LAW ON BUSINESS ORGANIZATION

FAR EASTERN UNIVERSITY

INSTITUTE OF ACCOUNTS, BUSINESS AND FINANCE (IABF)
ATTY. TYRON KIM D. BACULO
DISSOLUTION

Dissolution Winding up Termination

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Dissolution
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 of the business.
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Article 1829. On dissolution, the partnership is not

terminated, but continues until the winding up of
partnership affairs is completed.
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Winding-up
Process of settling the partnership business or
affairs after dissolution.
a. collection and distribution of assets
b. payment of debts
c. determination of the value of each partner’s interest in the
partnership
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Termination
Point in time when all partnership affairs are
wound up or completed and is the end of the
partnership life.
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CAUSES OF DISSOLUTION
EXTRA-JUDICIAL /
AUTOMATIC
JUDICIAL
(Art. 1830) (Art. 1831)
 EXTRA-JUDICIAL OR AUTOMATIC
DISSOLUTION

Without violation of partnership agreement

4. By the express
3. By the express will of ALL the
2. By the
1. By the will of ANY partners either
termination of
termination of partner when no before or after 5. By the
the particular
the definite term definite term or the termination expulsion of any
undertaking
specified in the particular of any specified partner
specified in the
agreement undertaking is term or
agreement
specified particular
undertaking
 EXTRA-JUDICIAL OR AUTOMATIC
DISSOLUTION

In contravention of
Partnership
the partnership Death of a partner
becomes unlawful
agreement

In the following cases of loss:

a. Loss before delivery of a specific thing which
a partner had promised to contribute to the Insolvency of any Civil
partnership;
partner or of the interdiction of
b. Loss before or after delivery of property to
the partnership, where the partner contributed
partnership a partner
only its use or enjoyment, the partner having
reserved the ownership thereof.
 JUDICIAL DISSOLUTION

a. On the application by or for a partner

3. Partner’s conduct
2. Incapacity of a
affecting
1. Insanity of a partner to perform
prejudicially the
partner his part of the
carrying on of the
partnership contract
business
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a. On the application by or for a partner

4. Willful or persistent
6. Other
breach of the 5. The partnership
circumstances
partnership cannot be carried
rendering a
agreement by a on except at a loss
dissolution equitable
partner
 JUDICIAL DISSOLUTION

a. On the application purchaser of a partner’s interest

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.
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Effect of dissolution on authority of a partner

General Rule: Dissolution terminates all
authority of any partner to act for the
partnership.
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Effect of dissolution on authority of a partner

Exceptions:
1. Acts necessary to wind up partnership affairs.
2. Acts to complete transactions begun before
dissolution.
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When authority of a partner to enter into new
transactions is terminated among the partners
1. If the cause of 2. If the cause of the 3. If the cause of the
dissolution is NOT by the dissolution is the ACT of dissolution is the
act, insolvency or a partner and the INSOLVENCY or DEATH
death of a partner. partner who entered of a partner and the
into the new partner who entered
transaction had into the new
knowledge of the transaction had notice
dissolution. or knowledge of such
insolvency or death.
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When authority of a partner to enter into new

transactions is NOT terminated among the partners
1. If the cause of the dissolution is 2. If the cause of the dissolution is
the ACT of a partner and the acting the INSOLVENCY or DEATH of a
partner who entered into the new partner and the acting partner who
transaction had NO knowledge of entered into the new transaction
the dissolution. had NO notice or knowledge of
such insolvency or death.
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When the act of a partner after dissolution binds the

partnership
a. When the act is b. When the act is
necessary for winding up necessary to complete
of partnership affairs. transactions begun before
dissolution.
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When the act of a partner after dissolution binds the
partnership
c. In case of a new transaction or business in the following cases:
1. If the other party to the transaction had extended credit to the partnership
before dissolution (previous creditor) and he had NO knowledge or notice of the
dissolution.
2. If the other party to the transaction had not so extended credit before dissolution
(new creditor) but had nevertheless known of the partnership before the
dissolution, and 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.
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When the act of a partner after dissolution binds the
partnership
d. Where although the partner has no authority to wind up partnership affairs, the
other party to the transaction:
1. One who had extended credit to the partnership before dissolution (previous
creditor) and he had NO knowledge or notice of the partner’s lack of authority.
2. One who had not so extended credit before dissolution (new creditor) and
having no knowledge of the partner’s lack of authority, the fact of want of
authority has 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.
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When the act of a partner after dissolution does NOT bind the
partnership
1. Where the partnership is dissolved because it is unlawful to carry on the
business, unless the act is appropriate for the winding up partnership affairs.
2. Where the acting partner is insolvent.
3. Where the partner had no authority to wind up the partnership affairs, except
to innocent third persons.
4. Where a partner’s authority is already terminated among the partners and the
third person had actual or constructive knowledge, as the case may be, of the
dissolution of the firm.
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Summary of rules on liability of the partners and the
partnership for acts of a partner after dissolution
A. If a partner’s authority is TERMINATED among the partners (or of such partner
has no authority to act) but the partnership is BOUND by the transaction.
1. The third person can go after the assets of the partnership.
2. If the assets of the partnership are not sufficient, he can go after the separate
assets of each partner.
3. Other partners may seek reimbursement from the acting partner for the
amount they paid and to demand return of the amount paid out of the
partnership assets.
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B. If a partner’s authority is NOT TERMINATED among the
partners and the partnership is BOUND by the transaction.
1. The third person can go after the assets of the partnership.
2. If the assets of the partnership are not sufficient, he can go
after the separate assets of each partner.
3. Other partners cannot go after the acting partner for
recovery of the amount they paid.
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C. If a partner’s authority is TERMINATED among the partners (or
of such partner has no authority to act) but the partnership is
NOT BOUND by the transaction.
1. The partnership assets cannot be held to answer for the
liability to third person.
2. The acting alone is liable to the third person with whom he
contracted.
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Effect of dissolution on existing liability of partners

a. The partner himself;
Does not of itself A partner is b. The partnership
discharge the discharged from creditor;
existing liabilities liability only upon c. The person or
of any partner agreement of: partnership continuing
the business.
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Separate property of the deceased partner

Shall be liable for

But preference shall be
partnership obligations
given to the payment of
incurred while he was a
his separate debts.
partner.
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Who may wind up partnership affairs (Article 1836)
Extra-judicially Judicially
1. By the partner or partners designated Under the direction and control of the
in the agreement. court upon proper cause shown by any
2. If none was designated: partner, his legal representative or his
assignee.
a. By the partner or partners who have
not wrongfully dissolved the
partnership.
b. If all the partners are dead, the legal The appointee should be a surviving
representative of the last surviving partner.
partner who was not insolvent.
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Article 1837: Rights of a partner upon dissolution

Dissolution without the contravention of the partnership
agreement
1. To have the partnership property applied to discharge the
liabilities of the partnership.
2. To have the surplus, if any, applied to pay in cash the
amount owing to the respective partners.
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Article 1837: Rights of a partner upon dissolution

Dissolution in contravention of the partnership agreement
1. To have the partnership property applied to discharge the
liabilities of the partnership.
2. To have the surplus, if any, applied to pay in cash the
amount owing to the respective partners.
3. To be indemnified for damages from the partner who
caused the wrongful dissolution of the partnership.
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Article 1837: Rights of a partner upon dissolution

Dissolution in contravention of the partnership agreement
4. To continue the business of the partnership in the same
name, either by themselves or jointly with others, and for that
purpose possess partnership property provided:
a. They pay the partner who has caused the wrongful dissolution of the
partnership the value of his interest less damages; or
b. They secure its payment by a bond approved by the court.
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Article 1837: Rights of a partner upon dissolution

Rights of partner who has caused the wrongful dissolution of the
partnership
1. If the business is not continued:
a. To have the partnership property applied to discharge the liabilities of
the partnership.
b. To receive his share in the surplus, less the damages suffered by the
other partners by reason of his having caused the wrongful dissolution of
the partnership.
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Article 1837: Rights of a partner upon dissolution

Rights of partner who has caused the wrongful dissolution of
the partnership
1. If the business is continued:
a. To have the value of his share in the partnership less the damages
caused to his co-partners, paid to him in cash or have its payment
secured by a bond approved by the court.
b. To be released from all existing liabilities of the partnership.
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Article 1838: Rights of a partner who was induced by fraud or

misrepresentation
1. Right to a lien, or retention of, the surplus of the partnership property 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. (Right of retention)
2. Right to stand, after all liabilities to third persons have been satisfied, in the
place of the creditors for any payments made by him in respect of the
partnership liabilities. (Right of subrogation)
3. Right to be indemnified by the person guilty of fraud or misrepresentation
against all debts of the partnership. (Right of indemnification)
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Liquidation – involves the sale of the assets of the partnership,

payment of its liabilities, and the distribution of the remaining
cash or other assets to the partners.
Powers of liquidating partner:
1. Make new contracts but mere for liquidation purposes;
2. Raise money to pay partnership debts;
3. Incur obligations to complete existing contracts or preserve partnership
assets;
4. Incur expenses necessary in the conduct of litigation.
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Order of payment of partnership liabilities:

1. Those owing to creditors other than partners.
2. Those owing to partners other than for capital and
profits.
3. Those owing to partners in respect of capital.
4. Those owing to partners in respect of profits.
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Example: A, B, C, and D are partners in ABCD Enterprises. A is

an industrial partner, while the rest are capitalist partners
contributing P60,000, P30,000 and P10,000, respectively. The
partners share in the profits in the ratio of 3:4:2:1. the
partnership is dissolved by reason of the expiration of its term.
The partnership has assets of P220,000 and owes the following
creditors: X, P40,000; Y, P20,000; and B, P30,000. Distribute the
partnership assets, if any.
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P220,000 – 60,0000 (outside creditors) – 30,000

(partner) – 100,000 (return of capital) = P30,000
(profits)

P30,000: A, P9,000 (30%); B, P12,000 (40%); C,

P6,000 (20%); and D, P3,000 (10%)
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A, B, C, D are partners.

A contributed 10,000
B contributed 10,000
C contributed 20,000
D contributed 30,000
E contributed 30,000
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 On dissolution, the assets of the partnership amounted

to P1,000,000.
 The partnership has a creditor, X in the amount of
400,000.00
 Partnership also owes partner E the amount of
100,000.
 SETTLE THE ACCOUNTS OF THE PARTNERSHIP.
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Pay first the partnership creditor X. P400,000.

Pay the partner who is also a creditor, E. P100,000.

Return the contributions of A B C D E in the total

amount of 100,000
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Distribute the profits:
A – 40,000 400,000 x 10/100 = 40,000
B – 40,000 400,000 x 10/100 = 40,000
C - 80,000 400,000 x 20/100 = 80,000
D – 120,000 400,000 x 30/100 = 120,000
E – 120,000 400,000 x 30/100 = 120,000
Suppose B also owes Y 50,000. Y can only get the 40,000
of B and get the 10,000 from the separate properties of B.
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Suppose, the partnership liability is 1,500,000.00.

Pay first the partnership creditor by exhausting the partnership

asset of P1,000,000

The unpaid balance of 500,000 shall be shared by the partners.

They must contribute to the loss depending on the agreement or
if none, depending on their capital contribution.
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Parties are liable for their separate assets.

A – 50,000 (500,000 x 10/100 = 50,000)

B – 50,000 (500,000 x 10/100 = 50,000)
C – 100,000 (500,000 x 20/100 = 100,000)
D – 150,000 (500,000 x 30/100 = 150,000)
E – 150,000 (500,000 x 30/100 = 150,000)
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Priority in the payment of liabilities if partnership property

and the individual property of the partners are in
possession of the court for distribution:
(Subject to the rights of lien or secured creditors)
1. Partnership creditors for partnership property.
2. Separate creditors for individual property.
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Article 1840.
When creditors of the dissolved partnership are also the
creditors of the person or partnership continuing the
business.
Preferential right of partnership over separate creditors of a
partner
Use of the name of the dissolved partnership or that of a
deceased partner
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Article 1841. Right of retired partner or legal representative of
deceased partner when business is continued without
liquidation
1. To have the value of the interest of the retiring or deceased
partner ascertained as of the date of dissolution of the partnership;
2. To receive as an ordinary creditor an amount equal to the value
of his interest in the dissolved partnership with interest, 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.
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Article 1842. Partner’s right to an account of his interest
Any partner or legal representative of a deceased partner has a
right to an account of his interest against the following:
a. Winding up partners.
b. Surviving partners.
c. Person or partnership continuing the business.

The right to account accrues at the date of dissolution, unless a

different date is provided in the agreement.