In case of dissolution of a firm, the assets of the firm, including any sum contributed by the partners to make up deficiencies of capital, shall be applied in the following manner and order:
A. In paying to each partner proportionately what is due to him on account of capital.
B. The residue, if any, shall be divided among the partners in their profit sharing ratio.
C. In paying each partner proportionately what is due to him/her from the firm for advances as distinguished from capital i.e. partner's loan.
D. In paying the debts of the firm to the third parties.
Choose the correct sequence from the options given below:
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → D, C, A, B
The order is laid down by Section 48 of the Indian Partnership Act, 1932, and it applies unless the partners have agreed otherwise. Outsiders are paid before insiders, and among the partners a loan ranks ahead of capital.
- (D) The firm’s debts to third parties are paid first — creditors, bank overdraft, bills payable. Secured loans come before unsecured ones.
- (C) Partners’ loans next. Money a partner lent the firm is a debt, not capital, so it is repaid before capital is touched. If there is not enough, the loans are paid proportionately.
- (A) Capital after that, to each partner proportionately.
- (B) The residue last, divided in the profit sharing ratio — it is a profit of the firm, so it goes the way profits go.
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