
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.
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.
 DISSOLUTION TO LIQUIDATION
Liquidation of dissolved partnership (Art. 1839)
1. Liquidation or winding up, concept
This involves 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.

2. Order of payment of partnership liabilities

a. Those owing to the 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. 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:
DISSOLUTION TO LIQUIDATION
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.
DISSOLUTION TO LIQUIDATION
4. 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.

5. 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
 CONTINUITY OF LIABILITIES OF A DISSOLVED PARTNERSHIP

When liabilities of dissolved partnership are also liabilities of the

person or partnership continuing the business (Art. 1840)
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. (Art. 1826)

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.
CONTINUITY OF LIABILITIES OF A DISSOLVED PARTNERSHIP

4. When any partner retires of 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 representative assign their rights
in partnership property to one or more third persons who
promise to pay the debts and who continue the dissolved
partnership.

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.
 RIGHTS OF RETIRING PARTNER OR OF
LEGAL REPRESENTATIVE OF DECEASED PARTNER

Rights of partner who retires or the legal representative of a

deceased partner if business is continued without settlement of
accounts (Art. 1841)
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.
 PREFERENCES & RIGHT TO FORMAL ACCOUNT

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 (Art. 1840 and 1841)

Right to accounting (Art. 1842)

Any partner or 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.
END OF MODULE
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