Short answer. Outside creditors first, partners last. Under Article 1839, the partnership's liabilities rank in this order: first those owing to creditors other than partners; then those owing to partners other than for capital and profits; then those owing to partners for capital; and last, those owing to partners for profits. The assets are applied in that order.
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 ranking of liabilities
Article 1839 fixes the order in which a dissolved partnership's debts are paid out of its assets. Subject to any agreement to the contrary, 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. The assets — the partnership property and, where needed, contributions from the partners — are applied in exactly that order.
Why creditors come first
The ranking reflects a clear priority: people outside the firm who trusted it are paid before the partners who ran it. Creditors other than partners — suppliers, lenders, anyone the firm owes who is not a partner — sit at the top, and their claims are met in full before a single partner recovers a peso of what the firm owes him. This is the same logic that runs through the whole law of winding up: the partners take the residual risk of the business, so they stand last in line for its assets.
When the assets fall short: contributions
The article also handles the case where the partnership property is not enough to pay everything. It treats the partners' required contributions as an asset of the firm: if the property cannot cover the liabilities, the partners must contribute the amount needed to make up the shortfall, in the proportions the law provides for sharing losses. Those contributions are then applied down the same ranking. And there are safeguards on collecting them — an assignee for creditors, or a court-appointed person, or a partner who has paid more than his share, can enforce the contributions.
In a liquidation
If your partnership is being liquidated, expect the assets to be paid out strictly in this order, so map the claims onto it early: outside creditors first, then partners' loans, then their capital, then their profits. Do not assume you will get your capital back before the firm's debts are cleared — you will not, and if the assets fall short you may have to contribute more rather than receive anything. Keep the accounting that establishes what rank each claim holds, because whether a payment to a partner is a loan, a return of capital or a profit share decides where it sits in the queue, and that is what determines who is paid and who is not.
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 →