Summary
Highlights
Chapter 3 discusses the final stages of a partnership: dissolution, winding up, and termination. Dissolution refers to a change in the relationship of partners, where one partner ceases to be associated with the business. Winding up involves settling the business affairs, also known as liquidation. Termination is the point when all partnership affairs are settled, and the partnership is no longer an ongoing concern.
Under Article 1829, dissolution means no new partnership business should be undertaken. The primary purpose becomes liquidating affairs and distributing assets. However, the partnership continues to exist for the purpose of winding up until liquidation is complete.
Extrajudicial causes of dissolution, as per Article 1830, do not require court intervention. These include: termination of a definite term or particular undertaking, expressed will of any partner (for partnership at will) or all partners (for fixed term/undertaking), expulsion of a partner in good faith, unlawfulness of the business, loss of specific property (before delivery or use/fruits contributed), death or insolvency of any partner, and civil interdiction of a partner.
Dissolution can occur in violation of the partnership agreement if circumstances do not permit dissolution under Article 1830. A partner withdrawing from a fixed-term partnership without the consent of all other partners would be liable for damages, though they cannot be compelled to remain in the partnership.
If a lawful business becomes unlawful due to a supervening event, it becomes a ground for dissolution as the business can no longer continue. This differs from a partnership that is unlawful from its inception, which does not acquire juridical personality.
Loss of a specific thing contributed before delivery leads to dissolution. Death of a partner causes dissolution due to a decrease in membership. Insolvency of a partner or the partnership itself also leads to dissolution, as it affects the ability to meet obligations. Civil interdiction incapacitates a partner from validly contracting, thereby dissolving the partnership.
Judicial dissolution requires a court order and can be initiated by any partner or assignee. Grounds include: a partner's insanity or incapacity, misconduct or persistent breach of agreement, a partner's prejudicial conduct, business being carried on at a loss, or other equitable circumstances. A purchaser of a partner's interest can also petition for dissolution under specific conditions.
Dissolution generally terminates a partner's authority to act for the partnership, and no new business should be transacted. However, acts necessary for winding up are binding. The liability of partners for new transactions after dissolution depends on whether the dissolution was caused by an act, insolvency, or death, and whether the acting partner had knowledge or mere notice of the cause.
If dissolution is not due to an act, insolvency, or death, other partners can seek reimbursement from the acting partner who entered into a new transaction. If dissolution is due to a partner's act, liability of other partners depends on their knowledge or notice. In cases of insolvency or death, mere notice to the acting partner makes them solely liable for new transactions.
Acts binding on the partnership after dissolution include transactions necessary for winding up, completion of unfinished transactions, and new business with an innocent third person (especially former clients not personally notified or new clients without publication of dissolution). Acts not binding include transacting unlawful business, transactions by an insolvent partner, or transactions by a non-liquidating partner (unless the third party is innocent and without notice).
A partner is discharged from liability upon dissolution only if the partner, other partners, and creditors all agree. Winding up can be extrajudicial (by partners designated in the agreement, innocent partners, or legal representative of the last solvent surviving partner) or judicial (under court control, which may appoint a receiver).
Partnership property is first applied to discharge liabilities to creditors, then to partners who are also creditors, then for capital repayment, and finally to distribute profits. If dissolution is not in violation, partners receive cash for their share. If in violation, innocent partners have rights to damages and continuation of business, while guilty partners' rights are reduced by damages.
If the partnership contract is annulled due to fraud or misrepresentation, the injured party is entitled to mutual restitution, a right of lien, and indemnification. A change in membership (admission, retirement, assignment, wrongful cause, or expulsion) dissolves the original partnership, but a new partnership may be formed to continue the business. The new partnership assumes obligations of the old if not liquidated.
Creditors of a dissolved partnership become creditors of a new partnership that continues the business without liquidation. Retiring partners or legal representatives of deceased partners have the right to ascertain the money value of their interest as of the dissolution date, receive it as an ordinary creditor, and may opt for interest or profits attributable to the use of their rights.