A, B, and C entered into a partnership to operate a restaurant business. When the restaurant had gone past break-even stage and started to garner considerable profits, C died. A and B continued the business without dissolving the partnership. They in fact opened a branch of the restaurant, incurring obligations in the process. Creditors started demanding for the payment of their obligations.
Who are liable for the settlement of the partnership’s obligations? Explain? (3%)
What are the creditors’ recourse/s? Explain. (3%)
Suggested answer only. Not an official answer and not legal advice.
(a) A and B are liable for new obligations, while C's estate is liable only for prior debts. (b) Creditors may sue the firm, pursue A and B pro rata, or claim against C's estate. Under Articles 1816, 1835, and 1841
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Quick check
Under Article 1830 of the Civil Code, what is the legal effect of the death of a partner upon the partnership?
The death of any partner automatically operates to dissolve the partnership under Article 1830 of the Civil Code.
Under Article 1835 of the Civil Code, what is the extent of liability of a deceased partner's estate for partnership debts?
The individual property of a deceased partner is liable only for partnership obligations incurred while he was still a partner.
Under Article 1816 of the Civil Code, what is the nature of the partners' liability for partnership obligations?
Partners are liable pro rata and subsidiary with their individual property after partnership assets are exhausted.
When surviving partners continue the business after a partner's death without liquidating, who is liable for new debts contracted?
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What recourse do creditors have for debts contracted prior to a partner's death under Philippine partnership law?
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Learn more about these topics
1. Dissolution By Death
Under Article 1830 of the Civil Code, the death of any partner automatically causes the dissolution of the partnership. Dissolution terminates all authority of any partner to act for the partnership, except so far as may be necessary to wind up partnership affairs or to complete transactions begun but unfinished. When surviving partners continue the business without liquidating the partnership, a new legal entity or relationship is created regarding newly contracted obligations, leaving the dissolved partnership's liabilities separate from post-dissolution ventures.
2. Surviving Partners Liability
Under Article 1816 and Article 1841 of the Civil Code, surviving partners who choose to continue the partnership business after dissolution without liquidating the assets assume personal liability for all new obligations contracted in the continuation of the business. All partners, including surviving partners continuing the enterprise, are liable pro rata with all their property after all partnership assets have been exhausted to satisfy creditors' claims, ensuring that third-party creditors dealing with the ongoing business are protected.
3. Liability Deceased Partner
Under Article 1835 of the Civil Code, the dissolution of the partnership by death does not of itself discharge the existing liability of any partner. However, the individual property of a deceased partner shall be liable only for those obligations of the partnership incurred while he was a partner. Consequently, the estate of a deceased partner cannot be held liable for new obligations or debts contracted by the surviving partners after the partner's death.