CHAPTER

DISSOLUTION, WINDING-UP AND TERMINATION

INTRODUCTION AND DEFINITION OF TERMS

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 binding up of the business,

ART. 1829. On dissolution the partnership is not terminated, but continues until the winding up of partnership
affairs is completed,

A proper understanding under Philippine Partnership Law of the terms "dissolution," "winding-up" and
"termination" would help clarify the multi-faceted legal relationships that exist in the partnership setting.

Article 1829 of New Civil Code implicitly distinguishes the three terms when it provides that "On dissolution
the partnership is not terminated, but continues until the winding up of the partnership affairs is completed."

"Dissolution" is the term that pertains primarily to the contract of partnership, the breaking of the vinculum
juris, so to speak, between and among the partners in the partnership arrangement. Article 1828 of New Civil
Code, defines "dissolution" as "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." It is equivalent to the terms
"rescission" and "extinguishment" of contract of partnership in the Law on Contracts.

"Termination" pertains essentially to the partnership as a business enterprise, and defines the time when all
matters pertaining to the business enterprise (i.e., the completion of pending contracts, the payment of all
obligations and the distribution, if any, of the net assets of the partnership to the partners) have been
completed. The Court has defined "termination" of a partnership as the "point in time after all the partnership
affairs have been wound up."

"Winding-up" is therefore the process which is commenced by the dissolution of the contract of partnership
between and among the partners, and is concluded upon the termination or complete liquidation of the
partnership business enterprise. The Court has defined "winding-up" as "the process of settling business affairs
after dissolution,” and it cites as examples the following: "the paying of previous obligations; the collecting of
assets previously demandable; even new business if needed to wind up, as the contracting with a demolition
company for the demolition of the garage used in a 'used car' partnership."

Dissolution which breaks the contractual privity between and among the partners, does not necessarily give
rise to winding-up or termination of partnership business enterprise, as the dissolution of an existing
partnership contract may actually lead to the constitution of a new partnership contract among the partners
who choose to proceed with the partnership business.

ART. 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 undertaking 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 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; and
(8) By decree of court under the following article.

ART. 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 proceedings 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 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;
(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,

Philippine Partnership Law classifies the causes of dissolution of partnerships into the following categories:

(I) DISSOLUTION IPSO JURE WITHOUT NEED OF COURT DECREE:

(a) Dissolution Effected Without Violation of the Partnership Agreement:

■ Termination of the term of the partnership;

■ Termination of the specific undertaking for which the partnership was constituted;

■ In a partnership at will, dissolution effected by the will of any partner exercised in good faith;

• - Mutual withdrawal by all the partners;

• - Expulsion of a partner bona fide under powers granted in the partnership agreement.

(b) Dissolution Effected in Contravention of the Partnership Agreement, Effected by the Will of Any
Partner:

■ When the partnership term has not expired;

- When the particular undertaking for which the partnership has been constituted has not yet terminated;

■ At any time, in a partnership at will.

(c) Dissolution Caused by Force Majeure or Outside the Will of the Partners:

§ Loss of the specific thing promised to be contributed;

§ Partnership business becoming unlawful;
§ Death, insolvency or civil Interdiction of any partner;
§ Insolvency of the partnership.

(II) DISSOLUTION EFFECTED THROUGH A COURT DECREE:

(a) When a partner has been declared insane in any judicial proceeding or is shown to be of
unsound mind;
(b) When a partner becomes incapacitated in performing the partnership contract;
(c) When a partner is guilty of such conduct as tends to affect prejudicially the carrying on of the
partnership business;
(d) When 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 the partnership with him;
(e) When the partnership business can only be carried on at a loss;
(f) Other circumstances that render dissolution equitable;
(g) On the application of the purchaser of a partner's interest in the partnership:

■ After termination of specified term of the partnership;

§ After termination of the particular undertaking for which the partnership was constituted;
§ At any time, in a partnership at will.

1. Dissolution in the Light of the Partnership Being Primarily a Contractual Relationship

It should be noted that Articles 1830 and 1831 of the New Civil Code clearly separate the causes of partnership
dissolution between those which may be effected extrajudicially, and those which require a court decree in
order to be effective.

Partnership being primarily a contractual relationship between and among the partners, the various modes of
dissolution are akin to the general principles covering the extinguishment of contracts.

When it comes to the first category of causes of partnership dissolution, namely, those that are effected ipso
jure or without need of any court decree, perhaps a good way of understanding the dynamics behind those
causes of dissolution is to think of dissolution in relation to terms very closely linked to principles of "obligatory
force" and "relativity pertaining to contracts, namely, the remedy of "rescission the legal concepts of "breach of
contract and the "happening of resolutory condition or term," as well as the other modes of extinguishment of
contracts.

Take the first two causes for dissolution, namely, the termination of the term or fulfillment of the particular
undertaking for which the partnership has been constituted, which basically take the character of either full
performance or fulfillment of the resolutory condition or term. Whether it be full performance or the happening
of the resolutory condition or term, a contract is deemed extinguished ipso jure, and there need not be any
particular act by which the legal effect comes about. The same legal effect would be the act of any partner
declaring the termination of a partnership in a partnership at will.
When all the partners in a partnership come to a unanimous agreement to terminate the partnership, this is
the same legal effect as in another other contract which is extinguished by mutual withdrawal. Finally, when a
partner is expelled bona fide from the partnership pursuant to the provisions granting such power in the
contract of partnership, then this is in accordance with exercising an extrajudicial right to rescind or cancel a
contract, which conforms to the spirit of, and is not in breach, of the contractual commitment.

On the other hand, when a partner, without any legal or contractual basis, seeks the dissolution of the
partnership, the same would indeed constitute a "breach of contract" for which he becomes personally liable
for damages, and for which he loses the right to wind-up its affairs, but nevertheless the dissolution would take
legal effect, in the same manner as in all contracts that embody personal obligations to do (like agency), i.e.,
that they are essentially revocable in spite of contractual stipulations to the contrary. In this case, there is the
application of the doctrine of delectus personae in the partnership setting.

As has been discussed previously, the principle of delectus personae, which treat of the contractual relationship
between and among the partners of the most extreme personal nature {i.e., the principle of "relativity" in
Contract Law applied at its most extreme norm), would override the principle of "obligatory force" of
contractual provisions. Thus, even when the contracting parties agree that their partnership contract would be
irrevocable for say ten years, under the principle of delectus personae, any partner even without cause may
seek to terminate his relationship by withdrawing from the partnership and thereby causing its dissolution.
There is no legal remedy allowed to the other partners to compel the withdrawing partner to remain with the
partnership arrangement within the remaining term of the partnership provided in its articles of partnership.
Nevertheless, in this case the withdrawal from the partnership would be in breach of a contractual agreement,
and would subject the withdrawing partnership to liability for damages.

When it comes to dissolutions caused by force majeure or outside the will of the partners, their importance lie
in the spirit of the Contract Law principle which provides that force majeure excuses a contracting party from
his obligations, and would not make him liable for damages for the occasion does not constitute a breach of
contract.

Finally, the causes of dissolution which require a court decree for their effectivity, usually cover causes of action
which either go into "breach of contract" or "radical change in the conditions or circumstances upon which the
contract was entered into" (i.e., the principle of rebus sic stantibus). In either case, the intervention of the courts
is required to establish the factual basis of the breach of contract, or the radical change of the circumstances
binding the partners together into the contract of partnership.

In essence, Philippine Partnership Law is careful to classify the various causes of dissolution because of the
varying legal consequences of dissolution as an act of rescission or cancellation of the partnership agreement.

a. Dissolution Effected with No Violation of the Partnership Contract

Article 1830 of New Civil Code, in enumerating the causes for partnership dissolution, distinguishes first
between causes "without violation of the agreement," and those causes that are "[i]n contravention of the
agreement." Those classified as causes "without violation of the agreement," are consistent with the agreed and
in compliance with, the terms of the contract of partnership, thus:

(a) Termination of the term or particular undertaking specified in the partnership agreement;
(b) By the exercise in good faith by any partner of the power to withdraw in a partnership at will
(no definite term or particular undertaking specified in the agreement);
(c) By the mutual withdrawal by all the partners from the partnership; and
(d) By the bona fide expulsion of any partner in accordance with the power provided for in the
partnership agreement.
In any of the foregoing enumerated causes, there is no breach or contravention of the partnership agreement,
and the dissolution of the partnership does not give rise to a liability for damages for breach of contract. When
it comes to the first three causes, there being no "partner at fault" means that none of the partners would be
disqualified from participating in the winding- up of the affairs of the partnership. Whereas, in the case of
expulsion of a partner in accordance with the power provided in the partnership agreement, since it can only
be exercised bona fide, it could only mean that the partner was expelled "for cause" and consequently, he would
be disqualified from participating in the winding-up of the affairs of the partnership business, and electing to
continue to pursue the partnership business.

b. Dissolution Effected in Violation of the Partnership Contract

In contrast, although any partner is recognized to have the power to withdraw from the partnership at any
time, it would be "in contravention of the agreement between the partners, where the circumstances do not
permit a dissolution under the provisions" of Article 1830 of the New Civil Code. In that case, the partner
seeking the dissolution would be liable for damages, and he is without right to continue to pursue the
partnership business.

An example of the consequences of an expulsion of a partner effected in bad faith is demonstrated in Tocao v.
Court of Appeals, where in an oral partnership, the capitalist partner Tocao had excluded the industrial partner
Anay from entrance into any of the business premises of the company or and severed any further dealings she
may have with the business venture. In ruling that the excluded partner had a right to recover damages, to have
a formal accounting of the business, and to receive her shares in the net profits, the Court ruled:

Undoubtedly, the petitioner Tocao unilaterally excluded private respondent [Anay] from the partnership to
reap for herself and/or for petitioner Belo financial gains resulting from private respondent's efforts to make
the business venture a success . . . Her instruction ... not to allow private respondent to hold office in both the
Makati and Cubao sales offices concretely spoke of her perception that private respondent was no longer
necessary in the business operation, and resulted in a falling out between the two. However, a mere falling out
or misunderstanding between partners does not convert the partnership into a sham organization. The
partnership exists until dissolved under the law. The partnership ... has no fixed term and is therefore a
partnership at will predicated on their mutual desire and consent, it may be dissolved by the will of a partner...
An unjustified dissolution by a partner can subject him to action for damages because by the mutual agency
that arises in a partnership, the doctrine of delectus personae allows the partners to have the power, although
not necessarily the right to dissolve the partnership.

In this case, petitioner Tocao's unilateral exclusion of private respondent from the partnership effected her
own withdrawal from the partnership and considered herself as having ceased to be associated with the
partnership in the carrying on of the business. Nevertheless, the partnership was not terminated thereby; it
continued until the winding up of the business.

Essentially, the Court in Tocao agreed with the decision of the trial court that "a partner who is excluded
wrongfully from a partnership is an innocent partner. Hence, the guilty partner must give him his due upon the
dissolution of the partnership as well as damages or share in the profits 'realized from the appropriation of the
partnership business and goodwill.' An innocent partner thus possesses 'pecuniary interest in every existing
contract that was incomplete and in the trade name of the co-partnership and assets at the time he was
wrongfully expelled."

c. Force Majeure and Other Similar Causes

A third general category for causes of dissolution recognized under Article 1830 of the New Civil Code are those
which occur by reason of force majeure or events that are outside of the will of the partners:

(a) Events which makes unlawful the partnership business;

 (b) Loss of the specific thing promised to be contributed to the partnership; and
(c) Death, insolvency or civil interdiction of any partner.

None of such causes of dissolution constitute a type of breach of the partnership agreement.

An interesting issue would be: If the loss of the specific thing promised to be contributed to the partnership would
cause the dissolution of the partnership, then would the return to a partner of his contribution be deemed to have
dissolved the partnership?

The decision in Fernandez v. Dela Rosa covered the issue of whether the receiving back by a partner of his
contribution to the partnership amount to withdrawal from the partnership to have effected a dissolution
thereof. The resolution of this issue was essential in Fernandez because it determined whether the partner so
receiving his contribution had a right to participate in the profits of the venture earned after he had allegedly
withdrawn. Thus, the Court asked specifically in Fernandez: "Did the defendant waive his right to such interest
as remained to him in the partnership property by receiving the money? Did he by so doing waive his right to
an accounting of the profits already realized, if any, and a participation in them in proportion to the amount he
had originally contributed to the common fund? Was the partnership dissolved by the will or withdrawal of
one of the partners' under Article 1705 of New Civil Code?" The Court held —

. . . We think these questions must be answered in the negative.

There was no intention on the part of the plaintiff in accepting the money to relinquish his rights as a partner,
nor is there any evidence that by anything that he said or by anything that he omitted to say he gave the
defendant any ground whatever to believe that he intended to relinquish them. On the contrary he notified the
defendant that he waived none of his rights in the partnership. Nor was the acceptance of the money an act
which was in itself inconsistent with the continuance of the partnership relation, as would have been the case
had the plaintiff withdrawn his entire interest in the partnership. There is, therefore, nothing upon which a
waiver, either express or implied, can be predicated. The defendant might have himself terminated the
partnership relation at any time, if he had chosen to do so, by recognizing the plaintiffs right in the partnership
property and in the profits. Having failed to do this he cannot be permitted to force a dissolution upon his
copartner upon terms which the latter is unwilling to accept. We see nothing in the case which can give the
transaction in question any other aspect than that of the withdrawal by one partner with the consent of the
other of a portion of the common capital."

d. Causes Equivalent to Rescission of the Contract of Partnership

The fourth general category covers the grounds whereby a partner may seek court order for the dissolution of
the partners under Article 1831 of New Civil Code, thus:

(a) When a partner has been declared insane in any judicial proceeding or is shown to be of unsound mind;
(b) When a partner becomes in any other way incapable of performing his part of the partnership contract;
(c) When a partner has been guilty of conduct as tends to affect prejudicially the carrying on of the
business;
(d) When 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 is not reasonably practicable
to carry on the business in partnership with him;
(e) When the business of the partnership can only be carried on at a loss;
(f) Other circumstances that render dissolution equitable.

In addition, Article 1831 of New Civil Code recognizes the standing of the assignee of a partner's interest to
seek judicial dissolution of the partnership when:

(a) Termination of the period upon which the partnership is expressly constituted;
 (b) Termination of the particular undertaking upon which the partnership is expressly constituted; or
(c) At any time, in a partnership at will.

The foregoing grounds enumerated in Article 1831 of the New Civil Code, for which a court order of dissolution
may be sought need to be considered carefully, each represents a public policy which takes into consideration
that the business purpose and future of a partnership which cannot be placed in a relatively clear vision at the
time the contract of partnership is entered into. The article recognizes the inherent risk that business
undertakings are exposed to, many of which cannot be anticipated at the time the partnership agreement is
entered into. Therefore, it sets-up a mechanism (i.e., an appropriate court proceeding for dissolution) by which
the parties may ask a tribunal to determine that the circumstances have rendered the rationale of the
partnership agreement inutile.

Take the case of the ground "when the business of the partnership can only be carried on at a loss," the Supreme

Court observed in Moran, Jr. v. Court of Appeals,' that even with the assurance by one of the partners to the
others that they would earn a huge amount of profits, "in the absence of fraud, the other partner cannot claim
a right to recover the highly speculative profits. It is a rare business venture guaranteed to give 100% profit."
Moran, Jr. considered it lawful for the managing partner to close down a partnership venture when the
prospects were that it would only sustain losses. The Court further held: "As already mentioned, there are risks
in any business venture and the failure of the undertaking cannot entirely be blamed on the managing partner
alone, especially if the latter exercised his best business judgment, which seems to be true in this case."

Likewise, each of the grounds provided under Article 1831 would constitute "substantial breach" of the
obligations assumed by the partners, as the basis by which an action for rescission may be pursued;
consequently, the factual basis upon which the substantial breach may arise must be determined to exist by the
courts, and cannot be left to the sole determination of any of the partners.

One would think that when a partner has been judicially declared insane, it would thereby ipso jure cause the
dissolution of the partnership, as in the case of death, insolvency or civil interdiction of a partner. Yet under
Article 1831 it would require a formal petition in court to have the partnership dissolved. The legal implication
is that the partnership remains unaffected by the judicial declaration of insanity of a partner, and the discretion
is given to the other partners to seek its dissolution. Judicial declaration of insanity, like civil interdiction, would
render the partner without legal capacity to contract, and yet the former does not result in automatic
dissolution of the partnership.

Perhaps it is because judicial declaration of insanity does not proceed from a criminal conviction as in the case
of civil interdiction, and that the law recognizes that the insane partner still has an estate that has a right to
benefit from the properties and rights to which a partner is entitled to, and the other partners are given the
option to remain in partnership with him to allow his estate to continue to benefit from the partnership
business. After all, a partner who turns out to be insane, may be a better partner to remain with, rather than
another partner who is sane but turns out to be insuperable. This is the same rationale under the second group
for judicial dissolution: when a partner becomes in any other way incapable of performing his part of the
partnership contract.

The last four grounds to seek judicial dissolution (when a partner has been guilty of conduct as tends to affect
prejudicially the carrying on of the business; when 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
is not reasonably practicable to carry on the business in partnership with him; when the business of the
partnership can only be carried on at a loss; and other circumstances that render a dissolution equitable), look
at the primary rationale for the partnership agreement: to operate a business venture for the benefit of all the
partners. When there are circumstances prevailing in the partnership setting that endanger or undermine the
viability of the partnership enterprise, any of the partners is given standing to seek for court determination of
the existence of such situation and decree the dissolution of the partnership.
For example, in Rojas v. Maglana* the Court held that when a partner engages in a separate business enterprise
that is competitive with that of the partnership and even withdraws equipment contributed into the
partnership enterprise, the other partner's withdrawal from the partnership becomes thereby justified and for
which the latter cannot be held liable for damages. In such an instance, a partner has violated his duty of loyalty,
which under the principle of delectus personae should allow the other partners to break any further ties with
him.

2. Legal Effects of Dissolution - In General

ART. 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.

ART. 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 dis- solved 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 the death or insolvency of a partner, the partner acting for the partnership had
knowledge or notice of the death or insolvency.

ART. 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.

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.

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
(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,

ART. 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,

ART. 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,

ART. 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.

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 for
breach of the agreement.
(2) The partners who have not cause 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 to any partner who has cause the dissolution
wrongfully, the value of his interest in the partnership at the dissolution, loss 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.
(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 co-partners 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 goodwill of
the business shall not be considered,

ART. 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 payment 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,

a. Effect of Dissolution on the Partnership Contract and Juridical Personality

In Corporate Law, "dissolution" is the termination of the juridical personality of the corporation which was
originally constituted to pursue new business, and that in fact and in law, the corporate juridical personality
continues to exist for three years with only the capacity to wind-down the corporate affairs.14 The dissolution
of a corporation affects directly the underlying corporate business enterprise in that it ceases to pursue
business as a going concern, and any contract entered into as "new business" would be considered void as
having been entered into with a non-existing corporate party.

In contrast, the concept of "dissolution" in Partnership Law focuses in the change of the contractual relationship
between and among the partners (the rescission of the partnership contract), as the termination of their
association in carrying the business venture as a going concern. The contract of partnership remains but only
in the concept of an association to pursue liquidation process.

A direct effect of the dissolution of the partnership is provided in Article 1832 of New Civil Code, which
extinguishes the right and power of the partners to represent one another to pursue the partnership as a going
concern: "Except so far as may be necessary to wind up partnership affairs or to complete transactions begun
but not then finished, terminates all authority of any partner to act for the partnership." Dissolution of a
partnership does not therefore undermine existing contracts, nor modify or extinguish then existing
obligations of the partnership and the partners, and that the completion or performance of existing contracts
and the settlement of partnership obligations are in fact integral parts in the winding-up process.

Since the juridical personality of a partnership is inextricably linked to the underlying contract of partnership,
it should mean that the dissolution of the partnership would bring about the impairment of the partnership
juridical person in whose name the business is pursued remains hovering.

b. Effect on the Partnership Business Enterprise

Likewise, in a partnership setting the underlying partnership business enterprise should cease to exist as "as a
going concern," but only if the remaining partners do not wish to continue the partnership business, whenever
they are entitled under the law the option to so continue.
Dissolution focuses mainly on the breaking-up of the contractual relationship of the partners among one
another. Thus, when Article 1832 of the New Civil Code provides that "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," it means that the force of the original contract of
partnership between them as to being mutual agents, as well as the enforceability of the doctrine of delectus
personae, are terminated, without prejudice to a new partnership arrangement being constituted among the
remaining partners.

c. Effects on Contracts Entered into With Third Parties

In Corporate Law, after dissolution, all contracts entered into that pursue new business for the corporate
venture are void even as to persons who deal with the corporation in good faith. The reason for this is that the
public policy behind the capacity of the corporate juridical personality pre-empts the consideration of
protecting the public that deal in good faith with a purportedly validly existing corporation. Is this the same
policy when it comes to contracts on new business entered into for and in behalf partnership after dissolution has
occurred?

In covering the general legal effects of the dissolution of a partnership, Bautista cited American decisions,
showing that upon dissolution the partnership continues to exist only for a limited purpose of winding it affairs,
and that no new business can be pursued. We feel that under Philippine Partnership Law, which expressly
recognizes that the non-defaulting partners can choose to continue the business enterprise, the answer to the
question raised should be in the negative, because there is no over-arching public policy of State supervision
and control over the juridical personalities of partnerships. Under Philippine Partnership Law, the partnership
juridical personality is merely an "added feature" to the partnership arrangement to improve the efficiency of
partnership transactions, and cannot overcome the more important public policy considerations, such as the
imperative need to protect the contractual expectations of the members of the public who deal in good faith
with the partnership venture.

We see the demonstration of this principle in Singson v. Isabels Sawmill, where the Court held —

It is true that the dissolution of a partnership is caused by any partner ceasing to be associated in the carrying
on of the business. However, on dissolution, the partnership is not terminated but continuous until the winding
up of the business.

The remaining partners did not terminate the business of the partnership 'Isabela Sawmill.' Instead of winding
up the business of the partnership, they continued the business still in the name of said partnership. It is
expressly stipulated in the memorandum-agreement that the remaining partners had constituted themselves
as the partnership entity, the "Isabela Sawmill."

There was no liquidation of the assets of the partnership. The remaining partners . . . used the properties of
said partnership.

xxx

It does not appear that the withdrawal of [a partner] from the partnership was published in the newspapers
the public in general had a right to expect that whatever credit they extended to [the remaining partners] doing
the business in the name of the partnership "Isabela Sawmill" could be enforced against the properties of said
partnership.. ,"

In Tocao v. Court of Appeals," the Court held that the fact that the managing partner excludes the industrial
partner from participation in the partnership business did not mean that the partnership was extinguished
automatically:
However, a mere falling out or misunderstanding between partners does not convert the partnership into a
sham organization. The partnership exists until dissolved under the law. Since the partnership created by
petitioners and private respondent has no fixed term and is therefore a partnership at will predicated on their
mutual desire and consent, it may be dissolved by the will of a partner. x x x In this case, petitioner Tocao's
unilateral exclusion of private respondent from the partnership effected her own withdrawal from the
partnership and considered herself as having ceased to be associated with the partnership in the carrying on
of the business. Nevertheless, the partnership is not terminated thereby; it continues until the winding up of
the business.

d. Effects on Determining Liability of Partners for Damages to One Another

In Soncuya v. De Luna, it was held that for purposes of determining whether a partner is entitled to damages
allegedly suffered by reason of the supposed fraudulent management of the partnership by the managing
partner, it is first necessary that a liquidation of the partnership business must be made "to the end that the
profit and losses may be known and the causes of the latter and the responsibility of the defendant as well as
the damages which each partner may have suffered, may be determined."

3. Effects of Dissolution Among the Partners Inter Se

We will now discuss the legal consequences of, and the rights and obligations that would govern the
relationship of the partners under, the various causes of partnership dissolution.

a. When Dissolution Is Caused Not in Contravention of the Partnership Agreement

Under Article 1837 of New Civil Code, unless otherwise agreed, each partner, as against his co-partners and all
persons claiming through them in respect of their interests in the partnership, may have the partnership
property applied to discharge its liability, and the surplus applied to pay in cash the net amount owing to the
respective partners. In other words, when there has been no breach of the partnership agreement upon the
dissolution of a partnership, every partner has a right to insist upon the winding-down of partnership affairs.

When dissolution of the partnership is caused without breach of the contract of partnership, the "remaining
partners" have no option to continue the partnership business enterprise when the "withdrawing partner"
insists on winding-up the partnership affairs. Consequently, the only way by which the remaining partners can
hope to continue the partnership business is to come into a settlement of the liquidation of the withdrawing
partner's equity interests in the partnership. The tendency therefore is that the withdrawing partner may
receive a premium or a higher price than the actual liquidation value of his share in the net assets of the
partnership in exchange for not demanding the formal winding-up and termination of the partnership business.

b. When Dissolution Is Caused by the Bona Fide Expulsion of a Partner

Under Article 1837 of New Civil Code, when dissolution is caused by the bona fide expulsion of a partner
pursuant to the terms of the partnership agreement, and if the expelled partner is discharged from all
partnership liabilities, either by payment or by express agreement to that effect between himself, the creditor
and the remaining partners, as provided under the second paragraph of Article 1835 of New Civil Code, then
such expelled partner shall receive in cash only the net amount due him from the partnership.

In other words, the expelled partner is without power or authority to insist upon the formal winding-up and
liquidation of the partnership business enterprise; and that the choice whether to continue with the business
enterprise or to formally wind-up and terminate the partnership is with the remaining partners.

c. When Dissolution Is Caused in Contravention of the Partnership Agreement

In the event the dissolution of the partnership is in contravention of the partnership agreement, there exists
legally a formal "breach of contract," and the rights and/or liabilities of the partners shall be as follows:

(a) Each partner who has not caused the dissolution wrongfully shall have the right:

(1) to participate in the net assets of the partnership after discharge of all partnership liabilities;
(2) to damages for breach of the agreement, as against each partner who caused the dissolution
wrongfully;

(b) The partners who have not caused the dissolution wrongfully, may, if they so desire:

(1) continue the business in the same name either by themselves or jointly with others, during the rest of
the agreed term for the partnership;
(2) and for that purpose may possess the partnership property, provided they secure the payment by bond
approved by the court, or pay to any partner who has caused the dissolution wrongfully, the value of
his interest in the partnership at the dissolution, less any damages for breach of the agreement and in
like manner indemnify him against all present or future partnership liabilities;

(c) A partner who has caused the dissolution wrongfully shall only have:

(1) If the business is not continued, all the rights of a partner for share in the net assets of the
partnership after payment of all its liabilities, subject to liability for damages incurred due to such
wrongful dissolution;
(2) If the business is continued, the right as against his co-partners 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
goodwill of the business shall not be considered.

d. When Dissolution Caused by Rescission of the Partnership Agreement Due to Fraud or Misrepresentation
(i.e., By Judicial Decree)

Under Article 1838 of New Civil Code, without prejudice to any other right, the party entitled to rescind or seek
the dissolution of the partnership shall be entitled:

(a) 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;
(b) To stand, after all liabilities to third persons have been satisfied, in the place of the creditors
of the partnership for any payment made by him in respect of the partnership liabilities; and
(c) To be indemnified by the person guilty of the fraud or making the representation against all
debts and liabilities of the partnership.

4. Effects of Dissolution on Partnership Liabilities Existing or Accrued at the That Time Discussions on
partnership dissolutions ought to center around the fourth attribute of partnership of "unlimited liability," i.e.,
that a partner shall be liable jointly with the other partners, for partnership debts which cannot be settled from
the partnership assets. In fact, it is the point of dissolution, that application of the attribute of unlimited liability
becomes most critical.
a. General Rule on Existing Partnership Liabilities

Under Article 1835 of New Civil Code, the general rule is that the dissolution of the partnership does not of
itself discharge the existing liability of any of the partners.

When it comes to a deceased partner, Article 1835 provides that "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."

b. Discharge of a Partner from Existing Partnership Liabilities

Article 1835 of the New Civil Code provides that the only manner by which a partner may be discharged from
any existing liability upon dissolution of the partnership, is by an agreement to that effect between himself, the
partnership creditor and the person or partnership continuing the business.

Such an 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.

5. Effects of Dissolution on Partnership Liabilities Contracted or Incurred After Dissolution

The rules when it comes to liabilities contracted or incurred on behalf of the partnership after dissolution
should be divided into the following categories:

(a) Those that were incurred pursuant to winding-up proceedings;

(b) Those that were incurred in the nature of "new business" in spite of the fact that the
partnership is in winding-up process; and
(c) Those that were incurred when the partnership enterprise has been continued and no
winding-up process have been pursued.

a. Liabilities Incurred Pursuant to Winding-up Proceedings

Article 1832 of New Civil Code clearly implies that even with the dissolution of the partnership, the partners
not at fault have full authority to act for the partnership in all matters that "may be necessary to wind up
partnership affairs or to complete transactions begun but not then finished."

Therefore, despite the dissolution of the partnership, it is clear under Article 1829 that the partnership is not
terminated on dissolution, and that the partnership continues to exist "until the winding up of the partnership
affairs is completed." During winding-up stage, every partner authorized to wind-up partnership affairs has full
authority to enter into any contract or transaction that is consistent with the winding-up of partnership affairs,
and such contracts and transactions shall be valid and binding upon the partnership and those of the partners.

Whether considered from the inter-partnership relationship, or viewed in relationship with third parties, all
contracts and transactions entered into after dissolution of the partnership, which are in pursuit of the winding-
up of partnership affairs, are valid and binding. Thus, Article 1834 provides that "After dissolution, a partner
can bind the partnership x x x (1) By any transaction appropriate for winding up partnership affairs or
completing transactions unfinished at dissolution."

(1) Where Partnership Not Bound Even for Winding-Up Liabilities

Under Article 1834 of the New Civil Code, even when the liability incurred in behalf of the partnership is
incurred for winding-up purpose, nonetheless "The partnership is in no case bound by any act of a partner after
dissolution xxx(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 the acting partner's want of authority; or
(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 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.

b. Liabilities Incurred Constituting "New Business" During the Winding-Up Process

Article 1832 of New Civil Code is also clear that after dissolution, and winding-up stage has been reached, and
there is no intention to continue the partnership enterprise, then it terminates all authority of any partner to
act for and in behalf of the partnership and/or the other partners involving "new business" or that which is not
in pursuit of the winding-up of partnership affairs.

The general rule applicable in Partnership Law would then be equivalent to the Agency Law principle that an
agent who acts without or outside the scope of his authority, which renders the contract entered into
unenforceable against the principal, but valid against the agent in his personal capacity. From the inter-
partnership relationship, every contract entered into or every liability incurred in the name of the partnership
as "new business," is done without lawful authority, and is non-binding on the partnership and the other
partners. As and between the partners, the liability incurred by the acting partner shall then be for his sole
account.

But the foregoing general rule applies only when the acting partner acts with knowledge of the fact of
dissolution of the partnership; for a partner acting for and in behalf of the partnership after dissolution, but
acting in good faith, binds the partnership. Therefore, in determining whether the acting partner acted in good
faith or not, distinguish among the causes of dissolution.

(1) When Dissolution Is By the Act, Insolvency or Death of a Partner

Under Article 1833 of New Civil Code, where the dissolution is caused by the act, death or insolvency of a
partner, the acting partner who acts without knowledge of the act, death or insolvency of another partner (i.e.,
without knowledge that dissolution has come about), will legally bind the partners to any liability created "for
the partnership as if the partnership had not been dissolved."

On the other hand, only the acting partner shall be liable for the liability entered into in behalf of the
partnership, when he knew at that time of the fact of dissolution of the partnership.

(2) When Dissolution Is NOT By the Act, Insolvency or Death of a Partner

Under Articles 1832 and 1833 of New Civil Code, when the dissolution of the partnership is other than "by the
act, insolvency or death of a partner," then knowledge of the fact of dissolution is presumed to have reached
every partner and therefore, as between and among them, a partner who incurs a liability in the name of the
partnership, is deemed to be acting without authority or in bad faith, and only such acting partner shall be liable
for the liability incurred.

(3) As To Third Party Creditors

Whatever may have been the cause of the dissolution of the partnership, third parties who in good faith (i.e.,
unaware of the dissolution of the partnership) enter into any contract or transaction with the partnership
through any of the partners, are protected in their contractual expectations that the contract is valid and
binding against the partnership.

The central principle in Partnership Law is that any third party who enters into a contract with the purported
partnership in good faith, shall have the validity and enforceability of such contract protected. Thus, Article
1834 of New Civil Code provides that "After dissolution, a partner can bind the partnership (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 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.

Notice how the law treats differently third parties who have previously extended credit to the partnership prior
to dissolution, and those who have only known of the partnership before dissolution: in the former it is only
actual knowledge or notice of the dissolution that would place him in bad faith; whereas, in the latter mere
notice of dissolution published in the newspapers would transform him into a third party acting in bad faith.

When it comes to the effects of dissolution, especially on the power of any partner to bind the partnership and
other partners in "new business" contracts and transactions, jurisprudence has ruled that unless otherwise
published or made known personally, third parties dealing with a partnership in good faith have a right to
expect that the partnership relation exists and that the partners are authorized to pursue partnership business
as a going concern.

Thus, in Singson v. Isabelsthe Supreme Court held that since it did not appear that the withdrawal of a partner
from the partnership was published in the newspapers, then "the public in general had a right to expect that
whatever, credit they extended to [the remaining partners] doing the business in the [original] name of the
partnership 'Isabela Sawmill' could be enforced against the properties of said partnership,"24 as well as against
the properties of the withdrawing partner.

(i) Particular Rule of "Limited Liability"

Although a partner may be bound personally to the liabilities incurred with third parties who act in good faith,
nonetheless, Article 1834 of the New Civil Code makes it clear that such liability is "limited liability," in that
"The liability of a partner shall be satisfied out of partnership assets alone when such partner had been prior
to dissolution:"

(a) Unknown as a partner to the person with whom the contract is made; and
(b) 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.

(ii) When Creditors Not Deemed to Be In Good Faith

It should be noted that Article 1834 of the New Civil Code provides that even when third parties enter into a
"new business" contract or transaction with the partnership without actual knowledge or notice of the fact of
its dissolution, nonetheless, they will not be considered to be third parties acting in good faith, and that "[t]he
partnership is in no case bound by any act of a partner after dissolution," in the following cases:

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 Where the acting partner has become insolvent.
 (iii) Particular Rule on Partner by Estoppel

Notwithstanding any of the foregoing rules, Article 1834 provides that the liability 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, shall be the same as that provided under Article 1825 on partnership by estoppel.

WINDING-UP OF PARTNERSHIP AFFAIRS

1. Who Has Authority to Wind-up?

Under Article 1836 of New Civil Code, the person or persons who have the power and authority to wind up the
partnership affairs as a consequence of its formal dissolution, is determined by the following rules:

(a) If there is an agreement on this matter, it is the partner or partners so provided to have such authority,
shall wind-up partnership affairs;
(b) In the absence of any such agreement:

i. 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;
ii. However, any partner or his legal representative or assignee, upon cause shown, may obtain
winding-up by the courts.

2. Rules and Procedures for Winding-up and Liquidation of Partnership Affairs

ART. 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 the partners in respect to capital;
(d) Those owing to partners in respect to 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 Article1797, 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 right of lien of 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 contributions.

Since winding-up and liquidation of the partnership affairs must apply the rules and principles relating to the
partnership doctrine of "unlimited liability," the partners' right to the benefit of excussion, and the priority
rules among conflicting claims, the Law on Partnership under Article 1839 of New Civil Code lays down the
following tenets, subject to any agreement to the contrary:

(a)What Constitutes Partnership Property?

The assets of the partnership which shall be applied to pay partnership liabilities are:

(i) The partnership property; (ii) The contributions of the partners necessary for the payment of all the
liabilities of the partnership.

(b) What Are the Priority Rules Against Partnership Property?

The liabilities of the partnership shall rank in order of payment as follows:

(i) Those owing to creditors other than partners; (ii) Those owning to partners other than for capital and
profits; (iii) Those owning to partners in respect of capital; and (iv) Those owing to partners in respect of
profits.

a. Enforcing Contributions from Partners to Cover Partnership Debts

Article 1839 of the New Civil Code specifically provides that the partners shall contribute "as provided by
Article 1797, the amount necessary to satisfy the liabilities," and that the individual property of a deceased
partner shall be liable for such contribution.

It also provides that an assignee for the benefit of the creditors or any person duly appointed by the court shall
have the right to enforce the contribution specified.

In addition, any partner or his legal representative shall have the right to enforce the contributions to the extent
of the amount which he has paid in excess of his share of the liability.

b. Priority Rules Between Partners' Creditors and Partnership Creditors

Under Article 1829(8) of the New Civil Code, 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 right of lien of secured creditors.

c. Priority Rules When Partner Is Insolvent

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.

d. Partner May Demand Share in Net Assets Only After Liquidation and Settlement of Claims of Partnership
Creditors

In Villareal v. Ramirez, the Supreme Court ruled that "A share in a partnership can be returned only after the
completion of the latter's dissolution, liquidation and winding up of the business." But even upon dissolution
of the partnership, a partner has no right to demand from the other partners for them to be personally liable
for the return of his contribution, especially when the partnership operations have been at a loss, thus:
We hold that respondents have no right to demand from petitioners the return of their equity share. Except as
managers of the partnership, petitioners did not personally hold its equity or assets. The partnership has a
juridical personality separate and distinct from that of each of the partners." Since the capital was contributed
to the partnership, not to petitioners, 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. However, before the partners can be paid their shares, the
creditors of the partnership must first be compensated. After all the creditors have been paid, whatever is left
of the partnership assets becomes available for the payment of the partners' shares.

The Villareal ruling reiterates the decision in Magdusa v. Albaran, It should be noted, however, that in Magdusa
the Court did not accept the theory of the Court of Appeals that partners have a personal cause of action against
the managing partner for the latter to return their capital on the basis that "Plaintiffs' action was based on the
allegation, substantiated in evidence, that Gregorion Magdusa, having taken delivery of their shares, failed and
refused and still fails and refuses to pay them their claims. The liability, therefore, is personal to Gregorio
Magdusa, and the judgment should be against his sole interest, not against the partnership's." This shows that
even when the cause for dissolution is fraud, the action to recover must still be by way of dissolution and
liquidation of the partnership affairs, and cannot be in the form of a personal action against the allegedly
defaulting partner.

Note must be taken of the decision in Martinez v. Ong Pong Co.,where two persons received from a capitalist
partner the latter's contribution for the establishment of a business with clear agreement on the sharing of
profits and losses from such venture. When the managing partners refused to render an accounting of the
operations of the venture although they admitted there were small profits made, the trial court rendered
judgment directing the managing partners to return the investment of the capitalist partner. The Court, in
affirming the return of contribution, rather than directing the dissolution and liquidation of the partnership
and determining the share of the partners in the net assets, held —

Inasmuch as in this case nothing appears other than the failure to fulfill an obligation on the part of a partner
who acted as agent in receiving money for a given purpose, for which he has rendered no accounting, such
agent is responsible only for the losses which, by a violation of the provisions of the law, he incurred. This being
an obligation to pay in cash, there are no other losses than the legal interest, which interest is not due except
from the time of the judicial demand, or, in the present case from the filing of the complaint... We do not consider
that article 1688 is applicable in this case, in so far as it proves "that the partnership is liable to every partner
for the amounts he may have disbursed on account of the same and for the proper interests," for the reason
that no other money that the contributed as capital is involved.

The author believe that the decision in Martinez is wrong, for as contemporaneously held in Villareal, a partner
cannot seek recovery of his contribution, much less share in the net assets of the partnership, unless it be part
of the dissolution and liquidation of the partnership, whereby the claims of partnership creditors have priority
payment rights.

Yet the Supreme Court in Uy v. Puzon, also ordered the primary partner to reimburse his co-partner the latter's
investment and unrealized profits. In Uy, the Court found that the primary partner in a construction venture
did not comply with his obligation to devote the project for the benefit of the partnership:

Had the appellant not been remiss in his obligations as partner and as prime contractor of the construction
projects in question as he was bound to perform pursuant to the partnership and sub-contract agreements ... it
is reasonable to expect that the partnership would have earned much more than the P334,255.61... The award,
therefore, made by the trial court of the amount of P200,000.00, as compensatory damages, is not speculative,
but based on reasonable estimate.
CONTINUANCE OF PARTNERSHIP BUSINESS INSTEAD OF WINDING-UP

ART. 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 1873, 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,

Article 1840 of the New Civil Code recognizes that a partnership may be dissolved, but the underlying
partnership business enterprise would not be wound-up, and in fact may be continued as a going concern.

1. Who May Continue Partnership Business and Obligations Assumed?

Article 1837 of the New Civil Code recognizes the right of the "partners who have not caused the dissolution
wrongfully," if they so desire, to continue the business in the same name either by themselves or jointly with
others during the agreed term for the partnership.
If such right to continue the partnership business is so exercised, then such exercising partners must secure
the payment by bond approved by the court, or pay to any partner who has caused the dissolution wrongfully,
the value of his interest in the partnership at the point of dissolution, less any damages recoverable from said
defaulting partner, as well as indemnify him against all present or future partnership liabilities.

2. Disposition of Liabilities When Partnership Business Continued

Article 1840 of the New Civil Code provides that if the dissolved partnership is not wounded-up and instead
the partners so qualified have chosen to continue the partnership enterprise as a going concern, then the
creditors of the dissolved partnership shall also be creditors of the person or partnership continuing the
business:

(a) 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 and one or more third persons, if the business is continued without
liquidation of the partnership affairs;
(b) When all but one partner retires and assigns (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;
(c) When any partner retires or dies and the business of the dissolved partnership is continued, with the
consent of the retired partners or the representative of the deceased partner, without any assignment
of his right in partnership property;
(d) When all the partners or their representatives assigns 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;
(e) When any partner wrongfully causes a dissolution and the remaining partners continue the business,
either alone or with others, and without liquidation of the partnership affairs;
(f) When a partner is expelled and the remaining partners continue the business either alone or with
others without liquidation of the partnership affairs.

Article 1840 likewise provides that the liability of a third person becoming a partner in the partnership
continuing the business, to the creditors of the dissolved partnership shall be satisfied out of the partnership
property only, unless there is a stipulation to the contrary. This is a form of "limited liability" on the part of a
new partner coming into an existing partnership.

The article also provides that when the business of a partnership after dissolution is continued under any
conditions set forth therein, 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 the article
shall be held to modify any right of creditors to set aside any assignment on the ground of fraud.

Finally, the article provides that 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.

The foregoing rules of liabilities must always be construed in consonance with the primary doctrine of
protecting creditors who deal in good faith with the partnership business and who cannot be expected to be
aware of the inner workings of the partnership and the intramural dealings of the partners.

Thus, in Singson v. Isabels Sawmill, where the partnership executed a chattel mortgage over its properties in
favor of a withdrawing partner, and the withdrawal was not published to bind the partnership creditors, the
Court ruled that the failure of a partner to have published her withdrawal from the partnership, and her
agreeing to have the remaining partners proceed with running the partnership business instead of insisting on
the liquidation of the partnership, did not relieve such withdrawing partner from her liability to the partnership
creditors. Even if the withdrawing partner acted in good faith, it could not overcome the position of partnership
creditors who also acted in good faith, without knowledge of her withdrawal from the partnership. Thus, the
Court affirmed the standing of the partnership creditors to seek the annulment of the chattel mortgage for
having been entered into adverse to their interests.

3. Disposition of Liabilities When Dissolution Is Caused by the Retirement or Death of a Partner

ART. 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 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 partners, shall have priority on any claim arising under this article, as provided by Article
1840, third paragraph,

Under Article 1841 of the New Civil Code, when any partner retires or dies, and the business is continued under
any of the conditions set forth in Article 1840, or in Article 1837(2), without any settlement of accounts as
between him or his estate and the person or partnership continuing the business, unless otherwise agreed,
then the following rules shall apply:

(a) The partner or his legal representative as against such person or partnership may have the value of his
interest at the date of dissolution ascertained; and
(b) The partner or his legal representative shall receive as an ordinary creditor an amount equal to the
value of his interest in the dissolved partnership, with option:
a. to receive interest; or
b. in lieu of interest, the profits attributable to the use of his right in the property of the dissolved
partnership.

Nonetheless, the article expressly provides 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 said article, as provided by Article 1840, third paragraph.

4. Partner's Right to Demand an Accounting

ART. 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.

Under Article 1842 of New Civil Code, in the absence of any agreement to the contrary, the right to receive an
accounting 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 Fue Leung v. Intermediate Appellate Court, the Court held that the right to accounting does not prescribe
during the life of the partnership, and that prescription begins to run only upon the dissolution of the
partnership and final accounting is done, under the rationale that:
. . . As stated by the respondent, a partner shares not only in profits but also in the losses of the firm. If excellent
relations exist among the partners at the start of business and all the partners are more interested in seeing
the firm grow rather than get immediate returns, a deferment of sharing in the profits is perfectly plausible. It
would be incorrect to state that if a partner does not assert his rights anytime within ten years from the start
of operations, such rights are irretrievably lost. The private respondent's cause of action is premised upon the
failure of the petitioner to give him the agreed profits in the operation of Sun Wah Panciteria. In effect the
private respondent was asking for an accounting of his interests in the partnership.