PARTNERSHIP

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August 17, 2016

W hats the difference between the loss of a specific thing and

carrying on at a loss?
W hen there is a loss of a specific thing, the subject of the loss
is the contribution. W hen it pertains to a specific thing, the
thing diminishes in v alue and/or goes out of commerce.
W hen we say that the business can only be carried on at a
loss, it means that there is already no more profit to be
deriv ed from the business because the liabilities therein
exceed the profits.
Does it hav e to be established that the liabilities incurred is higher? Do
you hav e to establish actual losses?
There is no need. It is enough that it is apparent that the
business is unprofitable. They can determine that in carrying
out such business, it would be unprofitable.
Actual losses need not be proved.
They can foresee that if they continue with the business, they will only
suffer. In other words, theres no need to prov e actual losses. You only
have to prove potential losses that you could already foresee.
There was an example with regard to the business of selling cameras.
You could just prov e to the court that the market has shrunk and
people are no longer buying cameras. Before, 1000 cameras are sold
per day, now, with all the cellphones hav ing cameras, it would be
lucky if 50 cameras are sold in a day.
There was a time when barber shops closed. That was the time when
ev ery boy, ev ery student in law school were wearing the hair of Mr.
Singh. That is how we looked during our law school days. Our hairs
were shoulder-high. So, no need for barbers. Barbershops had to
close. So that whenev er I v isited my former GF, the father, whenev er I
look for her will say ah she went away. He nev er allowed me to
come inside the house because of my hair. But there are other ways
Alright! No need to prov e actual losses. Potential losses will do.
These are some of the things you hav e to prov e; they need not be
actual losses.

Market has reduced.

Competition is getting stiff.

Caballero Daileg Gocuan Honoridez Lim Pungos Vergara

Prices of materials are getting higher.

Other grounds for dissolution?

A partner has been guilty of such conduct as tends to affect
prejudicially the carrying on of the business.
Example: The president announced the people
inv olv ed in drug trade and a partner's name is
included
A partner wilfully or persistently commits a breach of the
partnership agreement.
All these are part of judicial dissolution, meaning you hav e to prov e
them.
Once dissolution is done, what is the effect insofar as partners are
concerned?
During the existence of the partnership, each partner can
bind the partnership. Each partner is an agent. But once
dissolution is done, the authority to bind the partnership
ceases. Howev er, there are still instances when they can
enter into new contracts.
The partnership, before the dissolution, undertook to deliv er 100 bags
of palay. Howev er, only 50 bags were deliv ered. Before it deliv ered
the additional 50 bags, the partnership dissolv ed. The partners,
knowing that the balance of 50 bags were undeliv ered, contracted
the serv ices of the truck to deliv er the remaini ng 50 bags. The truck
deliv ered, but when it tried to collect for the serv ices rendered, the
accountant said that the contract was ent ered into after dissolution,
hence, the partnership could no longer pay. Can the partnership still
be compelled to pay ev en if it is a new contact?
Yes because it is a payment to complete an unfinished
business of the partnership.
On the other hand, the dissolution is already in progress, and the
partners discov ered that they hav e a lot of collectibles. They
engaged the serv ices of a collection agent. They entered into a new
contract. Can that be entered into?
Yes because it is an act appropriate for winding up
partnership affairs.

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August 17, 2016

So generally, upon dissolution, what did we learn?

Generally, upon dissolution, the partner cannot enter into
new contracts except by an act appropriate for winding up
partnership affairs or completion of transactions unfinished at
the time of dissolution.
Is there any other new contract that may be entered into and in
which case the partnership is still liable?
If the contract was entered into by a partner who did not
know that the partnership is already dissolv ed because of an
act, insolv ency, or death of another partner.
Exceptions to the general rule:
1. Necessary for the winding up of partnership affairs
2. Completion of unfinished business
3. If the contract was entered into by a partner who did not
know about the act, insolv ency, or death of another partner
which had caused the dissolution.
The partnership will still be liable to third persons because the partner
entered into a contract without knowledge of the death of his
partner. (Take note of codal provision. See im portant points.)
If the dissolution was caused by the act, insolv ency, or the death of a
partner and the partner has knowledge of such fact, the partnership is
not bound. Howev er, if the partner did not know that they were
already dissolv ed because of an act, insolv ency or death of a partner
and still the partner entered into a contract, the contract is still
binding. This is an additional exception to the general rule.
New contracts entered into by a partner after dissolution will still bind
the partnership if that contract is related to the W INDING UP AFFAIRS
of the partnership, TO COMPLETE UNFINISHED TRANSACTIONS/
BUSINESS or when a partner enters is into a contract when he had NO
KNOW LEDGE of the act, the insolv ency, or death of another partner
that caused the dissolution.
This is insofar as the partners are concerned. Otherwise, we said,
generally, the partners cease to be agents of the partnership. Partners
could no longer enter into contracts except those exceptions
prov ided.

Caballero Daileg Gocuan Honoridez Lim Pungos Vergara

On the other hand, there is also an effect as to third persons.

Exceptions: Credit was extended by a third person who was
already a creditor before dissolution and still extended credit
after the dissolution of the partnership and the third person
does not have any knowledge of such dissolution, the
partnership is still bound to the contract.
It is im portant to determ ine when the credit was extended
must be after the dissolution and without knowledge
The special circumstance to be protected by law is that the creditor
was already a creditor before the dissolution, and after such
dissolution, a new contract was entered into with that creditor.
Supposedly, this new transaction will no longer bind the partnership
but because he was an old creditor the law says that he must be
protected.
Do you know who this type of creditor is in the business language or in
the business world? W hy should the law giv e special protection to
them? He is the suki because dugay na kaayo na siya sige ug deal sa
partnership.
Dugay na kaayo na siya sigeg deal sa partnership nya karon di ninyo
bayran? Wa na sya kahibaw wa na diay m o. For sev eral years hes
been dealing and suddenly he is not paid. Quite unfair. If he did not
know that they were already dissolv ed, then pay him. But if he knows,
binuang na sad na. Kahibaw ka nag buwag2 nam i gipautang pa
gyud na nim o am ong kauban. We are no m ore. So thats the situation
that the law refers to.
The second instance inv olv ing a third person is that he did not deal
with the partnership before the dissolution. Although he has not been
extending credit, he knows of the partnership. This partnership was
quite popular. People were dealing wit h the partnership before. But
what happened?
Hav ing no knowledge or notice of such dissolution, and the
fact of such dissolution was not advertised in a newspaper of
general circulation in the place where the business.
In other words, despite the popularity of that partnership, the business
nev er bothered to publish the dissolution. It had quite a good name
but suddenly it dissolv ed. If someone entered into a new transaction

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August 17, 2016

after the dissolution that new transaction is still to be honoured

because the partnership did not bother to adv ertise; there was no
publication.
In these instances the partnership remains bound:
As between the partners
1. If new contract has been made in the course of the
winding up of the business
2. If it is in completion of transactions already begun but
not yet finished
3. If the cause of the dissolution is the act, insolv ency or
death of a partner
With regard to third persons
4. If the other party to the contract is already a creditor
of the partnership prior to its dissolution and such
person has no knowledge or notice of such
dissolution
5. Although the third persons has not extended any
credit to the partnership, he has known of such
partnership prior to its dissolution and he has no
knowledge of such dissolution, the fact of dissolution
had not been adv ertised
Corollary to this, because you are talking of instances where the
partnership is bound, there are also instances where the partnership,
regardless of the circum stances, is no longer bound (absolutely not
bound).
1.

2.

A contract is entered into when the partnership is dissolv ed

because it is already unlawful to continue the business. If it
has become unlawful for the partnership to continue their
business, then sorry na lang the partnership can nev er be
bound.
If the reason for dissolution is the insolvency of the partner
entering into a new contract. If the cause of the dissolution
was insolv ency of a partner, sorry na lang theres no way we
could assume that responsibility because nag lisod nam an
gani m i because insolvent na nya pabayron pa gyud m i
anang bag-ong utang.

Caballero Daileg Gocuan Honoridez Lim Pungos Vergara

3.

If the partner who has entered into that new contract has no
authority to wind up the business unless the contract is
a. with party who has already extended credit to the
partnership prior to the dissolution OR
b. although he has not extended credit to such
partnership before the dissolution he has known of
the existence of the partnership and he has no
knowledge and notice of such dissolution and such
fact was not published or adv ertised in a newspaper
of general circulation.

Remember nov ation? W hat is nov ation? Nov ation, from the latin word
novo which means new, like your hair, Villalon (birthday boy). The
style is new and I like it.
There is nov ation when obligation between the parties is
modified either by changing the object of the contract or
subrogation as to the rights of the parties to the third person
or substituting or change in the parties to the contract. (See
Art. 1291 for reference)
W here new obligations are entered into, either by changing the
subject matter which we call real novation because we change
the res - or we change the parties involved which we call personal
novation. W hen we change the person of the debtor, it is called
passive novation. If we change the person of the creditor, there is
active novation.
Novation may be referred to as a mode of dissolution, as when a
creditor is admitted as a new partner. The parties in a nov ation are
released.
W ho should giv e consent to a nov ation?
All the parties inv olv ed should consent. The new partners and
the old partners should agree before a nov ation takes effect.
How could winding up be done as part of the dissolution?
The general idea is that the assets of the partnership are
accounted for, as well as partnership liabilities, where the
partnership assets are applied for the payment of partnership
liabilities. Partners who adv anced loans to the partnership are
also paid. Then the partners are giv en back their capital

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August 17, 2016

contributions. And if there are any assets left, they shall be

distributed among the partners.
Winding up may be done judicially or extrajudicially.
Judicial

One or some of the partners may petition.

W hile petition is pending in court, a receiv er or administrator

may be appointed to take charge of the winding up.

The receiv er could either be one or some of the partners or

could be an independent party.

Because it is judicial, ev erything is done through the courts.

If you appoint a receiv er, the receiv er will be entitled a

receiv er fee which is a certain percentage of the assets.
Extrajudicial
W ho will undertake the dissolution?
a) First, partner earlier agreed upon as when his name appears
in the articles of partnership.
b) Next, any partner, so long as that partner did not the wrongful
dissolution of the partnership, and is not insolv ent.
c) If all the partners died, the representative of the last surv iv ing
partner
How is it done?

Gather all assets, gather all receiv ables. So here, we try to find
out whether we hav e enough to pay all the existing liabilities.

Once all existing liabilities are paid, distribute the surplus to the
partners.
W hen the dissolution was caused in violation of the articles of
partnership, we hav e two kinds of partners.
a) Innocent partner, and
b) Guilty partner
Is the guilty partner entitled to his share in the profits?
Ev en if a partner is declared guilty for causing the dissolution
of the partnership that does not mean that he has forfeited all
his interest in the partnership.
He is entitled to his share in the profits and surplus

Caballero Daileg Gocuan Honoridez Lim Pungos Vergara

The only thing is, whatev er damages he has caused and

whatev er damages the other partner hav e suffered, he
would hav e to pay them and these will hav e to be deducted
from his share in the profits and in the surplus.

Other than dissolution, a partnership may also cease to exist by v irtue

of fraud or misrepresentation. Because of fraud or misrepresentation,
any partner can ask for the rescission of the partnership agreement .
Once the partnership is rescinded, what happens?
An innocent partner can exercise three rights:
a) Retention of surplus
The innocent partner has the right to the cash v alue
of the surplus, if any, and the right to be indemnified
by the guilty partner.
b) Subrogation, in other words, some third party creditors
demanded payment and a partner was compelled
to pay these third party creditors, and hav ing paid
them himself, he is now subrogated to the latters
rights.
c) Indemnification for damages. Guilty partners are
liable for damages. This is what they will pay the
innocent partners.
How do we settle the accounts?
1. Determine the partnership assets, which include specific
partnership property, capital contributions of partners, profits,
receiv able, goodwill
2. Determine the liabilities
3. Pay these liabilities!
4. If the assets are not enough, there shall be additional
contribution.
There are lots of liabilities. To whom shall we pay first?
a. Partnership creditors (those owing to creditors other than
partners)
b. Partners who are creditors (those owing to partners other than
for capital and profits) If you are a partner, you could be a
creditor of the partnership, and the credits due to you may

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August 17, 2016

c.
d.

be in certain forms (The partner may hav e extended loans or

adv ances).
Those owing to partners in respect of capital
Those owing to partners in respect of profits

If ev erything is paid and we hav e settled all the obligations, what may
the remaining partners decide?
Some partners may decide to terminate the partnership or to
continue it.
There could be a problem if they hold on to the same creditors. W hat
happens then? W e now hav e two sets of creditors, the creditors of the
old partnership, and those of the new partnership. W hat does the law
prov ide to settle this conflict?
We will continue that in the next meeting. Finish Chapter 3, then
proceed to limited partnership.

IMPORTANT POINTS:
Causes of Dissolution (Judicial Dissolution)
1. A partner has been guilty of such conduct as tends to affect
prejudicially the carrying on of the business.
2. A partner wilfully or persistently commits a breach of the
partnership agreement.
3. The business of the partnership can only be carried on at a
loss.
o Compared with the dissolution caused by the loss of
a specific thing
o Actual losses need not be prov ed, only potential
losses, that continuance of business will be
unprofitable due, but not limited, to the following
causes:
a) Market has reduced.
b) Competition is getting stiff.
c) Prices of materials are getting higher.

Caballero Daileg Gocuan Honoridez Lim Pungos Vergara

Effect of Dissolution as to Partners

Partners cease to be agents of the partnership; hence, their
acts no longer bind the partnership. Otherwise stated, they no
longer hav e the authority to bind the partnership.
Exceptions:
1. Transactions necessary for the winding up of affairs
2. Transactions necessary for the completion of unfinished
business (Culbs palay illustration)
3. If the contract was entered into by a partner who did not
know about the act, insolvency, or death of another
partner which had caused the dissolution.
To exempt partner from liability to his co-owners, he
must hav e

No knowledge of the other partners act which

cause the dissolution

No knowledge OR notice of the other partners

death OR insolvency
Effect of Dissolution With Respect to Third Persons
General rule: The dissolution of the partnership causes the cessation of
the authority of the partner/s to act in behalf of the partnership
EXCEPT
a. A third person extended credit to the partnership prior to the
partnership (suki) and he had no knowledge or notice of
dissolution
b. A third person did not extend credit prior to the dissolution,
but
i.
He has
known of the partnership prior to the
dissolution
ii.
No knowledge or notice of dissolution
iii.
The fact of dissolution had not been adv ertised in a
newspaper of general circulation in the place of
business of the partnership
Partnership Absolutely Not Bound By Partners Act
1. Cause of dissolution: unlawful to carry on the business unless
the act is appropriate for winding up of affairs
2. Partner has become insolv ent
3. Partner has no authority to wind up affairs unless
a. Third person extended credit prior to dissolution and
he has no knowledge of notice of want of authority

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b.

Third did not extend credit prior to dissolution, did not

hav e knowledge or notice of want of authority, and
such want of authority was not adv ertised

Novation
May be the cause of dissolution as when a new partner is
admitted. This needs the consent of all the partners.
Real novation changing of subject matter
Personal novation changing the parties inv olv ed
o Passive novation change in the person of the
debtor
o Active novation change in the person of the
creditor
Winding Up
Assets and liabilities of the partnership are accounted for.
Liabilities are paid to outside creditors and partner who are
also creditors. If there are remaining assets, then they are
distributed among the partners.
A. Judicial

Court interv ention

A receiv er or administrator may be appointed to take

charge of the winding up.

Receiv er may be one or some of the partners or an

independent party.
B.

Extrajudicial
1. Person appointed in the articles of partnership
2. Any partner who hav e not caused the dissolution of
the partnership, and is not insolv ent or the legal
representativ e of a deceased partner

Guilty partner entitled to receiv e his share in the profits and

surplus less damages caused by him to the other partners and
the partnership

Rescission of Partnership on the Ground of Fraud or Mispresentation

The innocent partner has the following rights:
1. Right of Retention (surplus of partnership property
after satisfying partnership liabilities to third persons)

Caballero Daileg Gocuan Honoridez Lim Pungos Vergara

2.
3.

Right of Subrogation
Right to Indemnification (by guilty partner)

Settlement of Accounts
Partnership Assets
1. Partnership property
2. Additional contribution of partners for the payment of
all the liabilities
Partnership Liabilities
1. Owing to creditors other than partners
2. Owing to partners other than for capital and profits
3. Owing to partners in respect of capital
4. Owing to partners in respect of profits