Chapter 3

DISSOLUTION AND WINDING UP

Article 1830
Dissolution is caused:
1. Without violation to the agreement between the partners:
a) By the termination of the definite term or 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 the partners who have not assigned
their interests or suffered them to be charged for their
separate debts, either before or after the termination of
any specified term or particular undertaking;
 d) By the expulsion of any partner from the business
bona fide in accordance with such a power conferred by
the agreement between the partners;
2. In contravention of the agreement between the partners, where
the circumstances do not permit a dissolution under any
other provision of this article, by express will of any of the
partner at any time;
3. By any event which makes it unlawful for the business of the
partnership to be carried on or for the members to carry
it on in partnership;
4. When a specific thing, which a partner had promised to
contribute to the partnership, perishes before the delivery;
 in any case by the loss of the thing, when the partner
who contributed it having reserved the ownership thereof,
has only transferred to the partnership the use or
enjoyment of the same; but the partnership shall not be
dissolved by the loss of the thing when it occurs after the
partnership has acquired the ownership therof;
5. By the death of any of the partner;
6. By the insolvency of any of the partner or of the partnership;
7. By civil interdiction of any partner;
8. By degree of court under the following article. (1700a and 1701a)
Causes of Dissolution
1. No violation of Agreement
1. Termination of the definite term or specific undertaking
2. Express will of a partner who must act in good faith
3. Express will of all partners
4. Expulsion in good faith of a member
2. Violation of Agreement
3. Unlawfulness of the Business
4. Loss
1. Lost before delivery
2. Lost before or after delivery (only the use is contributed)
5. Death of Any Partner
6. Insolvency of Any Partner or of the Partnership
7. Civil Interdiction of Any Partner
8. Decrees of the Court under Art. 1831

Question:
Can the partners in their contract decrease or limit the causes
of dissolution?
Answer:
No. According to the case of Lichauco v. Lichauco, where the
Supreme Court held that the contractual provision prohibiting dissolution
except by authorization of two-thirds of the members, cannot be
sustained when the firm had lost its capital or had become bankrupt, or
had utterly abandoned the enterprise for which it had been organized.
Article 1831
On application by or for a partner the court shall decree a
dissolution whenever:
1. A partner has been declared insane in any judicial proceeding
or is shown to be of unsound mind;
2. A partner becomes in any other way incapable of performing
his part of the partnership contract;
3. A partner has been guilty of such conduct as tends to affect
prejudicially the carrying on of the business;
4. A partner wilfully or persistently commits a breach of the
partnership agreement, or otherwise so conducts himself in
matters relating to the partnership business that is not reasonably
 practicable to carry on the business in partnership with
him;
5. The business of the partnership can only be carried on at
a loss;
6. Other circumstances render a dissolution equitable.
On the application of the purchaser of a partner’s
interest under Article 1813 to 1814:
1. After the termination of the specified term or particular
undertaking;
2. At any time if the partnership was a partnership at will
when the interest was assigned or when the charging order
was issued. (n)
Dissolution by Judicial Decree
Note:
In a suit for dissolution, proof as to the existence of the firm must be
first given.
Question:
Who can sue for DISSOLUTION?
Answer:
a. A partner for any of the 6 causes given in the first paragraph;
b. The purchaser of a partners interest in the partnership under Art.
1813 or 1814, provided that the period has expired or if the firm was a
partnership at will when the interest was assigned or charged.
- If the period is not yet over, said purchaser cannot sue for dissolution.
1. Insanity of a partner
2. Incapability to perform part
3. Prejudicial Conduct or Persistent Breach of the Agreement
4. Appointment of the receiver

Note: The time of dissolution pertains at the time the judicial decree
becomes a final judgement.
Article 1832
Except so far as may be necessary to wind up partnership affairs
or to complete transactions begun but not then finished, dissolution
terminates all authority of any partner to act for the partnership:
1. With respect to the partners,
a) When the dissolution is not by the act, insolvency
or death of a partner; or
b) When the dissolution is by such act, insolvency or
death of a partner, in cases where Article 1833 so
requires;
2. With respect to persons not partners, as declared in Article
1834. (n)
Effects of Dissolution

General Rule:
Unless otherwise stipulated, every partner is considered as
the agent of the partnership with authority to bind the partnership as
well as the other partners with respect to the transaction of its
business. Upon dissolution, the partnership ceases to be a going
concern and the partners power of representation is confined only to
acts incident to winding up or completing transactions begun but not
then finished.
 Qualifications to the Rule:

a. In so far as the partners themselves are concerned, the authority

of any partner to bind the partnership by a new contract is immediately
terminated when the dissolution is not by act, insolvency or death of a
partner. When the dissolution is by such act, insolvency, or death, the
termination of authority depends upon whether or not the partner had
knowledge or notice of the dissolution as provided in Art. 1833.

b. With respect to third persons, the partnership is generally bound

by the new contract although the authority of the acting partner as it
affects his co-partners is already deemed terminated under Art. 1832
and 1833. In such a case, however, the innocent partners can always
recover from the acting partners.
 Question:
If the obligations and rights of a dissolved firm are transferred to
another firm, should creditors still hold the former liable even if the said
creditors have not been prejudiced?

Answer:
No more, as long as the new firm can indeed take care of said
creditors. It would be erroneous to let the old firm still pay, if the new firm
can really pay. (Aboitiz v. Oquinema and Co.,39 Phil 826)
Article 1833
Where the dissolution is caused by the act, death or insolvency
of a partner, each partner is liable to his co-partners for his share of
any liability created by any partner acting for the partnership as if the
partnership as if the partnership had not been dissolved unless:
1) The dissolution being by act of any partner, the
partner acting for the partnership had knowledge of the
dissolution; or
2) The dissolution being by the death or insolvency of a
partner, the partner acting for the partnership had
knowledge or notice of the death or insolvency.
Two Kinds of Causes for
Dissolution
Dissolution may be caused:
a. On the hand by:
A- act (Like withdrawing of a partner)
I- insolvency
D- death
b. On the other hand by other things, like TERMINATION of a period.
Effect of A-I-
D In Art. 1833, all the partners are still bound to each other
generally, except in the 2 instances mentioned, namely:
(a) If the partner acting had KNOWLEDGE (as distinguished from
mere NOTICE, but without actual knowledge), if dissolution is caused
by an ACT (like withdrawing, retiring). (Here, only the partner acting
assumes liability, in that even if the firm may be held by strangers,
and even if the partners will still be individually liable, still the other
partners can always recover from the partner acting.)
(b) If the partner acting had KNOWLEDGE or NOTICE, if
dissolution was caused by death or insolvency. Here again, while the
firm may be liable, in proper cases, recovery can be had by the other
partners from the partner acting.
 Question on A-I-D:
A, B and C were partners, A resigned from the firm. Therefore, it was dissolved.
B knew this, and yet he still deliberately entered into new transactions with X, an
innocent customer. Will the firm be still liable?
Answer:
Yes. If the firm assets are not enough, X can still go after the individual assets of
A, B, and C.
After all of them have paid X, can A and C still recover from B, the partner who
acted despite his knowledge of the firms dissolution?
Yes, because B should not have done what he did.

Note:
If in the preceding problem, X knew of the dissolution, the firm cannot be held
liable. Neither will A or C be liable. Only B and X are concerned, that they will have
to settle with each other, depending on their reason why they still entered into
contract.
Note:
1. A person has knowledge of a fact within the meaning of this Act
not only when he has actual knowledge thereof, but also when he has
knowledge of such other facts as in the circumstances show bad faith.
2. A person has notice of a fact when the person who claims the
benefit of the notice:
a. States the fact to such person
b. Delivers through the mail or by the other means of
communication, a written statement of the fact to such person or to a
proper person at his place of business or residence.
- Art. 1833 applies only if the contract of the partner binds the
partnership. If the partnership is not bound, only the acting partner is
personally liable.
Article 1834
After dissolution, a partner can bind the partnership
Except as provided in the third paragraph of this article:
1. By any act appropriate for winding up partnership
affairs or completing transactions unfinished at dissolution;
2. By any transaction which would bind the partnership
if dissolution had not taken place, provided the other party
to the transaction:
a) Had extended credit to the partnership prior to
dissolution and had no knowledge or notice of the
dissolution; or
 b) Though he had not so extended credit, had
nevertheless known of the partnership prior to
dissolution, and, having no knowledge or notice of
notice of dissolution, the fact of dissolution had not
been advertised in a newspaper of general
circulation in the place (or in each place if more
than one) at which the partnership business was
regularly carried on.
The liability of a partner under the first paragraph, No. 2,
shall be satisfied out of partnership assets alone when such partner had
been prior to dissolution:
1. Unknown as a partner to the person with whom the contract
 is made; and
2. So far unknown and inactive in partnership affairs
that the business reputation of the partnership could
not be said to have been in any degree due to his
connection with it.
The partnership is in no case bound by any act of a
partner after dissolution:
1. Where the partnership is dissolved because it is
unlawful to carry on the business, unless the act is
appropriate for winding up partnership affairs; or
2. Where the partner has become insolvent;
3. Where the partner has no authority to wind up
 partnership affairs, except by a transaction with one
who –
a) Had extended credit to the partnership prior to
dissolution and had no knowledge or notice of his
want of authority; or
b) Had not extended credit to the partnership prior to
dissolution, and having no knowledge or notice of his
want of authority, the fact of his want of authority
has been advertised in the manner provided for
advertising the fact of dissolution in the first paragraph
No. 2(b).
Nothing in this article shall affect the liability under Article 1825
of any person who after dissolution represents himself or consents to another
representing him as a partner in a partnership engaged in carrying on business.
When Firm is Bound or not Bound
1. When the partnership is bound to strangers
a. business is for winding up
ex. Selling of property of firm to pay off partnership debts

b. business is to complete unfinished transactions

c. completely new business with third parties considered
innocent
Note: The difference between a and b No. 2 of the 1st paragraph are
these: In (a), the customer had previously extended credit, that is, was a
previous creditor. In case of dissolution he deserves to ACTUALLY KNOW.
In (b), he was not a previous creditor. Here, if there was a publication of
the dissolution, it is presumed he already knows, regardless of actual
knowledge or non-knowledge.
 Question:
A, B and C are partners. A dies. B knows this, but still he later
transacts new business with X, a business not connected with winding up.
This notice of dissolution was in the paper but X did not read the notice,
and when X transacted with B, X thought all the time that the firm had
not yet been dissolved.
a. If X had been a previous creditor, is the firm liable?
Answer: Yes (Art. 1834, 1st par. (2)(a) But later on, as among the
partners, B alone will be liable, because he knew of A’s death.
b. If X had never extended credit before, is the firm liable?
Answer: No, because after all there had been publication of the
dissolution and it is his fault that he did not read the advertisement. He
did not deserve special attention for after all he had never been a
previous creditor of the firm.
 2. When the partnership is not bound to strangers
a. in all cases not included in our answer in comment No. 2
of this article.
ex. New business with 3rd parties who are in bad faith
b. where the firm was dissolved because it was unlawful to
carry on the business (as when its object were later declared by law to
be outside the commerce of man.
except- when the act is for winding up
c. where the partner that acted in the transaction has
become insolvent
d. where the partner is UNAUTHORIZED to wind up
except- if the transaction is with a customer in good faith. It is
understood that if after the dissolution a stranger will represent himself as a partner
although he is not one, he will be a partner by estoppel.
 Question:
After a firm was dissolved, a partner borrowed money under the
firm name from X. X knew that the firm had already been dissolved. Is the
firm liable? (JCH Service Station v. Patrikes)
Answer:
No, because of X’s knowledge of the dissolution.
Question:
A, B, and C are partners under a certain firm name. A retires, B
and C continue the business. Is A liable for previous customers who
transact with the new firm if the firm still uses the OLD firm name?
(McNeil Co. v Hamlet)
Answer:
Yes, unless A actually notifies said old customers or unless said
customers actually know of his retirement.
Article 1835
The dissolution of the partnership does not itself discharge the
existing liability of any partner.
A partner is discharged from any existing liability upon dissolution
of the partnership by an agreement to that effect between himself, the
partnership creditor and the person or partnership continuing the
business; and such agreement may be inferred from the course of dealing
between the creditor having knowledge of the dissolution and the person
or partnership continuing the business.
The individual property of a deceased partner shall be liable for all
the obligations of the partnership incurred while he was a partner, but
subject to the prior payment of his separate debts.
Dissolution Ordinarily Does Not Discharge Existing Liability of Partners

Just because the firm is dissolved does not automatically mean

that the existing liability of any partner is discharged.
Reason: Otherwise, creditors would be prejudiced, particularly
if a partner will just withdraw anytime from the firm.
How a Partner’s Liability is Discharged
There must be an agreement. The following must agree:
a. the partner concerned;
b. the other partners;
c. the creditors
Note:
If there be a novation of the old partnership debts, and such
novation is done after one of the partners has retired, and without the
consent of such retired partner, said partner cannot be held liable by
creditors who made the novation with knowledge of the firm’s
dissolution.
 Question:
A, B and C are partners. A dies. Is A’s estate (separate
properties) liable for his share of the partnership obligations incurred
while he was still a partner?
Answer:
Yes, but of course his individual creditors are to be preferred.
Effect of Death on Pending Action
An action for accounting against a managing partner should be
discontinued if he dies during the pendency of the action. The suit must
be conducted in the settlement proceedings of the deceased estate,
particularly if this is the desire of the administrator. (Po Yeng Cheo v.
Lim Ka Yam) Thus, it is wrong to just continue the action for accounting
and substitute the dead defendant with his heirs. (Lota v. Tolentino)