Question

X and Y are partners in a firm sharing profits in the ratio of 3 : 2. Mrs. X has given loan of ₹ 5,00,000 to the firm and the firm also took loan of ₹ 2,50,000 from Y. The firm was dissolved and its assets were realised for ₹ 6,25,000. State the order of payment of Mrs. X’s loan and Y’s loan with reason, if there were no other creditors of the firm.

Answer 1

First Payment: Mrs. X’s loan of ₹ 5,00,000 will be paid first and in full.

Second Payment: Y’s loan will be paid next, but only partially with the remaining balance of ₹ 1,25,000.

Reason:

According to Section 48 of the Indian Partnership Act, 1932, at the time of dissolution, the amount realised from assets must be paid in the following strict order:

• Outside Liabilities First: A loan from a partner’s relative (Mrs. X) is treated as an outside/third-party liability. It has legal priority and must be cleared fully before making any internal payments.
• Partner’s Loan Second: A loan from a partner himself (Y) is an internal liability. It is paid only after all outside creditors are completely satisfied.