DISSOLUTION OF PARTNERSHIP

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Published — July 07, 2022

The following post does not create a lawyer-client relationship between Alburo Alburo and Associates Law Offices (or any of its lawyers) and the reader. It is still best for you to engage the services of your own lawyer to address your legal concerns, if any.

Also, the matters contained in the following were written in accordance with the law, rules, and jurisprudence prevailing at the time of writing and posting, and do not include any future developments on the subject matter under discussion.

 

After reading “Dissolution of Partnership”, read also “Existence of Partnership without being Legally Formed”

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

• Under the law there are two (2) kinds of dissolution. First is extrajudicial dissolution and second is judicial dissolution.

• A dissolved partnership still has personality for the purpose of winding up of its affairs, or of completing transactions begun but finished.

Dissolution 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. (Article 1828, New Civil Code of the Philippines)

 

What happens to the partnership upon dissolution?

The law says:

On dissolution the partnership is not terminated, but continues until the winding up of partnership affairs is completed. (Article 1829, NCC)

 

Under the law there are two (2) kinds of dissolution. First is extrajudicial dissolution and second is judicial dissolution.

 

What are the causes of extrajudicial dissolution?

The law says:

Dissolution is caused:

1. Without violation of the agreement between the partners:
   1. By the termination of the definite term or particular undertaking specified in the agreement;
   2. By the express will of any partner, who must act in good faith, when no definite term or particular is specified;
   3. 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;
   4. 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. (Article 1830, NCC)

 

What are the grounds for judicial dissolution?

The law says:

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. (Article 1831, NCC)

 

Whether the firm is the creditor or the debtor, the contracts and obligations do not automatically cease. A dissolved partnership still has personality for the purpose of winding up of its affairs, or of completing transactions begun but finished.

 

What are the effects of dissolution as to the partner’s authority to act for the partnership?

The law says:

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,
   1. When the dissolution is not by the act, insolvency or death of a partner; or
   2. 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. (Article 1832, NCC)

 

What is the rule on the acting partner’s liability to his co-partners when the dissolution is due to the act, insolvency, or death of a partner?

The law says:

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. (Article 1833, NCC)

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Alburo Alburo and Associates Law Offices specializes in business law and labor law consulting. For inquiries, you may reach us at info@alburolaw.com, or dial us at (02)7745-4391/0917-5772207.

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