Chapter 3: Dissolution and Winding-Up Flashcards
The change in the relation of the parties caused by any partner ceasing to be associated in the carrying on the business.
Dissolution
This is the process of wrapping things up—settling debts, selling off assets, and handling any final business matters. The partnership still exists during this phase.
Winding-up
The final step. Once everything is settled, the remaining assets are divided among the partners based on their shares.
Termination (Partition or Distribution)
Refers to a partner leaving or dissociating from the partnership.
Retirement
What must happen before partners can be paid their shares after the dissolution of a partnership?
The creditors of the partnership must first be compensated. This ensures that all debts owed to creditors are settled before any distribution to the partners.
Is an agreement between partners regarding the liquidation of assets after dissolution valid?
Yes, the partners can establish their own terms for how the liquidation will be handled.
What happens to a partnership upon dissolution?
The partnership is not terminated; it continues to exist until the winding up of partnership affairs is completed.
Does the partnership automatically end when it is dissolved?
No, the partnership does not automatically end when it is dissolved. It remains in existence until all affairs have been properly wound up.
What are the causes of partnership dissolution that occurs without violating the agreement?
- Termination occurs when the specified term or undertaking in the agreement ends.
- Any partner can terminate the agreement in good faith if no definite term is specified.
- All partners who haven’t assigned their interests can terminate, regardless of whether a term has ended.
- A partner can be expelled from the business in good faith as per the agreement’s terms.
made in good faith without fraud
Bona fide
What does it mean for a partner to dissolve a partnership in contravention of the agreement?
It means that a partner dissolves the partnership despite not having the right to do so according to the terms of the partnership agreement.
Under what circumstances can a partner dissolve a partnership against the agreement?
A partner can dissolve the partnership at any time by their express will, even if circumstances do not allow for dissolution under any other provision of the agreement, but this is considered a BREACH OF CONTRACT.
What event can lead to automatic dissolution of a partnership?
Any event that makes it unlawful for the partnership’s business to be carried on, or for the partners to continue in partnership, will lead to automatic dissolution.
What does it mean for a partnership to become illegal?
A partnership becomes illegal when an event occurs that violates laws or regulations, making it unlawful for the business to operate.
What happens if a specific item promised by a partner is lost or destroyed before delivery to the partnership?
The partnership may be dissolved.
How does the ownership of an item affect the risk of loss in a partnership?
The partner who holds ownership of the item bears the risk of loss. If the partner only transferred the use or enjoyment of the item, the partnership may dissolve if the item perishes before delivery.
What is the difference in dissolution due to the loss of an item before and after it has been transferred to the partnership?
If the item is lost before it has been transferred to the partnership, the partnership may dissolve. However, if the partnership has already acquired ownership of the item, its loss does not result in dissolution.
What type of contributed item could lead to automatic dissolution if lost?
Specific item, such as equipment or property, promised by a partner that perishes before delivery
Under what condition does the partnership remain intact despite the loss of a contributed item?
The partnership remains intact if the item was already owned by the partnership at the time of its loss, meaning that the loss does not cause dissolution.
Occurs outside of court, the partners themselves decide to dissolve the partnership without needing a court’s intervention.
Extrajudicial Dissolution
Occurs through a court order. A partner or an interested party (creditor) must go to court and request that the partnership be dissolved for specific reasons.
Judicial Dissolution
A legal restriction that occurs when a person loses certain civil rights due to a criminal conviction or a legal incapacity.
Civil Interdiction
What are the causes of dissolution?
- Without Violating the Agreement:
- Termination of the specified term or undertaking in the agreement.
- Any partner’s express will to dissolve in good faith when no definite term is set.
- All partners’ express will to dissolve if they haven’t assigned their interests or charged them for debts, regardless of specified terms.
- Expulsion of a partner in good faith per the agreement’s terms. - In Contravention of the Agreement:
- Any partner can dissolve at any time if dissolution isn’t permitted by other provisions. - Unlawful Business Operations:
- Any event making it illegal to continue the partnership. - Loss of a Contributed Asset:
- If a promised asset perishes before delivery, or if a partner retains ownership and only transfers use, the partnership dissolves. However, loss after the partnership acquires ownership does not cause dissolution. - Death of a Partner.
- Insolvency:
- Insolvency of any partner or the partnership itself. - Civil Interdiction of any partner.
- Court Decree under specified conditions.
The court shall decree a dissolution upon application by or for a partner when:
- A partner is declared insane or shown to be of unsound mind.
- A partner becomes incapable of fulfilling their part of the partnership contract.
- A partner engages in conduct that adversely affects the business.
- A partner willfully or persistently breaches the partnership agreement, making it impractical to continue the partnership.
- The partnership can only operate at a loss.
- Other circumstances justify equitable dissolution.
Additionally, a purchaser of a partner’s interest under Articles 1813 or 1814 may apply for dissolution:
1. After the specified term or undertaking has ended.
2. Anytime if the partnership was at will when the interest was assigned or when the charging order was issued.
What are some circumstances that may render a partner incapable of fulfilling their part of the partnership contract?
A partner may become incapable due to illness, disability, or other reasons that prevent them from performing their duties as outlined in the partnership contract.
How does a partner’s legal declaration of insanity affect the partnership?
The court can dissolve the partnership. A partner’s legal declaration of insanity can lead to automatic dissolution of the partnership, as it affects their ability to participate in business decisions and fulfill their contractual obligations.
What type of conduct by a partner can lead to court-ordered dissolution of the partnership?
If a partner engages in conduct that severely disrupts or harms the business, such as unethical actions or mismanagement, the court can dissolve the partnership.
What happens if a partner persistently breaches the partnership agreement?
If a partner willfully or persistently commits a breach of the partnership agreement, the court may decide to dissolve the partnership, especially if such conduct makes it impractical to continue the business.
What financial condition can lead to the dissolution of a partnership?
If the partnership’s business is only making losses and is not financially sustainable, the court may order dissolution to prevent further financial damage.
Under what condition can the court dissolve a partnership after the termination of a specified term or project?
The court may dissolve the partnership if a partner’s interest was purchased after the end of a specific term or project, and this aligns with the terms of the partnership agreement.
What type of partnership allows for dissolution at any time if a partner’s interest is assigned?
If the partnership is a partnership at will, the court may dissolve the partnership at any time if the partner’s interest was assigned or if a charging order was issued. A charging order is a legal claim on a partner’s interest in the partnership. If such an order is issued in an at-will partnership, it can lead to the dissolution of the partnership.
What happens to the authority of partners when a partnership dissolves for reasons other than a partner’s action, insolvency, or death?
All partners lose their authority to act on behalf of the partnership.
How does a partner’s action, insolvency, or death affect the authority of remaining partners?
The remaining partners can still be held liable for any obligations incurred by another partner acting on behalf of the partnership.
What is the general rule regarding partner liability after a partnership is dissolved?
Even after the partnership is dissolved, each partner remains responsible for liabilities (debts or obligations) created by any partner acting on behalf of the partnership, as if the partnership had not been dissolved.
What happens if a partnership dissolves due to the act of a partner?
The remaining partners are liable for debts incurred by the acting partner only if that partner was unaware of the dissolution. If the acting partner knew about the dissolution, they are personally responsible for any debts incurred after that point.
How does the death or insolvency of a partner affect liability for the remaining partners?
The remaining partners are responsible for debts incurred by the acting partner if that partner knew about the death or insolvency. If the acting partner was unaware, they might not be held responsible.
Refers to a partner in a partnership who takes actions or makes decisions on behalf of the partnership. This partner is actively involved in the management and operations of the business and may engage in transactions, enter contracts, or represent the partnership in dealings with third parties. In the context of dissolution, It is the one whose actions may have led to the dissolution of the partnership or who continues to act for the partnership despite its dissolution.
Acting partner
Can a partner still bind the partnership after dissolution?
A partner can still bind the partnership by making decisions and performing actions necessary to wind up the partnership’s affairs and complete any unfinished transactions.
What the transactions that would would have been valid before dissolution?
- The other party had previously extended credit to the partnership and was not aware of the dissolution.
- The other party knew about the partnership before the dissolution, and the dissolution was not publicly announced.
What happens if a partner is not known to the other party in a transaction?
Their liability for that transaction will be covered only by the partnership’s assets, not their personal assets.
How does a partner’s inactivity affect their liability for transactions?
Their liability for transactions will also be limited to the partnership’s assets.
When can’t the partnership be bound after dissolution?
- Unlawful Business
- Insolvent Partner
- Partner lacks authority
What is an exception that allows the partnership to be bound by a transaction despite a partner lacking authority?
If the other party to the transaction had extended credit to the partnership before it was dissolved and didn’t know that the partner lacked authority, the partnership may still be bound by the transaction.
Does the dissolution of a partnership automatically discharge the existing liabilities of the partners?
No, the dissolution of the partnership does not automatically discharge the existing liabilities of any partner. Partners remain responsible for any debts or obligations that existed before the dissolution.
In order for the liability of a partner to be discharged, the following must agree:
- The partner
- The other partners
- The creditors
What is the responsibility of a deceased partner’s personal property regarding partnership obligations?
Their personal property is still responsible for the partnership’s obligations that were incurred while they were a partner.
What is the order of payment of a deceased partner’s liability?
Their individual debts (those not related to the partnership) must be settled first before the partnerships debts.
Who shall take the responsibility of winding-up the business affairs?
The partners who did not wrongfully end the partnership, or to the legal representative of the last surviving partner who is not bankrupt.
Who can seek a court order to manage the winding-up process?
- Any partners
- Legal representatives
- Assignee
What is the main purpose of using partnership property first during liquidation?
To pay off any outstanding liabilities or debts.
What happens to the remaining assets of a partnership after all debts are paid?
The remaining assets are distributed to the partners based on their contributions
In what form are the remaining assets given to the partners after a liquidation?
The remaining assets are distributed in cash.
If a partner is expelled from the partnership, what are they entitled to receive?
The expelled partner is entitled to receive their share of the net partnership assets in cash.
Does an expelled partner have to pay the partnership’s debts after being expelled?
No, the expelled partner is not liable for any partnership debts if they have been cleared from all liabilities.
Can a partner receive more than their net amount due if they are expelled?
No, an expelled partner can only receive their net amount due and nothing more.
What rights do non-wrongful partners have in a wrongful dissolution regarding partnership property?
Non-wrongful partners have the right to use partnership property to cover liabilities and receive their share of the remaining assets.
What can non-wrongful partners seek from the partner who wrongfully dissolved the partnership?
They can seek damages from the partner who caused the wrongful dissolution to compensate for any harm or loss resulting from the breach of the partnership agreement.
Are non-wrongful partners allowed to continue the business after a wrongful dissolution?
Yes, non-wrongful partners can continue the business under the same name, either alone or with others, for the remainder of the agreed partnership term.
A partner who did not cause the dissolution and did not violate the partnership agreement.
Non-wrongful partner
Is it possible for non-wrongful partners to use the partnership’s property if they continue the business?
Yes, they are allowed to use the partnership property to continue the business.
The act of a partner violating the partnership agreement leading to dissolution.
Wrongful dissolution
What rights does a wrongful partner have if the business is not continued after dissolution?
The wrongful partner has the same rights as in a standard dissolution, they are entitled to have the partnership’s liabilities settled and to receive their share of the remaining assets, less any damages owed.
What happens to the wrongful partner’s interest if the business is continued after dissolution?
The share is paid out in cash or secured by a court-approved bond, reduced by any damages they owe for causing the wrongful dissolution.
What happens to the wrongful partner’s debts to the partnership if the business continues?
The wrongful partner is released from all existing partnership liabilities.
Compensation for harm or loss. Protecting or compensating a partner who has been wrongfully dissolved from any financial losses or liabilities related to the partnership.
Indemnification
What are the three rights of a partner who is entitled to rescind?
- Right of lien or right of retention
- Right of subrogation
- Right of indemnification
A legal right that allows a person or entity to retain possession of someone else’s property until a debt owed by the property owner is paid.
Right of Lien
Allows a person who pays off someone else’s debt to take over the creditor’s rights to recover the money. This ensures that the person who settled the debt can seek reimbursement from the responsible party.
Right of Subrogation
Allows a person to be compensated or reimbursed for losses, expenses, or damages they incurred while acting on behalf of another party.
Right of Indemnification
What are the assets of the partnership primarily composed of?
- The partnership property
- The contributions of the partners necessary for the payment of liabilities.
In the order of payment of liabilities, what is the first group of debts that must be paid by the partnership?
Paying debts owed to outside creditors.
What must the partnership pay to partners before distributing any remaining profits?
The partnership must pay amounts owed to partners other than for capital and profits, and then the capital contributions.
Which partner is not entitled to participate in the capital payment upon dissolution, and why?
The industrial partner is not entitled to participate in the capital payment because they did not contribute money or property to the partnership.
After all liabilities and capital contributions have been paid, what is the last item to be distributed among the partners?
The remaining profits of the partnership.
What must partners do if the partnership’s assets are not enough to cover its liabilities?
The partners must contribute additional funds to satisfy the liabilities.
What happens if there is no specific agreement on how liabilities should be handled among partners?
They must contribute equally.
Who can enforce the contribution of partners if there are insufficient assets?
An assignee for the benefit of creditors or a court-appointed person.
What can an assignee demand from the partners if the partnership’s assets are not enough to satisfy all debts?
The assignee can demand that the partners contribute additional funds according to their obligations.
If a partner pays more than their share of the partnership’s liabilities, what right do they have?
They have the right to recover the excess amount from the other partners.
Who else, besides the partner, can enforce contributions?
The partner’s legal representative.
What happens to the individual property of a deceased partner regarding their share of partnership liabilities?
The individual property of a deceased partner can be used to satisfy their share of the partnership’s liabilities.
Who gets paid first from the partnership’s assets during court-controlled distribution?
Partnership creditors.
Who has priority over the individual property of partners when it is under court control?
Individual creditors have priority over the individual property of the partners, unless there are lien or secured creditors with special rights.
If a partner has personal debts, how does this affect the distribution of their individual property?
Creditors of those personal debts have priority over the partner’s individual assets.
Who has the highest priority when it comes to claims against the separate property of an insolvent partner?
Personal creditors of the partner have the highest priority.
After separate creditors are paid, who can make claims on the personal property of the insolvent partner?
Partnership creditors can make claims after separate creditors are satisfied.
When can partners claim money owed by an insolvent partner?
After all separate and partnership creditors are paid.
What claims do partners have against an insolvent partner’s separate property?
Claims for contributions the insolvent partner was supposed to make to the partnership or for covering partnership liabilities on their behalf.
What must happen for a retiring partner’s rights to be assigned?
The retiring partner’s rights may be assigned to existing partners, new partners, or a combination of both, allowing the business to continue.
In the following cases creditors of the dissolved partnership are also
creditors of the person or partnership continuing the business:
- Admission of New Partner or Retirement
- Retirement of All but One Partner
- Retirement or Death
- Assignment to Third Persons
- Wrongful Dissolution
- Expulsion of a Partner
What happens when all but one partner retire and assign their rights in partnership property?
The remaining partner can continue the business without liquidating the partnership affairs.
What happens when all partners assign their rights to third persons?
The creditors of the dissolved partnership retain their claims against these third persons.
Can the remaining partner continue the business alone or with others?
Yes, the remaining partner can continue the business either alone or with other partners.
What is the status of the partnership’s creditors after the other partners retire or die?
The creditors of the dissolved partnership can claim against the continuing partner.
When any partner wrongfully causes a dissolution and the remaining partners continue the business.
The creditors of the dissolved partnership can claim against the continuing business.
What happens if a partner is expelled from the partnership?
The remaining partners can continue the business without liquidation, and creditors retain their claims against the dissolved partnership.
What is the liability of a third person becoming a partner in a continuing business for the debts of a dissolved partnership?
He is liable to creditors of the dissolved partnership only from the partnership property, unless there is an agreement stating otherwise.
Who has priority over claims against the continuing business after a partnership dissolution?
Creditors of the dissolved partnership have priority over the claims of retired or deceased partners or their representatives against the continuing business.
What can creditors do if a partner fraudulently assigns their rights or property?
Creditors can contest such assignments based on fraud and seek remedies.
Does using a deceased partner’s name in the business make their personal assets liable for new debts?
No, it does not automatically make the deceased partner’s personal assets liable.
What is the general rule regarding the use of a business name after the dissolution of a commercial partnership?
The remaining partners can usually continue using the old business name unless the partnership agreement states otherwise.
A type of business arrangement where two or more individuals or entities come together to conduct business with the goal of making a profit.
Commercial Partnership
What rights does a partner have upon retirement or death when the business continues without settling accounts?
- To determine the value of their interest at the time of dissolution
- Receive payment equal to that value, plus interest or profits from the continued use of their share.
How can a retired or deceased partner receive compensation for their share?
They can receive the value of their share with interest or, at their option, profits from the continued use of their share instead of interest.
Who has the right to request an account of their interest upon dissolution?
- Any partner
- Legal representatives
Who is obligated to provide an account of the partnership interest?
- Winding-up Partners
- Surviving Partners
- The person or partnership continuing the business
When should the account of interest be rendered?
The account should be rendered at the date of dissolution unless there is a different stipulation in the partnership agreement.
