IV.

Dissolution and Winding Up

 
Art. 1828 & 1829 – Definition of Dissolution, Winding up and Termination; Effects of Dissolution
 
Dissolution
-          the change in the relation of the partners caused by any partner ceasing to be associated in the carrying on of the
business
-          that point of time when the partners cease to carry on the business together
 
Effects of Dissolution:
a.        partnership is not terminated;
b.        partnership continues for a limited purpose; and
c.        transaction of new business is prohibited
 
Winding Up
-          the process of settling business affairs after dissolution
 
Termination
-          the point in time after all the partnership affairs have been wound up
 
Effect on Obligations
a.          a partner cannot evade previous obligations entered into by the partnership
b.          absolution saves the former partners from new obligation to which they have not expressly or impliedly
consented, unless the same be essential for winding up
 
Art. 1830 – Causes of Dissolution
 
1. as to first cause
-          partnership agreement has not been violated
 
4 instances:
v      termination of the definite term or specific undertaking;
v      express will of a partner who must act in good faith when there is no definite term and specific undertaking;
v      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;
v      by the expulsion of any partner from the business bona fide in accordance with such p[power conferred by the
agreement between the partners
 
3.        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;
4.        when a specific thing, which a partner had promised to contribute to the partnership, perishes before delivery
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; and
8.        by decree of court
 
note: partners in their contract cannot limit the cause for dissolution
 
Art. 1831 – Judicial determination as to dissolution
 
·         this article speaks of a dissolution by decree of court. In a suit for dissolution proof as to the existence of the firm must
be given
·         Who may sue for dissolution:
a.        a partner for any of the causes given under 1831
b.        the purchaser of a partner’s interest in the partnership under Art. 1813/1814, provided that the period has expired
or if the firm was a partnership at will when the interest was assigned or changed
  
note: if period is not yet over, said purchaser cannot sue for dissolution
 
·         Grounds for Dissolution
a.        insanity
b.        incapacity
c.        misconduct and persistent breach of partnership agreement
d.        business can be carried on only at a loss
e.        other circumstances
 
·         Insanity of a partner
a.        even if a partner has not yet been previously declared insane by the court, dissolution may be asked, as long as
the insanity is duly proved in court;
b.        insanity is a cause since the partner will be incapacitated to contract
 
·         Incapability to perform part
-          may happen when the partner enters the government service which would prohibit him from participating in the firm, or
when he will stay abroad for a long time
 
Appointment of a receiver
        In a suit for dissolution, the court may appoint a receiver at its own discretion but a receiver is not needed when
practically all the firm assets are in the hands of a sheriff under a writ of replevin, or when the existence of a partnership
with the plaintiff is denied, particularly if the business of the firm is being conducted successfully
 
·         Time of Dissolution
-          a firm becomes a dissolved partnership at the time the judicial decree become s a final judgment
 
Art. 1832 – Effects of Dissolution
 
General Rile: Art. 1832
Exception: Art. 1833 and 1834
 
Effects of dissolution
- when a partnership is dissolved, certain effects are inevitable, insofar as the relations of the firm toward third persons
are concerned, and insofar as the partners themselves are affected in their relations with one another
 
Effect of previous contract
-          when a firm is dissolved, it does not mean that the contracts and obligations entered into, whether the firm is the
creditor or debtor, automatically cease;
-          the firm is still allowed to collect previously acquired credits, it is also bound to pay all the debts;
-          a dissolved partnership still has the personality for winding up its affairs
 
Creditors who have not been prejudiced
-          if the obligations and rights of a dissolved firm are transferred to another firm, the creditors may not hold the former
liable even if said creditors have not been prejudiced, as long as the new firm can indeed take care of said creditors. It
would be erroneous to let the old firm pay, if the new firm can really pay.
 
Art. 1833 – Kinds of Causes of Dissolution
 
a.        Act-Insolvency-Death
b.        Other things like termination
 
Effect of AID
-          all partners are still bound to each other generally, except:
a.        if the partner had knowledge (as distinguished by NOTICE without actual knowledge)
- if dissolution is caused by an act (e.g. withdrawing, retiring)
  
b.        if the partner acting had knowledge or notice, if dissolution was caused by death or insolvency
 
note:
Death or insolvency being more ordinary than an “act,” notice is enough. Hence, the law provides “knowledge” or
notice.   
However, it is still essential that there be knowledge or notice of the fact of death or insolvency   to justify non-liability of
the other partners to the parties acting.
 
·         Right of partner to contribution from co-partners
-          when a partner enters into a new contract with a third person after dissolution, the new contract generally will bind
the partners (Art. 1834, par. 1). Each of them is liable for his share of any liability created by the acting partner as
if the partnership had not been dissolved.
 
Art. 1834 – When Partnership is Bound
 
Article speaks of 2 possibilities:
a.        when the partnership is bound to strangers; and
b.        when the partnership is not bound to strangers
 
When Partnership is bound:
                (a partnership liability is created)
a.        business is for winding up;
b.        business is to complete unfinished transactions; and
c.        completely new business with third parties considered innocent
 
When firm is not bound:
a.        in all cases not included when partnership is bound;
b.        when the firm was discharged because it was unlawful to carry on the business; except when the act is winding
up;
c.        where the partner had acted in the transaction has become insolvent;
d.        where the partner is unauthorized to wind up
except: if the transaction is with a customer in good faith
                Note:
-          it is understood that if after dissolution a stranger will represent himself as a partner although he is not one, he will be
a partner by estoppel
 
Art. 1835 – Effect of Dissolution on Partner’s Existing Liability
 
                Dissolution ordinarily does not discharge existing liability of partners, otherwise, creditors would be prejudiced,
particularly if a partner will just withdraw anytime from the firm
 
How a Partner’s liability is discharged
-          the following must agree:
a.        the partner concerned;
b.        the other partners; and
c.        the creditors
 
Effect of death on pending action
-          An action for accounting against a managing partner should be discontinued if he dies during the pendency of the
action;
-          The suit must be conducted in the settlement proceedings of the deceased’s estate, particularly if this is the desire of
his administration;
-          Thus, it is wrong to just continue the action for accounting and substitute the dead defendant with his heirs
 
Art. 1836 – Judicial and Extrajudicial Wind up; Persons authorized to wind up
 
Extrajudicial winding up
-          by the partners who have not wrongfully dissolved the partnership;
-          or by the legal representative of the last surviving partner provided the last survivor was not insolvent
 
Judicial winding up
-          under the control and direction of the court, upon proper cause that is shown to the court;
-          petition for judicial winding up can be done by any partner, his legal representative or assignee
 
Rule if survivor is not the manager
-          he is not required to serve as liquidator thereof;
-          he is not required as liquidator without compensation; and
-          if he liquidates the affairs upon promise of a certain compensation by the managing partners, he is naturally entitled to
receive compensation
 
Profits
-          profits are supposed to accrue only during the existence of the partnership before dissolution;
-          profits that will actually enter the firm after dissolution as a consequence of transactions already made before
dissolution are included because they are considered as profits existing at the time of dissolution; and
-          any other income earned after the time should not be disturbed as profits, but merely as additional income to the
capital
 
Persons authorized to wind up:
a.        the partners designated by the agreement;
b.        in the absence of such agreement, all the partners who have not wrongfully dissolved the partnership; and
c.        the legal representative (executor or administrator) of the last surviving partner (when all the partners are already
dead) not insolvent.
 
Art. 1837 - Right of Partner to Application of Partnership Property on Dissolution
 
·         rights where dissolution not in contravention of agreement (par. 1)
·         rights where dissolution is in contravention of agreement (par.2)
 
Two aspects of dissolution
Dissolution may be caused:
a.           although the partnership contract is not violated;
b.           because the partnership contract is violated
 
Innocent Partners:
-          have better rights than guilty partners;
-          may continue the business (new partnership);
-          rights of the guilty partners are safeguarded by a:
a.        bond approved by the court
b.        payment of interest at the time of dissolution minus damages
 
Right to get cash
-          in case of non-continuance of the business, the interest of the partner should, if he desires, be given in CASH
 
note: a guilty partner, in ascertaining  the value of his interest is not entitled to a proportionate share of the value of the
GOOD WILL
 
Partner wrongfully excluded
-          he should be considered an innocent party;
-          the other partner must account not only for what is due to him at the date of the dissolution but also for damages or for
his share of the profits realized from the appreciation of the partnership business and good will (provided the excluded
partner had not substantially broken the partnership agreement)
 
Division of Losses
                -rule on losses must apply, provided that their real market values at the time of liquidation are the values considered
 
Art. 1838 – Right of Partner to Rescind Contract of Partnership
 
·         if the contract is annulled, the injured partner is entitled to restitution
 
Rescission or annulment of partnership contract
-          fraud or misrepresentation violates the consent whereby the contract of partnership had been entered into, hence, it is
really also causante
 
Three Rights (without prejudice to the other rights under other legal provisions)
a.        right to lien or retention;
b.        right of subrogation; and
c.        right of indemnification
 
Art. 1839 – Liquidation and Distribution of Assets of Dissolved Partnership
 
Liquidation
                - before liquidation is made, no action for accounting of a partner’s share in the profit or for a return of his capital
assets can properly be made, since it is essential to first pay off the creditors
 
Assets of Partnership
-          partnership property
-          contributions of the partners, which are made to pay off the partnership liabilities     
 
Order of Payment of Firm’s Liabilities
1.            creditors (who are strangers) otherwise they may be prejudiced;
2.            partners (who are already creditors);
3.            distribute profits
 
note:
-          if the partnership assets are insufficient the other partners must contribute more money or property
-          such contributors may be enforced by:
-          any assignee for the benefit of the creditor, or any person appointed by the court;
-          any partner or his legitimate representative
 
Preference with respect to the assets
                It depends:
-          regarding partnership property, partnership creditors have preference
-          regarding individual property, creditors are prejudiced
 
Rules if partners are insolvent
a.        give to the individual/separate creditors;
b.        give to the partnership creditor;
c.        then those owing to the other partners by way of contribution
 
Art. 1840 – Dissolution of Partnership by Change in Membership
a.        a new partner is admitted;
b.        when a partner dies, retires, expelled or withdraws;
c.        when the other partners assign their rights to the sole remaining partner;
d.        when all the partners assign their rights in partnership property to third persons
 
Rights of creditors of dissolved partnership which is continued
1.        equal rights of dissolved and new partnership creditors
 2.        liability of persons continuing business (see par. 2 and par. 1, no.4)
3.        prior right of dissolved partnership as against purchaser
-          without a final settlement with creditors of the partnership
 
Why are the old creditors considered creditors of the new firm?
-          the reason for the law (in making creditors of the dissolved firm also creditors of the person or partnership continuing
the business) is for said creditors not to loss their preferential rights as creditors to the partnership property
 
Art. 1841 – Retirement or Death of a partner
 
General Rule:
-          when a partner retires from the firm he is entitled to the payment of what may be due him after liquidation
-          but no liquidation is needed when there already is a settlement as to what the retiring partner shall receive
 
Art. 1842 – Accrual and Prescription of Partner’s right to account for his Interest
 
When right to account accrues
-          at the date of dissolution in the absence of any contrary agreement
 
Possible defendants:
                Action against
-          winding up partners
-          surviving partners
-          person in partnership continuing the business
 
Prescription
-          begins to run only upon the dissolution of the partnership when the final accounting is done
 
Limited Partnership