BUSINESS LAW AND REGULATIONS

LAW ON PARTNERSHIPs

Chapter III:
DISSOLUTION AND WINDING UP

ARTICLE 1828
“The dissolution of a partnership is 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. (n)”
Article 1828(explanasypn)
Dissolution, Winding Up, and Termination define
1. DISSOLUTION—change in the relation of the partners caused by any partner ceasing to
be associated in the carrying on of the business; partnership is not terminated but
continues until the winding up of partnership affairs is completed
2. WINDING UP—process of settling the business or partnership affairs after dissolution
3. TERMINATION—that point when all partnership affairs are completely wound up and
finally settled. It signifies the end of the partnership life.

ARTICLE 1829
“On dissolution the partnership is not terminated, but continues until the winding up of
partnership affairs is completed.”
ARTICLE 1830
Dissolution is caused:
(1) Without violation of the agreement between the partners:
(a) By the termination of the definite term or 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 is specified;
(c) By the express will 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;
(d) By the expulsion of any partner from the business bona fide in accordance with such a
power conferred by the agreement between the partners;

(2) 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;
(3) 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;

(4) When a specific thing which a partner had promised to contribute to the partnership, perishes
before the delivery; in any case by the loss of the thing, when the partner who contributed it
having reserved the ownership thereof, has only transferred to the partnership the use or
enjoyment of the same; but the partnership shall not be dissolved by the loss of the thing when it
occurs after the partnership has acquired the ownership thereof;
(5) By the death of any partner;
(6) By the insolvency of any partner or of the partnership;
(7) By the civil interdiction of any partner;
(8) By decree of court under the following article. (1700a and 1701a)
Article 1830 (explanasyon)
Causes of Dissolution

In agreement • Without violation (No.1)

• With violation (No. 2)
In connection to Will • Voluntary (Nos. 1 and 2)
• Involuntary (Nos. 3, 4, 5, 6, 7, and 8)
In connection to Court • Extrajudicially (Nos. 1 and 7)
• Judicially (No. 8 in relation to 1831)
In connection to driving cause • Automatic Dissolution (1830)
• Judicial Dissolution (1831)

Article 1830
(1) Dissolution effected without violation of partnership agreement
• By termination of the definite term/ particular undertaking specified in the
agreement
• By the express will of any partner, who must act in good faith, when no definite
term or particular undertaking is specified
• 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
• By the bona fide expulsion of any partner from the business in accordance with
power conferred by the agreement

Article 1830
(2) Dissolution effected in contravention of partnership agreement

• Dissolution may be for any cause or reason (like may iba na siyang priority)

• Power of dissolution always exists (power, not right)

• Legal effects of dissolution (liable for damages if unjustified, pero di mo pwede

pilitin na magstay aruy)

(3) Dissolution effect by business becoming unlawful

Article 1830
(4) Loss of Specific Thing
• Loss before delivery – dissolved
• Loss after delivery – not dissolved, partnership assumes the loss
• Loss where only use or enjoyment contributed – partner assumes loss, partnership
dissolved
(5) Death of any partner
- Automatic dissolution, business affairs will only continue insofar as to it winding up
- However, partnership agreement may provide that partner death, withdrawal, or admission of
new partner will not effect a dissolution.

Article 1830
(6) Insolvency of any partner or of partnership

- Partner insolvent, his partnership interest can be claimed by his personal creditors

- Partnership insolvent, renders partnership property in the hands of the partners liable to
partnership creditor

(7) Civil interdiction of any partner

- Civil interdiction (civil death) renders a person to cannot validly give consent and his capacity
to act is limited thereby

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;
(2) A partner becomes in any other way incapable of performing his part of the partnership
contract;
(3) A partner has been guilty of such conduct as tends to affect prejudicially the carrying on of
the business;
(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;
(5) The business of the partnership can only be carried on at a loss;
(6) Other circumstances render a dissolution equitable.
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. (n)”
Article 1831(explanasyon)
Grounds for dissolution by decree of court
1. On application by a partner
• Insanity
• Incapacity
• Misconduct and persistent breach of partnership agreement
• Business can be carried on only at a loss
• Other circumstances (ex. Abandonment of business, fraud in the management of
the business, refusal without justifiable cause to render formal accounting)
2. On application by a purchaser of a partner’s interest (refer sa listed sa article)

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. (n)”

Article 1832 (explanasyon)

Effect of dissolution on authority of partner

• General rule, unless otherwise stipulated, every partner is considered the agent of the
partnership with authority to bind the partnership as well as the other partners with
respect to the transaction of its business.
- Pero pagdating sa dissolution, hinde na going concern and the partner’s power of
representation is confined only to acts incident to winding up or completing
transactions begun but not then finished

• Qualifications to the rule – following articles (1833 and 1834)

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.
Article 1833 (explanasyon)
Right of partner to contribution from co-partners
Generally, when a partner enters into a new contract with a third person after dissolution, the new
contract will bind the partners. (as if the partnership had not been dissolved)
Authority of partners, as among themselves to act for the partnership
…is not deemed terminated except in two instances, namely:
1. The cause of dissolution is the ACT OF A PARTNER and the acting partner had
KNOWLEDGE of such dissolution
2. The cause of the dissolution is the DEATH OR INSOLVENCY of a partner and the
acting partner had KNOWLEDGE or NOTICE of the death or insolvency

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.

Article 1834
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.
Article 1834
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
Article 1834
(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. (n)
Article 1834 (explanasyon)
Power of partner to bind dissolved partnership to third persons
 Par. 1, Nos. 1 and 2 – cases when a partner continues to bind the partnership even after
dissolution
 Par. 3, Nos 1, 2, and 3 – cases when a partner cannot bind the partnership after
dissolution

- Para to sa protection of Third Person

Article 1834
Power of partner to bind dissolved partnership to third persons
1. As to persons who extended credit to partnership prior to dissolution
2. As to persons who had known of partnership’s existence
3. Where acting partner has no authority to wind up partnership affairs
- Notice of dissolution not needed in Par 3, except in its No. 3.
- 3rd persons dealing with such partner (no authority) are protected (Par1, No. (2) (a)
and (b))
4. Where acting partner has become insolvent
- Innocent partners of insolvent (acting) partner are protected from liability (Art
1833(2))
- But 3rd person who innocently contracted with such insolvent (acting) partner is not,
kase its incumbent upon him to know the status of the insolvent partner

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. (n)”

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. (n)”
 Article 1836 (explanasyon)
Manner of Winding Up
1. Judicially – control and direction of the proper court upon cause shown by any partner, his
legal representative, or his assignee
2. Extrajudicially – by the partners themselves, no court themselves
Persons Authorized to Wind Up
I. Designated Partners in the agreement
II. Absence of agreement, all partners who have not wrongfully dissolved the partnership; or
III. Legal representative of the last surviving partner

ARTICLE 1837
“When dissolution is caused in any way, except in contravention of the partnership agreement,
each partner, as against his co-partners and all persons claiming through them in respect of their
interests in the partnership, unless otherwise agreed, may have the partnership property applied
to discharge its liabilities, and the surplus applied to pay in cash the net amount owing to the
respective partners. But if dissolution is caused by expulsion of a partner, bona fide under the
partnership agreement and if the expelled partner is discharged from all partnership liabilities,
either by payment or agreement under the second paragraph of article 1835, he shall receive in
cash only the net amount due him from the partnership.

Article 1837
“When dissolution is caused in contravention of the partnership agreement the rights of the
partners shall be as follows:
(1) Each partner who has not caused dissolution wrongfully shall have:
(a) All the rights specified in the first paragraph of this article, and
(b) The right, as against each partner who has caused the dissolution wrongfully, to
damages breach of the agreement.”
(2) The partners who have not caused the dissolution wrongfully, if they all desire to continue the
business in the same name either by themselves or jointly with others, may do so, during the
agreed term for the partnership and for that purpose may possess the partnership property,
provided they secure the payment by bond approved by the court, or pay any partner who has
caused the dissolution wrongfully, the value of his interest in the partnership at the dissolution,
less any damages recoverable under the second paragraph, No. 1 (b) of this article, and in like
manner indemnify him against all present or future partnership liabilities.

Article 1837
(3) A partner who has caused the dissolution wrongfully shall have:
(a) If the business is not continued under the provisions of the second paragraph, No. 2, all the
rights of a partner under the first paragraph, subject to liability for damages in the second
paragraph, No. 1 (b), of this article.
(b) If the business is continued under the second paragraph, No. 2, of this article, the right as
against his copartners and all claiming through them in respect of their interests in the
partnership, to have the value of his interest in the partnership, less any damage caused to his co-
partners by the dissolution, ascertained and paid to him in cash, or the payment secured by a
bond approved by the court, and to be released from all existing liabilities of the partnership; but
 in ascertaining the value of the partner's interest the value of the good-will of the business shall
not be considered. (n)
Article 1837(explanasyon)
Right of Partner to Application of Partnership Property on Dissolution
Such right depends on whether the dissolution is caused:
• Without violation of the partnership agreement;
• In violation of the partnership agreement

Article 1837
Right where Dissolution not in Contravention of Agreement
Unless otherwise agreed, the rights of each partner in case of dissolution without
violation of partnership agreement, are as follows:
• To have the partnership property applied to discharge the liabilities of the partnership; and
• To have the surplus, if any, applied to pay in case the net amount owing to the respective
partners
When the dissolution is cause by expulsion of a partner bona fide (without violation of
partnership agreement), such expelled partner may be discharged from all partnership liabilities
either by payment or by an agreement between him, the partnership creditors, and the other
partner (Art. 1835)
If the dissolution is proper or rightful, no partner is liable for any loss sustained as a result
of the dissolution.

Article 1837
Rights where Dissolution in Contravention of Agreement
Dissolution if caused by violation of partnership agreement, the right of the partner
depends on whether kapag inosente siya or guilty
1. Rights of partner who has not cause the dissolution wrongfully:
a) To have partnership property applied for the payment of its liabilities and to
receive in cash his share of the surplus;
b) To be indemnified for damages caused by the partner guilty of wrongful
dissolution;
c) To continue the business in the same name during the agreed term of the
partnership, by themselves or jointly with others; and
d) To possess partnership property should they decide to continue the business

Article 1837
2. Rights of partner who wrongfully caused the dissolution:
a) If the business is not continued by the other partners, to have the partnership
property applied to discharge its liabilities and to receive in cash his share of the
surplus less damages caused by his wrongful dissolution
b) If the business is continued
1) To have the value of his interest in the partnership at the time of the
dissolution ascertained and paid in cash or secured by bond approved by
court
2) To be released from all existing and future liabilities of the partnership
ARTICLE 1838
“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 right,
entitled:
(1) To a lien on, or 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) 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) To be indemnified by the person guilty of the fraud or making the representation against all
debts and liabilities of the partnership. (n)”
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.
2. The liabilities of the partnership shall rank in order of payment, as follows:
(a) Those owing to creditors other than partners,
(b) Those owing to 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

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.
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;
(b) Those owing to partnership creditors;
(c) Those owing to partners by way of contribution. (n)
 Article 1839 (explanasyon)
Liquidation and Distribution of Assets of Dissolved Partnership

- Reducing the property to cash then distribute the proceeds

- Partners have the implied authority to sell partnership property and to collect obligations due
to the partnership
Rules in Settling Accounts Between Partners after Dissolution (subject to variation by
partners’ agreement)
I. Assets of the Partnership – they are:
a) Partnership property (including goodwill); and
b) Contributions of the partners necessary for the payment of all liabilities in accordance to
Art. 1797

II. Order of application of the assets – partnership assets shall be applied to the satisfaction of
the liabilities of the partnership in the following order:
• First, those owing to partnership creditors;
• Second, those owing to partners other than for capital and profits such as loans
given by the partners or advances for business expenses
• Third, those owing for the return of the capital contributed by the partners; and
• Finally, the share of the profits, if any, due to each partner
III. Right of a partner where assets insufficient
- Assets in No. 1 insufficient, required contribution for such capital loss
- Any partner, his legal representative, assignee of creditors, or any court-appointed
persons (right to enforce the contribution
- Any partner can’t pay, other partners will cover. Latter have right to indemnification
IV. Liability of deceased partner’s individual property
- Contribution necessary to satisfy the liabilities of the partnership incurred while he
was a partner
V. Priority to payment of partnership creditors/partners’ creditors
- Partnership property and Individual property under court possession for distribution
- Partnership property : Priority are partnership Creditors
- Individual Property : Personal creditors of Partners
VI. Distribution of property of insolvent partner
- First, to separate creditors
- Then, partnership creditors
- Lastly, to those owing to other partners by way of contribution (yung sa insufficiency :3)
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;
(6)When a partner is expelled and the remaining partners continue the business either alone or
with others without liquidation of the partnership affairs.

The liability of a third person becoming a partner in the partnership continuing the business,
under this article, to the creditors of the dissolved partnership shall be satisfied out of the
partnership property only, unless there is a stipulation to the contrary.
When the business of a partnership after dissolution is continued under any conditions set forth
in this article 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.
Nothing in this article shall be held to modify any right of creditors to set aside any assignment
on the ground of fraud.
The use by the person or partnership continuing the business of the partnership name, or the
name of a deceased partner as part thereof, shall not of itself make the individual property of the
deceased partner liable for any debts contracted by such person or partnership. (n)”

Article 1840 (eksplanasyon)

Dissolution of a Partnership by Change in Membership
- New partner admitted
- Partner dies/retires, withdraws, or expelled
- Other partners assign their rights to the sole remaining partner
- All the partners assign their rights in the partnership property to third persons

Change in membership dissolves a partnership aannnnnnnndddddddddd creates a new

partnership

Article 1840
Rights of Creditors of Dissolved Partnership which is Continued
And pinag-uusapan dito is kahit na anong mangyari sa dissolution and then continuing the
business, old or new creditor man, treated equally pa rin, take note sa partnership property yan
and sa persons continuing the business. PURPOSE? Maintain PREFERENTIAL RIGHTS of old
Creditors to the partnership property as against sa separate personal creditors ng partners.

Remember ulit ha yung discussion natin sa obligation ng Newly Admitted Partner (Art 1826)
- Interest niya sa partnership, old or new creditor may Karapatan (unlike ikaw sakanya)
- Sa personal properties na, di pwedeng mahabol ng old partnership creditors. Pwedeng
mahabol ng new partnership creditors at the time na inadmit niya. Unless there is a
stipulation to the contrary opkors
Bat ko to tinagalog magtype

Article 1840
Liability of Persons Continuing the Business of Dissolved Partnership
1. (Second Paragraph) Liability of the new or incoming partners shall be satisfied out of
partnership property only unless there is a stipulation to the contrary (Art 1826)
2. Par. 1, No. 4. Applies only when the third person promises to pay the debts of the
partnership; otherwise, creditors of the dissolved partnership have no claim on the
partnership continuing the business or its property unless the assignment can be set aside
as a fraud in creditors under Par. 4

ARTICLE 1841
“When any partner retires or dies, and the business is continued under any of the conditions set
forth in the preceding article, or in article 1837, second paragraph, No. 2, without any settlement
of accounts as between him or his estate and the person or partnership continuing the business,
unless otherwise agreed, he or his legal representative as against such person or partnership may
have the value of his interest at the date of dissolution ascertained, and shall receive as an
ordinary creditor an amount equal to the value of his interest in the dissolved partnership with
interest, or, at his option or at the option of his legal representative, in lieu of interest, the profits
attributable to the use of his right in the property of the dissolved partnership; provided that the
creditors of the dissolved partnership as against the separate creditors, or the representative of the
retired or deceased partner, shall have priority on any claim arising under this article, as provided
article 1840, third paragraph. (n)”
Article 1841 (eksplanasyon)
Rights of Retiring or of Legal Representative of Deceased Partner when Business is
Continued (without settlement of accounts)
Retiring partner or the legal representative of the deceased partner shall have the right:
 1. To have the value of the interest of the retiring partner or deceased partner in the
partnership ascertained as of the date of dissolution (date of retirement/death); and
2. To receive thereafter, as an ordinary creditor, an amount equal to the value of his share in
the dissolved partnership with interest, or, at his option, in lieu of interest, the profits
attributable to the use of his right
Remember niyo, in this article, after madissolve and nagcontinue parin ang business, walang
kasunduan as to the settlement of accounts. Tsaka iinsert si 1841

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. (n)”

Article 1842 (eksplanasyon)

Partner’s Right to Account of His Interest
1. Accrual of Right – right to demand an accounting of the value of his interest (Art. 1812)
accrues to any partner or his legal representative after dissolution in the absence if an
agreement to the contrary.
2. Person liable to render an account – right of a partner or the one who represents him as
owner of his interest to an account, i.e., to a statement of the partnership affairs, and, in
due course of liquidation, to a payment of the amount of his interest, may be exercised as
against:
• The winding up partner;
• The surviving partner; or
• The person or partnership continuing the business

Article 1842 (eksplanasyon)

When Liquidation not Required
- General rule, upon dissolution, a partner or his legal representative is entitled to the payment
of what may be due after a liquidation
- However, hinde na need ng liquidation kapag may settlement/agreement na as to what he
shall receive.

END OF THE TOPIC for Chapter III