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DISSOLUTION AND

WINDING UP
ART. 1828-1831

Dissolution is the change in the relation of the partners caused by any


partner ceasing to be associated in the carrying on the business.

Winding Up is the process of settling partnership affairs after dissolution. It


involves the sale of partnership affairs after dissolution. It involves the sale
of partnership assets, the settlement of liabilities, and the distribution of the
remaining cash and other assets to the partners.

Termination refers to the point when all business or affairs of the


partnership are completely wound up.
Causes of Automatic Dissolution

Without violation of the partnership agreement


By the termination of the definite term specified in the agreement
By the termination of the particular undertaking specified in the agreement
By the express will of any partner when no definite term or particular undertaking
is specified
By the express will of all the partners either before or after the termination of any
specified term or any specified term or particular undertaking
Thus, A, B, C, D & E are partners. A assigned his interest in the partnership to T, a third
person, on account of his debt to the latter. B, C, D and E who did not make any assignment
of their interest, may vote for the dissolution of the partnership

By the expulsion of any partner


Causes of Automatic Dissolution

In violation of the partnership agreement


In a case of a withdrawing partner.
The dissolution contravenes the partnership agreement and subjects the withdrawing partner
to the payment of damages to the other partners.

Partnership business becomes unlawful


Ex. Disbarment of a lawyer (the law firm becomes unlawful by having a non-lawyer as a
partner)
Causes of Automatic Dissolution

In the following cases of loss:


Loss before or after the delivery of property to the partnership where the partner
contributed only to its use or enjoyment, he having reserved the ownership
thereof.
Here the partner bears the loss as he is the owner of the property. With such loss, the
partnership is dissolved since the partner is considered not to have made any contribution at
all.

Loss before the delivery to the partnership of a specific property which a partner
has promised to contribute to the partnership
Causes of Automatic Dissolution

Death of a partner
Insolvency of any partner or of the partnership
Civil interdiction of a partner
Dissolution by decree of court

On the application by or for a partner, on any of the following grounds


i. insanity of a partner
ii. incapacity of a partner to perform his part of the partnership contract
iii. partners conduct affecting prejudicially the carrying on the of the
partnership (ex. rude attitude in dealing with customers)
iv. willful or persistent breach of the partnership agreement by a partner
(persistent use of partnership property for personal use)
v. the partnership business cannot be carried on except at a loss
vi. other circumstances rendering a dissolution equitable (refusal to render
an accounting of the partnership)
Dissolution by decree of court

On the application of purchaser of a partners interest


Here the purchases or assignee upon dissolution, can seek a winding up of
the partnership affairs and allow him to be recover his claim against the
debtor partner.
Art. 1832-1834

Effect of dissolution on authority of a partner


Dissolution terminates all authority of any partner to act for the partnership,
except with respect to the following;
Acts to wind up partnership affairs
Acts to complete transactions begun before dissolution
Ex. A, B, C, D and E are partners with A, as the manager. A purchased goods on
credit from T. The goods are to be delivered in four installments with the
equivalent payment to be made for each delivery. After two deliveries and
payment, E dies causing the dissolution of the partnership. Here, A must make
payment for each of the next two deliveries of the goods to be made by T after
the firms dissolution. Other than for the completion of this transaction, As
authority is deemed terminated.
When authority of a partner to enter into
new transactions is terminated among the
partners
If the cause of the dissolution is not by the act, insolvency or death of a partner
(such as by expiration of the term).

Ex. A, B, C, D & E are partners. A is the managing partner. The term of the
partnership expired on Dec. 31, 2016. Here, the authority of A to act for the
partnership is deemed terminated among the partners even if A was not aware of
the firms dissolution.
When authority of a partner to enter into
new transactions is terminated among the
partners
If the cause of dissolution is the act of a partner and the partner who entered into
the new transaction had knowledge of the dissolution
If the cause of the dissolution is the insolvency or death of a partner and the
partner who entered into the new transaction had notice or knowledge of such
insolvency or death.

Ex. A, B, C, D & E are partners. A is the managing partner. E withdraws from the
firm thereby causing the dissolution of the partnership. A knows of the
dissolution of the partnership by reason of Es withdrawal. Here, the authority of
A to act for the partnership is deemed terminated among the partners.
When authority of a partner to enter into
new transaction is not terminated among the
partners
If the cause of the dissolution is the act of a partner and the acting partner had no
knowledge of the dissolution

Ex. A, B, C, D and E are partners. A is the managing partner. E withdraws from


the firm thereby causing dissolution of the partnership. A has no knowledge of
the dissolution of the partnership by reason of Es withdrawal. Here, the
authority of A to act for the partnership is not deemed terminated among the
partners until he obtains knowledge of es withdrawal.
When authority of a partner to enter into
new transaction is not terminated among the
partners
If the cause of the dissolution is the insolvency or death of a partner and the acting
partner had no notice or knowledge of such insolvency or death.

A, B, C, D and E are partners. A is the managing partner. E becomes


insolvent thereby causing the dissolution of the partnership. A has no notice
or knowledge of the dissolution of the firm by reason of Es insolvency. Here
the authority of A to act for the partnership is not deemed terminated among
the partners.
When the act of a partner after dissolution
binds the partnership

When the act is necessary for winding up of partnership affairs


When the act is necessary to complete transactions begun before dissolution.
In case of a new transaction or business in the following cases;
i. if the other party to the transaction had extended credit to the partnership before
dissolution and he had no knowledge or notice of the dissolution.
ii. if the other party to the transaction to the transaction had not so extended credit
before dissolution but had nevertheless known of the partnership before dissolution, and
the fact of dissolution had not been advertised in a newspaper of general circulation in
the place at which the business is regularly on.

Where although the partner has no authority to wind up partnership affairs, the
other party to the transaction is:
i. One who had extended credit to the partnership before dissolution (i.e. previous
creditor) and he had no notice or knowledge of the partners lack of authority
ii. one who had not so extended credit before dissolution (i.e. new creditor) and having no
notice or knowledge of the partners lack of authority, such fact has not been advertised
in a newspaper of general circulation in the place at which the business is conducted.
When the act of a partner after
dissolution does not bind the partnership
Where the partnership is dissolved because it is unlawful to carry on the business,
unless the act is appropriate for winding up partnership affairs.
Where the acting partner is insolvent.
Where the partner had no authority to wind up partnership affairs, except with
innocent third persons.
Where a partners authority is already terminated among the partners and the
third person had actual or constructive knowledge, as the case may be, of the
dissolution of the firm.
RULES on liability of partners and the
partnership for acts of a partner after
dissolution.
IF a partners authority is terminated among the partners but the partnership
is bound by the transaction.
The third person can go after the assets of the partnership
If the assets of the partnership are not sufficient, the third person can go after the
separate assets of each partner.
Thereafter, the other partners can go after the acting partner to recover the
amount they paid out of their separate assets and to demand the return of the
amount paid out of the partnership assets. This is because in so far as the partners
are concerned, the authority of the acting partner was already terminated.
RULES on liability of partners and the
partnership for acts of a partner after
dissolution.
If partners authority is not terminated among the partners and the
partnership is bound by the transaction
The third person can go after the assets of the partnership
If the assets of the partnership are not sufficient, the third person can go after the
separate assets of each partner.
Thereafter, the other partners cannot go after the acting partner for recovery
because after all the authority of the latter was not terminated among all the
partners.
RULES on liability of partners and the
partnership for acts of a partner after
dissolution.
If a partners authority is terminated among the partners and the partnership
is not bound by the transaction.
The partnership assets cannot be held to answer for the liability to the third
person.
The acting partner alone is liable to the third person with whom he contracted and
he cannot call on the other partners to share in the payment.
RULES on liability of partners and the
partnership for acts of a partner after
dissolution.
If a partners authority is not terminated among the partners, but the
partnership is not bound by the transaction.
This may occur when a partnership is dissolved by reason of the death of a partner
and the acting partner has no knowledge of such death. Such acting partner enters
into a new transaction with a previous creditor who had notice or knowledge of the
dissolution of the partnership by reason of the such death.
Effect of dissolution on partners
existing liability (Art. 1835)
A partner may be relieved from all existing liabilities upon dissolution only by
an agreement to that effect between
The partner himself,
the partnership creditor, and
the other partners.
Manner of winding up (Art. 1836)

The winding up of the dissolved partnership may be done either:


(1) judicially, under the control and direction of the proper court upon cause
shown by any partner, his legal representative, or his assignee; or
(2) extrajudicially, by the partners themselves without intervention of the court.
Persons authorized to wind up

The partners designated by the agreement


In the absence of such agreement, all the partners who have not wrongfully
dissolved the partnership
The legal representative (executor or administrator) of the last surviving
partner (when all the partners are already dead), not insolvent