lOMoARcPSD|5381750

Chapter 3 Dissolution AND Winding UP

Bs accountancy (Rizal Technological University)

StuDocu is not sponsored or endorsed by any college or university

Downloaded by Phielle Pacheco (pachecophiellemarilen@gmail.com)
 lOMoARcPSD|5381750

Mary Rose E. Salvo CBET-01-401a

CHAPTER 3 Dissolution and Winding Up (part 1)
Article 1828. The dissolution of a partnership is the change in the relation of the partners
caused by any partner ceasing to be associated in the carrying on as distinguished from the
winding up of the business.
Dissolution, winding up, and termination defined
1. Dissolution
 It is the change in the relation of the partners caused by any partner ceasing to be
associated in the carrying on of business.
2. Winding up
 The process of settling the business or partnership affairs after dissolution
3. Termination
 All partnership affairs are completely wound up and finally settled. It signifies the
end of the partnership life.

Article 1829. On dissolution the partnership is not terminated, but continues until the winding
up of partnership affairs is completed.
Partnership not terminated by dissolution
 The dissolution of a partnership must not be understood to mean its
extinguishment.
 The partnership continues until the winding up is completed.
 Dissolution refers to the change in partnership relation and not the actual cessation
of the partnership business.
 Dissolution of a partnership must also be distinguished from a mere suspension in
the conduct of its business or operations.

Article 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 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;
1

Downloaded by Phielle Pacheco (pachecophiellemarilen@gmail.com)

 lOMoARcPSD|5381750

Mary Rose E. Salvo CBET-01-401a

(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 or
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;
(8) By decree of court under the following article.
Causes of dissolution
1. In agreement
 Without violation of the agreement, No. 1, with violation No. 2
2. In connection to will
 Voluntary, No. 1 and 2, involuntary, No. 3,4,5,6,7 and 8
3. In connection to court
 Extrajudicial (di na need ng court), No. 1 to 7, Judicial (need pa ng decision ng
court), No. 8
4. Connection to driving cause
 Automatic dissolution, Article 1830, Judicial dissolution, Article 1831
Dissolution effected without violation of partnership agreement
1. Termination of the definite term or particular undertaking
 A partnership may be constituted for a fixed term or it may have for its object a
specific undertaking
 Pag sinabi sa agreement na definite lang yung term, pag dumating yung time na
yun, dissolution na

Downloaded by Phielle Pacheco (pachecophiellemarilen@gmail.com)

 lOMoARcPSD|5381750

Mary Rose E. Salvo CBET-01-401a

2. By the express will of any partners
 May be dissolved at any time by any partner without the consent of his co-partners
without breach of contract
 Each partners have both the power and the right to terminate the partnership
relations at any time
 But it must be acted in good faith, no fraud
3. By the express will of all partners
 To protect third persons
 Agreement to dissolve the partnership before the termination of the specified term
or particular undertaking must be unanimous.
 The consent of the partners who have assigned their interests or suffered from them
to be charged for their separate debts.
 Wala dapat maapektuhan na interest ng third person.
4. By expulsion by any partners
 The expulsion has the effect of decreasing the number of the partner; hence, the
dissolution
 You remove a partner from the partnership, may changes na sa relation nila
Dissolution effected in contravention of partnership agreement
1. Dissolution may be for any cause or reason
 Pag may iba na siya priority, and umalis sya, contravention yun sa agreement
 Any partner may cause the dissolution of the partnership at any time without the
consent of his co-partners at his role pleasure or for any reason which he deems
sufficient by expressly withdrawing therefrom even though the partnership was
entered into for definite term
2. Power of dissolution always exists
 A partner has a power, although not necessarily the right, to dissolve a partnership,
even though his co-partners wish to continue the business.
3. Legal effects of dissolution
 The withdrawing partner is liable for damages for unjustified dissolution but he
can’t be compelled to stay in the partnership.
 The number of partners is decreased; hence, the dissolution
 Pero if justifiable yung pag alis, example, fraud, di sya liable sa damages
 Di mo rin pwedeng pilitin yung partner mo na mag stay sa partnership niyo. sadtttt

Business becomes unlawful

Downloaded by Phielle Pacheco (pachecophiellemarilen@gmail.com)

 lOMoARcPSD|5381750

Mary Rose E. Salvo CBET-01-401a

 Dissolution may be caused involuntarily when a supervening event makes the business
itself of the partnership unlawful, a law makes the continuance of the business illegal.
 For example, Law firm yung partnership, then si A naappoint as a Judge of the Regional,
that means di na pwedeng pumasok si A sa partnership ng law firm.
Loss of specific thing
1. Loss before delivery
 If a specific thing is contributed by a partners is lost before the delivery, the
partnership is dissolved
2. Loss after delivery
 If the lost occurred after the delivery of the thing promised, then the partnership is
not dissolved, but it assumes the loss
 Ownership comes with a risk of loss
3. Loss where only use or enjoyment contributed
 If only the use or enjoyment of the thing is contributed, the partner having reserved
the ownership thereof, the loss of the same before or after delivery dissolves the
partnership.
 Since na kay partner yung ownership, sa kanya yung loss, pero dahil nga nawala
yung right of use sa partnership, madidissolve sila
Death of any partner
The death of any partner will cause a dissolution. The surviving partners have no authority to
continue the business except so far as is necessary to wind up.
Insolvency of any partner or of the partnership
1. Insolvency of a partner
 Subjects his interest in the partnership to the right of his creditors
 Pag insolvent na sya, pwedeng habulin ng personal creditors niya yung interest
niya sa partnership.
2. Insolvency of a partnership
 Render its property in the hands of the partners liable for the satisfaction of
partnership obligations
 Partners na yung bahala to settle
Civil interdiction of any partner
 a convicted person suffering from the accessory penalty of civil interdiction for cannot
validly give consent at his capacity to act is limited thereby
 civil interdiction deprives the offender during the time of his sentence of the right to
manage his property and dispose of such property by any act
4

Downloaded by Phielle Pacheco (pachecophiellemarilen@gmail.com)

 lOMoARcPSD|5381750

Mary Rose E. Salvo CBET-01-401a

 with that, dissolve na ang partnership

Article 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 proceeding or is shown to be of unsound
mind;
(2) A partner becomes in any other way incapable of performing his part of the partnership
contract;
(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. (n)
Grounds for dissolution by decree of court
1. On application by a partner
a) Insanity
 The fact of his being of unsound mind must be duly proved. An insane
person is incapacitated to enter into a contract.
 Since di niya kayang makapagbigay ng consent. Gg sya
b) Incapacity
 The incapacity must be one which affects the ability of a partner to perform
his duties
 For example, brain dead or comatose, it means he can’t perform his duties to
the partnership
c) Misconduct and persistent breach of partnership agreement
 Conduct prejudicial to the carrying on of the business and persistent breach
of the partnership agreement are grounds for judicial dissolution

Downloaded by Phielle Pacheco (pachecophiellemarilen@gmail.com)

 lOMoARcPSD|5381750

Mary Rose E. Salvo CBET-01-401a

 If ever yung isang partner is nag aact of misconduct, and pinapaalis na sya
ng ibang partner pero ayaw niya umalis. Pwede makialam yung court.

d) Business can be carried on only at a loss

 Main purpose of the partnership is to generate profit; it may be dissolved by
decree of court when it becomes apparent that the business is unprofitable
with no reasonable prospects of success
 Valid ground kung puro loss lang yung naeearn
e) Other circumstances
 Abandonment of the business, fraud in the management of the business,
refusal without justifiable cause to render accounting of partnership affairs
2. On application by a purchaser of a partner’s interest
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.

Article 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.
Effect of dissolution on authority of partner
1. General rule
 Unless otherwise stipulated, every partner is considered the agent of the
partnership.
 Upon dissolution, the partnership ceases to be a going concern and the
partner’s power of representation is confined only to acts incident to winding
up or completing transactions begun but not then finished.
 Tatapusin lang yung mga contracts na pinasok bago yung dissolution
2. Qualifications to the rule
1. In so far as the partners themselves are concerned (1833)
6

Downloaded by Phielle Pacheco (pachecophiellemarilen@gmail.com)

 lOMoARcPSD|5381750

Mary Rose E. Salvo CBET-01-401a

 Contract is immediately terminated when the dissolution is not by the act,
insolvency, or death of a partner
 When the dissolution is caused by those, termination of authority depends
upon whether or not the partner had knowledge or notice of the dissolution
as provided in Article 1833
2. With respect to third persons (1834)

Article 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 dissolved unless:
(1) The dissolution being by act of any partner, the partner acting for the partnership had
knowledge of the dissolution; or
(2) The dissolution being by the death or insolvency of a partner, the partner acting for the
partnership had knowledge or notice of the death or insolvency.
Right to partner to contribution from co-partners
 Where a partner enters into a new contract with a third person after dissolution, the new
contracts generally will bind the partners, and each of them is liable for his share of and
liability created by the acting partner as if the partnership had not been dissolved.
Authority of partners, as among themselves, to act for the partnership
The authority of a partner as it affects his co-partners (not third persons) is not deemed
terminated except in two instances, namely:
1. The cause of the dissolution is the act of a partner and the acting partner had
knowledge of such dissolution
 If he has a knowledge, the partnership will not binds
 It will cause a bad faith if the acting partner knows that the partnership is in
the process of wind up and he still enter into a new partner
 Designed to protect the remaining partner who might continue to act for the
partnership as a going concern, without the knowledge of the dissolution.
2. The cause of the dissolution is the death and insolvency of a partner and the acting
partner had knowledge or notice of the death or insolvency
 If he has knowledge and notice, the partnership will not bind
 Discards the fiction that everybody is presumed to have a knowledge of
death and insolvency
 Knowledge of fact, he has knowledge of such other facts as in the
circumstances show bad faith
7

Downloaded by Phielle Pacheco (pachecophiellemarilen@gmail.com)

 lOMoARcPSD|5381750

Mary Rose E. Salvo CBET-01-401a

 Notice of fact, states the fact to such and delivers through the mail
(Note: this article protects the innocent partner from those partner with BAD FAITH)
Article 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.
(advertised in newspaper can defeat the presumption of having no
knowledge about prior to dissolution)
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;
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.
(pag nasatisfy yung dalawa pwedeng partnership property lang yung habulin pero if ever hindi,
pwedeng mahabol yung personal property)
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
(liable lang yung acting partner)
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

Downloaded by Phielle Pacheco (pachecophiellemarilen@gmail.com)

 lOMoARcPSD|5381750

Mary Rose E. Salvo CBET-01-401a

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.
Power of partner to bind dissolved partnership to third persons
 Cases when a partner continues to bind the partnership even after dissolution (par. 1, nos.
1 and 2)
 The cases when he cannot bind the partnership after dissolution (par 3, Nos. 1,2, and 3)
Notice of dissolution to creditors
1. As to persons who extended credit to partnership prior to dissolution
 Persons who extended credit to the partnership prior to its dissolution must
have knowledge or notice of the dissolution to relieve the partnership
liability.
2. As to persons who had known partnership’s existence
 As to persons who had not so extended credit prior to its dissolution had
been published in the newspaper would be sufficient, even if they didn’t
actually read the advertisement.
3. Where acting partner has no authority to wind up partnership
 Notice of dissolution is unnecessary except in case no. 3 where the partner
has no authority to wind up.
4. Where acting partner has become insolvent
Character of notice required.
1. As to prior dealers
 Notice must be actual. Mere mailing of a letter to a former dealer is
insufficient to relieve the retiring partner from subsequent liability, where
the notice was never received.
 A prior or former dealer is one who has extended credit on the faith of the
partnership, through confidence in the solvency and probity of the firm.

2. As to all others
 Notice is accomplished by an advertisement in a local newspaper. Actual
notification is not necessary.
9

Downloaded by Phielle Pacheco (pachecophiellemarilen@gmail.com)

 lOMoARcPSD|5381750

Mary Rose E. Salvo CBET-01-401a

Article 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.
Effect of dissolution on partner’s existing liability
 A partner may be relieved from all existing liabilities upon dissolution only by an
agreement to that effect between himself the partnership creditor, and the other partners.
The consent, however, Of the creditor and the other partners to the novation may be
implied from their conduct.
Liability of estate of deceased partner
 The individual property of a deceased partner shall be liable for all obligations of the
partnership incurred while he was a partner.

Article 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.
Manner of winding up
May be done either:
1. Judicially
 The control and direction of the proper court upon cause shown by
any partner, his legal representative, or his assignee
2. Extrajudicially
 By the partners themselves without intervention of the court.
Persons authorized to wind up

10

Downloaded by Phielle Pacheco (pachecophiellemarilen@gmail.com)

 lOMoARcPSD|5381750

Mary Rose E. Salvo CBET-01-401a

1. The partner designated by the agreement
2. In the absence of such agreement, all partners who have not wrongfully
dissolved the partnership
3. The legal representative of the last surviving partner (when all the partners
are already dead), not insolvent

11

Downloaded by Phielle Pacheco (pachecophiellemarilen@gmail.com)