Short answer. Yes. When a partnership is wound up, Article 1839 ranks a partner's loan to the firm above the return of his capital. Money he lent falls in the class owing to partners other than for capital and profits, which is paid before anything owing to partners in respect of capital.
What the law says
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.
Civil Code, Article 1839 — Settling Accounts After Dissolution. Read the full provision →
A partner wears two hats
The article treats a partner who lends money to his own firm as, for that transaction, a creditor rather than an owner. Article 1839 sorts everything the partnership owes into four ranks: Those owing to creditors other than partners; Those owing to partners other than for capital and profits; Those owing to partners in respect of capital; and finally Those owing to partners in respect of profits. A loan a partner extended is not capital and it is not profit, so it lands in the second rank. That places it ahead of the return of his — and everyone's — capital, which sits in the third.
Outside creditors are still paid first
The priority of a partner's loan is only over other partners, not over the world. The very first rank belongs to creditors other than partners — the bank, the supplier, the landlord. A partner-lender does not vault ahead of them simply because he is on the inside; he ranks behind outside creditors and ahead of the owners' capital and profit claims. So in a firm with limited assets, a partner may recover his loan only after the genuine third-party debts are cleared, and only if something is left once they are.
Capital and profits come last
Once outside creditors and partner-loans are paid, what remains answers capital, and only then profits. This ordering has a practical bite when assets fall short: a partner who both lent money and contributed capital may see the loan repaid in full while his capital comes back only in part, and his profit share not at all. The law also anticipates a shortfall — where the assets cannot cover the liabilities, the partners must themselves contribute the difference in the same proportion in which they share losses, a duty the article ties to the rule in Article 1797.
What can change the order
The ranking is a default, not an iron rule. The article opens by making the whole scheme subject to any agreement to the contrary, so partners are free to arrange a different order among themselves — though such an agreement binds only them, never outside creditors. The rules also shift when a partner is insolvent, where a separate ordering governs claims against his personal estate. And the priorities decide the order of payment, not whether a claim is valid in the first place; a disputed or unproven loan does not gain rank merely by being labelled a loan.
Cases citing this provision
These Supreme Court decisions cite the provision above. We list them so you can read them yourself; the summaries of what each decided are not ours to give.
- Primelink Properties & Devt. Corp., et al. vs. Ma. Clarita T. Lazatin-Magat, et al, G.R. No. 167379, June 27, 2006 — read the decision on LawPhil →
- Luzviminda J. Villareal, et al. vs. Donaldo Efren C. Ramirez, et al, G.R. No. 144214, July 14, 2003 — read the decision on LawPhil →
Related provisions
- Civil Code, Article 1839 — Settling Accounts After Dissolution
- Civil Code, Article 1797 — Distribution of Profits and Losses