Question

On dissolution of a firm, one of the partners, Abhi demands that his loan of ₹ 1,50,000 be paid before payment of capitals of the partners, whereas other partners, Bobby and Cathy demand that capitals should be paid before the payment of Abhi’s loan. State the correct order of payment. Give a reason for your answer.

Answer 1

The order of payments is as follows:

1. Payment of Firm’s Debts: The firm’s assets must be used to pay off debts owing to other parties.
2. Payment of Partner’s Loans: If any surplus remains, it is used to pay each partner proportionally what is owed to them for advances as opposed to capital.
3. Payment of Partner’s Capitals: If there is any remaining surplus, it is paid among the partners in proportion to their capital obligations.
4. Residual Division: The residual, if any, is divided among the partners according to their profit-sharing ratio.

Reason: As per Section 48 of the Indian partnership Act 1932, a partner’s loan is paid before the payment of the partner’s capital.