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Basic Terms: Dissolution and Winding Up
Basic Terms: Dissolution and Winding Up
B. Judicial dissolution
This refers to the termination of a partnership’s existence handled by the courts located within the state of
the company’s incorporation. A dissolution may be obtained when the attorney general of the state of the
incorporation petitions for it due to a company’s failure to comply with regulations of tax laws, administration
or statutory regulations.
Grounds for Dissolution by Decree of Court (Article 1831)
1. Partner declared insane in any judicial proceeding or shown to be of unsound mind
2. Incapacity of partner to perform his part of the partnership contract
3. Partner guilty of conduct prejudicial to business of partnership
4. Willful or persistent breach of partnership agreement or conduct which makes it reasonably
impracticable to carry on partnership with him
5. Business can only be carried on at a loss.
6. Other circumstances which render dissolution equitable
Exceptions to (a):
i. If cause of dissolution is the ACT of a partner and the acting partner have knowledge of
such dissolution
ii. If cause of dissolution is the DEATH or INSOLVENCY of a partner and the acting partner
had knowledge or notice of such dissolution
a. When partnership is bound to third persons even after dissolution (Article 1834):
i. Transactions in connection to winding up partnership affairs
ii. Acts for completing unfinished transactions
iii. Any transaction which would bind the partnership if dissolution had not taken place provided
the other party is in good faith, meaning:
1. Previous creditor and he had no knowledge or notice of the dissolution
2. Not a previous creditor and the fact of dissolution had not been published in a
newspaper of general circulation
b. When partnership is not bound to third persons after dissolution (Article 1834):
i. Where dissolution is due to unlawfulness to carry on with business (exception: winding up
of partnership affairs)
ii. Where the acting partner in the transaction has become insolvent
iii. Where partner is unauthorized to wind up partnership affairs, except by transaction with
one who is:
1. A previous creditor and he had no knowledge or notice of the dissolution
2. Not a previous creditor and the fact of dissolution had not been published in a
newspaper of general circulation
iv. Where act is not appropriate for winding up or for completing unfinished transactions
v. Completely new transaction which would bind the partnership if dissolution had not taken
place with third persons in bad faith
Notice of dissolution
1. Person had extended credit prior to dissolution – They must have knowledge or notice of
dissolution.
2. Persons who had known of partnership existence – Publication is sufficient.
B. Discharge of Liability
General rule: Dissolution does not automatically discharge existing liability of partner.
Exception: A partner may be relieved from all existing liabilities upon dissolution only by an agreement
between:
1. Partner concerned
2. Person/partnership continuing the business
3. Partnership creditors
Rights of a partner upon dissolution
1. Dissolution is not in contravention of the partnership agreement:
a. Have partnership property applied to discharge liabilities of partnership
b. Receive in cash his share of the surplus
C. Winding Up
Manner of winding up
1. Extrajudicial - By the partner themselves without court intervention
2. Judicial - Under the control and direction of the court upon proper cause shown by any partner,
his legal representatives of his assignee
The court, at its discretion, may appoint a receiver to wind up the partnership affairs where such step
is shown to be the best interest of all persons concerned.
Article 1840. In the following cases, creditors of the dissolved partnership are also creditors of the person
or partnership continuing the business:
(1) When any new partner is admitted into an existing partnership, or 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, if the
business is continued without liquidation of the partnership affairs;
(2) 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;
(3) When any partner retires or dies and the business of the dissolved partnership is continued as set
forth in Nos. 1 and 2 of this article, with the consent of the retired partners or the representative of the
deceased partner, but without any assignment of his right in partnership property;
(4) 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;
(5) 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; and
(6) When a partner is expelled and the remaining partners continue the business either alone or with
others without liquidation of the partnership affairs.
Note: If the surviving partners continue the business without the consent of the deceased partners’
estate, they do so without any risk to the estate, if the estate consents, it, in effect becomes a new
partner and would be answerable for all debts and losses after the death but only to the extent of the
decedent’s share in the partnership assets.
G. Partner’s Lien
Right of every partner to have the partnership property applied to discharge partnership liabilities and to
have the surplus assets, if any, distributed in cash to the respective partners after deducting what may be
due to the partnership from them as partners.
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.
The above article speaks of accounting to be done upon dissolution of the partnership, while Article 1809
refers to accounting before dissolution by reason of the circumstances mentioned in the article.
REFERENCES:
De Leon, H.S. & De Leon Jr., H.M. (2014). Comments and cases on partnership, agency, and trusts (9th ed.).
Manila: REX Book Store.
What is EXTRAJUDICIAL? (n.d.). Retrieved from https://thelawdictionary.org/extrajudicial/ on June 7, 2019
What is judicial dissolution? (n.d.). Retrieved from http://www.businessdictionary.com/definition/judicial-
dissolution.html on June 7, 2019