When a partnership is dissolved without breaking the agreement, what is each partner entitled to receive?

The winding-up order: creditors first

Article 1837 covers the normal case — a dissolution that happens except in contravention of the partnership agreement, meaning no partner has wrongfully broken the deal. In that situation the law lays out a clear order for settling accounts. Each partner may have the partnership property applied to discharge its liabilities, and the surplus applied to pay in cash the net amount owing to the respective partners. The sequence matters: the partnership's debts to outsiders and creditors are paid first out of its property; only what is left over — the surplus — is distributed among the partners. No partner simply grabs assets ahead of the firm's creditors.

What each partner receives: the net amount in cash

After the liabilities are cleared, the article entitles each partner to the net amount owing to him, paid in cash. That net amount reflects the value of his interest — broadly, his share of the surplus and of what he contributed — once the partnership's obligations and the internal accounts among the partners are settled. Two features stand out. First, the right is to a cash settlement, not to particular items of partnership property, unless the partners agree otherwise. Second, the words unless otherwise agreed run through the article: the partners can arrange their winding up differently by agreement, and this statutory scheme is the default that governs when they have not done so.

Dissolution does not erase existing debts

A common misunderstanding is that dissolving a partnership wipes the slate clean. It does not. As the related provision makes plain, The dissolution of the partnership does not of itself discharge the existing liability of any partner. Debts the partnership already owes survive the dissolution and must still be met — which is exactly why the winding up applies the partnership property to those liabilities before anything reaches the partners. A partner can be released from an existing liability, but generally only by an agreement to that effect with the creditor and the person or partnership continuing the business. Winding up is about paying what is owed and then sharing the remainder, not about escaping obligations.

When someone did break the agreement

The article also handles the harder case where the dissolution is caused by breaking the partnership agreement, and there the innocent and the wrongdoing partners are treated very differently. A partner who did not wrongfully cause the dissolution keeps the ordinary winding-up rights and, in addition, may claim damages against the partner whose breach caused it; the innocent partners may even continue the business under conditions the law sets. The partner who wrongfully caused the dissolution has more limited rights, is exposed to those damages, and, if the others continue the business, has the value of his interest ascertained without counting the firm's good-will. Because these calculations are technical and the partnership agreement heavily shapes them, a winding up is best worked through with counsel.

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 →
• E. Zobel, Inc. vs. Court of Appeals, et al, G.R. No. 113931, May 6, 1998 — read the decision on LawPhil →

Related provisions

• Civil Code, Article 1837 — Rights on Winding Up
• Civil Code, Article 1835 — Existing Liability Survives Dissolution