The final stages of partnership Include

1. Dissolution
2. Winding up
3. Termination

In dissolution - it is A change in the relation of the partners caused by any partner

ceasing to be associated in carrying on the business.
- It is that point in time when the partners cease to
carry on the business together. It represents the demise of a partnership. Thus, any
time a partner leaves the business, the partnership.

in Winding up under Art 1836

- It is the Settling the partnership business or affairs after dissolution.
- It is the final step after dissolution in the termination of the partnership.
- Winding up a business is not the same as bankruptcy, though winding up is
usually an end result of bankruptcy.
- Bankruptcy is a legal proceeding that involves creditors attempting to gain
access to a company's assets so that they can be liquidated to pay off debts.
the proceedings can help a company emerge as a new entity that is debt-free
and usually smaller.
- once the winding-up process has begun, a company can no longer pursue
business as usual. The only action they may attempt is to complete the
liquidation and distribution of its assets. At the end of the process, the
company will be dissolved and will cease to exist.

After Winding up is the termination which

- Is a Point in time When all partnership affairs are wound up or completed; the
end of the partnership life.
- It takes place After both dissolution and winding up have occurred.
-

In winding up It is during this time after dissolution that partnership business or

affairs are being settled.

WINDING UP MAY HAPPEN IF:

● There is insolvency or bankruptcy
● the shareholders can no longer get along,
● the company is in a declining business with no future prospects,
● the company has achieved the purpose for which it was set up, or
● for any other reason.

EXAMPLE:
X Company, a shoe retailer, filed for bankruptcy in April 2017, almost two years
before the business finally ceased operations. Under court supervision, the company
shut down about 700 stores and repaid about $435 million in debt. Four months
later, the court allowed it to emerge from bankruptcy. It continued to operate until
March 2019, when it abruptly shut down its remaining 2,500 stores and filed again
for bankruptcy. In February 2019, the shoe store chain closed its remaining stores,
effectively beginning the winding-up process.

What are the ways of winding up? (1836)

The winding up of the dissolved partnership may be done either:
1.COMPULSORY OR Judicially, under the control and direction of the proper court
upon cause shown by any partner, his legal representative, or his assignee;

EXAMPLE:
JUDICIAL winding up is initiated by an application to court by a person who is
entitled to do so (ie they have locus standi or standing to do so). The application
must be based upon one of the grounds set out in the Insolvency,
The court will decide, at the hearing of the application, whether to grant or dismiss it.
If the application is granted, an order to wind up the company will be made. The
winding up is deemed to have commenced at the time of the application for winding-
up.

2. VOLUNTARY OR Extrajudicially, by the partners themselves without intervention

of the court

EXAMPLE:
First, in the case of a creditors’ voluntary winding up, a creditors’ meeting must be
summoned, to be held on the same day as the company’s meeting, or on the next
day. This meeting is not necessary in a members’ voluntary winding up. Second,
they get to appoint the liquidator. The creditors, on the other hand, are in control in a
creditors’ voluntary winding up. They appoint the liquidator and the members of the
committee of inspection.

In what nature of action can winding up be filed?

- An action for the liquidation of a partnership is a personal one; hence, it may
be brought in the place of residence of either the plaintiff or the defendant

Are all persons in the partnership authorized to wind up, even those in bad
faith?
No. Only those:
1. Partners designated by the agreement;
2. In the absence of such, all partners who have not wrongfully dissolved the
partnership; and,
 3. Legal representative of last surviving partner who is not insolvent

The court may, in its discretion, after considering all the facts and circumstances of
the particular case, appoint a receiver to wind up the partnership affairs where such
a step is shown to be to the best interests of all persons concerned.

An insolvent partner does not have the right to wind up partnership affairs

What are the powers of a liquidating partner?

1. Make new contracts; debt-free contract or contract to pay debts

2. Raise money to pay partnership debts;

3. Incur obligations to complete existing contracts or preserve partnership

assets; and,

4. Incur expenses necessary in the conduct of litigation

(AYAW ISAMA NI ATTY KASI 1839 NA DAW)

Upon winding up, there is an order of payment to be considered.

a. In a general partnership:

- It refers to a relationship in which all partners contribute to the day-to-day

management of the business. Each partner will have the authority to make business
decisions and even legally bind the company in contracts.

1. Those owing to creditors other than partners

2. Those owing to partners other than for capital or profits

3. Those owing to partners in respect of capital

4. Those owing to partners in respect to profits [NCC, Art. 1839(2)].

b. In a Limited Partnership
- A limited partnership is a relationship where one or more partners are not involved
in the day-to-day management of the business.
- Often, a limited partner, sometimes known as a “silent partner,” will serve solely as
an investor in the business, with the funds that they contribute being the extent of
their liability.
- However, since the limited partner does not have decision-making power in the
company, withdrawing funds – even just the amount they’ve already contributed –
cannot be done without the approval of a general partner.
 1. Those to creditors, in the order of priority as provided by law, except those to
limited partners on account of their contributions, and to general partners.

2. Those to limited partners in respect to their share of the profits and other
compensation by way of income on their contributions.

3. Those to limited partners in respect to the capital of their contributions.

4. Those to general partners other than for capital and profits.

5. Those to general partners in respect to profits.

6. Those to general partners in respect to capital. (Art. 1863, NCC)

“Doctrine of marshalling of assets”

The doctrine of marshalling of assets provides that:

1. Partnership creditors have preference in partnership assets.

2. Separate or individual creditors have preference in separate or individual

properties.

3. Anything left from either goes to the other.

NOTE: The doctrine of marshalling of assets involves the ranking of assets in a

certain order toward the payment of outstanding debts

The doctrine of marshaling assets requires that where two or more

creditors seek satisfaction out of the assets of their common debtor, and one
of them can resort to two funds where another has recourse to only one of the
funds, the former creditor may be required to seek satisfaction out of the
funds which the latter creditor cannot reach, before resorting to the other fund.
By this method of distribution both creditors may be paid or both funds will be
exhausted.

It is well settled that a creditor who has a claim against two debtors, one a
principal and the other a surety, cannot be compelled by another creditor of
the principal debtor to exhaust his remedy against the surety before
proceeding against the principal.

EXAMPLE:

For example, Creditor A has a lien against the debtor’s equipment and inventory
while Creditor B has a lien against the debtor’s equipment and inventory and real
estate. Creditor A will ask the court to force Creditor B to liquidate the real estate for
payment before liquidating the equipment or inventory. If the court agrees, then the
funds left from the liquidation of the equipment or inventory can be used to pay off
Creditor A. The purpose of the doctrine is to prevent a senior lienholder from
arbitrarily destroying the rights of a junior lienholder.
Rights of a partner where dissolution is not in contravention of the agreement
1837

Unless otherwise agreed, the rights of each partner in case of dissolution without violation of
partnership agreement are as follows:

o To Whom It May Concern: have the partnership property applied to discharge the
liabilities of the partnership

o To have the surplus, if any, applied to pay in case the net amount owing to the respective
partners

When the dissolution is caused by expulsion of a partner bona fide, such expelled partner
may be discharged from all partnership liabilities either by payment or by agreement between
him, the partnership creditors, and the other partnerS

- He shall have the right only to receive in cash the next amount due him from the partnership

If the dissolution is proper, no partner is liable for any loss sustained as a result of the
dissolution

Rights of a partner where dissolution is in contravention of the agreement

- When the partnership is dissolved in violation of the partnership agreement, the rights of the
partner vary depending upon whether he is the innocent or the guilty partner

1. Rights of partner who has not caused 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 the 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

d. To possess partnership property should they decide to continue the business

2. Rights of partner who has 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:

● To have the value of his interest in the partnership at the time of the
dissolution, less any damage caused by the dissolution to his co- partners,
ascertained and paid in cash, or secured by bond approved by the court; and

● To be released from all existing and future liabilities of the partnership

Note:

- Innocent partners have more rights than guilty partners

- Guilty partners are made liable for damages caused by their wrongful dissolution
- In ascertaining the value of the interest, the value of the goodwill of the business is
not considered
- If the innocent partner decides to buy the guilty partner‟s interest, they may continue
the partnership business under the same firm name
- The guilty partner is entitled to the appraised value of the business less the damages
recoverable by the innocent partners

Rights of injured partner where partnership contract is rescinded (1838)

Rescission - cancellation or revocation

Rights of a partner to rescind contract of partnership

- If one is induced by fraud or misrepresentation to become a partner, the contract is

voidable or annullable
- If the contract is annulled, the injured partner is entitled to restitution

Right of the injured partner where partnership contract is rescinded

- This article speaks of the rights of the injured partner where the partnership contract is
rescinded on the ground of fraud or misrepresentation

- The rights are as followS

o Right on a lien on or retention of the surplus of the partnership property after satisfying
partnership liabilities for any sum of money paid or contributed by him

o Right to subrogation in place of partnership creditors after payment of partnership

liabilities

o Right to indemnification by the guilty partner against all debts and liabilities of the
partnership
Settlement of accounts between partners

1. Assets of the partnership include:

a. Partnership property (including goodwill)

b. Contributions of the partners

2. Order of application of the assets:

a. First, those owing to partnership creditors

b. Second, those owing to partners other than for capital and profits such as
loans given by the partners or advances for business expenses

c. Third, those owing for the return of the capital contributed by the partners

d. Fourth, the share of the profits, if any, due to each partner

EXAMPLE:

A partnership was formed with A as the manager. During the existence of the
partnership, two partners expressed their desire to withdraw from the firm. A
determined the value of the partners share which were embodied in the document
drawn in the handwriting of A but was not signed by all of the partners. Later, the
withdrawing partners demanded payment but were refused. Considering that not all
partners intervened in the distribution of all or part of the partnership assets, should
the action prosper?

ANSWER:

NO. A partner’s share cannot be returned without first dissolving and liquidating the
partnership, for the return is dependent on the discharge of creditors, whose claims
enjoy preference over those of the partner, and it is self- evident that all members of
the partnership are interested in its assets and business, and are entitled to be heard
in the matter of the firm’s liquidation and distribution of its property. The liquidation
prepared by Magdusa not signed by the other partners is not binding on them
(Magdusa v. Albaran, G.R. No. L-17526, June 30, 1962).

Since the capital was contributed to the partnership, not to partners, it is the
partnership that must refund the equity of the retiring partners. Since it is the
partnership, as a separate and distinct entity that must refund the shares of the
partners, the amount to be refunded is necessarily limited to its total resources. In
other words, it can only pay out what it has in its coffers, which consists of all its
assets (Villareal v. Ramirez, G.R. No. 144214, July 14, 2003).