Garner, Murray, and Wilkins were partners in a firm. Accounting to Partnership agreement they had unequal capitals but
they shared profits equally.
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Garner vs Murray decision regarding the insolvency of the partners |
On 30th June 1900 their firm was dissolved by the order of the court on the dissolution assets were realized. The realized amount was sufficient to pay the creditors and advances of two of the partners but it was insufficient to repay the partners capitals.regarding the insolvency of the partners
Wilkins was declared insolvent and was unable to contribute anything. According to section all of British partnership Act, 1890 Wilkins overdrawn balance of £ 263 could be treated as the loss. Hence under the old method, £ 263 would have been added to £ 635 realization loss and the total loss of £898 would have been shared by the solvent partners in equal ratio i.e., 1: 1 or one half each.
By following this principle, Murray suffered the maximum loss because he had to pay £ 135 from his private property.
that is 898 x 1/2= £449.£ 314 = £135. Whereas Garner had to receive back£ 2051 that is £2500 - £449 = £2051.Hence
Garner vs Murray decision regarding the insolvency of the partners followed
Therefore, the case was instituted.
In this case, it was held that in the absence of any agreement to the contrary the deficiency on the insolvent partner is capital account debit balance must be born by the other solvent partners in proportion of their capital, after each solvent partner has brought in cash to extent of his own share of loss on realization. The effect of this decision is that:
1. The loss of an account of realization is normal- loss. It should be born by all the partners in their profit sharing ratio.
2. The solvent panners must bring in cash equal to their respective share of the loss an realization.
3. The capital deficiency of an insolvent partner is to be shared by the solvent partners in the ratio of their capitals just prior to dissolution.
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Criticisms of Gamer Vs Murray |
Criticisms of Gamer Vs Murray :
1. In order to apply the decision of Garner Vs Murray case, one of the three conditions is that there should be two more than two solvent partners.
This means that viders do not apply when the firm is having only two panners.
2. If a partner is having a nil capital balance or debit balance, he will not have to bear the deficiency of an insolvent partner.
3. According to the decision in Garner Vs Murray, the solvent partners will have to bring in cash equal to their respective share of realization loss.
4. The decision is the violation of natural justice and equity principles.
Application of Gamer Vs Murray in India
In India, it is mentioned in the partnership deed" that in the insolvency of
a partner, deficiency of his capital account will be born in a particulars ratio. It
will be born accordingly in the case of insolvency of the partner, but if no
mention about any ratio is made in this connection in the partnership deed, the
deficiency of the insolvency partner's capital account will be shared by the
solvent partners in their capital ratio but they should not bring the loss on
the realization in cash. If the capitals are fixed, deficiency should be shared in the
ratio of that capital which is given in the balance sheet which was prepared
before the date of dissolution and if the capital is floating. This capital will
be adjusted after taking into consideration general reserve and undivided profits
etc. but before taking into consideration the loss or realization; capitals thus'
arrived at will on the basis of sharing the deficiency.
