Article 1838  liquidating partnership property (turning
(The provision speaks of the right of the partner to
rescind contract of partnership.)
 The contract of partnership is voidable or
annullable if one is induced by fraud or
misrepresentation to become a partner.1
 The “fraud or misrepresentation” here vitiates
the consent whereby the contract of
partnership had been entered into, hence, it is
really “dolo causante.”2
Thus “where a partnership contract is
rescinded on the ground of the fraud or
misrepresentation of one of the parties
thereto, the party entitled to rescind is,
without prejudice to any other right, entitled:”
a. right of LIEN or RETENTION
“To a lien on, or right of retention of, the surplus
of the partnership property after satisfying the
partnership liabilities to third persons for any
sum of money paid by him for the purchase of
an interest in the partnership and for any
capital or advances contributed by him”
b. right of SUBROGATION
“To stand, after all liabilities to third persons
have been satisfied, in the place of the creditors
of the partnership for any payments made by
him in respect of the partnership liabilities”
c. right of INDEMNIFICATION
” To be indemnified by the person guilty of the
fraud or making the representation against all
debts and liabilities of the partnership.”
It is to be noted, however, that the rights of the
partner entitled to rescind (to annul) “are
without prejudice to any other rights” under
other provisions of law.
Article 1839
(This article enunciates of the methods of settling
the accounts of the partnership—liquidation and
distribution of assets of dissolved partnership)
Where the business of dissolved partnership is not
continued, the process of winding up consists:
it into cash)
 paying outstanding debts
 collecting outstanding receivables
 distributing the proceeds, and
 any other actions required to bring
partnership business to close.
Until the partnership accounts are determined, it
cannot be determined how much any of the
partners is entitled, if at all.
Article 1839 sets forth a priority system for the
distribution of partnership property (see Art.
1810.) and individual property when a
partnership is dissolved to those entitled thereto.
(1) The assets of the partnership are:
(a) partnership property (including
goodwill); and
(b) The contributions of the partners
necessary for the payment of all the
liabilities in accordance with Article
1797.
(2) Order of application the assets:
(a) First, those owing to partnership
creditors;
(b) Second, those owing to partners other
than for capital and profits (such as
loans given by the partners or
advances for business expenses);
(c) Third, those owing for the return of
the capital contributed by the
partners;
(d) Finally, if any partnership assets
remain, they are distributed as profits
to the partners in the proportion in
which profits to the partners in the
proportion in which profits are to be
shared
(3) The assets shall be applied in the order of
their declaration in No. 1 of this article to the
satisfaction of the liabilities.
(4) The partners shall contribute, as provided by
article 1797, the amount necessary to satisfy
the liabilities.
(5) An assignee for the benefit of creditors or any
person appointed by the court shall have the
right to enforce the contributions specified in
the preceding number.
(6) Any partner or his legal representative shall
have the right to enforce the contributions
specified in No. 4, to the extent of the amount
which he has paid in excess of his share of the
liability.
(7) The individual property of a deceased partner
shall be liable for the contributions specified
in No. 4.
(8) When partnership property and the individual
properties of the partners are in possession of
a court for distribution, partnership creditors
shall have priority on partnership property
and separate creditors on individual property,
saving the rights of lien or secured creditors.
(9) Where a partner has become insolvent or his
estate is insolvent, the claims against his
separate property shall rank in the following
order:
(a) Those owing to separate creditors;
(b) Those owing to partnership creditors;
(c) Those owing to partners by way of
contribution.
EXAMPLES:
(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
the partnership amounted to P500,000.00. The partnership
owes D the amount of P70,000.00, E, P50,000.00, and A,
P20,000.00.
(2) The accounts of the partnership shall be settled as follows:
(a) D and E, who are partnership creditors, shall be paid
first the total sum of P120,000.00, leaving a balance of
P380,000.00;
(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
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 A, B, and C (unless there is an
agreement to the contrary [Art. 1839, 1st par.] which,
however, cannot prejudice the rights of third persons)
in proportion to their capital contributions. Therefore,
A is entitled to 3/6 or P30,000.00, B, 2/6 or P20,000.00
and C, 1/6 or P10,000.00.
(3) Suppose, in the same example, the liabilities of the
partnership amount to P560,000.00. The partnership assets,
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
to the contrary, in accordance with their capital
contributions. Consequently, A is liable out of his separate
property in the amount of P30,000.00, B, P20,000.00, and C,
P10,000.00.
These contributions which are necessary to pay the
liabilities of the partnership are considered partnership
assets (No. 1[b].) and any assignee for the benefit of
creditors and any person appointed by the court may
enforce the contributions.
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,
P20,000.00.
(4) If B is already dead, his estate is still liable for the
contributions needed to pay off the partnership obligations
provided they were incurred while he was still a partner.
(5) Suppose now that under Nos. 1 and 2 above, C owes F
P40,000.00. Following the rule that partnership creditors
have preference regarding partnership property, only the
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
taken from the individual property, if any, of C.
(6) Suppose again, that the partnership debts amount to
P560,000.00 as in No. 3. So, C is still liable out of his
separate property to partnership creditors in the amount of
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
P40,000.00 to F and the balance of P5,000.00 to pay part of
his debt of P10,000.00 still owing to partnership creditors in
accordance with the rule that regarding individual
properties, individual creditors are preferred.