EP 19

Dissolution of pp may be ordered judicially after a HEARING ON APPLICATION either by:

1. Partner
2. Purchaser of a partner’s interest

Article 1831. On application by or for a partner the court shall decree a dissolution
whenever:

(1) A partner has been declared insane in any judicial proceeding or is shown to
be of unsound mind;

- There must be previous judicial declaration of insanity. Otherwise unsound mind must be
proved

- Insane person cannot contract

(2) A partner becomes in any other way incapable of performing his part of the
partnership contract;

- Incapacity: must affect his ability to perform his duties is a partner

(3) A partner has been guilty of such conduct as tends to affect prejudicially the
carrying on of the business;

- Persistent drunkenness

(4) A partner wilfully 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;

- Persistent drunkenness

(5) The business of the partnership can only be carried on at a loss;

- Since purpose of pp is carrying of a business for profit

(6) Other circumstances render a dissolution equitable.

- Abandonment of business

- Fraud in mgt

- Refusal without justifiable cause to render accounting of pp (Pp is based on trust)

On the application of the purchaser of a partner's interest under article 1813 or 1814:
 (1) After the termination of the specified term or particular undertaking;

(2) At any time if the partnership was a partnership at will when the interest was
assigned or when the charging order was issued.

EFFECTS OF DISSOLUTION

1. On authority of a partner
- Mutual agency of pp

Article 1832. Except so far as may be necessary to wind up partnership affairs or to

complete transactions begun but not then finished, dissolution terminates all authority of
any partner to act for the partnership:

(1) With respect to the partners,

(a) When the dissolution is not by the act, insolvency or death of a

partner; or

(b) When the dissolution is by such act, insolvency or death of a partner,

in cases where article 1833 so requires;

(2) With respect to persons not partners, as declared in article 1834.

- GR: Terminate all authority of partner to act for pp

- XPNs: As far as necessary

1. To wind up pp affairs; or

2. To complete transactions begun but not then finished

Article 1833. Where the dissolution is caused by the act, death or insolvency of a

partner, each partner is liable to his co-partners for his share of any liability
created by any partner acting for the partnership as if the partnership had not been
dissolved unless:

(1) The dissolution being by act of any partner, the partner acting for the
partnership had knowledge of the dissolution; or

(2) The dissolution being by the death or insolvency of a partner, the partner
acting for the partnership had knowledge or notice of the death or insolvency.

- If acting partner has knowledge of dissolution, it will not bind pp

- If he has no knowledge (in GF), it will bind pp

 
 2. As to partners
- GR: Mutual agency
- Upon dissolution, pp ceases to be a going concern and partners’ power is
confined only to acts incident to winding up for completing transaction begun or
not yet finished
- Authority of any partner to bind pp by a new contract is immediately terminated
when dissolution is NOT by the AID of a partner
- When dissolution is BY AID, termination of authority depends upon whether or
not the partner had knowledge of dissolution

3. As to 3rd persons
- Pp generally bound by the new contract although the authority of acting partner
as it affects his co-partners is already deemed terminated
- Innocent partner can always recover from the acting partner

Article 1834. After dissolution, a partner can bind the partnership, except as provided in
the third paragraph of this article:

(1) By any act appropriate for winding up partnership affairs or completing

transactions unfinished at dissolution;

(2) 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 no
knowledge or notice of the dissolution; or

(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
than one) at which the partnership business was regularly carried on.

The liability of a partner under the first paragraph, No. 2, shall be satisfied out of
partnership assets alone when such partner had been prior to dissolution:

(1) Unknown as a partner to the person with whom the contract is made; and

(2) 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.

The partnership is in no case bound by any act of a partner after dissolution:

(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; or

(2) Where the partner has become insolvent; or

 (3) Where the partner has no authority to wind up partnership affairs; except by a
transaction with one who -

(a) Had extended credit to the partnership prior to dissolution and had no
knowledge or notice of his want of authority; or

(b) Had not extended credit to the partnership prior to dissolution, and,
having no knowledge or notice of his want of authority, the fact of his want
of authority has not been advertised in the manner provided for
advertising the fact of dissolution in the first paragraph, No. 2 (b).

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

LIQUIDATION AND DISTRIBUTION OF ASSETS OF DISSOLVED PP

- Settling accounts
- Bring pp accounts back to zero
- Determine assets and liabilities

Article 1839. In settling accounts between the partners after dissolution, the following
rules shall be observed, subject to any agreement to the contrary:

(1) The assets of the partnership are:

(a) The partnership property,

(b) The contributions of the partners necessary for the payment of all the
liabilities specified in No. 2. (Unlimited liability of partners)

(2) The liabilities of the partnership shall rank in order of payment, as follows:

(a) Those owing to creditors other than partners, (External creditors/3rd

persons)

(b) Those owing to partners other than for capital and profits, (Internal
creditors)

(c) Those owing to partners in respect of capital, (Return their

capital/contribution)

(d) Those owing to partners in respect of profits. (Surplus; share in profits)

(3) The assets shall be applied in the order of their declaration in No. 1 of this
article to the satisfaction of the liabilities.

(4) The partners shall contribute, as provided by article 1797, the amount
necessary to satisfy the liabilities.
 (5) An assignee for the benefit of creditors or any person appointed by the court
shall have the right to enforce the contributions specified in the preceding
number.

(6) Any partner or his legal representative shall have the right to enforce the
contributions specified in No. 4, to the extent of the amount which he has paid in
excess of his share of the liability.

(7) The individual property of a deceased partner shall be liable for the
contributions specified in No. 4.

- Even in case of death of a partner, ESTATE of deceased partner still liable for contrib

- Reason: Partners bound with unlimited liability

(8) When partnership property and the individual properties of the partners are in
possession of a court for distribution, partnership creditors shall have priority on
partnership property and separate creditors on individual property, saving the
rights of lien or secured creditors.

(9) Where a partner has become insolvent or his estate is insolvent, the claims
against his separate property shall rank in the following order:

(a) Those owing to separate creditors; (Personal creditors)

(b) Those owing to partnership creditors; (Pp creditors)

(c) Those owing to partners by way of contribution. (Partners)

RECAP:

DISSOLUTION

- Change in relation of partners caused by any partner ceasing to be associated in

the carrying on of the business
- But still has limited personality: to wind up pp affairs and no more

Winding Up

- Process of settling business affairs

Termination

- Point when all business affairs are settled or wound up

- Pp accounts zero

Liquidation
 - Involve sale of assets of pp, payment of its liabilities and the distribution of
remaining cash/prop of partners

ORDER OF PAYMENT OF PP LIAIBLITIES (1839)

(a) Those owing to creditors other than partners, (External creditors/3rd persons)

(b) Those owing to partners other than for capital and profits, (Internal creditors/partners)

(c) Those owing to partners in respect of capital, (Return their capital/contribution)

(d) Those owing to partners in respect of profits. (Surplus; share in profits)

- Until such time partnership accts zero

Where a partner has become insolvent or his estate is insolvent, the claims against his
separate property shall rank in the following order:

(a) Those owing to separate creditors; (Personal creditors)

(b) Those owing to partnership creditors; (Pp creditors)

(c) Those owing to partners by way of contribution. (Partners)