Partnership 7.2: Dissolution, Winding Up, & Termination Part 2

Summary

This video script discusses the intricacies of partnership dissolution, winding up, and termination, focusing on the rights of partners in rightful and wrongful dissolutions, the winding up process, and the order of payment to creditors and partners. It highlights the importance of understanding the legal implications for both the partnership and its individual members, emphasizing that dissolution does not immediately end the partnership's legal existence but initiates a process of settling affairs and eventually terminating the partnership.

Takeaways

• 📜 The script discusses the legal aspects of partnership dissolution, winding up, and termination, emphasizing that it's for educational purposes and not a substitute for legal advice.
• 🤝 In a rightful dissolution, where no partnership agreement is violated, partners have a lien on the partnership property and are entitled to their share of surplus after liabilities are settled.
• 🚫 For expelled partners or those who caused a wrongful dissolution, they are only entitled to the net amount due to them, without share in the surplus or indemnification for damages.
• 💼 In wrongful dissolution scenarios, innocent partners have rights to partnership property, surplus share, indemnification for damages, and the option to continue the business under the same name.
• 🚷 Partners who wrongfully dissolve a partnership face consequences, including liability for damages and potentially reduced rights to partnership surplus and assets.
• 🔄 The winding up process involves settling partnership affairs, which can be judicial or extrajudicial, and includes liquidating assets and distributing them to creditors and partners.
• 💼 Liquidating partners have the authority to sell property, collect debts, raise money for debts, and incur necessary obligations, but they cannot continue the business under normal operations.
• 💰 The order of payment during winding up prioritizes non-partner creditors first, then partners for loans or advances, and finally for capital and profits.
• 📊 Partnership creditors have preference over individual partner creditors when it comes to partnership property, reflecting the separate legal personality of the partnership.
• ✋ The script also covers the effects of changes in partnership membership, such as the admission of a new partner or the retirement of an existing one, which can trigger dissolution and create new partnership entities.

Q & A

What is a rightful dissolution in the context of a partnership?

A rightful dissolution occurs when there is no contravention of the partnership agreement, meaning the partnership contract was not violated. In such a case, a partner has the right to receive a partner's lien, which includes applying partnership property to discharge liabilities and receiving their share of the surplus in cash.

What are the rights of a partner in case of an expelled partner or a partner who was expelled from the firm?

An expelled partner or a partner who was expelled from the firm is entitled to receive in cash only the net amount due to him from the partnership, which is subject to a contrary agreement.

What are the rights of an innocent partner in case of a wrongful dissolution?

In a wrongful dissolution, an innocent partner has the right to have partnership property applied to partnership liabilities, to receive their share of the surplus in cash, to be indemnified for damages caused by the partner who caused the wrongful dissolution, to continue the business in the same name during the agreed term, and to possess partnership property if they continue the business.

What are the two scenarios for the rights of a partner who caused a wrongful dissolution?

If the other partners do not continue the business, the partner who caused the wrongful dissolution has the right to receive only the partner's lien. If the other partners continue the business, the rights of the partner who caused the wrongful dissolution include having the value of their interest in the partnership at the time of dissolution ascertained, less the damages caused by their wrongful dissolution.

What does the term 'partner's lien' mean in the context of a wrongful dissolution?

A partner's lien refers to the right to apply partnership property to the liabilities and to receive in cash their share of the surplus, less any damages they are liable for due to their wrongful dissolution of the partnership.

Can a partner have the contract of partnership voided under certain conditions?

Yes, a partner may have the contract of partnership voided if they were induced by fraud or misrepresentation to become a partner. In such cases, the contract is voidable, and the partner can have it annulled.

What are the rights of a partner who successfully has the contract of partnership annulled?

If a partner successfully has the contract of partnership annulled, they are entitled to restitution, which means they will get back what they have given as a consequence of the contract, and they are also entitled to be subrogated in place of partnership creditors and have the right of indemnification by the guilty partner.

What is the winding up process in the context of a partnership?

Winding up is the process of settling the business or partnership affairs after dissolution. It involves reducing the property to cash and distributing the proceeds. The process does not continue the business of the partnership but instead focuses on liquidating property and distributing assets to those entitled to them.

What is the order of payment during the winding up process?

The order of payment during winding up is as follows: first, liabilities owing to creditors who are not partners; second, those owing to partners other than for capital or profit; third, those owing to partners in respect of capital; and finally, those owing to partners in respect of profits.

What are the rights of partnership creditors compared to individual creditors?

Partnership creditors enjoy preference over the creditors of each individual partner with respect to partnership property. Individual creditors are entitled to be paid only out of the individual debtor's part at the individual debt or partner's share in the surplus, which remains after the firm debts have been paid.

How does the law treat the continuation of a partnership business after dissolution by a change in membership?

When a partnership is dissolved by a change in membership and the business is continued without liquidation, the law treats the creditors of the dissolved partnership as creditors of the continuing partnership or person. This ensures that the old creditors maintain their preferential rights to the partnership property against the separate creditors of each individual partner.