Art. 1838.

Where a partnership contract is rescinded on the ground of the fraud or

misrepresentation of one of the parties thereto, the party entitled to rescind is, without
prejudice to any other right, entitled:

(1) 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;

(2) To stand, after all liabilities to third persons have been satisfied, in the place of the
creditors of the partnership for any payments made by him in respect of the partnership
liabilities; and

(3) To be indemnified by the person guilty of the fraud or making the representation against
all debts and liabilities of the partnership. (n)

Art. 1839. In settling accounts between the partners after dissolution, the following rules
shall be observed, subject to any agreement to the contrary:

(1) The assets of the partnership are:

(a) The partnership property,

(b) The contributions of the partners necessary for the payment of all the liabilities specified
in No. 2.

(2) The liabilities of the partnership shall rank in order of payment, as follows:

(a) Those owing to creditors other than partners,

(b) Those owing to partners other than for capital and profits,

(c) Those owing to partners in respect of capital,

(d) Those owing to partners in respect of profits.

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(3) The assets shall be applied in the order of their declaration in No. 1 of this article to the
satisfaction of the liabilities.

(4) The partners shall contribute, as provided by article 1797, the amount necessary to
satisfy the liabilities.

(5) An assignee for the benefit of creditors or any person appointed by the court shall have
the right to enforce the contributions specified in the preceding number.

(6) Any partner or his legal representative shall have the right to enforce the contributions
specified in No. 4, to the extent of the amount which he has paid in excess of his share of
the liability.

(7) The individual property of a deceased partner shall be liable for the contributions
specified in No. 4.

(8) 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 rights of lien or secured
creditors.

(9) Where a partner has become insolvent or his estate is insolvent, the claims against his
separate property shall rank in the following order:

(a) Those owing to separate creditors;

(b) Those owing to partnership creditors;

(c) Those owing to partners by way of contribution. (n)

EXAMPLES:
(1) A, B, and C, are partners. A contributed P150,000.00, B
P100,000.00, and C, P50,000.00. On dissolution, the assets of the
partnership amounted to P500,000.00. The partnership owes D
the amount of P70,000.00, E, P50,000.00, and A, P20,000.00.
(2) The accounts of the partnership shall be settled as
follows:
(a) D and E, who are partnership creditors, shall be

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paid first the total sum of P120,000.00, leaving a balance of
P380,000.00;
(b) Then, A, who is also a creditor, will be paid his
credit of P20,000.00, leaving a balance of P360,000.00;
(c) Afterwards, the contributions of A, B, and C to the
partnership capital shall be returned to them in the total
sum of P300,000.00, thereby leaving a balance of P60,000.00;
(d) The balance of P60,000.00 constitutes the profit
which shall be divided among A, B, and C (unless there
is an agreement to the contrary [Art. 1839, 1st par.] which,
however, cannot prejudice the rights of third persons) in
proportion to their capital contributions. Therefore, A is
entitled to 3/6 or P30,000.00, B, 2/6 or P20,000.00 and C,
1/6 or P10,000.00.
(3) Suppose, in the same example, the liabilities of the
partnership amount to P560,000.00. The partnership assets,
then shall be exhausted to satisfy these liabilities thereby
leaving an unpaid balance of P60,000.00. The partners shall
then contribute to the loss, in the absence of an agreement to
the contrary, in accordance with their capital contributions.
Consequently, A is liable out of his separate property in the
amount of P30,000.00, B, P20,000.00, and C, P10,000.00.
These contributions which are necessary to pay the
liabilities of the partnership are considered partnership assets
(No. 1[b].) and any assignee for the benefit of creditors and any
person appointed by the court may enforce the contributions.
In case C paid the whole amount of P60,000.00, then, he has
a right to recover the amount which he has paid in excess of his
share of the liability from A, P30,000.00 and from B, P20,000.00.
(4) If B is already dead, his estate is still liable for the
contributions needed to pay off the partnership obligations
provided they were incurred while he was still a partner.

(5) Suppose now that under Nos. 1 and 2 above, C owes F

P40,000.00. Following the rule that partnership creditors have
preference regarding partnership property, only the share of C
in the amount of P10,000.00 can be used to pay his debt to F
and the unpaid balance of P30,000.00 must be taken from the
individual property, if any, of C.
(6) Suppose again, that the partnership debts amount to
P560,000.00 as in No. 3. So, C is still liable out of his separate
property to partnership creditors in the amount of P10,000.00.
His separate property amounts to P45,000.00. In this case, his

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 assets shall first be applied to pay his debt of P40,000.00 to F
and the balance of P5,000.00 to pay part of his debt of P10,000.00
still owing to partnership creditors in accordance with the rule
that regarding individual properties, individual creditors are
preferred.

Art. 1840. In the following cases creditors of the dissolved partnership are also creditors of
the person or partnership continuing the business:

(1) 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;

(2) 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;

(3) 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;

(4) 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;

(5) 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;

(6) When a partner is expelled and the remaining partners continue the business either
alone or with others without liquidation of the partnership affairs.

The liability of a third person becoming a partner in the partnership continuing the business,
under this article, to the creditors of the dissolved partnership shall be satisfied out of the
partnership property only, unless there is a stipulation to the contrary.

When the business of a partnership after dissolution is continued under any conditions set
forth in this article the creditors of the dissolved partnership, as against the separate

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creditors of the retiring or deceased partner or the representative of the deceased partner,
have a prior right to any claim of the retired partner or the representative of the deceased
partner against the person or partnership continuing the business, on account of the retired
or deceased partner's interest in the dissolved partnership or on account of any
consideration promised for such interest or for his right in partnership property.

Nothing in this article shall be held to modify any right of creditors to set aside any
assignment on the ground of fraud.

The use by the person or partnership continuing the business of the partnership name, or
the name of a deceased partner as part thereof, shall not of itself make the individual
property of the deceased partner liable for any debts contracted by such person or
partnership. (n)

EXAMPLE:
Assume that C is admitted as a new partner into the
existing partnership of A and B.
Technically, the old firm of A and B is dissolved and a
new firm composed of A, B, and C is formed. C will not be
individually liable for the debts of the old firm. His investment,
however, constituting a part of the firm assets, will be equally
available to both creditors of the old and creditors of the new
firm. (par. 2; Art. 1826.)
Various other changes in membership effect a technical
dissolution, yet justice dictates that the two sets of creditors
involved, those of the old and those of the new firm, be treated
on an equal basis.
A note to Uniform Partnership Act provides: Where there
is a continuous business carried on first by A, B, and C, and
then by A, B, C, and D, or by B and C, or by B and D, or by
C and D, or by B, C, and D, without liquidation of the affairs
of the dissolved partnership of A, B, and C, both justice and
business convenience require that all creditors of the business,
irrespective of the exact groupings of the owners at the time
their respective claims had their origin, should be treated alike,
all being given an equal claim on the property embarked in the
business. (Babb & Martin, op. cit., p. 265.)

EXAMPLE:
If A, B, and C, partners, sell the partnership business to D,
and if D promises to pay the debts and to continue the business,

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 the creditors of the dissolved partnership of A, B, and C are
also the creditors of D. (Ibid., op. cit., pp. 265-266.)

Art. 1841. When any partner retires or dies, and the business is continued under any of the
conditions set forth in the preceding article, or in Article 1837, second paragraph, No. 2,
without any settlement of accounts as between him or his estate and the person or
partnership continuing the business, unless otherwise agreed, he or his legal representative
as against such person or partnership may have the value of his interest at the date of
dissolution ascertained, and shall receive as an ordinary creditor an amount equal to the
value of his interest in the dissolved partnership with interest, or, at his option or at the
option of his legal representative, in lieu of interest, the profits attributable to the use of his
right in the property of the dissolved partnership; provided that the creditors of the
dissolved partnership as against the separate creditors, or the representative of the retired
or deceased partner, shall have priority on any claim arising under this article, as provided
Article 1840, third paragraph. (n)

EXAMPLE:
A, B, and C are partners in X & Co. which is indebted to D
in the amount of P50,000.00. Later on, X & Co. was dissolved
by reason of the withdrawal of C. The business was continued
by A and B without any settlement of account between A and
B, on the one hand, and C, on the other.
C or his legal representative has the right to have the
value of his interest in the partnership ascertained and paid
to him. Assuming that the interest of C has been ascertained

to be P30,000.00, D has priority over the claim of C, his legal

representative, or his separate creditor.

Art. 1842. The right to an account of his interest shall accrue to any partner, or his legal
representative as against the winding up partners or the surviving partners or the person or
partnership continuing the business, at the date of dissolution, in the absence of any
agreement to the contrary.

Facts: A, B, C, D, and E formed a partnership for the sale

of general merchandise with A as the manager. During the
existence of the partnership, B and C expressed a desire to
withdraw from the firm. A thereupon made a computation
to determine the value of the partners shares. The results of
the computation were embodied in a document drawn in the
handwriting of A. Thereafter, B and C made demands upon
A for payment. A having refused, B and C filed a complaint

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against A.
The Court of Appeals ruled in favor of B and C, holding that
the action is not one for dissolution and liquidation but one for
recovery of a sum of money with A as principal defendant and
the partnership as an alternative defendant only, as it is based
on the allegation that A, having taken delivery of the shares of
B and C, failed to pay their claims and, therefore, the liability is
personal to A.
Issue: As argument is that the action cannot be entertained
because in the distribution of all or part of the partnership
assets, all the partners have an interest and are indispensable
parties without whose intervention no decree of distribution
can be validly entered. Is this argument correct?
Held: Yes. (1) Return of a partners share. A partners share
cannot be returned without first dissolving and liquidating
the partnership, for the return is dependent on the discharge
of creditors, whose claims enjoy preference over those of
the partners; and it is self-evident that all members of the
partnership are interested in its assets and business, and are
entitled to be heard in the matter of the firms liquidation and
the distribution of its property.
The liquidation prepared by A is not signed by D and E,
the other partners; it does not appear that they have approved,
authorized, or ratified the same and, therefore, it is not binding
upon them. At the very least, they are entitled to be heard as to
its correctness.

(2) Repayment of capital shares of retiring partners. In

addition, unless a proper accounting and liquidation of the
partnership affairs is first had, the capital shares of B and C,
as retiring partners, cannot be repaid, for the firms outside
creditors have preference over the assets of the enterprise, and
the firms property cannot be diminished to their prejudice.
(3) Personal liability of manager. Finally, A cannot be held
liable in his personal capacity for the payment of partners
shares, for he does not hold them except as a manager of or
trustee for the partnership. It is the latter that must refund
the shares to the retiring partners. (B and C.) Since not all the
members have been impleaded, no judgment for refund can be
rendered. (Magdusa vs. Albaran, supra.)

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ILLUSTRATIVE CASES:
1. Withdrawing partner agreed to relinquish all rights and
interests in the partnership upon the return of his investment.
Facts: A withdrew as partner from partnership X. It was
the intention and understanding of the parties that A was
relinquishing all his rights and interests in the partnership
upon the return of all his investment, subject to the condition
that A was to be repaid within three (3) days from the date the
settlement was agreed upon.
This condition was fulfilled when on the following day, A
was reimbursed the amount due him under the agreement.
Issue: Is A entitled to profits of the partnership at the time
of dissolution?
Held: No liquidation was called for because there was
already a settlement as to what A should receive. It appeared that
the settlement was agreed upon the very day the partnership
was dissolved. The acceptance by A of his investment was

understood and intended as a final settlement of whatever

right or claim A might have in the dissolved partnership. A was
precluded from claiming any share in the profits should there
be any, at the time of dissolution. (Bonnevie vs. Hernandez, 95
Phil. 175 [1954].)
________ ________ ________
2. Plaintiff, in violation of his promise, refused to sign the final
statement of accounts after receiving, without reservation, his share
in the partnership.
Facts: Partnership X was dissolved. A promised to sign
the last and final statement of accounts as soon as he receives
his shares as shown in said statement. A accepted such share
without any reservation but he refused to sign the statement.
Issue: Is A still entitled to liquidation?
Held: No. The statement was deemed approved when A
received his share without any reservation. The signing became
a mere formality to be complied with by A exclusively and his
refusal to sign, after receiving his shares, amounted to a waiver
of that formality. This approval precludes any right on the part
of A to a further liquidation unless he can show that there was
fraud, deceit, error, or mistake in said approval. (Ornum vs.
Lasala, 74 Phil. 242 [1943].)