DISSOLUTION

AND
WINDING UP
 DISSOLUTION

It is the change in the relation

of the partners caused by any
partner ceasing to be
associated in the carrying on of
the business.
 DISSOLUTION

Dissolution is the time

when the partners will no
longer work together as
partners in the business.
 Testate Estate of Lazaro Mota vs. Salvador Serra
G.R. No. L-22825, 14 February 1925.

The dissolution of the partnership did not mean that

the juridical entity was immediately terminated and
that the distribution of the assets to its partners
should perfunctorily follow. On the contrary, the
dissolution simply effected a change in the
relationship among the partners. The partnership,
although dissolved, continues to exist until its
termination, at which time the winding up of its affairs
should have been completed and the net partnership
assets are partitioned and distributed to the partners.”
[Emphasis supplied.]
 WINDING UP
It is the actual process of settling the
partnership business or affairs after the
dissolution. It involves the collection and
distribution of partnership assets,
payment of debts and
determination of the value of the interest
of the partners in the partnership.
Primelink Properties and Development Corporation vs.
Ma. Clarita Lazatin-Magat G.R. No. 167379, 27 June
2006.
On dissolution, the partnership is not
terminated but continues until the winding up
of partnership affairs is completed. Winding
up means the administration of the assets of
the partnership for the purpose of
terminating the business and discharging the
obligations of the partnership.
 TERMINATION

It is the point in time when all

partnership affairs are completely
wound up and finally settled. It
signifies the end of the
partnership. (De Leon)
ILLUSTRATION
• A, B and C organized ABC Partnership on February
14, 2013. They agree that the partnership is for 10
years.
• On February 14, 2023, the partnership will be
dissolve due to the expiration of the term.
• After February 14, 2023, A,B and C needs to wind up
to pay all their debts, collect their accounts, and
finished pending transactions, inventory the property
and distribute the surplus to all the partners
• Winding up of the business is completed on March
14, 2023, the partnership is terminated.
CAUSES OF DISSOLUTION
 CAUSES OF DISSOLUTION

1. EXTRA-JUDICIAL DISSOLUTION
A. WITHOUT VIOLATION OF THE
AGREEMENT.
B. IN CONTRAVENTION OF THE
AGREEMENT.
2. JUDICIAL DISSOLUTION
3. BY OPERATION OF LAW
4. OTHER CAUSES
 EXTRA-JUDICIAL
DISSOLUTION

A. WITHOUT VIOLATION OF THE

AGREEMENT
 EXTRA JUDICIAL DISSOLUTION WITHOUT
VIOLATION OF THE AGREEMENT
1. Without violation of the agreement between the partners
a. By termination of the definite term/particular undertaking specified in
the agreement

b. By the express will of any partner, who must act in good faith, when no
definite term or particular undertaking is
specified

c. By the express will of all the partners who have not assigned their
interest/charged them for their separate debts, either before or after the
termination of any specified term or particular undertaking

d. By the bona fide expulsion of any partner from the business in

accordance with power conferred by the agreement
EXTRA-JUDICIAL DISSOLUTION WITHOUT
VIOLATION OF THE AGREEMENT

a. By the termination of
the definite term or
particular undertaking
specified in the
agreement;
ILLUSTRATION

ABC PARTNERSHIP
FOR 3 YEARS ONLY

DEF PARTNERSHIP
EXTRA-JUDICIAL DISSOLUTION WITHOUT
VIOLATION OF THE AGREEMENT

b. By the express will of any

partner, who must act in
good faith, when no definite
term or particular
undertaking is specified;
 ILLUSTRATION
DISSOLUTION BY EXPRESS WILL OF ANY
PARTNER
EXTRA-JUDICIAL DISSOLUTION WITHOUT
VIOLATION OF THE AGREEMENT

c. By the express will of all the

partners who have not assigned
their interest or suffered them to be
charged for their separate debts,
either before or after the termination
of any specified term or particular
undertaking;
ILLUSTRATION
EXTRA-JUDICIAL DISSOLUTION WITHOUT
VIOLATION OF THE AGREEMENT

d. By the bona fide expulsion

of any partner from the
business in accordance with
such power conferred by the
agreement between the
partners;
EXTRA-JUDICIAL
DISSOLUTION

B. IN VIOLATION OF THE
AGREEMENT
 2. EXTRA-JUDICIAL DISSOLUTION IN
VIOLATION OF THE AGREEMENT

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.
DISSOLUTION IN CONTRAVENTION
OF THE AGREEMENT

Partnership may also be

dissolved by the express
will of any partner at any
time.
 ILLUSTRATION
DISSOLUTION IN CONTRAVENTION
OF THE AGREEMENT
X, Y and Z put up a XYZ partnership.
They agreed that the partnership is for ten
(10) years.
On the fifth (5) year X give notice to the
partnership that he is withdrawing
irrevocably as a partner effective
immediately.
2. JUDICIAL DISSOLUTION
 JUDICIAL DISSOLUTION
1. A partner was declared
“insane” in any judicial proceeding or
is shown to be of UNSOUND MIND

2. Partner becomes INCAPABLE

of performing his part of the
partnership contract
 JUDICIAL DISSOLUTION
3. Partner has been guilty of such
CONDUCT as tends to affect
prejudicially the business;

4.Willful or Partners PERSISTENT

BREACH of agreement
 JUDICIAL DISSOLUTION

5.The business of the partnership can

only be carried on at a loss

6. Other circumstances which

render dissolution equitable
(Art. 1831)
 3. DISSOLUTION
BY OPERATION OF LAW
 DISSOUTION
BY OPERATION OF LAW

a. by any event which make

it unlawful for the business of
the partnership to be carried
on or for the members to
carry it on in partnership;
 DISSOLUTION
BY OPERATION OF LAW
b. when a specific thing which the partner
had promise to contribute, perishes
before delivery, or by the loss of the
thing, only the use or enjoyment of which
had been contributed; the loss of specific
thing, however, does not dissolve the
corporation after its ownership has
already been transferred to the
partnership;
 DISSOLUTION
BY OPERATION OF LAW
c. By the death of any partner;

d. by the insolvency of any partner

or the partnership;

e. by the civil interdiction of any

partner
 CIVIL INTERDICTION

Civil interdiction is an accessory

penalty which deprives individuals
of parental rights, guardianship,
marital authority, and the right to
manage and dispose of property.
 CIVIL INTERDICTION

Death, reclusion perpetua and

reclusion temporal penalties carries
an inherent accessory penalty of
civil interdiction (Art. 40 and 41
RPC)
4. OTHER CAUSES
OF DISSOLUTION
 OTHER CAUSES
OF DISSOLUTION
a. when a new partner is admitted
into an existing partnership;
b. when any partner retires;
c. when the other partners assign
their interest to the remaining
partner;
 OTHER CAUSES
OF DISSOLUTION

d. when all the partners

assign their rights in the
partnership property to
third person (Art. 1840)
EFFECTS OF DISSOLUTION
 EFFECTS OF DISSOLUTION
1. Authority of the partner to bind the
partnership;
a. with respect to partners
b. with respect to third persons
2. Discharge of liability;
3. Settlement of accounts between partners
4. When business of dissolved partnership
continued.
AUTHORITY OF THE PARTNER
TO BIND THE PARTNERSHIP

WITH RESPECT TO PARTNERS

1. ON AUTHORITY OF THE PARTNERS TO
BIND THE PARTNERSHIP

General Rule:
Authority of the partners to represent the
partnership is terminated.
EXCEPTION:
a. wind up partnership affairs; or
b. complete transactions already begun
but not yet finished.
ILLUSTRATION

X, Y and Z are partners. When the partnership

was dissolved, X and Y decided to sell a parcel
of land belonging to the partnership to pay off
the A, a creditors of the partnership.

Do X and Y have the power to sell the land?

Why?
WITH RESPECT TO PARTNERS;

a. Authority of partners to bind

partnership by new contract is
immediately terminated when
dissolution is not due to ACT,
DEATH or INSOLVENCY (ADI)
of a partner (art 1833);
WITH RESPECT TO PARTNERS;
b. If due to ADI, partners are liable as if
partnership not dissolved, when the ff.
concur:
i. If cause is ACT of partner, acting
partner must have knowledge of
such dissolution ;
ii. If cause is DEATH or INSOLVENCY,
acting partner must have knowledge
/ Notice of such dissolution.
EXAMPLE
DISSOLUTION NOT BY ACT, DEATH, OR
INSOLVENCY OF THE PARTNERS

X, Y and Z are partners. The

partnership have a fix term of five (5)
years which will expire on March 23,
2023.
On March 24, 2023, the partners
have no more right to bind the
partnership .
EXAMPLE
DISSOLUTION BY ACT, DEATH, OR INSOLVENCY
OF THE PARTNERS

X, Y and Z are partners. In one travel

abroad X died while on vacation in a
remote island.
Y, unaware of the death of X, entered
into transaction with A for the
shipment of rice.
EXAMPLE
DISSOLUTION BY ACT, DEATH, OR INSOLVENCY
OF THE PARTNERS

Before A can deliver the rice, the

death of X had been known.
A claim Y had no authority to bind
the partnership.
Is A contention legally correct?
B. WITH RESPECT TO THIRD
PERSONS NOT PARTNERs (ART.
1834);
B. WITH RESPECT TO THIRD PERSONS
(ART. 1834);
Partner continues to bind partnership
even after dissolution in ff. cases:
(a) Transactions in connection to winding
up partnership affairs/completing
unfinished transactions;
B. WITH RESPECT TO THIRD PERSONS
(ART. 1834);
b. Transactions which would bind partnership if
not dissolved, when the other party / obligee:
Situation 1
i. Had extended credit to the partnership prior to
dissolution &
ii. Had no knowledge / notice of dissolution, or
B. WITH RESPECT TO THIRD PERSONS
(ART. 1834);
Situation 2 -
i. Did not extend credit to
partnership;
ii. Had known partnership prior to
dissolution;
B. WITH RESPECT TO THIRD PERSONS
(ART. 1834);
iii. Had no knowledge/notice of
dissolution / fact of dissolution
not advertised in a newspaper of
general circulation in the place
where partnership is regularly
carried on .
PARTNER CANNOT BIND THE
PARTNERSHIP ANYMORE
AFTER DISSOLUTION
 PARTNER CANNOT BIND THE PARTNERSHIP
ANYMORE AFTER DISSOLUTION

(1) Where dissolution is due to

unlawfulness to carry on with
business (except: winding up of
partnership affairs);
(2) Where partner has become
insolvent;
 PARTNER CANNOT BIND THE PARTNERSHIP
ANYMORE AFTER DISSOLUTION

(3) Where partner unauthorized to wind up

partnership affairs, except by transaction with
one who:
Situation 1 -
i. Had extended credit to partnership prior to
dissolution &
ii. Had no knowledge/notice of dissolution, or
 PARTNER CANNOT BIND THE PARTNERSHIP
ANYMORE AFTER DISSOLUTION

Situation 2 -
i. Did not extend credit to
partnership prior to dissolution;
ii. Had known partnership prior to
dissolution;
PARTNER CANNOT BIND THE PARTNERSHIP
ANYMORE AFTER DISSOLUTION

iii. Had no knowledge/notice of

dissolution/fact of dissolution not
advertised in a newspaper of
general circulation in the place
where partnership is regularly
carried on .
 ILLUSTRATION
ONE WHO EXTENDED CREDIT TO THE
PARTNERSHIP
X, Y and Z are partners. X dies hence the
partnership was dissolved. Such death and
dissolution was never advertised.
B who had previously transacted business with
the partnership and without knowledge of the
dissolution, extended credit to Y.
May the partnership be held liable?
2. DISCHARGE OF LIABILITY
2. DISCHARGE OF LIABILITY
Dissolution does not discharge existing
liability of partner, except by agreement
between:
1. Partner and himself
2. Person/partnership continuing the
business
3. Partnership creditors
RIGHTS OF PARTNER
RIGHTS OF PARTNER WHERE DISSOLUTION
NOT IN CONTRAVENTION OF AGREEMENT
RIGHTS OF PARTNER WHERE DISSOLUTION
NOT IN CONTRAVENTION OF AGREEMENT

1. Apply partnership property to

discharge liabilities of
partnership;
2. Apply surplus, if any to pay in
cash the net amount owed to
partners.
 RIGHTS OF PARTNER WHERE
DISSOLUTION IS IN
CONTRAVENTION OF AGREEMENT

PARTNER WHO DID NOT

WRONGFULLY CAUSE
DISSOLUTION
PARTNER WHO DID NOT WRONGFULLY
CAUSE DISSOLUTION

1. Partner who did not cause dissolution

wrongfully:
a. Apply partnership property to
discharge liabilities of partnership
b. Apply surplus, if any to pay in cash
the net amount owed to partners
PARTNER WHO DID NOT WRONGFULLY
CAUSE DISSOLUTION

c. Indemnity for damages caused by

partner guilty of wrongful dissolution ;
d. Continue business in same name
during agreed term ;
e. Posses partnership property if business
is continued .
 RIGHTS OF PARTNER WHERE
DISSOLUTION IS IN
CONTRAVENTION OF AGREEMENT

PARTNER WHO WRONGFULLY

CAUSE DISSOLUTION
PARTNER WHO WRONGFULLY CAUSE
DISSOLUTION

a. If business not continued by others -

apply partnership property to discharge
liabilities of partnership & receive in cash
his share of surplus less damages caused
by his wrongful dissolution;
PARTNER WHO WRONGFULLY CAUSE
DISSOLUTION

b. If business continued by others -

have the value of his interest at time of
dissolution ascertained and paid in
cash/secured by bond & be released from
all existing/future partnership liabilities.
RIGHTS OF INJURED PARTNER WHERE
PARTNERSHIP CONTRACT IS RESCINDED ON
GROUND OF FRAUD/MISREPRESENTATION
BY ONE PARTY:
RIGHTS OF INJURED PARTNER WHERE
PARTNERSHIP CONTRACT IS RESCINDED ON
GROUND OF FRAUD/MISREPRESENTATION
BY ONE PARTY:

1. Right to lien on surplus of partnership

property after satisfying partnership liabilities;
2. Right to subrogation in place of creditors
after payment of partnership liabilities ;
3. Right of indemnification by guilty partner
against all partnership debts & liabilities ;
 LIEN

a right to keep possession of

property belonging to another
person until a debt owed by that
person is discharge. (oxford languages)
 SUBROGATION

The substitution of one person or a

group by another in respect of a
debt or insurance claim,
accompanied by the transfer of any
associated rights and duties. (oxford
languages)
 INDEMNIFICATION

It refers to
compensation for
harm or loss.(oxford languages)
SETTLEMENT OF ACCOUNTS
BETWEEN PARTNERS
ASSETS OF THE PARTNERSHIP:
1. Partnership property (including
goodwill)
2. Contributions of the partners
 GOODWILL
It refers to the value a company gets from
its brand, customer base and reputation
associated with its intellectual property.
Goodwill is a long-term assets that
generates value for a company over a
number of years.
GOODWILL
OF MANG
INASAL

Jollibee, the country’s largest food chain with

networks worldwide, bought Mang Inasal’s
secret recipe and system for Php2.8 Billion good
will money. (source-https://moneylifebloodph.wordpress.com)
ORDER OF APPLICATION OF
ASSETS:
ORDER OF APPLICATION OF ASSETS:

1. Partnership creditors;
2. Partners as creditors;
3. Partners as investors—return of
capital contribution ;
4. Partners as investors—share of
profits if any.
4. WHEN BUSINESS OF DISSOLVED
PARTNERSHIP IS CONTINUED
 BUSINESS OF DISSOLVED
PARTNERSHIP IS CONTINUED

1. Creditors of old partnership are

also creditors of the new
partnership which continues the
business of the old one w/o
liquidation of the partnership
affairs;
 BUSINESS OF DISSOLVED
PARTNERSHIP IS CONTINUED

2. Creditors have an equitable lien on

the consideration paid to the
retiring /deceased partner by the
purchaser when retiring/deceased
partner sold his interest w/o final
settlement with creditors;
 BUSINESS OF DISSOLVED
PARTNERSHIP IS CONTINUED
3. Rights if retiring/estate of deceased partner:
a. To have the value of his interest ascertained
as of the date of dissolution
b. To receive as ordinary creditor the value of
his share in the dissolved partnership with
interest or profits attributable to use of his
right, at his option.
PERSONS AUTHORIZED TO
WIND UP
PERSONS AUTHORIZED TO WIND UP

1. Partners designated by the agreement ;

2. In absence of agreement, all partners
who have not wrongfully dissolved the
partnership ;
3. Legal representative of last surviving
partner.
LIMITED PARTNERSHIP
 LIMITED PARTNERSHIP
A limited partnership is one formed by two or
more persons under the provisions of the
following article, having as members one or
more general partners and one or more limited
partners. The limited partners as such shall not
be bound by the obligations of the partnership.
(Art. 1843)
CHARACTERISTICS OF
LIMITED PARTNERSHIP
 CHARCTERISTICS OF
LIMITED PARTNERSHIP
CHARACTERISTICS:
1. Formed by compliance with
statutory requirements ;
2. One or more general partners
control the business.
 CHARACTERISTICS OF
LIMITED PARTNERSHIP
3. One or more general partners
contribute to the capital and share in the
profits but do not participate in the
management of the business and are not
personally liable for partnership
obligations beyond their capital
contributions
 CHARACTERISTICS OF
LIMITED PARTNERSHIP
4. May ask for the return of their
capital contributions under conditions
prescribed by law ;
5. Partnership debts are paid out of
common fund and the individual
properties of general partners .
DIFFERENCES BETWEEN GENERAL
AND
LIMITED PARTNER/PARTNERSHIP
 DIFFERENCES BETWEEN GENERAL AND
LIMITED PARTNER/PARTNERSHIP

GENERAL LIMITED
1. Personally liable for 1. Liability extends
partnership obligations . only to his capital
2. When manner of mgt. contributions.
not agreed upon, all 2. No participation in
gen. partners have an
equal right in the mgt.
management.
of the business
 DIFFERENCES BETWEEN GENERAL AND
LIMITED PARTNER/PARTNERSHIP

GENERAL LIMITED
3. Contribute cash, property 3. Contribute cash or property
or industry . only, not industry.
4. Proper party to proceedings 4. Not proper party to
by/against partnership. proceedings by/against
5. Interest not assignable partnership.
w/o consent of other 5. Interest is freely assignable .
partners
 DIFFERENCES BETWEEN GENERAL AND
LIMITED PARTNER/PARTNERSHIP

GENERAL LIMITED
6. Name may appear in 6. Name must
firm appear in firm
name. name .
7. Prohibition against 7. No prohibition
engaging in business.
against engaging
in business
 DIFFERENCES BETWEEN GENERAL AND
LIMITED PARTNER/PARTNERSHIP

GENERAL LIMITED
8. Retirement, death, 8. Does not have
insolvency, insanity same effect; rights
of gen partner transferred to legal
dissolves partnership
representative
SPECIFIC RIGHTS OF LIMITED
PARTNERS:
 SPECIFIC RIGHTS OF LIMITED
PARTNERS:

1. Right to have partnership

books kept at principal place of
business;
2. Right to inspect/copy books at
reasonable hour ;
 SPECIFIC RIGHTS OF LIMITED
PARTNERS:
3. Right to have on demand true and full
info of all things affecting partnership ;
4. Right to have formal account of
partnership affairs whenever
circumstances render it just
and reasonable;
 SPECIFIC RIGHTS OF LIMITED
PARTNERS:
5. Right to ask for dissolution and
winding up by decree of court;
6. Right to receive share of
profits/other compensation by way of
income;
 SPECIFIC RIGHTS OF LIMITED
PARTNERS:
7. Right to receive return of
contributions provided the
partnership assets are in excess
of all its liabilities.
LIABILITIES OF A LIMITED
PARTNER
LIABILITIES OF A LIMITED PARTNER

A. To the partnership
1. for the difference between his contribution
as actually made and that stated in the
certificate as having been made, and
2. for any unpaid contribution which he agreed
in the certificate to make in the future time.
LIABILITIES OF A LIMITED PARTNER

B. As a trustee for the partnership

1. for the specific property stated in the
certificate as contributed by him but
which he had not contributed;
2. for the specific property of the
partnership which had been wrongfully
returned to him; and
LIABILITIES OF A LIMITED PARTNER

3. Money or other property

wrongfully paid or
conveyed to him on
account of his contribution.
PRIORITY IN DISTRIBUTION
OF ASSETS
 PRIORITY IN DISTRIBUTION OF
ASSET
1. Those due to creditors, including limited
partners ;
2. Those due to limited partners in respect of
their share in profits/compensation ;
3. Those due to limited partners of return of
capital contributed ;
 PRIORITY IN DISTRIBUTION OF
ASSET
4. Those due to general partner other
than capital & profits.
5. Those due to general partner in
respect to profits .
6. Those due to general partner for
return of capital contributed .
 REFERENCES
• Act 3814 Revised Penal Code of the Philippines
• https://www.bdc.ca
• https://chanrobles.com
• https://www.alburolaw.com
• https://batasnatin.com
• https://ndvlaw.com
• https://moneylifebloodph
• Oxford languages
• Republic Act 386, Civil Code of the Philippines
• SC decisions