Art. 1828. The dissolution of a partnership is the change in the relation of the partners caused by any partner ceasing to be associated in the carrying on as distinguished from the winding up of the business.
Effects of change in membership of a partnership
Dissolution of existing partnership and formation of a new one – any change in the membership of a partnership produces, technically, an immediate dissolution of the existing partnership relation and the formation of a new one, although common business usage speaks of the admission of a partner to a firm and regards the firm as subsisting so long as the course of its business is not materially interrupted
Transformation of all partners into incoming partners – all persons forming the new partnership upon the admission of the new person into the business are “incoming partners” even though the same business had been conducted by the others through the medium of the partnership
Continuance by remaining partners of partnership as before – the change in the relation of the partners will dissolve the partnership but will not disturb the continuance by the remaining partners or by the existing and new partners of the business as before
Dissolution, winding up and termination
When a partnership ends, it involves 3 stages o Dissolution – that point in time when the
partners cease to carry on the business together. It represents the demise of a partnership
o Winding up – process of settling the business or partnership affairs after dissolution
o Termination – all partnership are completely wound up and finally settled. It signifies the end of the partnership life
Art. 1829. On dissolution the partnership is not terminated, but continues until the winding up of partnership affairs is completed.
Effects of dissolution:
Partnership not terminated – dissolution does not automatically result in the termination of the legal personality of the partnership, nor the relations of the partners among themselves who remain as co- partners until the partnership is terminated
Partnership continues for a limited purpose – a partnership is considered as maintaining a limited existence for the purpose of making good all outstanding engagements, of taking and settling all accounts, and collecting all the property, means and assets of the partnership existing at the time of dissolution for the benefit of all interested
Transaction of new business prohibited – no new partnership business should be undertaken, but affairs should be liquidated and distribution made to those entitled to the partners‟ interest
Dissolution refers to the change in partnership relation and not the actual cessation of the partnership business
Dissolution must be distinguished from a mere suspension in the conduct of its business or operations
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 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 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
Statutory enumeration exclusive
o Art. 1830, 1831, and 1840 provide for causes of dissolution
o Under Art. 1830, extrajudicial dissolution may be caused without violation of the agreement between the parties (no. 1) or in contravention of said agreement (no. 2). It may be voluntary when caused by the will of one or more or all of the parties (nos. 1 and 2) or involuntary when brought about independently of the will of the partners or by operation of law (nos. 3-8)
Voluntary dissolution may be o Extrajudicial (nos. 1-7); or
o Judicial (no. 8 in relation to Art. 1831) o The causes provided for in Art. 1830
result in the automatic dissolution of the partnership
In Art. 1840, automatic dissolution takes place when a new partner is admitted or when a partner retires, withdraws, or is expelled from the partnership There is no automatic
dissolution under Art. 1831. Art. 1831 enumerates the grounds for the judicial dissolution of the partnership
The statutory enumeration of the causes of dissolution precludes dissolution for any other causes
Effect of sale or assignment by one partner of his entire interest in the partnership to a third person
o The dissolution created in such case is only technical, and not actual, only in the sense that his connection with the partnership is terminated
Dissolution effected without violation of partnership agreement: Four ways by which a partnership may be dissolved without violation of the partnership agreement:
1. termination of the definite term or particular undertaking
after the expiration of the term or particular undertaking, the partnership is automatically dissolved without the partners extending the said term or continuing the undertaking. If after said expiration the partners continue the partnership without making a new agreement, the firm becomes a partnership at will
2. by the express will of any partner
a partnership at will may be dissolved at any time by any partner without the consent of his co-partners without breach of contract, provided, the said partner acts in good faith. If there is bad faith, the dissolution is wrongful
good faith will absolve the partner exercising the right to dissolve the partnership from liability for damages which result to his co-partners by reason of his action
for as long as the reason for withdrawal of a partner is not contrary to the dictates of justice and fairness, nor for the purpose of unduly causing harm and damage upon the partnership, bad faith cannot be said to characterized the act
while bad faith cannot prevent the dissolution of a partnership, it can result in liability for damages
3. by the express will of all partner
may be accomplished either by an express agreement or by words and acts implying an intention to dissolve
must be unanimous
the consent of the partners who have assigned their interests or suffered them to be charged for their separate debts is not required to effect dissolution without
breach of the partnership agreement. They are not given the right to have a voice or vote in the dissolution of the partnership
4. by expulsion of any partner
must be made in good faith, and strictly in accordance with the power conferred by the agreement between the partners
the partner expelled in bad faith can claim damages
Dissolution effected in contravention of partnership agreement
dissolution may be for any cause or reason o any partner may cause the dissolution at
any time without the consent of his co- partners for any reason which he deems sufficient by expressly withdrawing therefrom even though the partnership was entered into for a definite term or particular undertaking. Such dissolution is a contravention of the agreement
a partner guilty of wrongful dissolution is not given the right to wind up partnership affairs
power of dissolution always exists
o the right of a partner to dissolve is inseparably incident to every partnership and there can be no indissoluble partnership
delectus personae – allows the partners to have the power, although not necessarily the right to dissolve the partnership an unjustified dissolution by a
partner can subject him to a possible action for damages Business becomes unlawful
dissolution may be caused involuntarily when a supervening event makes the business itself of the partnership unlawful of makes it unlawful for the partners to carry it on together
Loss of specific thing
loss before delivery – the partnership is dissolved because there is no contribution inasmuch as the thing to be contributed cannot be substituted with another
loss after delivery – the partnership assumes the mist of the thing having acquired ownership thereof. The partners may contribute additional capital to save the venture
loss where only use or enjoyment contributed – if only the use or enjoyment of the thing is contributed, its loss before or after delivery,
dissolves the partnership because in either case, the partner cannot fulfil his undertaking
o the partner bears the loss
Death of any partner – because of the partner‟s death, there is dissolution o the partnership by operation of law
status of partnership – the subsequent legal status is that of a partnership in liquidation, and the only rights inherited by the heirs are those resulting from the said liquidation
liquidation of its affairs – entrusted to the surviving partners or to liquidators appointed by them
continuation of business without liquidation – a clause in the article of co-partnership providing for the continuation of the firm notwithstanding the death of one of the partners is legal
Under the rules of the SEC, the heirs of a deceased partner may be admitted as partners when so authorized by the articles of partnership
To reflect the substitution, the articles must be amended Insolvency of any partner or of the partnership
must be adjudged by a court
insolvency of partner – the insolvency of a partner subjects his interest in the partnership to the right of his creditors. Art. 1816 is also violated. Thus, by his insolvency, the partnership‟s credit is impaired
insolvency of partnership – such renders the partnership‟s property in the hands of the partners liable for the satisfaction of partnership obligations resulting in their inability to continue the business, which practically amounts to dissolution
o reconveyance by the assignee of the properties of the partnership after the termination of insolvency proceedings has the effect of restoring the partnership to its status quo
Civil interdiction of any partner
civil interdiction deprives the offender during the time of his sentence of the right to manage his property and dispose of such property
one who is without capacity to manage his own property should not be allowed to manage partnership property
Right to expel a partner – in the absence of an express agreement to that effect, there exists NO right or power of any member, or even the majority of the members, to expel all other members of the firm at will. Nor can they at will forfeit the share or interest of a member or members and compel him/ her to quit
partner guilty of extreme and gross faults – there may be extreme and gross faults which would work a forfeiture, especially where there was an extreme emergency for a partner to perform his duty, and to be prompt and faithful
industrial partners, engaging in business for himself – Art. 1789 applies
power expressly given by agreement – power is not validly exercised if it is shown to have been exercised unfairly and without regard to the general interest of the partnership
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 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 wilfully 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.
Grounds for dissolution by decree of court
Dissolution of a partnership may be decreed judicially on application either:
by a partner in the cases mentioned in par (1) nos. 1-5; or
by the purchaser or assignee of a partner‟s interest under par. (2) nos. 1 and 2
On application by a partner
insanity
o an insane person is incapacitated to enter into a contract. The insanity must materially affect the capacity of the partner to perform his contractual duties as a partner
incapacity
o courts have the power to decree dissolution of the partnership because of incapacity of a partner which materially affects his ability to discharge the duties imposed by his partnership contract o the incapacity must be lasting from
which the prospect of recovery is remote since every partnership must be presumed to be entered into, subject to the common incidents of life such as temporary illness, infirmity or insanity
misconduct and persistent breach of partnership agreement
o such acts defeat and materially affect and obstruct the purpose of the partnership o where the quarrels and disagreements are
of such a nature and to such extent that all confidence and cooperation between the parties have been destroyed, or where one of the parties, by his misbehaviour, materially hinders a proper conduct of the partnership business
business can be carried on only at a loss
o the partnership may be dissolved by decree of court when it becomes apparent that it is unprofitable with no reasonable prospects of success
o where a partnership has lost all its capital, or had become insolvent, or that the enterprise for which it had been organized had been concluded or utterly abandoned, a provision in the articles of partnership prohibiting the dissolution of the partnership except by the consent and agreement of 2/3 of its partners, can in no wise limit or restrict the right of a less number of the partners to affect the dissolution through judicial intervention or otherwise
other circumstances
o examples are abandonment of the business, fraud in the management of the business, refusal without justifiable cause to render accounting of partnership affairs, etc.
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.
Effect of dissolution on partner‟s authority: Scope of partner‟s authority
general rule
o every partner is considered as the agent of the partnership with authority to bind the partnership and the partners
o however, the dissolution terminates the actual authority of the partners to undertake new businesses except only as regards to those acts incident to the liquidation or completion of unfinished transactions
exceptions
o as regards co-partners: the authority of a partner to bind the co-partners immediately ceases when the dissolution is NOT caused by the Act, Insolvency or Death (AID) of a partner. Otherwise, when the cause of dissolution is by AID, termination of authority depends on whether the acting partner has knowledge of the dissolution
o as regard 3rd
persons: the partner‟s authority continues with respect to the contracts entered by the acting partner
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 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.
Liability and authority of a partner as to co-partners: Liability of partners
right to contribution
o the article refers to dissolution caused by AID
o the new contract entered by the acting partner after dissolution generally will bind the partner after dissolution generally will bind the partners. Hence, each partner is liable for his share of any liability created by the acting partner as if the partnership has not been dissolved Partner‟s authority to act for the partnership
general rule
o the authority of a partner as it affects the partnership is not deemed terminated by dissolution
exceptions
o when the acting partner has knowledge of the dissolution of the partnership brought by the act of the partner, partner‟s authority ceases. This is to protect the remaining partners who have no knowledge of the dissolution
o also, the partner‟s authority ceases when he has knowledge of the death or insolvency of a partner. This rule discards the fiction that everybody is presumed to have knowledge of the death or insolvency of a partner
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