Dissolution and winding up of Partnership: A thorough discussion PDF

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This is about who entirely a partnership is being dissolve in line of several reasons why a partnership is dissolve because it needs the concurrence of all ....

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DISSOLUTION & WINDING UP ART. 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.

Effects of change in membership of a partnership (1) Dissolution of existing partnership and formation of a new one. — Any change in the membership of a partnership, either by the retirement or death of partner, or by the admission of new members into the partnership, produces, technically, an immediate dissolution of the existing partnership relation, and the formation of a new one (2) Continuance by remaining partners of partnership as before. — The change in the relation of the partners will dissolve the partnership but will not disturb the continuance by the remaining partners or by the existing and new partners of the business as before.

Dissolution, winding up, and termination defined. Three separate stages (1) Dissolution is the change in the relation of the partners caused by any partner ceasing to be associated in the carrying on of the business. (Art. 1828.) 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 is dissolved. (2) Winding up is the actual process of settling the business or partnership affairs after dissolution, involving the collection and distribution of partnership assets, payment of debts, and determination of the value of each partner’s interest in the partnership. It is the final step after dissolution in the termination of the partnership. (3) Termination is that point in time when all partnership affairs are completely wound up and finally settled. It signifies the end of the partnership life. It takes place after both dissolution and winding up have occurred. ART. 1829. On dissolution the partnership is not terminated, but continues until the winding up of partnership affairs is completed.

Effects of dissolution. (1) Partnership not terminated. — Dissolution does not automatically result in the termination of the legal personality of the partnership, or the cessation of his business, nor the relations of the partners among themselves who remain as co-partners until the partnership is terminated. (2) Partnership continues for a limited purpose. — After dissolution, a partnership is considered as maintaining a limited existence for the purpose of making good all outstanding engagements, of taking

and settling all accounts, and collecting all the property, means and assets of the partnership existing at the time of its dissolution for the benefit of all interested. (3) Transaction of new business prohibited. — After dissolution, the partnership as a business enterprise remains viable only for the purpose of winding up its affairs. The principal significance of dissolution is that thereafter, no new partnership business should be undertaken, but affairs should be liquidated and distribution made to those entitled to the partners’ interest.

Causes of dissolution (LAY DOWN) 1. Without violating the agreement 2. Violating the agreement 3. Unlawfulness of the business 4. Loss 5. Death of any of the partners 6. Insolvency of any partner or of the partnership 7. Civil interdiction of any partner 8. By decree of court under Art. 1831 ___________________________________________________________________________________ 1. DISSOLUTION EFFECTED WITHOUT VIOLATION OF PARTNERSHIP AGREEMENT. (LAY DOWN) A. Termination of the definite term or specific undertaking B. Express will of any partner in good faith, when there is no definite term and no specified undertaking C. Express will of all partners (except those who have 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. Expulsion of any partner in good faith of a member 1. Termination of the definite term or particular undertaking After the expiration of the term or particular undertaking, the partnership is automatically dissolved without the partners extending the said term or continuing the undertaking. If after said expiration the

partners continue the partnership without making a new agreement, the firm becomes a partnership at will. 2. By the express will of any partner  Here, each partner has both the power and the right to terminate the relation at any time. If there is bad faith, the dissolution is wrongful  Where the withdrawal of a partner has been spurred by “interpersonal conflict’’ among the partners, it would not be right to let any of the partners remain in the partnership under such an atmosphere of animosity and, certainly, not against their will.  Indeed, for as long as the reason for withdrawal of a partner is not contrary to the dictates of justice and fairness, nor for the purpose of unduly causing harm and damage upon the partnership, bad faith cannot be said to characterize the act.  A violation of the partnership agreement by the exclusion of a partner from participation in the management of the business of the firm has been held to give the excluded partner the right to declare the partnership dissolved. 3. By the express will of all the partners  No particular form of agreement is necessary to dissolve a partnership by consent. Such dissolution may be accomplished either by an express agreement or by words and acts implying an intention to dissolve.  The agreement to dissolve the partnership before the termination of the specified term or particular undertaking must be unanimous. The majority alone cannot dissolve the partnership without breach of contract.  That the consent of the partners who have assigned their interests or suffered them to be charged for their separate debts (Art. 1814.) is not required to effect dissolution without breach of the partnership agreement. They are not given the right to have a voice or vote in the dissolution of the partnership. The remaining partners alone may dissolve the partnership. 4 By expulsion of any partner  The expulsion has the effect of decreasing the number of the partners, hence, the dissolution. The expulsion must be made in good faith, and strictly in accordance with the power conferred by the agreement between the partners. This power may be vested in one partner exclusively. The partner expelled in bad faith can claim damages. 2. VIOLATING THE AGREEMENT (LAY DOWN)  Legal effects of dissolution. — The withdrawing partner is liable for damages for unjustified dissolution but in no case can he be compelled to remain in the partnership. With his

withdrawal, the number of members is decreased; hence, its dissolution. A partner guilty of wrongful dissolution is not given the right to wind up partnership affairs. (Art. 1836.)  Power of dissolution always exists. — No person can be compelled either to become a partner or to remain one. The relation of partners is one of mutual agency. The doctrine of delectus personae allows the partners to have the power, although not necessarily the right, to dissolve the partnership. An unjustified dissolution by a partner can subject him to a possible action for damages 3. UNLAWFULNESS OF THE BUSINESS (LAY DOWN)  A partnership must have a lawful object or purpose. (see Art. 1770.) The partners, however, can change the nature of their business and continue the partnership with the new business. 4. LOSS (LAY DOWN)  This provision of Article 1830 refers only to specific things. When the thing to be contributed is not specific, Articles 1786 (par. 1.) and 1788 shall govern.  Loss before delivery. — If the specific thing to be contributed by a partner is lost before delivery, the partnership is dissolved because there is no contribution inasmuch as the thing to be contributed cannot be substituted with another.  Loss after delivery. — If the loss occurred after the delivery of the thing promised, then the partnership is not dissolved, but it assumes the loss of the thing having acquired ownership thereof. The partners may contribute additional capital to save the venture. 5. DEATH OF ANY OF THE PARTNERS (LAY DOWN)  The deceased partner ceases to be associated in the carrying of the business; hence, the ipso facto dissolution of the partnership by his death by operation of law. The surviving partners have no authority to continue the business except so far as is necessary to wind up (see Art. 1836.) except as provided in Article 1833.  The subsequent legal status of a partnership dissolved by the death of a partner is that of a partnership in liquidation, and the only rights inherited by the heirs are those resulting from the said liquidation in favor of the deceased partner, and nothing more. 6. INSOLVENCY OF ANY PARTNER OR OF THE PARTNERSHIP (LAY DOWN)  The insolvency of the partner or of the partnership must be adjudged by a court. 7. CIVIL INTERDICTION OF ANY PARTNER (LAY DOWN)

 A partnership requires the capacity of the partners. A person under civil interdiction (or civil death) cannot validly give consent (Art. 1327.), as his capacity to act is limited thereby. (Art. 38.)  Civil interdiction deprives the offender during the time of his sentence of the right to manage his property and dispose of such property by any act or any conveyance inter vivos. 8. BY DECREE OF COURT UNDER ART. 1831 (LAY DOWN) Article 1831 (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;  It is not the mere fact of the existence of insanity, infirmity, or other disability supervening that will justify a court to decree a dissolution. The incapacity contemplated by law is incapacity which is lasting, from which the prospect of recovery is remote. If the disability be of a temporary nature, if it be merely an occasional malady or accidental illness, if there be a fair prospect of recovery within a reasonable time, then, and in such cases, there is no fit ground to decree a dissolution (3) A partner has been guilty of such conduct as tends to affect prejudicially the carrying on of the business; (4) 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 partnership with him;

 Like incapacity, conduct prejudicial to the carrying on of the business (e.g., inveterate drunkenness) and persistent breach of the partnership agreement (e.g., keeping and rendering false accounts, misuse or misappropriation of partnership funds) are grounds for judicial dissolution, for they defeat and materially affect and obstruct the purpose of the partnership.  Temporary grievances, discourtesies, disagreements, or mistakes of judgments that involve no permanent mischief or injury will not suffice as the basis for a judicial decree of dissolution. (5) The business of the partnership can only be carried on at a loss;

 Since the purpose of a partnership is the carrying of a business for profit, it may be dissolved by decree of court when it becomes apparent that it is unprofitable with no reasonable prospects of success.

 A court is authorized to decree a dissolution notwithstanding that the partnership has been making profits wherein it appears at the time of the application that the business can only be carried on at a loss. (6) Other circumstances render a dissolution equitable.  Examples of circumstances which render a dissolution equitable are abandonment of the business, fraud in the management of the business, refusal without justifiable cause to render accounting of partnership affairs, etc. In a case, it was held that the sale of all real property (lots) of a partnership did not work the dissolution of the firm which was left without the real property it originally had because the firm was not organized to exploit the lots sold but to engage in buying and selling real estate, and “in general real estate agency, and brokerage business.” 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. Examples (1) A, B, and C formed a partnership to continue for a term of five (5) years. On the third year, C sold his entire interest to D. Under Article 1813, such conveyance does not dissolve the partnership, and D does not become a partner, his only right being to receive the profits to which C would otherwise be entitled. Hence, D cannot ask for judicial dissolution of the partnership. However, if after the fifth year, the partnership is continued, D is entitled to ask for judicial dissolution. The partnership as continued may or may not be a partnership at will. (2) Suppose now, after the fifth year, the partnership was continued by the partners without any express agreement, becoming a partnership at will. (see Art. 1785.) If C’s was purchased by D or a charging order was issued against C in favor of D, his judgment creditor, as provided in Article 1814, when the partnership was already a partnership at will, D, at any time, may ask for judicial dissolution.

EFFECT OF DISSOLUTION ON AUTHORITY OF PARTNER (A1832)  General rule. Upon dissolution, the partnership ceases to be a 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. The event of dissolution, therefore, terminates the actual authority of a partner to undertake new business for the partnership.

QUALIFICATIONS OF THE GR  (a) In so far as the partners themselves are concerned , the authority of any partner to bind the partnership by a new contract is immediately terminated when the dissolution is not by the act, insolvency, or death of a partner. (Art. 1832.) When the dissolution is by such act, insolvency, or death, the termination of authority depends upon whether or not the partner had knowledge or notice of the dissolution as provided in Article 1833.  (b) With respect to third persons (Art. 1834.), the partnership is generally bound by the new contract although the authority of the acting partner as it affects his co-partners is already deemed terminated under Articles 1832 and 1833. In such a case, however, the innocent partners can always recover from the acting partner.  A, B, and C were partners in X & Co. The term of existence of the partnership as fixed in the articles of partnership expired yesterday. Therefore, it was dissolved. Here, the dissolution was caused not by the act, insolvency, or death of a partner. If today A enters into a new transaction (not necessarily for winding up or to complete a transaction begun but not yet finished) with D, he (A) alone assumes whatever liability may arise under the contract because his authority to act for the partnership X & Co. as to bind B and C terminated as of yesterday, when the partnership was dissolved. If the partnership is liable to D under 1834, B and C are entitled to indemnity from A. LIABILITY OF A PARTNER WHERE THE DISSOLUTION IS CAUSED BY THE ACT, DEATH OR INSOLVENCY OF A PARTNER 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. (1) A, B, and C were partners. A informed B that the former was resigning or withdrawing from the partnership. The partnership was thus dissolved by the act of A. C had no knowledge of the dissolution. If partnership liability is incurred by a contract entered into by C, A and B are bound to contribute their share of the liability as if the partnership had not been dissolved. To avoid being liable for his share of partnership liability arising after the dissolution, A should prove knowledge on the part of C that A had already dissolved the partnership at the time the contract was made. If the contract was entered into by B despite his knowledge of the dissolution, A and C can recover from B. In the end, only B will assume

the entire liability. Suppose B learned of the resignation of A only from C. In this case, B had merely notice (as distinguished from knowledge) of the dissolution. Hence, A and C can be called upon to contribute their share in the liability. (2) If A had died or had become insolvent, knowledge or notice on the part of B will justify nonliability on the part of the other partners. After the dissolution of a partnership, can a partner still bind the partnership?

GR: A partner continues to bind partnership even after dissolution in the following cases 1. Transactions to wind up partnership affairs or to complete transactions unfinished at dissolution; 2. Transactions which would bind partnership if dissolution had not taken place, provided the other party/obligee: a. Had extended credit to partnership prior to dissolution; and had no knowledge/notice of dissolution; or b. Did not extend credit to partnership; Had known partnership prior to dissolution; AND Had no knowledge/notice of dissolution/fact of dissolution not advertised in a newspaper of general circulation in the place where partnership is regularly carried on (1834, p.1) Where A, B, and C are active and ostensible partners, A’s retirement terminates the actual authority of A, B, or C to impose new obligations on the partnership, except such as may be necessary to wind up the business or to complete transactions begun but not then finished. Assume that D has extended credit to the partnership prior to A’s retirement, and has no knowledge of A’s retirement, and that no notice thereof has been communicated to X, by mail or otherwise, then on the ground of estoppel: (1) If B or C, purporting to act on behalf of the partnership, contracts orders goods), the partnership (A, B, and C, jointly) is liable to D. (2) If A, purporting to act on behalf of the partnership, contracts partnership (A, B, and C, jointly) is liable to D. XPNs: Partner cannot bind the partnership anymore after dissolution: 1. Where dissolution is due to unlawfulness to carry on business; or 2. Where partner has become insolvent; or

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3. Act is not appropriate for winding up or for completing unfinished transactions; or 4. Partner is unauthorized to wind up partnership affairs, except by transaction with one who: a. Had extended credit to partnership prior to dissolution; AND Had no knowledge or notice of dissolution; or b. Did not extend credit to partnership prior to dissolution; Had known partnership prior to dissolution; AND Had no knowledge/notice of dissolution/fact of dissolution not advertised in a newspaper of general circulation in the place where partnership is regularly carried on (Art. 1834(3)); 5. Completely new transactions which would bind the partnership if dissolution had not taken place with third persons in bad faith. Does the dissolution of a partnership discharge existing liability of a partner?

GR: Dissolution does not discharge the existing liability of a partner (Art. 1835(1)). XPN: Said liability is discharged when there is an agreement between: 1. Partner himself; 2. Person/s continuing the business; and 3. Partnership creditors [NCC, Art. 1835(2)]. WINDING UP OF THE PARTNERSHIP It is during this time after dissolution that partnership business or affairs are being settled The winding up of the dissolved partnership may be done either: (1) judicially, under the control and direction of the prop...