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PARTNERSHIP LIQUIDATION

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Liquidation

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§ Refers to the termination of a business operation.

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§ The winding up of business activities

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where partnership assets are sold

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creditors (liabilities) are paid

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and distribution of remaining cash to the partners.

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§ A business is said to be liquidated when its business operations are completely terminated.

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§ It is the phase of the partnership operations

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which begins after dissolution and ends with

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the termination of the partnership activities.

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Rules in Settling the Accounts between Partners after the Dissolution (Art. 1839):

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1. The assets of the partnership are:

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a. Partnership property

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b. Additional contribution of the partners necessary for the payment of all liabilities.

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2. Order of application of the assets

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§ The partnership assets shall be applied in the following order:

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a. First

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those owing to partnership creditors

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b. Second

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those owing to partners other than for capital and profits (i.e.

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to the partnership or advances for business expenses)

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c. Third

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those owing for return of the capital contributed by the partners; and

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d. Finally

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those owing to partners in respect of their share in profits.

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Marshaling of Assets

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§ It is a doctrine applied when the partnership assets and one or more of the partners are

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insolvent.

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o It involves the order of creditors’ claims against partnership assets and the

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personal assets of each partner.

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§ One of the characteristics of the partnership is that it has unlimited liability where

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partners are held liable for the unpaid liabilities of the partnership.

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o Therefore

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if the partnership assets are insufficient to settle its liabilities to

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outside creditors

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the partners should make additional capital contributions to

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the business.

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o Any partner who contributed in excess of his share in the liability of the

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partnership has the right to enforce the supposed additional contribution from

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the other partners.

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§ The partnership assets and liabilities are linked with the partners’ personal assets and

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liabilities.

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o The creditors of the partnership shall have priority in payments over those of the

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partners’ separate creditors with regard to the partnership properties.

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o On the other hand

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the partners’ personal creditors shall have priority with regard

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to the personal properties of the partners.

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Priority Claims against the Partnership Assets

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1. Partnership creditors.

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2. Personal creditors of the partners that did not recover their claims in full from the personal

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assets of the partners.

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Priority Claims against the Personal Assets of Partners

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1. Personal creditors of the partners.

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2. Partnership creditors on the unpaid liabilities of the partnership regardless whether or not

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the partner has positive or negative (capital deficiency) capital balance.

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3. Those owing to the partners by way of additional capital contribution when the partnership

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assets were insufficient to settle the partnership liabilities.

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Statement of Liquidation

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§ It is a statement that summarizes all liquidation activities

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including payments to

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partners.

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§ It presents the procedures of liquidation from the conversion of non-cash assets to

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cash

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allocation of gain or loss on realization

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distributions of cash to creditors and partners.

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Types of Partnership Liquidation

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1. Lump-Sum Liquidation

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§ Under this approach

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there would be a single distribution of cash to partners after all

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non-cash assets are realized and the gain or loss has been distributed and all liabilities

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of the partnership are settled.

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2. Installment Liquidation

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§ Under this approach

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there would be multiple distributions of cash to some or all

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partners as cash become available.

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§ The non-cash assets of the partnership will be realized on a piecemeal basis.

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§ Therefore

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even if there are remaining non-cash assets which were not sold but after

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payment in full or in part the liabilities to outside creditors

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cash will be distributed to

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partners in accordance with the schedule of safe payments or cash priority program.