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