BUSINESS LAWS AND REGULATIONS

Lecture Notes
WEEK 5-6 MATERIALS
Legal Effects of Partnership old obligations by novation of other
Dissolution After a Partner form of release. It is often said that a
partnership continues, even after
Withdraws
dissolution, for the purpose of
 The dissolution of a partnership under winding up its affairs.”
the Civil Code is the change in the
relation of the partners caused by any  Clearly, the dissolution of a
partner ceasing to be associated in the partnership does not mean its
carrying on, as distinguished from the termination. In the case of Jesus Sy
winding up, of the business.[1] Hence, vs. Court of Appeals [4], the Supreme
Art. 1829 of the Civil Code states that Court elucidated that upon such
“on dissolution, the partnership is not dissolution, the legal personality of
termination but continues until the the partnership continues, thus:
winding up of partnership affairs is “Petitioners fail to recognize the basic
completed.” distinctions underlying the principles of
In the case of Testate Estate of Lazaro dissolution, winding up and partition or
Mota vs. Salvador Serra[2], the Supreme distribution. The dissolution of a
Court held that: partnership is the change in the relation of
the parties caused by any partner ceasing
“The dissolution of a partnership must not to be associated in the carrying on, as
be understood in the absolute and strict might be distinguished from the winding
sense so that at the termination of the up, of its business. Upon its dissolution,
object for which it was created the the partnership continues, and its legal
partnership is extinguished, pending the personality is retained until the complete
winding up of some incidents and winding up of its business culminating in
obligations of the partnership, but in such its termination.
case, the partnership will be reputed as
existing until the juridical relations arising  The dissolution of the partnership did
out of the contract are dissolved.” not mean that the juridical entity was
[Emphasis and underscoring supplied.] immediately terminated and that the
distribution of the assets to its partners
In the same case of Mota [3], the should perfunctorily follow. On the
Supreme Court went on to say that: contrary, the dissolution simply
effected a change in the relationship
 “The dissolution of a firm does not among the partners. The partnership,
relieve any of its members from although dissolved, continues to exist
liability for existing obligations, until its termination, at which time the
although it does save them from new winding up of its affairs should have
obligations to which they have not been completed and the net
expressly or impliedly assented, and partnership assets are partitioned and
any of them may be discharged from
 distributed to the partners.” [Emphasis partnership affairs, and the partition
and underscoring supplied.] and distribution of the net partnership
assets as provided by law. After all,
Partnership Not Automatically Article 1836 of the New Civil Code
Terminated Upon Dissolution provides that unless otherwise agreed
by the parties in their JVA,
The case of Primelink Properties and
respondents have the right to wind up
Development Corporation vs. Ma. Clarita
the partnership affairs:
Lazatin-Magat [5] is likewise instructive,
wherein the Supreme Court held that on  Art. 1836. Unless otherwise agreed,
dissolution, the partnership is not the partners who have not wrongfully
automatically terminated: dissolved the partnership or the legal
representative of the last surviving
On the second issue, we agree with the
partner, not insolvent, has the right to
CA ruling that petitioner Primelink and
wind up the partnership affairs,
respondents entered into a joint venture as
provided, however, that any partner,
evidenced by their JVA which, under the
his legal representative or his
Court’s ruling in Aurbach, is a form of
assignee, upon cause shown, may
partnership, and as such is to be governed
obtain winding up by the court.
by the laws on partnership.
 It must be stressed, too, that although
When the RTC rescinded the JVA on
respondents acquired possession of
complaint of respondents based on the
the lands and the improvements
evidence on record that petitioners
thereon, the said lands and
willfully and persistently committed a
improvements remained partnership
breach of the JVA, the court thereby
property, subject to the rights and
dissolved/cancelled the partnership. With
obligations of the parties, inter se, of
the rescission of the JVA on account of
the creditors and of third parties under
petitioners’ fraudulent acts, all authority
Articles 1837 and 1838 of the New
of any partner to act for the partnership is
Civil Code, and subject to the
terminated except so far as may be
outcome of the settlement of the
necessary to wind up the partnership
accounts between the parties as
affairs or to complete transactions begun
provided in Article 1839 of the New
but not yet finished. On dissolution, the
Civil Code, absent any agreement of
partnership is not terminated but
the parties in their JVA to the
continues until the winding up of
contrary. Until the partnership
partnership affairs is completed. Winding
accounts are determined, it cannot be
up means the administration of the assets
ascertained how much any of the
of the partnership for the purpose of
parties is entitled to, if at all.
terminating the business and discharging
the obligations of the partnership.  At this juncture, it is well to note that
Art. 1832 of the Civil Code provides
 The transfer of the possession of the
the direct effect of the dissolution of
parcels of land and the improvements
partnership, to wit:
thereon to respondents was only for a
specific purpose: the winding up of
“Art. 1832. Except so far as may be of partnership obligations are integral
necessary to wind up partnership affairs parts in the winding-up process.[8]
or to complete transactions begun but not
 Accordingly, once a partnership
then finished, dissolution terminates all
business is dissolved with due to the
authority of any partner to act for the
withdrawal of a partner, its legal
partnership:
personality will remain until the
(1) With respect to the partners: completion of its existing contracts,
and the performance of its obligations
(a) When the dissolution is not by the act,
to third parties.
insolvency or death of a partner; or
 Villanueva opined that although not
(b) When the dissolution is by such act,
explicitly stated in the provisions of
insolvency or death of a partner, in cases
the Civil Code, the partnership may
where article 1833 so requires;
constitute also a “business enterprise”
(2) With respect to persons not or what is known in the disciplines of
partners, as declared in article 1834.” Economics and Accounting as a
[Emphasis supplied.] “going concern”.[9]
Villanueva, a distinguished author in the  Notably, our Civil Code allows the
field of Agency, Trust, and Partnership, partnership to continue to wind up its
opined that such dissolution focuses on affairs or to complete transactions
the breaking-up of the contractual begun but not then finished[10]. This
relationship or privity of the partners means that the dissolution of an
among one another.[6] existing partnership contract may
actually lead to the constitution of a
Legal Personality of a Partnership
new partnership contract among the
Continues After Dissolution
parties who choose to proceed with
Hence, as stated under Art. 1832, the partnership business.[11]
dissolution extinguishes the right and
power of the partners to represent one
Dissolution of a Partnership does
another to pursue the partnership, “except Not End the Partnership Business
so far as may be necessary to wind up  It is axiomatic that dissolution refers
partnership affairs or to complete to the change in partnership relation,
transactions begun but not then and NOT the actual cessation of the
finished.”[7] partnership business.[12]
 Dissolution of a partnership should,  In fact, Art. 1840 of the Civil Code
perforce, NOT undermine existing recognizes that a partnership may be
contracts, nor modify or extinguish dissolved, but the underlying
then existing obligations of the partnership business enterprise would
partnership and the partners. In fact, not be wound-up and may be
the completion or performance of continued as a going concern by the
existing contracts and the settlement remaining partners, alone or with new
partners.[13]
 Art. 1840 states that if the dissolved continue the business under the provisions
partnership is not wounded-up and the of article 1837, second paragraph, No. 2,
parties so qualified have chosen to either alone or with others, and without
continue the business of the liquidation of the partnership affairs;
partnership, then the creditors of the
(6) When a partner is expelled and the
dissolved partnership shall also be
remaining partners continue the business
creditors of the person or partnership
either alone or with others without
continuing the business[14], thus:
liquidation of the partnership affairs.”
(1) When any new partner is admitted into [Emphasis supplied.]
an existing partnership, or when any
partner retires and assigns (or the Dissolved Partnership is Still Liable
representative of the deceased partner to Creditors
assigns) his rights in partnership property  The rules of liability under Art. 1840
to two or more of the partners, or to one should be construed in consonance
or more of the partners and one or more with the doctrine and overarching
third persons, if the business is continued public consideration of protecting
without liquidation of the partnership creditors who deal in good faith with
affairs; the partnership business and who
(2) When all but one partner retire and cannot be expected to be aware of the
assign (or the representative of a deceased inner workings of the partnership and
partner assigns) their rights in partnership the intramural dealings of the partners.
property to the remaining partner, who [15]
continues the business without liquidation  Of note is the case of Singson vs.
of partnership affairs, either alone or with Isabella Sawmill[16], where the
others; Supreme Court held a withdrawing
(3) When any partner retires or dies and partner liable to a third-party creditor
the business of the dissolved partnership of the old partnership. Interestingly,
is continued as set forth in Nos. 1 and 2 of the withdrawing partner failed to
this article, with the consent of the retired publish her withdrawal from the
partners or the representative of the partnership and agreed to have the
deceased partner, but without any remaining partners proceed with
assignment of his right in partnership running the partnership business
property; instead of insisting on the liquidation
of the partnership. The Supreme Court
(4) When all the partners or their ruled, to wit:
representatives assign their rights in
partnership property to one or more third “Although it may be presumed that
persons who promise to pay the debts and Margarita G. Saldajeno had action in
who continue the business of the good faith, the appellees also acted in
dissolved partnership; good faith in extending credit to the
partnership. Where one of two innocent
(5) When any partner wrongfully causes a persons must suffer, that person who gave
dissolution and the remaining partners occasion for the damages to be caused
must bear the consequences. Had right to carry on the business under
Margarita G. Saldajeno not entered into the old name, in the absence of a
the memorandum-agreement allowing stipulation forbidding it, (s)ince the
Leon Garibay and Timoteo Tubungbanua name of a commercial partnership is a
to continue doing the business of the partnership asset inseparable from the
partnership, the appellees would not have good will of the firm. … (60 Am Jur
been misled into thinking that they were 2d, s 204, p. 115) xxx” [Emphasis
still dealing with the partnership “Isabela supplied.]
Sawmill”. Under the facts, it is of no
 It is thus clear that a business
moment that technically speaking the
enterprise of a commercial partnership
partnership “Isabela Sawmill” was
or partnership business may continue
dissolved by the withdrawal therefrom of
notwithstanding the dissolution of
Margarita G. Saldajeno. The partnership
such partnership due to changes in the
was not terminated and it continued doing
membership, or withdrawal of a
business through the two remaining
partner.
partners.” [Emphasis and underscoring
supplied.]
 It is also well to note the case of
Petition for Authority to Continue Use
of the Firm Name “Sycip, Salazar,
etc.”/ “Ozaeta, Romulo, etc.”, where
the Supreme Court pronounced that
Art. 1840 of the Civil Code deals
more with a commercial partnership
with a good to will to protect, rather
than of a professional partnership, to
wit:
 Secondly, Article 1840 treats more of
a commercial partnership with a good
will to protect rather than of a
professional partnership, with no
saleable good will but whose
reputation depends on the personal
qualifications of its individual
members. Thus, it has been held that a
saleable goodwill can exist only in a
commercial partnership and cannot
arise in a professional partnership
consisting of lawyers.
 As a general rule, upon the dissolution
of a commercial partnership the
succeeding partners or parties have the