Short answer. Liabilities first, then partners get the surplus in cash. Under Article 1837, when a partnership is dissolved not in contravention of the agreement, each partner may, unless otherwise agreed, 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.
What the law says
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
Civil Code, Article 1837 — Rights on Winding Up. Read the full provision →
The basic order: liabilities, then partners
Article 1837 sets out what each partner is entitled to when a partnership is wound up after a clean dissolution — one not caused in breach of the agreement. Its first paragraph gives every partner, as against his co-partners and all persons claiming through them, the right, unless otherwise agreed, to 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 order is the heart of it. The firm's property is used first to pay what the partnership owes; only what is left over — the surplus — is divided among the partners.
Creditors before partners
The sequence protects the firm's creditors. Because the property is applied first to discharge the partnership's liabilities, the people the firm owes are paid before any partner takes a share of the assets. A partner cannot insist on drawing out capital or profit ahead of the firm's debts; his claim is only to the surplus that exists after those debts are met. This is why a partner in a winding up may recover less than he put in, or nothing, if the liabilities consume the assets — the risk of the business falls on the partners after the creditors are satisfied.
'Unless otherwise agreed'
The whole scheme is a default that yields to the partners' own agreement. Twice the paragraph is qualified by unless otherwise agreed, so the partners are free to arrange their winding up differently — a different order of distribution, a payment in kind rather than in cash, a special allocation of particular assets. What the article supplies is the rule where they have not agreed otherwise. It is worth knowing this cuts both ways: a partnership agreement can shape how a dissolution plays out, but only among the partners and those claiming through them.
At your winding up
For a clean dissolution, the practical expectation is straightforward: gather the firm's property, pay off what the partnership owes, and then divide the surplus in cash among the partners according to what each is net owed. Get the accounts right first, because 'the net amount owing to the respective partners' is a figure that comes out of a proper accounting — contributions, drawings, profits and losses all reckoned. If your agreement provides its own method of winding up, follow it; if it does not, this is the default you are under. And do not expect to be paid ahead of the firm's creditors, because the property answers to them first.
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 →