1. Define dissolution, winding up, and termination.

Dissolution - change in the relation of the partners caused by any partner ceasing to be associated in the
carrying on of the business, partnership is not terminated but continues until the winding up of
partnership affairs is completed. It is that point in time when the

partners cease to carry on the business together. It represents the

demise of a partnership. Thus, any time a partner leaves the business, the partnership is dissolved.

Example: Layla and Gus are partners, but Layla decided to leave the partnership then there is a change
in the status of the partnership and dissolution will occur. Layla sell her share to Odette, then Odette
and Gus are the new partners in a new partnership which will the original partnership will dissolve. Also,
if Layla and Gus decided to sell their share or close the business, the dissolution of their original
partnership will occur.

Winding Up - process of settling the business or partnership affairs after dissolution, involving the
collection and distribution of partnership assets, payment of debts, and determination of the value of
each partner’s interest in the partnership. It is the final step after dissolution in the termination of the
partnership

Example: Popol and Kupa are partners in which they are engaged in food business. After one year of
operation, they became bankrupt and they end their operation. All their store shutdown and they have
to pay P1,000,000. After five months, the court decided to allow them to emerge from bankruptcy.
Because of that, they continued the business operation until June 16, 2022, but they did not gain any
profit and they have to file again bankruptcy.

Termination - that point when all partnership affairs are completely wound up and finally settled. It
signifies the end of the partnership life. It takes place after both dissolution

and winding up have occurred.

Example: Popol and Kupa finally settled all liabilities to their ceditors. In this case, since they are no
longer producing profits from their partnership, the partnership of them become terminated.

2. Enumerate the different grounds for dissolution of partnership.

a. Without violation of the agreement between the parties

a.By termination of the definite term/ 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 undertaking is specified c.By the express will of all the partners who have not assigned
their interest/ charged them for their separate debts, either before or after the termination of any
specified term or particular undertaking

d.By the bona fide expulsion of any partner from the business in accordance with power
conferred by the agreement between the partners

Example: Miya, Nana, Wanwan, and Layla are partners in MM Company. The interest of Miya and Nana
are assigned, Miya sold her interest to Thamuz, and Nana's interest is charged to Cecillion because she
borrowed P10,000 from him. Wanwan and Layla are the only ones who can ask for dissolution since
their interest is not assigned.

b. In contravention of the agreement between the partners

The withdrawing partner can be held liable for damages.

Example: Kagura, Kaldita, and Lylia are partners in Mage Comapany, they all agreed that the term of
their partnership is until December 31, 2021 only. But before the partnership end, Kagura decided to
withdraw into the partnership. Because of that, Kaldita and Lylia ask for damages because Kagura did
not stay with their agreement.

c. Any event which makes it unlawful for the business of the partnership to be carried on

Example 1: J is a partner in a law firm. Later on, J is appointed Judge of the Regional Trial Court. Under
the law, a Judge of the Regional Trial Court is prohibited from engaging in the practice of law. In this
case, it would be unlawful for J to continue as a partner in the law fi rm. His appointment dissolves the
partnership of which he is a member

Example 2: AX Company have partnership from Xiu Company in China. Because Philippines want to take
back their territory from China, they declared a war. In which the partnership of AC Company and Xiu
Company became unlawful.

d. Loss of specific thing that a partner promised to contribute

1. Loss before delivery. — If the specific thing to be contributed by a partner is lost before
delivery, the partnership is dissolved because there is no contribution in as much as the thing to be
contributed cannot be substituted with another. There is here a failure of a partner to fulfi ll his part of
the obligation.

Example: Atlas and Grock are partners who are engaged in delivery of products. Atlas promised to
contribute his Dongfeng 12 wheelers to the partnership. Before the delivery of the promised
contribution, the truck loss because someone steal it. In this case, the partnership is dissolved.

2. Loss after delivery. — If the loss occurred after the delivery of the thing promised, then the
partnership is not dissolved, but it assumes the loss of the thing having acquired ownership thereof.

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 because in either case,

the partner cannot fulfi ll his undertaking to make available the

use of the specific thing contributed.

Example: Atlas complied with his contribution at the date of the partnership began. After five days, the
truck was stolen. The partnership of Atlas and Grock bears the loss of the truck.

e. Death of any partner

Example: Elizabeth is the winow of her deceased husband Meliodas, she became the new partner in the
partnership. She sold a partnership property to a third person. The surviving partner of the partnership,
Ban, authorized Elizabeth to manage the affaird of the partnership which are engaged in real state
business. In this case even the orignal partner died, the articles of partnership expressly stipulates that
in the event of the death of any of the partners, the firm shall not be dissolved but will have to be
continued and the deceased partner shall be represented by his heirs or assignee in said partnership.

f. Insolvency of any partner

Example: Baxia and Mino are partners. Aside from their partership, Baxia have a liabilities to his own
creditors. Because of his debts, he cannot pay anymore. One time, Mino asked for Baxia's additional
contribution to the partnership to pay the partnership debts. But Baxia cannot give anymore, because of
this the partnership is dissolved due to partner's insolvency.
g. Civil interdiction of any partner

A partnership requires the capacity of the partners. A person

under civil interdiction (or civil death) cannot validly give

consent (Art. 1327.), as his capacity to act is limited thereby.

Example:

h. Decree of the court on any of the following grounds:

1. Insanity of any partner

2. Incapacity of the partner

3. A partner was found guilty of conduct that tends to affect prejudicially the carrying
on of the business

4. Wilful commission of breach of partnership agreement

5. Business can only be carried on at a loss

6. Other analogous circumstances

Example: Wade, Jane, and Josh are partners. One time, Jane noticed that Wade is doing something
unusual. Also, Wade is saying something unnecessary to them when they are having a business meeting.
Because of this, their business get affected and their business transactions. Jane and Josh suddenly
know that Wade is insane as declared by his doctor.

3. What is the effect of dissolution?

A.AUTHORITY OF PARTNER TO BIND PARTNERSHIP

GENERAL RULE: Authority of partners to bind partnership is terminated

Exception: (1832)

1.Wind up partnership affairs

2.Complete transactions not finished

QUALIFICATIONS:

1.With respect to partners

a.Authority of partners to bind partnership by new contract is immediately terminated when

dissolution is not due to ACT, DEATH or INSOLVENCY (ADI) of a partner (art 1833);
Example: Brody and Carmilla, Teriz are partners, Brody sends his resignation to Carmilla via email only
because Carmilla have a contract with Rafaela. When the email arrived, Brody's authority is not
terminated as he has only received a notice. The notice cannot terminated the authority of partners.

b.If due to ADI, partners are liable as if partnership not dissolved, unless:

i. If cause is ACT of partner, acting partner must have knowledge of such dissolution

ii. If cause is DEATH or INSOLVENCY, acting partner must have knowledge/ notice; hence, acting partner
is personally liable

Example: Teriz send an email that Brody had died. In this case, their authority is terminated because the
cause of dissolution is death. Mere notice is sufficient to terminate authority if the grounds are due to
death.

2.With respect to persons not partners (Art. 1834)—

a.Partner continues to bind partnership even after dissolution in ff. cases:

(1)Transactions in connection to winding up partnership affairs/completing transactions

unfinished

(2) Transactions which would bind partnership if not dissolved

Example: RnR Company was dissolved, but due to their unpaid liabilities, the court allowed them to
operate to wind up or settle their debts.

b.Partner cannot bind the partnership anymore after dissolution:

(1)Where dissolution is due to unlawfulness to carry on with business (except: winding up of

partnership affairs)

(2)Where partner has become insolvent

(3)Where partner unauthorized to wind up partnership affairs

Example: Pete, a partner in RnR Company become insolvent. He cannot pay his debts anymore and he
cannot contribute additional capital for the partnership. After the dissolution, he wants to bind the
partnership again. But due to his insolvency, Pete cannot bind the partnership anymore.

B. DISCHARGE OF LIABILITY
Dissolution does not discharge existing liability of partner, except by agreement between (1835):

•Partner and himself

•person/partnership continuing the business

•partnership creditors

Example: Bruno, Lesley, and Beatrix are in a partnership, they have a debt to Odette of P50,000. The
total partnership assets equate of P50,000. Beatrix dies and her total assets worth P20,000. Her
individual property shall be used to clear her liabilities when she was still alive, the personal creditor has
priority.

C. SETTLEMENT OF ACCOUNTS BETWEEN PARTNERS (1839)

ASSETS OF THE PARTNERSHIP:

1.Partnership property (including goodwill)

2.Contributions of the partners

LIABILITY OF DECEASED PARTNER’S INDIVIDUAL LIABILITY – for his share of the contributions necessary
to satisfy liabilities of the partnership while he was a partner.

PRIORITY TO PAYMENT OF PARTNERSHIP CREDITORS / PARTNER’S CREDITORS – partnership creditors

shall first be paid from partnership property; separate creditors from the individual properties of the
partners.

DISTRIBUTION OF PROPERTY OF INSOLVENT PARTNER –

1.Owing to his separate creditors

2.Owing to partnership creditors

3.Owing to partners by way of contribution

Example: Lolita, Baxia, and Carmilla are partners. Lolita contributed P150,000, Baxia P100,000, and
Carmilla, P50,000. On dissolution, the assets of the partnership amounted to P500,000.00. The
partnership owes Deriri the amount of P70,000.00, Elizabeth, P50,000.00, and Atlas, P20,000.00.

(2) The accounts of the partnership shall be settled as

follows:

(a) Deriri and Eizabeth, who are partnership creditors, shall be

paid first the total sum of P120,000.00, leaving a balance of

P380,000.00;

(b) Then, Lolita, who is also a creditor, will be paid her

credit of P20,000, leaving a balance of P360,000;

(c) Afterwards, the contributions of Lolita, Baxia, and Carmilla 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 Lolita, Baxia, and Carmilla (unless there is an agreement to the contrary

D. WHEN BUSINESS OF DISSOLVED PARTNERSHIP IS CONTINUED:

1.Creditors of old partnership are also creditors of the new partnership which continues the
business of the old one w/o liquidation of the partnership affairs (1840)

2.Creditors have an equitable lien on the consideration paid to the retiring /deceased partner by
the purchaser when retiring/deceased partner sold his interest w/o final settlement with creditors

3.Rights if retiring/estate of deceased partner: (1841)

a.To have the value of his interest ascertained as of the date of dissolution

b.To receive as ordinary creditor the value of his share in the dissolved partnership with interest
or profits attributable to use of his right, at his option

Example: Esmeralda, Kagura, and Lylia are partners. Esmeralda decided to retire but Kagura and Lylia
continue the business without liquidation. Esmeralda have her rights that her interest be ascertained as
of dissolution date and she can collect her interest in the partnership plus profits by the use of her right
to these as a creditor.

4. When is the partnership bound by transaction entered by a partner after dissolution?

a. Business transaction is for winding up

b. The transaction is to complete business begun but unfinished

c. Completely new business with innocent parties

Example: XYZ Company is dissolved, but there are other party to thr transaction which had extended
credit to the partnership before dissolution and he had no knowledge about the dissolution, he is
entitled to a special attention. The creditor without such notice, the partnership will be bound by the
transaction.

5. When is the partnership not bound by transactions entered into by a partner after dissolution?

a. When it becomes unlawful to carry on the business

b. Insolvency of a partner

c. Unauthorized winding up except:

1. Credit was extended and there was no knowledge of lack of authority

2. No credit was extended and there was no knowledge of the dissolution because there was no
advertisement of such

Example: Suppose on my previous example, J is a partner in a law firm. Later on, J is appointed Judge of
the Regional Trial Court. Under the law, a Judge of the Regional Trial Court is prohibited from engaging
in the practice of law. In this case, it would be unlawful for J to continue as a partner in the law firm. His
appointment dissolves the partnership of which he is a member and he cannot bound by transactions
entered after dissolution.

6. How are profits and losses distributed to the partners?

Profits or losses, made by the partnership should be divided among its partners in accordance with the
provision of their Partnership Deed. However, if there is no agreement among the partners, the law
prescribes that profits and losses should be shared equally by the partners.

Example: Hannah, Jab, and Leo are partners. After two years, their partnership dissolved. In their
agreement, once the partnership dissolved, they will share a ratio of 2:3:4 of profits or losses. After the
dissolution, the partnership gained a profit of P20,000. Hannah will have a share of P4,000, Jab is
P6,000, and Leo P8,000.

7. What is a limited partnership?

According to Article 1843, limited partnership is one formed by two or more persons under the
provisions of the following article, having as members one or more general partners and one or more
limited partners. The limited partner as such shall not be bound by the obligations of the partnership.

Example: Karina is a limited partner while Winter is a general partner, Karina contributed P10,000 while
Aespa is a land. The reason why they created the partnership is to address the needs of all those who
wish to join a partnership without the risk of losing any personal property. Karina is not liable personally
for partnership debts.

8. What are the characteristics of limited partnership?

a. Must be organized in compliance with the requirements of the law;

b. There must be one or more general partner;

c. There must be one or more limited partners contributing capital and sharing in the profit;

d. Limited partners do not participate in the control of the business;

e. Limited partners are not bound by the obligations of the partnership.

f. Partnership debts shall be paid out of the common fund and the separate properties of the general
partners.

Example: Lisa and Jennie form a partnership namely BP Partnership-ltd., Lisa is a limited partner while
Jennie is a general partner. Jennie as a general partners has a rights and powers in a partnership, while
Lisa do not. After six months, they incurred a debt which costs P50,000. The partnerships common fund
exhausted and the partnership cannot pay the debt anymore. Jennie, as a general partner, is liable to
her separate property while Lisa, a limited partner, is liable based on her capital contribution only.

9. What are the requisites in the formation of limited partnership?

a. The certificate must be signed and sworn to by all the partners;

a.Name of partnership + word "ltd."

b.Character of business

c.Location of principal place of business

d.Name/place of residence of members

e.Term for partnership is to exist

f.Amount of cash/value of property contributed; no services for limited partner (1845)

g.Additional contributions

h.Time agreed upon to return contribution of limited partner i.Sharing of profits/other

compensation

j.Right of limited partner (if given) to substitute an assignee

k.Right to admit additional partners

 l.Right of limited partners (if given) to priority for contributions

m.Right of remaining gen partners (if given) or continue business in case of death, insanity,
retirement, civil interdiction, insolvency

n.Right of limited partner (if given) to demand/receive property/cash in return for contribution

Example: Johnson and Khufra wants to form a limited partnership. At the date of entering into a
contract, a certificate was signed by them. The name of their partnership is Tnk Partnership-ltd because
Johnson is a limited partner and Khufra is a general partner. The certificate also contains the date of the
existence of their contract which is only for five years, and Johnson as a limited partner will only
contribute money or property only.

b. The certificate must be registered in the Securities and Exchange Commission.

Example: Johnson said to Khufra that the certificate must be registered in SEC, who will be dealing with
the partnership, that there are partners with limited liability. If they failed to comply with SEC, the
partnership will be considered as general partnership.

c. Adding "limited" in the partnership name

The name of the partnership, adding thereto the word limited.

10. What are the limitations and exceptions on the use of surname of the limited partner in a limited
partnership?

- Liable as general partner, except:

a. When the surname of the limited partner is the same as the surname of general partner

b. When before the limited partner became as such, the business had been carried on under a name in
which his surname appeared;

c. When the third person extended credit to the partnership with the knowledge that he is a limited
partner.

Example: Johnson, as a limited partner, is not allowed to include his surname in the partnership's name.
But because he want to, he included his name. Because of this, he is liable as a general partner to
partnership creditors who extend credit to the partnership without actual knowledge that he is not a
general partner.
11. What are the order of preference in the the liquidation of a limited partnership?

1.Those due to creditors, including limited partners

2.Those due to limited partners in respect of their share in profits/compensation

3.Those due to limited partners of return of capital contributed 4.Those due to general partner other
than capital & profits

5.Those due to general partner in respect to profits

6.Those due to general partner for return of capital contributed