Short answer. Yes. Article 1839 ranks the partnership's debts on winding up, and outside creditors come first. Those owing to creditors other than partners are paid before anything owing to partners, and a partner's capital ranks near the bottom, after outside creditors and even after loans partners made to the firm.
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 →
The order of payment the law sets
Article 1839 governs settling accounts after a partnership dissolves, and it fixes a strict order: 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. Read from the top, outsiders are paid first. Only after they are satisfied does anything go to partners, first for loans they advanced, then for their capital, and last for profits. The order is deliberate, and it puts ownership last.
Why partners rank behind outsiders
This ordering reflects what a partner is. An outside creditor dealt with the firm as a stranger and is entitled to be made whole from its assets before the owners take anything back. A partner, by contrast, shares in the venture's fortunes; the capital you put in is at risk in the business, and the law treats its return as something you collect only once the firm's true debts to outsiders are cleared. That a partner's own loan to the firm ranks above the return of capital, yet still below outside creditors, shows the same logic: the further a claim sits toward ownership, the later it is paid.
What happens if the assets fall short
The article does not stop at ranking claims; it addresses a shortfall. The assets of the partnership include not only its property but the contributions of the partners necessary for the payment of all the liabilities, and the partners must contribute the amount needed to satisfy them. So if the firm's property cannot cover the outside creditors, the partners can be called on to put in more. An assignee for creditors or a court-appointed person may enforce those contributions, and a partner who pays more than his share can seek contribution from the others. Losing your capital, in a bad wind-up, is not the worst case; you may owe more.
Separate creditors, separate property
The section also sorts competing creditors where both the firm and a partner are insolvent. Partnership creditors have priority on partnership property, while a partner's separate creditors have priority on that partner's individual property, subject to liens and secured claims. And where a partner is personally insolvent, claims against his separate estate rank separate creditors ahead of partnership creditors. For anyone joining or winding up a partnership, the practical message is that your capital is not a protected deposit; it is the last of the firm's own obligations to be returned, and only after outsiders are paid does the money start flowing back to the partners.
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 →