CA51017: Business Law

Chapter 3: Dissolution and Winding Up

Notes_by_ai

ARTICLE 1828 - 1829. Concepts of Dissolution, Winding Up, and Termination

Dissolution – refers to the change in the relation of the partners caused by any partner ceasing to be associated in the
carrying on as distinguished from the winding up of the business.
● Any partner na tumitigil ma-associate sa isang business. Hindi lang dahil may umalis o namatay na partner, may
dissolution din kapag may na-admit o pumasok na bagong partner
● Ex. AB partnership. Papasok si C magiging ABC partnership, na-dissolve yung AB partnership.

Winding Up – the process of settling the business affairs of the partnership after dissolution
● It is the process of liquidating the assets of a partnership or corporation in order to pay creditors and make
distributions to partners or shareholders upon dissolution (pagbebenta ng assets)
● On dissolution the partnership is not terminated, but continues until the winding up of partnership affairs is
completed.
● Hindi lahat ng dissolution ay mapupunta sa liquidation. May mga partnership na na-dissolve dahil mag-form ng
panibagong partnership kasi may nadagdag na bagong partner.
○ Question: All dissolution will lead to liquidation and all liquidation came from a valid dissolution?
FALSE, dahil may dissolution that results in the formation of a new partnership. TRUE, specific type
ng dissolution na nauwi sa liquidation: RETIREMENT— retirement lahat ng partner o namatay lahat
ng partner — leads to liquidation. Kapag may natirang partner hindi ito mag-lead sa liquidation, babalik
ulit sa formation ng panibagong partnership.

Termination - the point when all the business or affairs of the partnership are completely wound up.

Article 1830-1831. Causes of Dissolution

1. Causes of Automatic Dissolution

A. Without violation of the agreement of the partners

a. By the termination of the definite term or particular undertaking specified in the agreement
■ Nakaka dissolve ng partnership kapag tapos na yung definite term or yung particular
undertaking
■ Definite Term: Kapag napag-usapan niyo na yung partnership niyo is good for 2 years, at
ngayong araw na ito matatapos ang 2 years, after this day dissolved na ang partnership.
■ Particular undertaking: Ang partnership niyo ay binuo para magbenta ng tickets sa Sea
games. After ng sea games, dissolved na rin ang partnership.

Example: Ang partnership niyo ay one with a fixed term e.g. 5 years, pero kalagitnaan
pa lang ay umaayaw na yung partner mo.

Question: Yung partner ba na gustong umalis ay legally pwede mong pilitin na mag
stay? NO, kahit 5 years ang usapan niyo, hindi mo siya pwedeng pigilan na umalis.
Dahil kapag pinilit mo ay isang tao na ayaw na, this is tantamount/ equivalent to
involuntary servitude. (slavery or person laboring against that person's will to benefit
another) This is against our constitution especially on the right to involuntary servitude
dahil para kang trinatrato na alipin.
 b. By the express will:

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

● Paano natatapos ang isang partnership at will— sila ay mag partners hanggang pareho
pa nilang gusto? Kapag ang isa ay umayaw na, ma-ddisolve na ang partnership, by the
express will of the partner.

Example: Okay lang mag-initiate ng break-up (dissolution) kung talagang valid (good
faith) yung rason mo sa pakikipaghiwalay such as focus sa sarill.

Example: Kaya ka pala nakikipaghiwalay ay may kapalit na pala (bad faith). During
the course of your partnership, may nakita siyang greater opportunity. Supposedly,
kung magkapartner pa kayo yung kikitain sa sales niyo ay dapat paghahatian niyo.
Porket nalaman niya mag-isa yung offer, instead na sabihin sayo yung transaction,
humingi siya ng dissolution para maging sole proprietorship at masolo ang kita.

Analysis: Kapag napatunayan sa korte, na ang pag-alis mo sa partnership ay one in bad

faith, you could be liable for damages.

2. Of all the partners who have not assigned their interests or suffered them to be charged
for their separate debts, either before or after the termination of any specified term or
particular undertaking;
● Kapag nagkaayawan na lahat ng partners, dissolved na ang partnership

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;
■ Example: ABCD partnership. Si D na-expel dahil may kalokohang nagawa, from ABCD
partnership na na-dissolve, naging ABC partnership na lang.

B. In contravention of the agreement between the partners, where the circumstances do not permit a
dissolution under any other provision of this article, by the express will of any partner at any time;
■ The withdrawing partner can be held liable for damages
■ Kinontra ang agreement/ yung napag-usapan.
■ Example: 5 years na partnership agreement niyo, pero 2 years palang gusto na umalis. Pwede
umalis but magiging liable for damages.

C. By any event which makes it unlawful for the business of the partnership to be carried on or for the
members to carry it on in partnership;
■ Example: Bumuo kayo ng partnership na gumagawa ng motorcycle barrier. Pero dahil sa
sunod-sunod na aksidente dahil sa motorcycle barrier, naglabas bigla ng batas na bawal na
magbenta ng motorcycle barrier. Dahil ipmnagbabawal na yung produkto ng partnership niyo,
involuntarily ma-ddissolve ang inyong partnership.
■ Example: Nagbebenta yung partnership niyo ng marijuana noong time na legal pa. Pero kasama
na ito sa ipinagbabawal na gamot, ang effect nito ay ma-dissolve ang partnership niyo dahil
yung line of business niyo is considered unlawful or illegal na.

D. 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 thereof
■ The partner who owns the property bears the loss. With such loss, the partnership is dissolved
since the partner is considered not to have any contribution at all
 b. Loss before delivery of specific thing, which a partner had promised to contribute to the
partnership
■ Where a partner has promised to contribute a specific property to the partnership and not merely
its use or enjoyment, its loss before the delivery causes the automatic dissolution of the
partnership.

Example: ABC Partnership. Nangako si A na mag-invest ng specific na carabao. Bago

niya ma-icontribute yung specific carabao, tinamaan ito ng kidlat at namatay
Analysis: Dahil specific thing at wala nang maibigay na ganong carabao, the
partnership will be dissolved dahil yung specific thing na ipinangako ni A ay nag-perish
na before niya pa ma-deliver. —- Natapos na bago pa magsimula.

■ If the loss occurs after the delivery of the property to the partnership, the partnership is not
dissolved. The partnership, having acquired ownership upon the delivery, bears the loss.

Analysis: Dapat the specific thing perishes before the delivery, dahil kapag ito ay
nawala o namatay after ma-contribute sa partnership or the partnership has acquired
the ownership, hindi ma-dissolve ang partnership.
Example: Na-deliver na yung specific carabao sa farm ng partnership at kinabukasan
namatay yung kalabaw. Ang nawalan na ay ang partnership, considered as loss of the
partnership. But hindi to rason para ma-dissolve ang partnership.

E. By the death of the partner

■ Kapag namatay may isang partner: from ABCD partnership, namatay si D kaya magiging ABC
partnership na lang dahil na-dissolve yung ABCD.

F. By the insolvency of any partner or of the partnership;

■ Insolvency: mas marami na ang personal liabilities mo kesa sa personal assets mo
Example: ABCD partnership. Insolvent na si D yet hindi alam ng publiko. Si ABCD uutang sa
bangko at ang alam nila maganda ang credit standing ni D. Pero nung nalugi si ABCD,
hahabulin ang bawat isang partner lalo na si D dahil akala nila mayaman pa rin siya. Only to
find out, wala na palang masyadong personal assets dahil matagal na siyang insolvent. To
protect the public, sabi ng batas na tanggalin muna ang mga insolvent partners sa partnership.

G. By the civil interdiction of any partner

■ Civil interdiction: kawalan ng isang preso na mag-manage ng kanyang mga ari-arian
Analysis: Dahil siya ay nasa kulungan, walang paraan para ma-monitor niya ang assets ntya.
For the benefit of everyone, habang nakakulong ka tinanggalan ka ng batas ng karapatan na i-
manage ang assets mo sa labas which includes yung share mo sa isang partnership.

2. Dissolution by decree of court

A. In application by or for a partner

a. Insanity of a partner – A partner has been declared insane in any judicial proceeding or is shown to
be of unsound mind;
■ Legally, tanging ang judge lang ang pwedeng magsabi na baliw ng isang tao sa tulong ng mga
experts. Kinailangan pa ng tulong ng isang third person (si judge) para sabihin na ang isang
partner niyo ay baliw na at dapat itigil na yung partnership dahil hindi na siya fit maging partner.
(Kailangan ng third person dahil hindi massolve kapag within partners lang at mas natatauhan
kapag ibang tao ang nagsabi)
 b. Incapacity of a partner to perform his part – partner becomes in any other way incapable of
performing his part of the partnership contract;
■ Example: Incapability to perform part: may happen when the partner enters the government
service which would prohibit him from participating in the firm, or when he will stay abroad
for a long time

c. A partner has been guilty of such conduct as tends to affect prejudicially the carrying on of the
business;

d. 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;

e. The business of the partnership can only be carried on at a loss – Sasabihin ni judge na itigil na ang
partnership dahil kundi paulit-ulit lang na malulugi

f. Other circumstances render a dissolution equitable.

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

a. After the termination of the specific term or particular undertaking
b. At any time when the partnership was a partnership at will when the interest was assigned or the
charging order was issued.

Article 1832 - 1835. EFFECTS OF DISSOLUTION

Kapag na-dissolve ang partnership, nawawala ang lahat ng authority ng mga partner to act for the partnership. Maliban
na lang sa mga transactions to wind up, tapusin lahat ng affairs ng partnership such as pagbebenta ng mga assets at
tapusin ang mga transactions na nasimulan pero hindi pa natapos.

Once ma dissolve bawal na yung magbenta ng regular items niyo as if nag-ooperate pa kayo normally, ang ibebenta na
lang ay yung mga natitirang assets for liquidation.

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:
A. Acts to wind up partnership affairs
B. Acts to complete transactions begun before dissolution

Nota bene: In the above cases, teh 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 enter into new transactions is terminated among the Partners
A. If the cause of dissolution is not by act, insolvency, or death of a partner(such as expiration of the term for which
the partnership was constituted or by the decree of court)
○ Notice or knowledge of the acting partner of the cause of dissolution is immaterial

B. If the case of dissolution is the act of a partner and the parter who entered into the new transaction had knowledge
of the dissolution

C. If the dissolution is the 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 enter into new transaction is not terminated among the Partners
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

When the act of a partner after dissolution binds the partnership

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 in the following cases:

a. If the other party to the transaction had extended credit to the partnership before dissolution (previous
creditor) and he had no knowledge or notice of the dissolution
■ Previous creditor = entitled to special attention
b. If the other party to the transaction had not so extended credit before dissolution (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 more than one), at which
the business is regularly carried on.
■ New creditor = not entitled

Nota bene: In above cases (3A and 3B), a partner is not liable with his separate property after the
exhaustion of partnership assets:
a. If he is unknown as a partner to the person with whom the contract is made
b. So far unknown and inactive in partnership affairs that the business reputation of the partnership
could not be said to have been to 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 (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 (new creditor) and having no notice or
knowledge of the partner’s lack of authority, the fact of want authority has not been advertised in a
newspaper at which the business is conducted
Nota bene: Except for the subject matter of the notice/knowledge, the explanation for 3 and 4 is the same

When the act of a partner after dissolution does not bind the partnership
a. Where the partnership is dissolved because it is unlawful to carry on the business, unless the act is appropriate
for winding up partnership affairs
b. Where the acting partner is insolvent
c. Where the partner had no authority to wind up partnership affairs, except with innocent third persons (Case 4
of the precious topic)
d. Where the 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 partner after dissolution
A. Terminated and Bound: If the 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 ti demand the return of the amount paid out of the partnership assets. This is because
in so far as the partners are concerned, the authority of the acting partner was already terminated.
 B. Not Terminated and Bound: 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 asset of the partnership is 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 to recover 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.

C. Terminated and Not Bound: if a partner’s authority is terminated among the partners (no authority) and the
partnership is not bound by the transaction
a. The partnership assets cannot be held to answer for the liability of 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.

D. Not Terminated and Not Bound: if a partner’s authority is not terminated among the partners, but the
partnership is not bound by the transaction
a. May occur when a partnership is dissolved by reason of the death of a partner and the acting partner has
no knowledge of such death; and the acting partner entered into a new transaction.
b. Not covered in the provisions of partnership. However, this should not bind either the partnership or
the acting partner by reason of the bad faith of the third person

Article 1835. The dissolution of the partnership does not of itself discharge the existing liability of any partner.

A partner is discharged from any existing liability upon dissolution of the partnership by an agreement to that
effect between himself, the partnership creditor and the person or partnership continuing the business; and such
agreement may be inferred from the course of dealing between the creditor having knowledge of the dissolution
and the person or partnership continuing the business.

The individual property of a deceased partner shall be liable for all obligations of the partnership incurred while
he was a partner, but subject to the prior payment of his separate debts.

Effect of dissolution on existing liabilities of partners

The dissolution of the partnership does not of itself discharge the existing liabilities of any partner. A partner is
discharged from liability only upon agreement of the following:
1. The partner himself liable
2. The partnership creditor
3. The person or partnership continuing the business
The agreement may be inferred from the course of dealing between the creditor having knowledge of the dissolution
and the person or partnership continuing the business.

Separate property of deceased partner

The separate property of a deceased partner shall be liable for partnership obligations incurred while he was a partner.
However, preference shall be given to the payment of his separate debts.

Article 1836. Unless otherwise agreed, the partners who have not wrongfully dissolved the partnership or the
legal representative of the last surviving partner, not insolvent, has the right to wind up the partnership affairs,
provided, however, that any partner, his legal representative or his assignee, upon cause shown, may obtain
winding up by the court.

Who may wind up partnership affairs

1. Extra-judicially
a. By the partner or partners designated in the agreement
 b. If none was designated:
i. By the partner or partners who have not wrongfully dissolved the partnership
ii. 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
Appointee of the court – should be the surviving partner, not legal representative of the deceased
partner who was not insolvent, except when he was the last surviving partner.

Analysis: Sino ang may karapatan mamahala sa pagtatapos ng partnership? Yung partner na hindi siya ang dahilan kung
bakit na wrongfully dissolved yung partnership— innocent partner, or yung legal representative ng last surviving partner
(assuming namatay na yung iba)

Article 1837. Application of Partnership Property

A. 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.

Nota bene: 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 receiver in cash only
the net amount due him from the partnership.

B. Dissolution in contravention of the partnership agreement.

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

i. To have the partnership property applied to discharge the liabilities of the partnership
ii. To have the surplus, if any, applied to pay in cash the net amount owing to the respective
partners.
iii. To be indemnified for damaged from the partner who has caused the wrongful dissolution of
the partnership
iv. 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:
1. They pay the partner who has caused the wrongful dissolution of the partnership the
value of his interest in the partnership less damages
2. They secure its payment by a bond approved by the court

b. Rights of partner who has caused the dissolution wrongfully

i. If the business is not continued

1. To have the partnership property applied to discharge the liabilities of the partnership
2. 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.

ii. If the businesses continued

1. To have the value of his interest in the partnership less damages paid to him in cash or
have it payment secured by a bond approved by the court
2. To be released from all existing liabilities of the partnership
Article 1838. Rescission of partnership contract
Ground for rescission
a. Fraud
b. Misrepresentation to enter into the partnership contract

Rights of partners who was induced by fraud or misrepresentation

Where a partnership contract is rescinded on the ground of the fraud or misrepresentation of one of the parties thereto,
the party entitled to rescind is, without prejudice to any other night, entitled:
1. Right of Lien On – right of retention of, the surplus of the partnership property after satisfying the partnership
liabilities to third persons for any sum of money paid by him for the purchase of an interest in the partnership
and for any capital or advances contributed by him;
2. Right of Subrogation – To stand, after all liabilities to third persons have been satisfied, in the place of the
creditors of the partnership for any payments made by him in respect of the partnership liabilities, and
3. Right of Indemnification – To be indemnified by the person guilty of the fraud or making the representation
against all debts and liabilities of the partnership.

Article 1839. Liquidation of Dissolved Partnership

Liquidation (Winding up) – the sales of the assets of the partnership, the payment of its liabilities, and the distribution
of the remaining cash or other property to the partners.

Order of Payment of Partnership Liabilities

a. Those owing to the creditors other than partners
b. Those owing to the 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

Assets of the Partnership

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;
i. The contributions shall be in accordance with the rules on the division of profits and losses
ii. The individual property of a deceased partner shall be liable for such contributions
iii. The following may enforce payment of the contributions;
1. An assignee for the benefit of creditors
2. Any person appointed by the court
3. Any partner or his legal representative to the extent of the amount which he paid in exceed 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 contributing
Article 1840. When liabilities of dissolved partnership are also liabilities off the person or partnership continuing
the business
1. When any new partner is admitted into an existing partnership,
2. When any partner retires and assigns (or the representative of the deceased partner assigns) his rights in
partnership property to two or more of the 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 nghts 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 partners or the representative of the deceased partner, but without any assignment of his right in
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 business of the dissolved partnership,
6. When any partner wrongfully causes a dissolution and the remaining partners continue the business under the
provisions of article 1837, second paragraph, No. 2, either alone or with others, and without liquidation of the
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.

Article 1841. Right 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 receiver as ordinary credit 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 hir right in the property
of the dissolved partnership

Preferences 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

Article 1842. The right to an account of his interest shall accrue to any partner, or his legal representative as
against the winding up partners or the surviving partners or the person or partnership continuing the business,
at the date of dissolution, in the absence of any agreement to the contrary.

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. Surviving partners
3. Person or partnership continuing the business

Nota bene:
● Dapat mag-compute kung magkano ang matatanggap ng bawat isa
● right of the partner to demand an accounting for his interest(the return of his capital and profits) in the
partnership, if there is no agreement to the contrary.
● Rule: the right to demand an accounting of his interest will commence after the dissolution of partnership.