Settlement of accounts

When a firm closes, Section 48 sets the order in which its money is used.

Losses, including a shortfall of capital, are paid first out of profits, then out of capital, and finally by the partners individually, in their profit sharing ratio.

The assets (with any money the partners bring in to cover a shortfall) are used in this order:

• first, to pay the firm's debts to outsiders;
• then, partners' loans (advances, apart from capital), proportionately;
• then, each partner's capital, proportionately;
• whatever is left is shared among the partners in the profit sharing ratio.

So a partner's loan is always paid before any capital.

Firm's debts and private debts (Section 49). If a partner also has private debts: the firm's property pays the firm's debts first, and any surplus goes into each partner's share. A partner's private property pays his private debts first, and any surplus can then go to the firm's debts. His private property does not include his wife's or his children's property.

An insolvent partner. If a partner cannot pay the debit balance in his capital account, the solvent partners bear that loss in the ratio of their capitals (the rule in Garner vs Murray), not in the profit sharing ratio.