CHAPTER 9 DISSOLUTION, WINDING UP, AND TERMINATION

1828 DISSOLUTION of a partnership –is the change in the relation of the partners caused by any partner ceasing to be
associated in carrying on as distinguished from the winding up of business
1829 (the partnership is not terminated, but continues until the winding up of partnership affairs completed.
a) TERMINATION- THE POINT IN TIME AFTER ALL THE PARTNERSHIP AFFAIRS HAVE BEEN WOUND UP
b) WINDING-UP- as the process of settling business affairs after dissolution (e.g. the paying of previous obligations; the
collecting of assets previously demandable; even new business if needed to wind up.)
c) Dissolution breaks the contractual privity between and among the partners
BUT does not necessarily give rise to winding upon termination of partnership business enterprise for it may actually
lead to the constitution of a new partnership contract among the partners who choose to proceed with the partnership
business
DISSOLUTION
DISSOLUTION IPSO JURE WITHOUT NEED OF COURT DECREE

a) Effected without violation of the partnership agreement

1) Termination of the term of the partnership
2) Termination of a specific undertaking for which the partnership was constituted
3) IN A PARTNERSHIP AT WILL, dissolution effected by the will of any partner exercised in good faith
4) By mutual withdrawal by all the partners.
5) Expulsion of a partner bona fide under powers granted in the partnership agreement
b) Effected in contravention of the partnership agreement, effected by will of any partner:
1) When the partnership term has not expired
2) When the particular undertaking for which the partnership has been constituted has not yet terminated
3) At any time, in a partnership at will when effected in bad faith
c) Caused by Force Majeure
1) Loss of the specific thing promised to be contributed
2) Partnership business becoming unlawful
3) Death, insolvency or civil interdiction of any partner
4) Insolvency of partnership

DISSOLUTION EFFECTED THROUGH A COURT DECREEE

1) A partner has been declared insane in ant judicial proceedings or is shown to be of unsound mind
2) A partner becomes incapacitated
3) A partner is guilty of such conduct as tend to affect prejudicially the carrying on of the partnership business
4) When 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 the partnership with him
5) When partnership business can only be carried on at a loss
6) Other circumstances that render dissolution equitable
 7) ON THE APPLICATION OF THE PURCHASER OF A PARTNERS INTEREST IN THE PARTNERSHIP
- After the termination of the specified term
- After the termination of the particular undertaking for which the partnership was constituted
- At any time, in a partnership at will

DISSOLUTION IN THE LIGHT OF THE PARTNERSHIP BEING PRIMARILY A CONTRACTUAL RELATIONSHIP

a) Separate the causes of partnership dissolution between those which may be effected extrajudicially, and those which
require a court decree in order to effective.
b) When a partner is expelled bona fide from the partnership pursuant to the provisions granting such power in the
contract of partnership, then this is in accordance with exercising an extrajudicial right to rescinds or cancel a contract
which conforms to the spirit of and is not a breach of contractual commitment
c) BREACH OF CONTRACT- when a partner without any legal or contractual basis, seeks dissolution of the partnership.
---He becomes personally liable for damages and for which he loses the right to wind up its affairs BUT nevertheless
dissolution will take effect
d) FORCE MAJEURE excuses a contracting party from his obligations
e) DISSOLUTION REQUIRE A COURT DEGREE- The intervention of the court is required to established the factual basis of
the breach of contract or the radical change of the circumstances binding the partners together into the contract of
partnership.
Dissolution effected WITH NO VIOLATION OF THE PARTNERSHIP CONTRACT
a) There is no breach or contravention of the partnership agreement, and the dissolution of the partnership does not
give rise to a liability for damages for breach of contract
b) None of the partners would be disqualified from participating in the winding up of the affairs of the partnership
Dissolution effected IN VIOLATION OF THE PARTNERSHIP CONTRACT
a) Partner seeking the dissolution would be liable for damages and he is without right to continue to pursue the
partnership business
b) The doctrine od delectus personae allows the partner to have the power to choose although not necessarily the right
to dissolve the partnership.
c) A partner who is excluded wrongfully from a partnership is an innocent partner. Hence the guilty partner must give
him due upon the dissolution of the partnership as well as damages or share in the profits realized from the
appropriation of the partnership business and goodwill
 CAUSES EQUIVALENT TO RESCISSION OF THE CONTRACT OF PARTNERSHIP
1) A partner has been declared insane in ant judicial proceedings or is shown to be of unsound mind
2) A partner becomes incapacitated
3) A partner is guilty of such conduct as tend to affect prejudicially the carrying on of the partnership business
4) When 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 the partnership with him
5) When partnership business can only be carried on at a loss
6) Other circumstances that render dissolution equitable

7) ON THE APPLICATION OF THE PURCHASER OF A PARTNERS INTEREST IN THE PARTNERSHIP

- After the termination of the specified term
- After the termination of the particular undertaking for which the partnership was constituted
- At any time, in a partnership at will

a) The article recognizes the inherent risk that business undertakings are exposed to many of which cannot be
anticipated at the time the partnership agreement is entered into. Sets up the mechanism for the parties to ask a
tribunal to determine that the circumstances have rendered the rationale of the partnership agreement inutile.
b) It is because judicial declaration of insanity does not proceed from a criminal conviction as in the case of civil
interdiction. That the law recognizes that the insane partner still has an estate that has a right to benefit from the
properties and rights to which a partner is entitled to.
c) LAST FOUR GROUNDS- When there are circumstances prevailing in the partnership setting that endanger or
undermine the viability of the partnership enterprise, any of the partners is given standing to seek for court
determination of the existences of such situation and decree the dissolution of the partnership.
d) When a partner engages in a separate business enterprise that is competitive with that of the partnership and even
withdraws equipment contributed into the partnership enterprise, the other partner’s withdrawal thereby justified.

LEGAL EFFECTS OF DISSOLUTION

1832-1833-1834-1835-1836-1837-1838
EFFECT ON THE PARTNERSHIP CONTRACT AND JURIDICAL PERSONALITY
a) Dissolution as the termination of their association in carrying the business venture as a going concern. The contract of
partnership remains but only in the concept of an association to pursue liquidation process
b) Extinguishes the right and power of the partners to represent one another to pursue the partnership as going
concern. Except for winding up
c) Dissolution therefore does not undermines existing contracts, nor modify or extinguish then existing obligations of the
partnership and the partners.
d) That the completion or performance of existing contracts and the settlement of partnership obligation are in fact
integral in the winding up process.
 EFFECT ON THE PARTNERSHIP BUSINESS ENTERPRISE
a) Business enterprise should cease to exist as a going concern BUT ONLY if the remaining partners do not wish to
continue the partnership business.
b) The force of the original contract of partnership between them as being mutual agents, as well as the enforceability of
the doctrine of delectus personae are terminated without prejudice to a new partnership arrangement being
constituted among the remaining partners.
EFFECT ON CONTRACTS ENTERED INTO WITH THIRD PARTIES
Corporate law “After dissolution all contracts entered into that pursue new business for the corporate venture is void”
a) Not with partnership—Partnership continue to exist for limited purpose of winding up affairs BUT non defaulting
partner can choose to continue the business enterprise.
b) The juridical personality of a partnership is only an added feature which cannot overcome the more important public
policy considerations, such as the imperative need to protect the contractual expectations of the members of the public
who deal in good faith with the partnership venture.
EFFECTS OF DETERMINING LIABILITY OF PARTNERS FOR DAMAGES TO ONE ANOTHER
a) It is first necessary that a liquidation of the partnership business must be made to the end that the profit and losses
may be known and the causes of the latter and the responsibility of the defendant as well as the damages which each
partner may have suffered may be determined.

EFFECT OF DISSOLUTION AMONG THE PARTNERS INTER SE

Dissolution not in contravention of the partnership agreement
a) Every partner has a right to insist upon the winding down of partnership affairs
b) The remaining partners have no option to continue the partnership business when the withdrawing partner insists in
winding up the partnership affairs. UNLESS come to a settlement of the liquidation of the withdrawing partners equity
interest in the partnership
c) THEREFORE withdrawing partner may receive a premium or a higher price than his share THAN for not demanding the
formal winding up and termination of the partnership business.
Caused by the bona fide expulsion of a partner
a) Such expelled partner shall receive in cash only the net amount due him from the partnership.
b) The expelled partner do not have the right to insists the formal winding-up and liquidation of the partnership business
enterprise
c) The choice to wind-up or to continue business is with the remaining partner

EFFECT WHEN DISSOLUTION IS CAUSED IN CONTRAVENTION OF THE PARTNERSHIP AGREEMENT

A) Partner who has not caused the dissolution wrongfully shall have the right
i TO PARTICIPATE in the net assets of the partnership after the discharge of all the partnership liabilities
ii to DAMAGES against each partner who caused the dissolution wrongfully

B) Partners who have not caused the dissolution MAY, IF THEY SO DESIRE:
i continue the business in the same name either by themselves or jointly with others
ii and for that purpose may possess the partnership property, provided they secure thew payment bond approved by
the court, or pay to any partner who caused the wrongful dissolution the value of his interest in the partnership at the
dissolution less any damages for brach of the agreement and indemnify him against all present or future partnership
liabilities.
C) Partners who caused the dissolution wrongfully shall only have:
IF THE BUSINESS NOT CONTINUED--- all the rights of a partner for share in the net assets of the partnership after
payment of liabilities, subject to liability for damages incurred due to such wrongful dissolution
IF THE BUSINESS CONTINUED--- The right as against his co-partners and all claiming through them in respect of their
interest in the partnership
---- Value of goodwill shall not be considered

D) DISSOLUTION CAUSED BY RESCISSION DUE TO FRAUD OR MISREPRESENTATION

Party entitled to rescind or seek dissolution of the partnership is
1) Entitled to a LIEN on or right of retention of the surplus of the partnership property after satisfying the partnership
liabilities to third person, 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) Entitled to stand after all the liabilities to third person been satisfied, in the place of the creditors of the partnership
for any payment made by him in respect of the partnership liabilities.
3) To be indemnified of the person guilty of the fraud or misrepresentation against all debts and liabilities of the
partnership.
EFFECT OF DISSOLUTION ON PARTNERSHIP LIABILITIES EXISTING OR ACCRUED AT THAT TIME
a) GENERAL RULE: the dissolution of the partnership does not itself discharge the existing liability of any partners.
b) DECEASED PARTNER- His individual property shall be liable for the obligations of the partnership incurred while he
was a partner but subject to the prior payment of his separate debts.
c) DISCHARGED FROM LIABILITIES IS ONLY POSSIBLE IF there is an agreement to that effect between himself, the
artnership creditor and the person or partnership continuing the business.
EFFECT OF DISSOLUTION ON PARTNERSHIP LIABILITIES CONTRACTED OR INCURRED AFTER DISSOLUTION
a) Liabilities incurred pursuant to winding up proceedings
1) Every partner authorized to wind up partnership has authority to enter in any contract that is consistent with the
winding up of partnership affairs.
2) The partnership is not bound to the act of a partner who after dissolution do not have the authority to wind up
partnership affairs
EXCEPTION: by a transaction with one who:
a) Had extended credit to the partnership prior to dissolution and had no knowledge or notice of the acting partner’s
want of authority
b) Had not extended credit to the partnership prior to the dissolution and having knowledge or notice of his want of
authority, the fact of his want of authority has not been advised in a newspaper of general circulation
b) Liabilities incurred constituting new business during the winding up process.
1) After dissolution and the winding up process has been reached and there is no intention to continue the partnership
enterprise then it terminates all authority of any partner to act for and in behalf of the partnership or other partners
involving “new business”.
2) Every contract or liability entered into incurred in the name of the partnership as “new business” is done without
lawful authority and is non-binding on the partnership and the other partners. The liability incurred shall be for his sole
account.
a) APPLIES only when the acting partner acts with knowledge of the fact of dissolution of the partnership.
b) But acting in good faith binds the partnership.
 DISSOLUTION IS BY AN ACT, INSOLVENCY OR DEATH OF A PARTNER
1) The acting partner who acts without the knowledge of the act, death or insolvency of another partner will legally bind
the partners to any liability created for the partnership
2) BAD FAITH- only the acting partner
DISSOLUTION IS NOT BY THE ACT, INSOLVENCY OR DEATH OF A PARTNER.
1) Knowledge of the fact of dissolution is PRESUMED to have reached every partner and therefore, a partner who acts is
deemed to be in bad faith
AS TO THIRD PARTY CREDITORS
1) Whatever may have been caused of the dissolution of the partnership, third parties who in good faith enter in any
contract or transaction with the partnership through any of the partners are protected in their contractual expectations
that the contract is valid and binding against the partnership
2) BINDING 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
b) Though had not extended credit, had nevertheless known of the partnership prior to the dissolution and
having no knowledge or notice of the dissolution, the fact of dissolution had not been advertised in a newspaper of
general circulation in the place.
PARTICULAR RULE OF LIMITED LIABILITY
1834 The liability of a partner shall be satisfied out of partnership assets alone when such partner had been prior to
dissolution.”
A) Unknown as a partner to the person 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 in any degree due to his connection with it)
CREDITORS NOT IN GOOD FAITH
Even without actual knowledge or notice of the fact of dissolution they will not be considered in good faith and the
partnership is not bound when
1) Partnership is dissolved because it is UNLAWFUL to carry on the business
2) Acting partner has become INSOLVENT
RULE ON PARTNER BY ESTOPPEL
WINDING UP OF PARTNERSHIP AFFAIRS
1) Authority to wind up
a) If there is an agreement, the partner or partners so provided to have such authority.
b) In the absence of such agreement
(i) Partners who have not wrongfully dissolved the partnership or the legal representative of the last surviving partner.
(Not insolvent)
(ii) Any partner or his legal representative or assignee.
2) Rule and procedures for winding up
a) What constitutes partnership property
(i) Partnership property
(ii) The contributions of the partners necessary for the payment of all the liabilities of the partnership
b) Priority rules against the partnership property
(i) Owing to the creditors other than partners
(ii) Those owning to partners other than for capital and profits
(iii) Those owning to partners in respect of capital
(iv) Those owing to partners in respect of profits
c) Person who may enforce contributions from partners to cover partnership debts.
1) Individual property of a deceased partner shall be liable for such contribution
2) Assignee for the benefit of the creditors or any person duly appointed by the court
3) Any partner or his legal representative (to the extent of the amount which he has paid in excess of his share of the
liability)
NOTE: Partnership creditors shall have priority on partnership property and separate creditors on individual property,
saving the right of lien of secured creditors.
d) Priority when partner is insolvent
1) Those owing to separate creditors
2) Those owning to partnership creditors
3) Those owing to partners by way of contribution
a) But even after dissolution, a partner has no right to demand from the other partners for them to be personally liable
for the return of his contribution, especially when the partnership operations have been at a loss
b) The even when the cause for dissolution is FRAUD, the action to recover must still be by way of dissolution and
liquidation of the partnership affairs and cannot be in the form of a personal action against the allegedly defaulting
partner.
c) Since a partnership is a separate juridical entity, the shares to be paid out of the partners are necessarily limited only
to its total resources.
CONTINUANCE OF PARTNERSHIP BUSINESS INSTEAD OF WINDING UP
Before continuing the business as the going concern “such exercising partner must secure the payment by bond
approved by the court or pay to any partner who has caused the dissolution wrongfully, the value of his interest in the
partnership at the point of dissolution, less any damage recoverable from said defaulting partner as well as indemnify
him against all present or future partnership liabilities.
The creditors of the dissolved partnership shall also be creditors of the person or partnership continuing the business:
a) When any new partner is admitted into an existing partnership or when any partner RETIRES AND ASSIGNS his rights
to 2 or more partners and one or more third persons
b) When all but one partner retires and assigns their rights to the remaining partner.
c) When any partner retires or dies and the business is continued with the consent of the retired partners or the
representative of the deceased partner WITHOUT ANY ASSIGNMENT of his right in partnership property.
d) When all the partners or their representative assigns their rights in partnership property to one or more third
persons who promise to pay debts and continue the business of the dissolved partnership
e) When any partner wrongfully caused the dissolution and the remaining partners continue the business.
f) When a partner is expelled and the remaining partner continues the business.
a) The creditors of the dissolved partnership, as against the separate creditors of the retiring or deceased partner or the
representative of the deceased partner, have a prior right to any claim of the retired partner or the representative of the
deceased partner against the person or partnership continuing the business, on account of the retired or deceased
partner’s interest in the dissolved partnership or on account of any consideration promised for such interest or for his
right in partnership property.
DISPOSITION OF LIABILITIES WHEN DISSOLUTION IS CAUSED BY THE RETIREMENT OR DEATH OF A PARTNER
1841 When any partner retires or dies and the business is continued under ant of the conditions in Art, 1840 or Art.
1837 WITHOUT ANY SETTLEMETN of accounts as between him or his estate and the person or partnership continuing
the business then the following rule shall apply:
a) The partner or his legal representative as against such person or partnership may have the value of his interest at the
date of dissolution ascertained; and
b) The partner or his legal representative shall receive as an ordinary creditor an amount equal to the value of his
interest in the dissolved partnership, with option:
(i)to receive interest
(ii) In lieu of interest, the profits attributable to the use of his right in the property of the dissolved partnership.
PARTNER’S RIGHT TO DEMAND AN ACCOUNTING
1842 In the absence of any agreement to the contrary, the right to receive an accounting 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.
a) That the right to accounting does not prescribe during the life of the partnership and the prescription begins to run
only upon the dissolution of the partnership and final accounting is done.