(ARTS.

1828-1842)
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 The dissolution of a partnership is the change in the relation of
ARTICLE the partners caused by any partner ceasing to be
1828 associated in the carrying on as distinguished from the
winding up of the business.

EFFECTS OF CHANGE OF
MEMBERSHIP:
1. formation of a new partnership
2. transformation of all partners into incoming
partners
3. continuance by remaining partners of
ARTICLE
1828

•“A partnership does not last

forever.”
- De Leon
 STAGES OF ENDING A
ARTICLE
1828
PARTNERSHIP

DISSOLUTI WINDIN TERMINA

ON G UP TION
It is that point in time It is the process of It is that point in time
when the partners cease settling the business or when all partnership
to carry on the business partnership affairs after affairs are completely
together. dissolution. wound up and finally
ARTICLE
Partnership Not
1829 Terminated
by Dissolution
but continues until the winding up of partnership affairs is completed.

EFFECTS OF
DISSOLUTION:
1. Partnership not automatically terminated.

2. Partnership continues for a limited purpose.

3. Transaction of new business prohibited.

ARTICLE
1830 Causes o f
Dissolution
Without violation of the agreement between the
partners:
By the termination of the definite term or particular undertaking specified in
the agreement;

By the express will of any partner, who must act in good faith, when no
definite term or particular is specified;

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;

By the expulsion of any partner from the business bona fide in accordance
with such a power conferred by the agreement between the partners;
 1
QUESTION

Jen Madala brought an action for withdrawal of his capital

contribution from Vernadette, which would mean the dissolution
because the partnership was for a definite term.
In impugning Jen 's right to maintain the suit, Vernadette cited Arts.
1808 and 1830 and Jen 's alleged bad faith. Does Jen has a right to
withdraw from the partnership?

A: YES. Art. 1808 only requires the capitalist partner (who had
engaged for his own account a similar business as that of the
partnership) to bring to the common fund of the partnership the
profits he might have realized. it does not prevent him from
withdrawing from he partnership. (Lee Tee v, Ching Chiong)
 2
QUESTION

Q: Jojoe and Verna formed a partnership to exploit a fishpond

and thereafter to divide it between them into 2 equal parts.
succeeding events reveal the intent of both parties to terminate
the partnership by refusing to share the fishpond with the other -
in direct violation of the undertaking for which they've established
their partnership - which resolution they articulated in letters to
each other. Should the partnership be considered dissolved?

A: YES. Both Jojoe and Verna must be deemed to have expressly

withdrawn from the partnership, thereby causing its dissolution
pursuant to Art. 1830 (2) which provides, inter alia, that
dissolution is caused “by the express will of any partner” at any
time. (Deluao v. Casteel)
 Causes
ARTICLE
o f
1830 Dissolution

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;
 Causes
ARTICLE
1830 Dissolution o f
By any event which makes it unlawful for the
business of the partnership to be carried on or
for the members to carry it on in partnership

A partnership must have a lawful

object or purpose.
(ART. 1770)
 1
EXAMPLE

Cha and Fer are partners in a law. Cha is later on

appointed Judge of the RTC.
Under the law, a Judge of the RTC is prohibited from
engaging in the practice of law.
In this case, it would be unlawful for Cha to continue as
a partner in the law firm. Her Appointment dissolves
the partnership of which she is a member.
 Causes
ARTICLE o f
1830 Dissolution
Loss of Specific Thing

Loss before Loss after Loss there only

Delivery
If the specific thing to be
contributed by a partner
is lost before delivery, the
partnership is dissolved.
Delivery use or enjoyment
If the loss occurred after is contributed
the delivery of the thing The loss of this thing
promised, then partnership before or after the delivery
is not dissolved. dissolves the partnership.
 Causes o f
ARTICLE
1830 Dissolution
By the Death of
any Partner
ARTICLE
1830 Causes o f Dissolution
By the Insolvency of any Partner or of the
Partnership

The insolvency of a partner subjects his interest in the

partnership to the right of is creditors and makes it impossible
for him to satisfy partnership obligations to its creditors.
 Causes o f
ARTICLE
1830 Dissolution

By civil interdiction
of any partner

By decree of court under the following

article.
 Causes o f
ARTICLE
1830 Dissolution
Can the partners in their contract decrease or limit the
causes of dissolution?

No. A contractual provision prohibiting dissolution

except by authorization of two-thirds of the members,
cannot be sustained when the firm had:
a) lost its capital;
b) become bankrupt; or
c) had utterly abandoned the enterprise for which it
had been organized. (Lichauco v. Lichauco, 33 Phil.
350)
ARTICLE
1831 Grounds f o r Dissolution

The facts enumerated in Art. 1831 a necessary

judicial determination as to dismay be so far open to
dispute or difference of opinion as to make solution
rather than allow for automatic dissolution by
operation of law.

Dissolution of the firm is effected at the time the

judicial decree becomes a final judgement.
ARTICLE Grounds f o r Dissolution
1831
1831 On application by a partner
REQUISITES:
1. must materially affect the
capacity of the partner to
INSANITY
perform is contractual duties as
partner.; and
2. must be lasting or recovery is
remote.
OTHER INCAPACITY
CIRCUMSTANCES

BUSINESS CAN BE MISCONDUCT AND

CARRIED ONLY AT PERSISTENT BREACH
LOSS OF PARTNERSHIP
AGREEMENT
ARTICLE Grounds f o r Dissolution
1831 On application by a
purchaser of a partner’s
interest

a) when the interest was

assigned
b) when the charging order was
issued
ARTICLE Right o f Partner t o Rescind
1838 C o n t r a c t o f Partnership

Inducement of an individual to become a partner by

means of fraud or misrepresentation makes the
partnership contract voidable and annullable.

INJURED PARTNER IS ENTITLED TO RESTITTUTION

Continuous existence of partnership.

DEFRAUDED PARTNER LIABLE FOR ALL OBLIGATIONS
TO THIRD PERSONS.
ARTICLE Right o f Injured Partner where
1838 Partnership C o n t r a c t Rescinded
Right of a lien on, or retention of, the
surplus of partnership property after
satisfying partnership liabilities for any
sum of money paid or contributed by
him. RETENTION

Right to stand in the place of the creditors

of the partnership after payment of
partnership liabilities. SUBROGATION

Right of indemnification by the guilty

 Rules in Settling Accounts between
ARTICLE
Partners a f t e r Dissolution
1839
ASSETS OF THE
PARTNERSHIP

Partnership Contributions
Property of Partners
 Rules in Settling Accounts between
ARTICLE
Partners a f t e r Dissolution
1839
ORDER OF APPLICATION
OF THE ASSETS
Partnership Creditors

Loans to Partners

Return of capital contributions

Share in profits
 Rules in Settling Accounts between
ARTICLE
Partners after Dissolution
1839 Right of a partner if the
assets insufficient

Capital Loss of a Partner

Enforce contributions of the Partners

All partners contributed Only few partners contribute

Sue non-paying partners for indemnification.

 ARTICLE Rules in Settling Accounts between
1839 Partners a f t e r Dissolution
Liability of deceased partner’s
individual property
Only liabilities of the partnership incurred while the deceased partner
is a partner will be attached to individual property as his share.

Liabilities covered by
individual property of
a deceased partner
ARTICLE
Rules in Settling Accounts between
1839 Partners a f t e r Dissolution
PRIORITY TO PAYMENT OF PARTNERSHIP
CREDITORS / PARTNER’S CREDITORS

PARTNERSHIP PROPERTY PARTNERSHIP CREDITORS

INDIVIDUAL PROPERTY INDIVIDUAL CREDITORS

ARTICLE Rules in Settling Accounts between
1839 Partners a f t e r Dissolution
DISTRIBUTION OF PROPERTY OF
INSOLVENT PARTNER

SEPARATE
CREDITORS
PARTNERSHIP
CREDITORS
CONTRIBUTION
TO PARTNERS
A, B, and C, are partners. A contributed P150,000.00, B
P100,000.00, and C, P50,000.00. On dissolution, the assets of the
partnership amounted to P500,000.00. The partnership owes D
the amount of P70,000.00, E, P50,000.00, and A, P20,000.00.
(2) The accounts of the partnership shall be settled as follows:
(a) D and E, who are partnership creditors, shall be paid first the total
sum of P120,000.00, leaving a balance of
P380,000.00;

(b) Then, A, who is also a creditor, will be paid his credit of

P20,000.00, leaving a balance of P360,000.00;

(c) Afterwards, the contributions of A, B, and C to the partnership

capital shall be returned to them in the total sum of P300,000.00,
thereby leaving a balance of P60,000.00;

(d) The balance of P60,000.00 constitutes the profit which shall be

divided among A, B, and C (unless there is an agreement to the
contrary [Art. 1839, 1st par.] which, however, cannot prejudice the
rights of third persons) in proportion to their capital contributions.
Therefore, A is entitled to 3/6 or P30,000.00, B, 2/6 or P20,000.00 and
C,1/6 or P10,000.00.
(3) Suppose, in the same example, the liabilities of the partnership
amount to P560,000.00. The partnership assets, then shall be
exhausted to satisfy these liabilities thereby leaving an unpaid balance
of P60,000.00. The partners shall then contribute to the loss, in the
absence of an agreement to the contrary, in accordance with their
capital contributions. Consequently, A is liable out of his separate
property in the amount of P30,000.00, B, P20,000.00, and C,
P10,000.00.

These contributions which are necessary to pay the liabilities of the

partnership are considered partnership assets (No. 1[b].) and any
assignee for the benefit of creditors and any person appointed by the
court may enforce the contributions.

In case C paid the whole amount of P60,000.00, then, he has a right

to recover the amount which he has paid in excess of his share of the
liability from A, P30,000.00 and from B, P20,000.00.
(4) If B is already dead, his estate is still liable for the contributions
needed to pay off the partnership obligations provided they were
incurred while he was still a partner.

(5) Suppose now that under Nos. 1 and 2 above, C owes F

P40,000.00. Following the rule that partnership creditors have
preference regarding partnership property, only the share of C in the
amount of P10,000.00 can be used to pay his debt to F and the
unpaid balance of P30,000.00 must be taken from the individual
property, if any, of C.
(6) Suppose again, that the partnership debts amount to
P560,000.00 as in No. 3. So, C is still liable out of his separate
property to partnership creditors in the amount of P10,000.00.
His separate property amounts to P45,000.00. In this case, his
assets shall fi rst be applied to pay his debt of P40,000.00 to F
and the balance of P5,000.00 to pay part of his debt of P10,000.00
still owing to partnership creditors in accordance with the rule
that regarding individual properties, individual creditors are
preferred.
ARTICLE D i s s o l u t i o n o f Partnership by
1840 Change in Membership

ADMISSION OF NEW PARTNER

RETIREMENT, DEATH, WITHDRAWAL OR EXPULSION OF A

PARTNER

PARTNER’S ASSIGNMENT OF RIGHTS TO SOLE REMAINING

PARTNER

ALL PARTNERS’ ASSIGNMENT OF RIGHTS TO THIRD PERSONS

ARTICLE
Rights o f Creditors o f Dissolved
1840 Partnership which is Continued

DISSOLVED NEW
CONTINUING PARTNERSHIP
PARTNERSHIP PARTNERSHIP
CREDITORS
CREDITORS CREDITORS
C is admitted as a new partner into the existing partnership of A
and B.

Technically, the old firm of A and B is dissolved and a new firm

composed of A, B, and C is formed. C will not be individually liable for
the debts of the old firm. His investment, however, constituting a part
of the firm assets, will be equally available to both creditors of the old
and creditors of the new firm. (par. 2; Art. 1826.)
ARTICLE
Liability o f Persons Continuing
1840 Business o f Dissolved Partnerships
The liability of the new or incoming
partners shall be satisfied out of
partnership property only unless there is
stipulation to the contrary.

Obligations to the debts of the dissolved

partnership of one or more third persons
who continue the partnership shall apply
only when the continuing partners
promise to pay such.
If A, B, and C, partners, sell the partnership business to D, and if D
promises to pay the debts and to continue the business, the creditors
of the dissolved partnership of A, B, and C are also the creditors of D.
ARTICLE Rights o f Retiring o r o f Legal Representative
1841 o f Deceased Partner when Business is Deceased

To have the value of the interest of the retiring partner

or deceased partner in the partnership ascertained as
of the date of dissolution.

To receive thereafter, as an ordinary creditor, an

amount equal to the value of his share in the dissolved
partnership with interest, or, at his option, in lieu of
interest , the profits attributable to the use of his right.
A, B, and C are partners in X & Co. which is indebted to D in the
amount of P50,000.00. Later on, X & Co. was dissolved by reason of
the withdrawal of C. The business was continued by A and B without
any settlement of account between A and B, on the one hand, and C,
on the other.

C or his legal representative has the right to have the value of his
interest in the partnership ascertained and paid to him. Assuming that
the interest of C has been ascertained to be P30,000.00, D has priority
over the claim of C, his legal representative, or his separate creditor.
ARTICLE Partner ’s Right t o A c cou nt
1842 o f His Interest
Accrual Right
• The right to demand an accounting of the
value of his interest accrues to any partners
or his legal representative after dissolution in
the absence of an agreement to the contrary.
• Prescription begins to run only upon the
dissolution of the partnership when the final
accounting is done. Under Articles 1806, 1807,
and 1809, the right to demand an accounting
exists as long as the partnership exists.
(Fue Leung vs. IAC , 169 SCRA 746 [1989]
 ARTICLE Partner ’s Right t o A c cou nt
1842 o f HisInterest

Person liable to render anaccount

The right of a partner or the one who
represents him as owner of his interest
to an account to a payment of the
amount of his interest, may be exercised
as against:
1. The winding up partner
2. The surviving partner
3. The person or partnership
continuing the business.
3. LOANS AND ADVANCES MADE BY PARTNERS
Loans payable at maturity and
accumulated profits may be withdrawn at
any time by consent of a majority.

Example:
Amounts paid in excess of a
partner’s agreed capital contributions.
CAPITAL CONTRIBUTED BY PARTNERS
Industrial partner
-not entitled to any part of the firm capital on
dissolution in the absence of agreement
Note:
Total capital contribution of partners is not equivalent to the
gross assets to be distributed to the partners at the time of
the dissolution. It may be impaired or become unavailable for
distribution or return to the partners because of losses
sustained by the partnership.
(Villareal vs Ramirez, 406 SCRA 145, 2003).
RIGHT OF A PARTNER WHERE ASSETS
INSUFFICIENT

deficit is a capital loss which requires

contribution like any other loss.
Who has the right to enforce the contributions of
the partners provided in Article 1797?
A. any partner or legal representative (to the extent of
the amount which he has paid in excess of his share in the
liability)

B. any assignee for the benefit of creditors

C. any person appointed by court
LIABILITY OF DECEASED PARTNER’S
INDIVIDUAL PROPERTY

… shall be liable for his share of the

contributions necessary to satisfy the
liabilities of the partnership incurred while
the former was a partner (Articles 1816 &
1835,paragraph 3)
DOCTRINE OF THE MARSHALLING
ASSETS

“Partnership assets to partnership

creditors, individual assets to individual
creditors; anything left from either goes
to the other”.
Q. What if all the partners are solidarily
liable to a creditor on the transaction
independent of partnership, is the creditor
allowed to share pari passu (by same
gradation) with the partnership assets?

A. No. Having secured priority over the firm

creditors against the individual property of
the firm members, the creditors are
relegated to a secondary position to the firm
creditors, since the claim is not based on
firm obligation.
PRINCIPLE OF EQUITY

Separate creditor of an individual partner

can execute against the assets of the firm
ONLY to the extent of the interest of the
partner in firm assets, which is nothing
more than a right to any surplus
remaining after firm creditors have been
paid.
Purpose:

to maintain the preferential rights of the

old creditors to the partnership property
as against the separate creditors of the
partners
Purpose:

to maintain the preferential rights of the

old creditors to the partnership property
as against the separate creditors of the
partners