According to Section 49 of the Indian Partnership Act, when both firm debts and private debts of a partner exist, how should the firm’s property be applied?

To pay the debts of the firm first, then the surplus (if any) to partner's claim

The correct answer is option 2- To pay the debts of the firm first, then the surplus (if any) to partner's claim.

Where both the debts of the firm and private debts of a partner co-exist, the following rules, as stated in Section 49 of the Act, shall apply.

(a) The property of the firm shall be applied first in the payment of debts of the firm and then the surplus, if any, shall be divided among the partners as per their claims, which can be utilised for payment of their private liabilities.

(b) The private property of any partner shall be applied first in payment of his private debts and the surplus, if any, may be utilised for payment of the firm’s debts, in case the firm’s liabilities exceed the firm’s assets. It may be noted that the private property of the partner does not include the personal properties of his wife and children. Thus, if the assets of the firm are not adequate enough to pay off firm’s liabilities, the partners have to contribute out of their net private assets (private assets minus private liabilities).