Dissolution, Insolvent Partner and Garner v Murray
P, Q and R share profits 3:2:1. On 31 March 2024 their balance sheet showed cash ₹15,000; stock ₹1,00,000; debtors ₹80,000; furniture ₹50,000; machinery ₹1,50,000; creditors ₹1,10,000; P’s loan ₹40,000; capitals P ₹1,50,000, Q ₹90,000 and R ₹5,000. The firm is dissolved. Assets realise: stock ₹70,000, debtors ₹64,000, furniture ₹36,000 and machinery ₹1,20,000. Dissolution expenses are ₹12,000. Creditors accept ₹1,04,000 in full settlement. P’s loan is repaid. R is insolvent and can bring only ₹3,000 from his private estate. The deed is silent on how an insolvent partner’s deficiency is to be shared. Q argues that the deficiency should be shared in the profit-sharing ratio 3:2:1, while P says it must follow the capital ratio. The accountant must also decide whether cash should be transferred to the realisation account.
1. Prepare the realisation account, partners’ capital accounts and cash account.
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Realisation account: debit stock 1,00,000; debtors 80,000; furniture 50,000; machinery 1,50,000; expenses 12,000; creditors paid 1,04,000; P’s loan paid 40,000 = ₹5,36,000. Credit creditors 1,10,000; P’s loan 40,000; sale proceeds 2,90,000 = ₹4,40,000. Loss = ₹96,000, shared 3:2:1: P ₹48,000; Q ₹32,000; R ₹16,000.
Capital accounts: P = 1,50,000 − 48,000 − 5,000 = 97,000; Q = 90,000 − 32,000 − 3,000 = 55,000; R = 5,000 − 16,000 = −11,000; R brings ₹3,000, leaving ₹8,000 deficiency. P:Q capital ratio = 1,50,000:90,000 = 5:3, so P bears ₹5,000 and Q ₹3,000. Cash account: opening 15,000 + sale 2,90,000 + R 3,000 = 3,08,000; payments expenses 12,000 + creditors 1,04,000 + P loan 40,000 + P capital 97,000 + Q capital 55,000 = 3,08,000. R receives nothing.
2. Explain the correct treatment of R’s deficiency. How would the answer change if the deed provided that deficiencies are borne in the profit-sharing ratio?
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Absent an agreement, the deficiency of an insolvent partner is borne by solvent partners in the ratio of their capitals before dissolution, not in the profit-sharing ratio. This is the Garner v Murray rule: capital is the loss-bearing fund, and sharing by capital ratio prevents a solvent partner with a large capital from being unfairly burdened. Here P:Q = 1,50,000:90,000 = 5:3, so the unrecovered ₹8,000 is split ₹5,000 and ₹3,000.
If the deed says deficiencies are shared in the profit-sharing ratio, R’s ₹8,000 deficiency is split between P and Q in 3:2 (R is insolvent and cannot bear it): P ₹4,800; Q ₹3,200. Then P’s closing capital = 97,200 and Q’s = 54,800; cash total remains ₹3,08,000.