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(ARTS.

1828-1842)
#letsendthis
#itsover
The dissolution of a partnership is the change
ARTICL in the relation of the partners caused by

182
E any partner ceasing to be associated in the
carrying on as distinguished from the
winding up of the business.
8
EFFECTS OF CHANGE
OF MEMBERSHIP:
1. formation of a new partnership
2. transformation of all partners
into incoming partners
3. continuance by remaining
ARTICL
182
E

A partnership does not


last forever.
- De Leon
ARTICL
STAGES OF
182
E
ENDING A
8 PARTNERSHIP

DISSOL WINDI TERMI


UTION NG UP NATIO
It is that point in It is the process
time when theN
partners cease to
of settling the
business or
carry on the partnership It is that point in
Partnership Not
ARTICL
182
E Terminated
9 by Dissolution
but continues until the winding up of

EFFECTS OF
partnership affairs is completed.

DISSOLUTION:
1. Partnership not automatically

terminated.

2. Partnership continues for a


ARTICL
183
Causes o f
E

0Without violation of the agreement


Dissolution
between the partners:
By the termination of the definite term or particular
undertaking specified in the agreement;

By the express will of any partner, who must act in


good faith, when no
definite term or particular is specified;

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;
N1
QUESTIO

Jen Madala brought an action for withdrawal of


his capital contribution from Vernadette, which
would mean the dissolution because the
partnership was for a definite term.
In impugning Jen 's right to maintain the suit,
Vernadette cited Arts. 1808 and 1830 and Jen 's
alleged bad faith. Does Jen has a right to
withdraw from the partnership?

A: YES. Art. 1808 only requires the capitalist


partner (who had engaged for his own account a
similar business as that of the partnership) to
bring to the common fund of the partnership the
profits he might have realized. it does not
prevent him from withdrawing from he
partnership. (Lee Tee v, Ching Chiong)
N2
QUESTIO

Q: Jojoe and Verna formed a partnership to


exploit a fishpond and thereafter to divide it
between them into 2 equal parts. succeeding
events reveal the intent of both parties to
terminate the partnership by refusing to share
the fishpond with the other - in direct violation
of the undertaking for which they've
established their partnership - which resolution
they articulated in letters to each other. Should
the partnership be considered dissolved?

A: YES. Both Jojoe and Verna must be deemed to


have expressly withdrawn from the partnership,
thereby causing its dissolution pursuant to Art. 1830
ARTICL
183
E
Causes o f
0 Dissolution

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
Causes
ARTICL
183
E
o f
Dissolution
0By 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

A partnership must have a


lawful
object or purpose.
1
EXAMPLE

Cha and Fer are partners in a law. Cha


is later on appointed Judge of the RTC.
Under the law, a Judge of the RTC is
prohibited from engaging in the practice of
law.
In this case, it would be unlawful for Cha to
continue as a partner in the law firm. Her
Appointment dissolves the partnership of
which she is a member.
Causes
ARTICL
183
E
o f
Dissolution
0 Loss of Specific Thing

Loss before Loss after Loss there only


Delivery Delivery use or enjoyment
If the loss occurred is contributed
If the specific thing
after the delivery of The loss of this
to be contributed
the thing promised, thing before or
by a partner is lost
then partnership is after the delivery
before delivery,
not dissolved. dissolves the
the partnership is
Causes o f
ARTICL
183
E Dissolution
0 By the Death of any
Partner
ARTICL
183
E
Causes o f
0 By theDissolution
Insolvency of any Partner or of the
Partnership

The insolvency of a partner subjects his interest in


the partnership to the right of is creditors and
makes it impossible for him to satisfy partnership
obligations to its creditors.
ARTICL Causes o f
183
E

0 Dissolution
By civil interdiction
of any partner

By decree of court under the following


article.
ARTICL Causes o f
183
E

Dissolution
0 Can the partners in their contract
decrease or limit the causes of
dissolution?

No. A contractual provision prohibiting


dissolution except by authorization of two-
thirds of the members, cannot be sustained
when the firm had:
a) lost its capital;
b) become bankrupt; or
c) had utterly abandoned the enterprise for
which it had been organized. (Lichauco v.
Lichauco, 33 Phil. 350)
Grounds f o r
ARTICL
183
E Dissolution
1 The facts enumerated in Art. 1831 a
necessary judicial determination as to
dismay be so far open to dispute or
difference of opinion as to make solution
rather than allow for automatic dissolution
by operation of law.

Dissolution of the firm is effected at


the time the judicial decree becomes a
final judgement.
Grounds f o r
ARTICL
183
183
E Dissolution
1 On application byREQUISITES:
a partner
1 1. must materially affect the
capacity of the partner to
INSANIT
perform is contractual
Y duties as partner.; and
2. must be lasting or
recovery is remote.
OTHE INCAPACIT
R Y
CIRCUMSTANCE
S

BUSINESS CAN MISCONDUCT


BE AND PERSISTENT
CARRIED ONLY BREACH OF
AT PARTNERSHIP
Grounds f o r
ARTICL Dissolution
183
E
On application by a
1 purchaser of a partners
interest

a) when the interest was


assigned
b) when the charging order was
issued
ARTICL EFFECT OF DISSOLUTION ON
183
E
AUTHORITY OF PARTNER
2
GENERAL RULE
Unless, otherwise stipulated, every partner is
considered the agent of he partnership with authority to
bind the partnership with respect to the transaction of its
business. (Art. 1803)
ARTICL EFFECT OF DISSOLUTION ON
183
E
AUTHORITY OF PARTNER
2
QUALIFICATION TO THE RULE
In so far as the partners themselves are concerned.

With respect to third persons.


EXAMPLE
The articles of co-partnership provide
that in case of death of one partner, the
partnership shall not be dissolved but
shall be continued by the deceased
partners heirs. When Jen, a partner, died,
his wife, Verns, took over the management
of some of the real properties with
permission of the surviving partner, Jojo,
but her name was not included in the
partnership name. She eventually sold
these real properties after a few years.
Jojo now claims that Verns did not have
the authority to manage and sell those
properties as she was not a partner. Is the
ANSWER
Yes. The widow was not a mere agent,
because she had become a partner upon her
husband's death, as expressly provided by the
articles of co-partnership, and by authorizing
the widow to manage partnership property X
recognized her as a general partner with
authority to administer and alienate partnership
property. It is immaterial that W's name was not
included in the firm name, since no conversion
of status is involved, and the articles of co-
partnership expressly contemplated the
admission of the partner's heirs into the
partnership (Goquiolay v. Sycip, G.R. No. L-
11840, Dec. 16, 1963).
ARTICL
183
E

3
After the dissolution of a partnership,
can a partner still bind the partnership?

Generally, the authority of the partner


as it affects his co-partners is not
deemed terminated
ARTICL
183
E
CAUSES OF
3 DISSOLUTION

ACT
INSOLVENCY
DEATH
ARTICL AUTHORITY OF PARTNERS, AS AMONG
183
E THEMSELVES, TO ACT FOR THE
PARTNERSHIP
3
The cause of the dissolution is the act of a
partner and the acting partner had knowledge
of such dissolution.

The cause of the dissolution is the death or


insolvency of a partner and the acting partner had
knowledge or notice of the death or insolvency.
dissolved
ARTICL partnership to third
183 persons
E

By an act appropriate for winding up


partnership affairs of completing
transactions unfinished at dissolution;
ARTICL Power of partner to bind dissolved
183
E partnership to third persons
4 By any transaction which would bind
the partnership if dissolution had not
taken place, provided the other party
to the transaction:
(a)Had extended credit to the
partnership prior to
dissolution and had knowledge or notice of the
dissolution
(b)Though he had not so extended credit,
had nevertheless known of the partnership prior
to dissolution, and, having no knowledge or notice
of dissolution, the fact of dissolution had not been
advertised in a newspaper of general circulation in
the place (or in each place if more that one) at
ARTICL
183
E WHEN IS PARTNERSHIP
4
BOUND: Not BOUND:
1. business is for
WINDING UP 1.UNLAWFULLY
2. Business is to DISSOLVED
complete 2.INSOLVENT Partners
UNFINISHED 3. Partner
TRANSACTION UNAUTHORIZED to
3.COMPLETELY NEW wind up (with XPTNs)
BUSINESS with
innocent third party
ARTICL Notice of dissolution to partners
183
E
As to persons who extended credit
4 to partnership
to dissolution

As to persons who had known of


partnerships
existence

Where acting partner has no


authority to wind up partnership
affairs


ARTICL
183
E
Cha purchased goods from a partnership.
4
Thereafter, the partnership was dissolved. Notice of
the dissolution was advertised in the Mayon Times.
Without knowledge of the dissolution, Cha thereafter
extended credit to the supposed partnership at the
request of Abenson, her c in connection with
transaction not necessary for the liquidation of the
business.
May Cha hold the partnership liable on the said
transaction?
ARTICL
183
E

4 No. Prior dealers must be


given actual notice of the
dissolution of a partnership
liability. Cha, however, is not
prior dealer. Hence, she is
considered to have received
notice as a matter of law when
the fact of dissolution was
advertised in Mayon Times.
Eff ect o f d i s s o l u t i o n
ARTICL
on
183
E
partners existing
5 liability
The dissolution of a not of
partnership does itself
discharge the existing liability of a
Apartner.
partner may be relieved from all existing
liabilities upon dissolution only by an
agreement to that effect between himself,
the partnership creditor and the other
partners.
Liability o f estate o f
ARTICL
183
E deceased
partner
5

The individual property of a deceased partner


shall be liable for all obligations of the
partnership incurred while he was a partner
with preference to his individual creditors.
ARTICL MANNER OF
183
E

6 WINDING UP
ARTICL PERSONS AUTHORIZED TO
183
E
WIND UP
6
ARTICL Right o f partner t o application o f
183
E partnership p r o p e r t y o n d i s s o l u t i o n

7
Dissolution without
contravention of the partnership
agreement.
Dissolution in
contravention of the
partnership agreement.
A.Rights of partner who has not
caused the dissolution
wrongfully.
ARTICL
Dissolution without
183
E
contravention of the
7 partnership agreement.
(A) To have the partnership property
applied to discharge the liabilities of the
partnership; and
(B) To have the surplus, if any, applied to
pay in cash the net amount owing to the
respective partners.
*NOTE: If the dissolution is proper or rightful, no
partner is liable for any loss sustained as a result
of the dissolution.
ARTICL
Dissolution in
183
E
contravention of the
7 partnership agreement.
Rights of partner who has not caused the dissolution
wrongfully:
a. To have partnership property applied for the
payment of its liabilities and to receive in cash his
share of the surplus;
b. To be indemnified for damages caused by the
partner guilty of wrongful dissolution;
c. To continue the business in the same name
during the agreed term of the partnership, by
themselves or jointly with others; and
d. To possess partnership property should they
decide to continue the business.
ARTICL
Dissolution in
183
E
contravention of the
7 Rights of partner who has wrongfully caused the
partnership agreement.
dissolution:
a. If the business is not continued by the other partners,
to have the partnership property applied to discharge its
liabilities and to receive in cash his share of the surplus less
damages caused by his wrongful dissolution.
b. If the business is continued:
1. To have the value of his interest in the partnership at
the time of the dissolution, less any damage caused by the
dissolution to his co-partners, ascertained and paid in cash or
secured by bond approved by the court; and
2.To be released from all existing and future liabilities of
the partnership.
*Note that the innocent partners have more rights than the guilty partners and
that the latter are made liable for damages caused by their wrongful dissolution,
and in ascertaining the value of their interest, the value of the goodwill of the
business is not considered, obviously as a penalty for their bad faith.
ARTICL Order of priority in the
183
E distribution of assets during the
dissolution of a limited
7 partnership
1. Those to creditors, in the order of priority
as provided by law, except those to limited
partners on account of their contributions,
and to general partners
2. Those to limited partners in respect to
their share of the profits and other
compensation by way of income on their
contributions
3. Those to limited partners in respect to the
capital of their contributions
4. Those to general partners other than for
capital and profits
ARTICL Order of priority in the
183
E distribution of assets during the
dissolution of a limited
7 partnership
5. Those to general partners in respect to
profits
6.Those to general partners in respect to
capital (Art. 1863, NCC)

NOTE: Subject to any statement in the certificate or to


subsequent agreement, limited partners share in the
partnership assets in respect to their claims for
capital, and in respect to their claims for profits or for
compensation by way of income on their contribution
respectively, in proportion to the respective amounts
of such claims.
ARTICL Right o f Partner t o
183
E Rescind C o n t r a c t o f
Partnership
8
Inducement of an individual to become a partner
by means of fraud or misrepresentation makes the
partnership contract voidable and annullable.

INJURED PARTNER IS ENTITLED TO RESTITTUTION

Continuous existence of
partnership.
DEFRAUDED PARTNER LIABLE FOR ALL OBLIGATIONS
TO THIRD PERSONS.
ARTICL
Right o f Injured Partner
E where
1838 Partnership C o n t r a c t Rescinded
Right of a lien on, or retention of, the
surplus of partnership property after
satisfying partnership liabilities for any
sum of money paid or contributed by
him. RETENTION

Right to stand in the place of the


creditors of the partnership after
payment of partnership liabilities.
SUBROGATION
Rules in Settling Accounts between
ARTICL
Partners a f t e r Dissolution
183
E

9 ASSETS OF THE
PARTNERSHIP

Partnership Contributions
Property of Partners
Rules in Settling Accounts between
ARTICL
Partners a f t e r Dissolution
183
E

9 ORDER OF APPLICATION
OF THE ASSETS
Partnership Creditors

Loans to Partners

Return of capital
contributions

Share in profits
Rules in Settling Accounts
ARTICL between Partners after
183
E
Right of a Dissolution
partner if the
9 assets insufficient

Capital Loss of a Partner

Enforce contributions of the


Partners

All partners Only few partners


contributed contribute

Sue non-paying partners for


ARTICL Rules in Settling Accounts between
E183 Partners a f t e r Dissolution
9Liability of deceased partners
individual property
Only liabilities of the partnership incurred while the
deceased partner
is a partner will be attached to individual property as his
share.

Liabilities covered by
individual property
of a deceased
ARTICL
Rules in Settling Accounts between
183
E Partners a f t e r Dissolution
PRIORITY TO PAYMENT OF PARTNERSHIP
9 CREDITORS / PARTNERS CREDITORS

PARTNERSHIP PROPERTY PARTNERSHIP CREDITORS

INDIVIDUAL PROPERTY INDIVIDUAL CREDITORS


ARTICL Rules in Settling Accounts between
183
E
Partners a f t e r Dissolution
9 DISTRIBUTION OF PROPERTY OF
INSOLVENT PARTNER

SEPARATE
CREDITORS
PARTNERSHIP
CREDITORS
CONTRIBUTION
TO PARTNERS
A, B, and C, are partners. A contributed
P150,000.00, B
P100,000.00, and C, P50,000.00. On
dissolution, the assets of the
partnership amounted to P500,000.00. The
partnership owes D
the amount of P70,000.00, E, P50,000.00, and
A, P20,000.00.
(2) The accounts of the partnership shall be
settled as follows:
(a) D and E, who are partnership creditors, shall be
paid first the total sum of P120,000.00, leaving a
balance of
P380,000.00;

(b) Then, A, who is also a creditor, will be paid his


credit of P20,000.00, leaving a balance of
P360,000.00;

(c) Afterwards, the contributions of A, B, and C to


the partnership capital shall be returned to them
in the total sum of P300,000.00, thereby leaving a
balance of P60,000.00;

(d) The balance of P60,000.00 constitutes the


profit which shall be divided among A, B, and C
(unless there is an agreement to the contrary [Art.
(3) Suppose, in the same example, the liabilities of
the partnership amount to P560,000.00. The
partnership assets, then shall be exhausted to
satisfy these liabilities thereby leaving an unpaid
balance of P60,000.00. The partners shall then
contribute to the loss, in the absence of an
agreement to the contrary, in accordance with
their capital contributions. Consequently, A is
liable out of his separate property in the amount
of P30,000.00, B, P20,000.00, and C, P10,000.00.

These contributions which are necessary to pay


the liabilities of the partnership are considered
partnership assets (No. 1[b].) and any assignee for
the benefit of creditors and any person appointed
by the court may enforce the contributions.

In case C paid the whole amount of P60,000.00,


(4) If B is already dead, his estate is still liable for
the contributions needed to pay off the
partnership obligations provided they were
incurred while he was still a partner.

(5) Suppose now that under Nos. 1 and 2 above, C


owes F P40,000.00. Following the rule that
partnership creditors have preference regarding
partnership property, only the share of C in the
amount of P10,000.00 can be used to pay his debt
to F and the unpaid balance of P30,000.00 must be
taken from the individual property, if any, of C.
(6) Suppose again, that the partnership debts
amount to
P560,000.00 as in No. 3. So, C is still liable out of
his separate
property to partnership creditors in the amount of
P10,000.00.
His separate property amounts to P45,000.00. In
this case, his
assets shall fi rst be applied to pay his debt of
P40,000.00 to F
and the balance of P5,000.00 to pay part of his
debt of P10,000.00
still owing to partnership creditors in accordance
with the rule
that regarding individual properties, individual
creditors are
preferred.
ARTICL Dissolution o f
184
E Partnership by Change in
Membership
0
ADMISSION OF NEW PARTNER

RETIREMENT, DEATH, WITHDRAWAL OR


EXPULSION OF A
PARTNER

PARTNERS ASSIGNMENT OF RIGHTS TO SOLE


REMAINING PARTNER

ALL PARTNERS ASSIGNMENT OF RIGHTS TO


THIRD PERSONS
ARTICL Rights o f Creditors o f
184
E Dissolved Partnership
which is Continued
0

DISSOLVED NEW CONTINUING PARTNERSHIP


PARTNERSHI PARTNERSHI CREDITORS
P CREDITORS P
CREDITORS
C is admitted as a new partner into the existing
partnership of A
and B.

Technically, the old firm of A and B is dissolved and


a new firm composed of A, B, and C is formed. C
will not be individually liable for the debts of the
old firm. His investment, however, constituting a
part of the firm assets, will be equally available to
both creditors of the old and creditors of the new
firm. (par. 2; Art. 1826.)
ARTICL
E Liability o f Persons
Continuing
1840 Business o f Dissolved Partnerships
The liability of the new or incoming
partners shall be satisfied out of
partnership property only unless
there is stipulation to the contrary.

Obligations to the debts of the


dissolved partnership of one or more
third persons who continue the
partnership shall apply only when the
continuing partners promise to pay
such.
If A, B, and C, partners, sell the partnership
business to D, and if D promises to pay the debts
and to continue the business, the creditors of the
dissolved partnership of A, B, and C are also the
creditors of D.
Rights o f Retiring o r o f Legal
ARTICL Representative
184
E o f Deceased Partner when Business is
Deceased
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.

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 profits
attributable to the use of his right.
A, B, and C are partners in X & Co. which is
indebted to D in the amount of P50,000.00. Later
on, X & Co. was dissolved by reason of the
withdrawal of C. The business was continued by A
and B without any settlement of account between
A and B, on the one hand, and C, on the other.

C or his legal representative has the right to have


the value of his interest in the partnership
ascertained and paid to him. Assuming that the
interest of C has been ascertained to be
P30,000.00, D has priority over the claim of C, his
legal representative, or his separate creditor.
Partners Right t o
ARTICL
Ac c o u n t
184
E
o f His Interest
2 Accrual
Right
The right to demand an
accounting of the value of his
interest accrues to any partners or
his legal representative after
dissolution in the absence of an
agreement to the contrary.
Prescription begins to run only upon
the dissolution of the partnership when
the final accounting is done. Under
Articles 1806, 1807, and 1809, the
right to demand an accounting exists
as long as the partnership exists.
(Fue Leung vs. IAC , 169 SCRA 746
[1989]
ARTICL Partners Right t o
E184 Ac c o u n t
o f His Interest
2
Person liable to render an
The rightaccount
of a partner or the one
who represents him as owner of
his interest to an account to a
payment of the amount of his
interest, may be exercised as
against:
1. The winding up partner
2. The surviving partner
3. The person or partnership
continuing the business.
3. LOANS AND ADVANCES MADE BY PARTNERS
Loans payable at maturity and
accumulated profits may be withdrawn at
any time by consent of a majority.

Example:
Amounts paid in excess of a partners
agreed capital contributions.
CAPITAL CONTRIBUTED BY PARTNERS

Industrial partner
-not entitled to any part of the firm capital on
dissolution in the absence of agreement

Note:
Total capital contribution of partners is not equivalent to the gross
assets to be distributed to the partners at the time of the
dissolution. It may be impaired or become unavailable for
distribution or return to the partners because of losses sustained
by the partnership.
(Villareal vs Ramirez, 406 SCRA 145, 2003).
RIGHT OF A PARTNER WHERE ASSETS
INSUFFICIENT

deficit is a capital loss which requires


contribution like any other loss.
Who has the right to enforce the contributions
of the partners provided in Article 1797?

A. any partner or legal representative (to the extent


of the amount which he has paid in excess of his share
in the liability)

B. any assignee for the benefit of creditors

C. any person appointed by court


LIABILITY OF DECEASED
PARTNERS INDIVIDUAL PROPERTY

shall be liable for his share of the


contributions necessary to satisfy the
liabilities of the partnership incurred
while the former was a partner (Articles
1816 & 1835,paragraph 3)
DOCTRINE OF THE
MARSHALLING ASSETS

Partnership assets to partnership


creditors, individual assets to
individual creditors; anything left
from either goes to the other.
Q. What if all the partners are solidarily
liable to a creditor on the transaction
independent of partnership, is the creditor
allowed to share pari passu (by same
gradation) with the partnership assets?

A. No. Having secured priority over the firm


creditors against the individual property of
the firm members, the creditors are
relegated to a secondary position to the
firm creditors, since the claim is not based
on firm obligation.
PRINCIPLE OF EQUITY

Separate creditor of an individual


partner can execute against the
assets of the firm ONLY to the extent
of the interest of the partner in firm
assets, which is nothing more than a
right to any surplus remaining after
firm creditors have been paid.
Purpose:

to maintain the preferential rights of


the old creditors to the partnership
property as against the separate
creditors of the partners
Purpose:

to maintain the preferential rights of


the old creditors to the partnership
property as against the separate
creditors of the partners