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Article 1838  liquidating partnership property (turning

(The provision speaks of the right of the partner to it into cash)


rescind contract of partnership.)  paying outstanding debts
 collecting outstanding receivables
 The contract of partnership is voidable or  distributing the proceeds, and
annullable if one is induced by fraud or  any other actions required to bring
misrepresentation to become a partner.1 partnership business to close.
 The “fraud or misrepresentation” here vitiates
the consent whereby the contract of Until the partnership accounts are determined, it
partnership had been entered into, hence, it is cannot be determined how much any of the
really “dolo causante.”2 partners is entitled, if at all.

Thus “where a partnership contract is Article 1839 sets forth a priority system for the
rescinded on the ground of the fraud or distribution of partnership property (see Art.
misrepresentation of one of the parties 1810.) and individual property when a
thereto, the party entitled to rescind is, partnership is dissolved to those entitled thereto.
without prejudice to any other right, entitled:”
(1) The assets of the partnership are:
a. right of LIEN or RETENTION (a) partnership property (including
“To a lien on, or right of retention of, the surplus goodwill); and
of the partnership property after satisfying the (b) The contributions of the partners
partnership liabilities to third persons for any necessary for the payment of all the
sum of money paid by him for the purchase of liabilities in accordance with Article
an interest in the partnership and for any 1797.
capital or advances contributed by him”
(2) Order of application the assets:
b. right of SUBROGATION (a) First, those owing to partnership
“To stand, after all liabilities to third persons creditors;
have been satisfied, in the place of the creditors (b) Second, those owing to partners other
of the partnership for any payments made by than for capital and profits (such as
him in respect of the partnership liabilities” loans given by the partners or
advances for business expenses);
c. right of INDEMNIFICATION (c) Third, those owing for the return of
” To be indemnified by the person guilty of the the capital contributed by the
fraud or making the representation against all partners;
debts and liabilities of the partnership.” (d) Finally, if any partnership assets
remain, they are distributed as profits
It is to be noted, however, that the rights of the to the partners in the proportion in
partner entitled to rescind (to annul) “are which profits to the partners in the
without prejudice to any other rights” under proportion in which profits are to be
other provisions of law. shared

(3) The assets shall be applied in the order of


their declaration in No. 1 of this article to the
Article 1839 satisfaction of the liabilities.
(This article enunciates of the methods of settling
the accounts of the partnership—liquidation and (4) The partners shall contribute, as provided by
distribution of assets of dissolved partnership) article 1797, the amount necessary to satisfy
the liabilities.
Where the business of dissolved partnership is not
continued, the process of winding up consists:
(5) An assignee for the benefit of creditors or any total sum of P300,000.00, thereby leaving a balance of
P60,000.00;
person appointed by the court shall have the (d) The balance of P60,000.00 constitutes the profit which
right to enforce the contributions specified in shall be divided among A, B, and C (unless there is an
the preceding number. agreement to the contrary [Art. 1839, 1st par.] which,
however, cannot prejudice the rights of third persons)
in proportion to their capital contributions. Therefore,
(6) Any partner or his legal representative shall A is entitled to 3/6 or P30,000.00, B, 2/6 or P20,000.00
have the right to enforce the contributions and C, 1/6 or P10,000.00.
specified in No. 4, to the extent of the amount
(3) Suppose, in the same example, the liabilities of the
which he has paid in excess of his share of the partnership amount to P560,000.00. The partnership assets,
liability. then shall be exhausted to satisfy these liabilities thereby
leaving an unpaid balance of P60,000.00. The partners shall
then contribute to the loss, in the absence of an agreement
(7) The individual property of a deceased partner to the contrary, in accordance with their capital
shall be liable for the contributions specified contributions. Consequently, A is liable out of his separate
in No. 4. property in the amount of P30,000.00, B, P20,000.00, and C,
P10,000.00.
(8) When partnership property and the individual These contributions which are necessary to pay the
properties of the partners are in possession of liabilities of the partnership are considered partnership
a court for distribution, partnership creditors assets (No. 1[b].) and any assignee for the benefit of
creditors and any person appointed by the court may
shall have priority on partnership property enforce the contributions.
and separate creditors on individual property,
saving the rights of lien or secured creditors. In case C paid the whole amount of P60,000.00, then, he has
a right to recover the amount which he has paid in excess of
his share of the liability from A, P30,000.00 and from B,
(9) Where a partner has become insolvent or his P20,000.00.
estate is insolvent, the claims against his
separate property shall rank in the following (4) If B is already dead, his estate is still liable for the
contributions needed to pay off the partnership obligations
order: provided they were incurred while he was still a partner.
(a) Those owing to separate creditors;
(b) Those owing to partnership creditors; (5) Suppose now that under Nos. 1 and 2 above, C owes F
P40,000.00. Following the rule that partnership creditors
(c) Those owing to partners by way of have preference regarding partnership property, only the
contribution. share of C in the amount of P10,000.00 can be used to pay
his debt to F and the unpaid balance of P30,000.00 must be
EXAMPLES: taken from the individual property, if any, of C.
(1) A, B, and C, are partners. A contributed P150,000.00, B
P100,000.00, and C, P50,000.00. On dissolution, the assets of (6) Suppose again, that the partnership debts amount to
the partnership amounted to P500,000.00. The partnership P560,000.00 as in No. 3. So, C is still liable out of his
owes D the amount of P70,000.00, E, P50,000.00, and A, separate property to partnership creditors in the amount of
P20,000.00. P10,000.00. His separate property amounts to P45,000.00.
In this case, his assets shall first be applied to pay his debt of
(2) The accounts of the partnership shall be settled as follows: P40,000.00 to F and the balance of P5,000.00 to pay part of
(a) D and E, who are partnership creditors, shall be paid his debt of P10,000.00 still owing to partnership creditors in
first the total sum of P120,000.00, leaving a balance of accordance with the rule that regarding individual
P380,000.00; properties, individual creditors are preferred.
(b) Then, A, who is also a creditor, will be paid his credit of
P20,000.00, leaving a balance of P360,000.00;
(c) Afterwards, the contributions of A, B, and C to the
partnership capital shall be returned to them in the