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XI. Dissolution and Winding Up - Coggle Diagram
XI. Dissolution and Winding Up
A. Concept Dissolution; winding up; termination – ART. 1828, 1829
B. Causes of dissolution
C. Effects of dissolution
D. Right to wind up – ART. 1836
E. Settling of accounts/application of properties/sharing of profits & losses – ART. 1797, 1798, 1799, 1827, 1837, 1838
F. Effects of rescission – ART. 1838, 1839
G. Effects of continuation of the business – ART.1840, 1841
H. Prescription of action – ART. 1153, 1144
General Prescription 1144
- The following actions must be brought within ten years from the time the right of action accrues:
Upon a written contract;
Upon an obligation created by law;
Upon a judgment. (n)
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General Rule
- The creditors of the dissolved partnership are also creditors of the person or partnership continuing the business.
Limited Liability
- the liability of a third person becoming a partner in the partnership continuing the business shall be satisfied from the partnership property only unless there is a stipulation to the contrary.
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Specific Circumstances
-
New Partner/Assignment to Remaining Partner
- When any new partner is admitted into an existing partnership, or when any partner retires and assigns (or the representative of the deceased partner assigns) his rights in partnership property to two or more of the partners, or to one or more of the partners and one or more third persons, if the business is continued without liquidation of the partnership affairs;
Assignment to Remaining Partner
- When all but one partner retire and assign (or the representative of a deceased partner assigns) their rights in partnership property to the remaining partner, who continues the business without liquidation of partnership affairs, either alone or with others;
Death/Retirement
- When any partner retires or dies and the business of the dissolved partnership is continued as set forth in Nos. 1 and 2 of this article,
with the consent of the retired partners or the representative of the deceased partner
, but
without any assignment of his right in partnership property
;
Assignment to Third Person
- When all the partners or their representatives assign their rights in partnership property to one or more third persons who promise to pay the debts and who continue the business of the dissolved partnership;
Wrongful Dissolution
- When any partner wrongfully causes a dissolution and the remaining partners continue the business under the provisions of article 1837, second paragraph, No. 2, either alone or with others, and without liquidation of the partnership affairs;
Expulsion
- When a partner is expelled and the remaining partners continue the business either alone or with others without liquidation of the partnership affairs.
What Constitutes Partnership Property (1839)
-
The partnership property,
The contributions of the partners necessary for the payment of all the liabilities specified in No. 2.
Priority Rules Against Partnership Property (1839)
- the liabilities of the partnership shall rank in order of payment as follows:
Those owing to creditors other than partners,
Those owing to partners other than for capital and profits,
Those owing to partners in respect of capital,
Those owing to partners in respect of profits.
Enforcement of Contribution -
Partners shall contribute as provided by NCC 1797 the amount necessary to satisfy the liabilities. This includes individual property of a deceased partner.
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Priority Rules Between Partners' Creditors and Partnership Creditors
- 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 right of lien of secured creditors.
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Right to Net Assets (Villareal v. Ramirez)
- "A share in a partnership can be returned only after the completion of the latter's dissolution, liquidation and winding up of the business. However, partner may not demand that the other partners be personally liable for the return of his contribution.
Arbes v. Politico - Right to contribution may be enforced independent of the right to profits in case of void partnership? double check case
E1. To share in the profits/losses – ART. 1797, 1798, 1799
Distribution of Losses and Profits (1797) -
GR
- Losses and Profits shall be distributed according to prior agreement. If only share in profits stipulated, losses shall be distributed in same proportion.
XCPN
- If no stipulation, share shall be in proportion to what they have contributed.
Industrial partner (1797)
- IP receives just and equitable share, based on services contributed + share in the profits in proportion to his capital.
GR - Shall not be liable for losses.
XCPN - But, you may stipulate that the industrial partner shall bear some of the loss.
Sir says if person represented as employee, but you notice indispensable to business then argue that they are an industrial partner.
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Designated Third Persons (1798)
- When partners agree to intrust to a third person the designation of their individual shares in loss/profits, this designation may be impugned ONLY when manifestly inequitable. No partner may be tasked with designation. Otherwise, stipulation void.
Exemption/Exclusion 1799
- any stipulation that exempts one or more i.e. ANY partner from ANY share in the profits is void.
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Execution
- Partner may not complain of such decision.If partner has
BEGAN EXECUTION
- of the decision of the third person and same partner has
NOT IMPUGNED
- the decision within a (3) month period from the time they had knowledge thereof,
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Guarantee of Profits (Moran, Jr. v. CA)
- Each partner must share in profits and losses of the venture. Similarly, even with assurance of profit, in the absence of fraud, no recovery can be made against partner assuring profit.
Right to Profit (Sison v. McQuaid)
- Right to share in profits refers to net profits. This means that there must first be proper accounting of income and expenses pertaining to business UNLESS there is dissolution/liquidation or specific stipulation on periodic distribution of profits.
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Dissolution
- Effects vary depending on the grounds for dissolution.
Dissolution Caused by Contravention (1837)
- Here, there is a breach of contract. Rights and Liabilities depend if the partner caused or did not cause the wrongful dissolution.
Caused the Dissolution
-
Business Not Continued
- all the rights of a partner for share in the net assets of the partnership after payment of all its liabilities,
subject to liability for damages incurred
due to such wrongful dissolution;
Business Continued
- The
right
as against his co-partners and all claiming through them in respect of their interests in the partnership, to
have the value of his interest in the partnership
,
less any damage
caused to his co‐partners by the dissolution,
ascertained and paid to him in cash, or the payment secured by a bond approved by the court, and to be released from all existing liabilities of the partnership
Did not Cause
- Shall have the following rights:
PARTICIPATE
- in the net assets of the partnership AFTER discharge of partnership liabilities.
DAMAGES
- for breach of the agreement against the wrongful partner.
CONTINUE
- the business in the same name either by themselves or jointly during the rest of the agreed term for the partnership.
3a.
POSSESS
- the partnership property provided they secure the payment by court approved bond OR pay to any partner who cause the wrongful dissolution the value of their interest at the time of dissolution less damages. Must also indemnify them against all present or future partnership liabilities.
Dissolution Not by Contravention (1837)
- Unless otherwise agreed, each partner as against co-partners and persons claiming through them in respect of their interests in the partnership may have the partnership property applied to discharge its liability.
Surplus
- Applied in cash the net amount owing to the respective partners.
Continuing Business Enterprise
- If the dissolution is without breach, the remaining partners have no option to continue the partnership business enterprise if the withdrawing partner insists on a winding-up.
Dissolution Caused by Expulsion (1837)
- If the expulsion is bona fide AND the expelled partner is discharged from all partnership liabilities, the expelled partner shall receive only in cash the net amount due to him from the partnership.
How Discharged
-
By Payment
Agreement (1835)
- 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.
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Dissolution Caused by Judicial Decree i.e. rescission due to fraud/misrepresentation (1838)
- Without prejudice to any other right, the party entitled to seek rescission or dissolution entitled to the following rights:
LIEN
- 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;
CREDITOR
- To stand, after all liabilities to third persons have been satisfied, in the place of the creditors of the partnership for any payment made by him in respect of the partnership liabilities; and
INDEMNIFIED
- To be indemnified by the person guilty of the fraud or making the representation against all debts and liabilities of the partnership.
Sir says can happen in a possible joint venture.
Excussion
- You have to go after the partnership property first.
Trust Fund Doctrine 1827
. The creditors of the partnership shall be preferred to those of each partner as regards the partnership property. Without prejudice to this right, the private creditors of each partner may ask the attachment and public sale of the share of the latter in the partnership assets. (n)
By Whom Possessed
-
GR
- Partners who have not wrongfully dissolved or the legal representative of the last surviving partner if not insolvent.
XCPN
- Unless otherwise agreed. Any partner, assignee, legal rep may upon cause obtain winding up by the court.
- Termination of mutual agency; exceptions – ART. 1832, 1833, 1834
All other grounds for Dissolution (1832)
-
GR
- Dissolution terminates all authority of any partner to act for the partnership. Provided that the dissolution is not by the death,act or insolvency of the partner.
XCPN
-
2a. So far as may be necessary to wind up partnership affairs or
2b. to complete transactions begun but not then finished.
Dissolution by Death/Insolvency/Act (1833)
-
GR
- Dissolution on these grounds makes each partner liable to co-partners for his share of any liability created by any partner acting for the partnership as if there was no dissolution.
XCPN
- If the partner acting for the partnership had knowledge OR knowledge/notice
2a
The dissolution being by act of any partner, the partner acting for the partnership had knowledge of the dissolution; or
2b
. 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.
Acts after Dissolution (1834)
- After dissolution, a partner can bind the partnership in two circumstances:
Winding Up
- By any act appropriate for winding up partnership affairs or completing transactions unfinished at dissolution
Transactions
- By any transaction which would bind the partnership if dissolution had not taken place, provided the other party to the transaction:
EXTENDED
- Had extended credit to the partnership prior to dissolution and had no knowledge or notice of the dissolution; or
KNOWN
- Though he had not so extended credit, had nevertheless known of the partnership prior to dissolution, and, having no knowledge or 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.
Satisfaction from Partnership Assets
- Liability of the partner here shall be satisfied solely by partnership assets in case the partner prior to dissolution had been:
UNKNOWN
- as a partner to the person with whom the contract is made; and
INACTIVE
- 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.
When Not Bound
- The Partnership in no case shall be bound by any act of the partner after dissolution in the following:
UNLAWFUL
- 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
INSOLVENT
- Where the partner has become insolvent; or
NO AUTHORITY
- Where the partner has no authority to wind up partnership affairs;
XCPN
- except by a transaction with one who
Had extended credit to the partnership prior to dissolution and had no knowledge or notice of his want of authority; or
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 not been advertised in the manner provided for advertising the fact of dissolution in the first paragraph, No. 2 (b).
- Without violating the agreement – ART. 1830(1)
- Refers to grounds for dissolution that are consistent with the terms of the contract of partnership.
- In contravention of the agreement – ART. 1830(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 the express will of any partner at any time;
- By operation of law – ART. 1830 (3)-(7)
- By court decree – ART. 1830(8), 1831
- Principle of rebus sic stantibus
Dissolution by Order (1831)
- The grounds for dissolution here constitute substantial breach of the obligations assumed by the partners.
On application by or for a partner
-
INSANE PARTNER
- A partner has been declared insane in any judicial proceeding or is shown to be of unsound mind;
INCAPABLE PARTNER
- A partner becomes in any other way incapable of performing his part of the partnership contract;
PREJUDICIAL CONDUCT
- A partner has been guilty of such conduct as tends to affect prejudicially the carrying on of the business;
BREACH/UNREASONABLE CONDUCT
- A partner willfully or persistently commits a breach of the partnership agreement, or otherwise so conducts himself in matters relating to the partnership business that it is not reasonably practicable to carry on the business in partnership with him;
LOSS TO BUSINESS
- The business of the partnership can only be carried on at a loss;
OTHER
- Other circumstances render a dissolution equitable.
Insanity/Incapable
- the law recognizes that an insane partner still has an estate that has a right to benefit from the properties and rights which a partner is entitled to, the other partners are given the option to allow the estate.
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Other Grounds
- relate to circumstances prevailing in the partnership setting that endanger or undermine the viability of the partnership enterprise.
Assignment is to deal with gap in the law. Expulsion v. Dissolution.
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Application By Purchaser of Interest
-
TERMINATION OF TERM/UNDERTAKING
- After the termination of the specified term or particular undertaking;
PARTNERSHIP AT WILL
- At any time if the partnership was a partnership at will when the interest was assigned or when the charging order was issued.
1831 is not expulsion. It is dissolution of the partnership. Expulsion must be expressly provided in the articles of partnership.
Dispute Among the Partners
- Considered as an intra-corporate controversy,
UNLAWFUL BUSINESS
- 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;
LOSS OF THE THING
-
2a.
GR
- When a specific thing which a partner had promised to contribute to the partnership, perishes before the delivery; ,
2b.
XCPN
- 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 thereof;
Presupposes that the thing to be contributed is so important as to constitute a ground for dissolution.
DEATH
- By the death of any partner;
INSOLVENCY
- By the insolvency of any partner or of the partnership;
CIVIL INTERDICTION
- By the civil interdiction of any partner;
Without Violating the Agreement
- the dissolution does not give rise to a liability for damages for breach of contract.
All partners have the right to participate in the winding-up of the affairs, except the partner that was expelled for cause.
In Violation of the Partnership
- The partner seeking dissolution would be liable for damages and does not have the right to continue to pursue the partnership business.
Rationale
- Partner wrongfully excluded has pecuniary interest in every existing contract that was incomplete and in the trade name of the co-partnership and assets at the time he was expelled.
Force Majeure/Similar Causes -
Dissolution on these grounds do not constitute a breach of the partnership agreement.
Par. 2 Constitutes the right of the partner to dissolve the partnership.
TERM/UNDERTAKING
- By the termination of the definite term or particular undertaking specified in the agreement;
WILL OF ONE
- By the express will of any partner, who must act in good faith, when no definite term or particular is specified;
WILL OF ALL
- By the express will of all 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;
EXPULSION
- By the expulsion of any partner from the business bona fide in accordance with such a power conferred by the agreement between the partners;
Definitions
-
Dissolution (1829)
- refers to the contract of partnership. The breaking of the vinculum between the partners.
Dissolution (1828)
- the change in the relation of the partners caused by any partner ceasing to be associated in the partnership or the winding up of the business i.e. the extinguishment or rescission of the contract.
Termination
- pertains to the partnership as a business enterprise. The time when all matters pertaining to the business enterprise i.e. completion of contracts, payment of pending obligations, etc. have been completed. After the winding up of the partnership.
Winding Up
- the process commenced by the dissolution of the contract of partnership. This is concluded upon the termination or complete liquidation of the partnership enterprise. As defined by the SC, it is the process of settling the business affairs after dissolution.
Dissolution Alone
- If the dissolution breaks the contractual privity between and among the partners, this does not necessarily lead to the dissolution of an existing partnership contract. Instead, it may lead to the formation of a new partnership among the partners who choose to proceed with the partnership business.