Financial Accounting · Dissolution of Partnership Firms including Piecemeal Distribution

Insolvency of Partners and Garner v Murray Rule

Updated 10 October 2026 · Fact-checked

When a partner is insolvent at dissolution, his debit capital balance cannot be recovered from him. Under the Garner v Murray rule, the solvent partners bear this deficiency in the ratio of their capitals before dissolution, not in the profit-sharing ratio. Share the realisation loss first, find the deficiency, then apply the capital ratio.

Understand Insolvency of Partners and Garner v Murray Rule

When a firm is wound up, the realisation loss is first shared by all partners in the profit-sharing ratio. If a partner's capital is small, his share of the loss can push his capital account into a debit balance. This debit balance is called a deficiency. A solvent partner must bring the cash in, and the firm recovers the amount from him.

If that partner is insolvent, the firm cannot recover the deficiency in full. Someone has to bear the unrecovered amount. The default rule in section 48(a) of the Indian Partnership Act, 1932 says losses, including deficiencies of capital, are paid first out of profits, next out of capital, and lastly by the partners individually in the proportions in which they shared profits. This is expressly "subject to agreement by the partners".

The English case Garner v Murray (1904) is the rule your syllabus applies to the insolvency of a partner. It says the solvent partners bear the unrecovered deficiency of the insolvent partner in the ratio of their last agreed capitals. In practice this means capitals as they stood before dissolution, after adjusting reserves, accumulated profits or losses and drawings, but before the realisation loss is charged. The loss on realisation itself is still shared in the profit ratio. Only the insolvent partner's deficiency goes in the capital ratio.

Insolvency also affects the firm in law. Under section 42(d), subject to contract between the partners, a firm is dissolved by the adjudication of a partner as an insolvent. Under section 34(1), the partner ceases to be a partner from the date of the adjudication order. Under section 41(a), a firm is compulsorily dissolved if all partners, or all but one, are adjudicated insolvent. If the firm's own debts remain unpaid, the creditors rank first. The firm's debts to third parties are paid before partners' advances and capital, as section 48(b) lays down.

Textbooks usually contrast this with Wilkins v Hughes (1909). The usual statement is that where the insolvent partner's capital account already showed a debit balance before dissolution, for example from heavy drawings, that debit is not a realisation loss. The Garner v Murray rule is not applied to it, and the solvent partners share it in the profit-sharing ratio. Check how your study material words this before the exam.

Key rules to remember

Step 1: Share of realisation loss: Loss share of each partner = Total realisation loss × his profit-sharing ratio; All partners, including the insolvent one, share the loss in the profit ratio first.
Deficiency of the insolvent partner: Deficiency = Debit balance of his capital account after his share of loss − Amount received from his estate; If the estate pays nothing, the whole debit balance is the deficiency.
Garner v Murray sharing: Share of solvent partner X = Deficiency × (Capital of X ÷ Total capital of solvent partners); Use capitals before dissolution, before realisation loss, after adjusting reserves, profits and drawings.
Default rule (section 48(a)): Losses, including deficiency of capital: first out of profits, next out of capital, lastly by partners individually in profit ratio; Applies subject to agreement by the partners.
Order of payment (section 48(b)): Third-party debts → partners' advances (loans) → partners' capital → residue in profit ratio; Use this order to check the final cash paid to partners.
Cash check: Cash realised + cash from estate − outside liabilities − realisation expenses = Total paid to solvent partners; This must equal the sum of closing balances of the solvent partners' capital accounts.

How to solve Insolvency of Partners and Garner v Murray Rule questions

Follow the same sequence for any question on an insolvent partner. The capital ratio must be fixed before any loss is charged.

1Write down the capital of each partner just before dissolution. Adjust for reserves, accumulated profits or losses and drawings. This is your capital ratio for Garner v Murray.
2Prepare the Realisation Account and find the total loss on realisation, including realisation expenses.
3Share the realisation loss among all partners in the profit-sharing ratio and post it to the capital accounts.
4Find the insolvent partner's capital balance. A debit balance is his deficiency.
5Deduct any amount received from his estate. Check wording such as "pays 40 paise in the rupee". The remainder is the unrecovered deficiency.
6Share the unrecovered deficiency among the solvent partners in their capital ratio. Do not use the profit ratio unless the question says so or the Wilkins v Hughes situation applies.
7Close the solvent partners' capital accounts. Their closing balances are the cash you pay them.
8Do the cash check: cash realised plus any estate recovery, less outside liabilities, must equal the total paid to the solvent partners.

Quickest way: Capital ratio first, then net-off table

When to use it: Use this when the question gives balance sheet figures and asks for the final payment to each solvent partner.

Before you do anything else, write the capital ratio of the solvent partners in the margin.
Make one table with a column for each partner. Rows: capital, less loss share, deficiency of insolvent partner, final balance.
Fill the insolvent partner's column first. If it is negative, move that figure to the solvent partners' columns in the capital ratio.
Total the solvent columns. Match this to cash realised less liabilities. If the totals differ, check the loss or the ratio.
Write the journal entries only if the question asks for them. Marks are given for the table and the working notes.

Common mistakes in Insolvency of Partners and Garner v Murray Rule

Sharing the insolvent partner's deficiency in the profit-sharing ratio.
Section 48(a) is remembered, and the loss on realisation is shared in the profit ratio, so students use it for everything.
Fix: Split the work in two. Realisation loss goes in the profit ratio. The unrecovered deficiency of the insolvent partner goes in the capital ratio of the solvent partners, unless the question gives another rule.
Using capitals after the realisation loss to find the capital ratio.
Students take the balances from the partners' capital accounts after posting the loss, which is the wrong point in time.
Fix: Use the capitals before dissolution, adjusted for reserves, accumulated profits or losses and drawings, but before any realisation loss.
Including the insolvent partner's capital when computing the capital ratio.
Students take the ratio of all partners' capitals out of habit.
Fix: Only the solvent partners share the deficiency. Use the ratio of their capitals alone.
Forgetting to deduct the amount recovered from the insolvent partner's estate.
The question says "pays 40 paise in the rupee" and students overlook it or apply it to the wrong base.
Fix: Apply the paise rate to his debit balance after the loss share. Only the unpaid part is the deficiency to be shared.
Confusing Garner v Murray with Wilkins v Hughes.
Both are about insolvent partners and the names are similar.
Fix: Ask one question: was the insolvent partner's capital account already in debit before dissolution? If yes, the Wilkins v Hughes situation, with profit-ratio sharing, may apply. If the debit arises only from his share of realisation loss, apply Garner v Murray.
Paying partners before outside creditors or ignoring the order of payment.
Students rush to close capital accounts and leave liabilities for last.
Fix: Remember the section 48(b) order: third-party debts, partners' advances, partners' capital, then residue.

Worked examples

Example 1

A, B and C share profits in the ratio 3:2:1. Their capitals just before dissolution are A ₹80,000, B ₹1,20,000 and C ₹10,000. Creditors are ₹60,000. The assets, which stand at ₹2,70,000 in the books, realise ₹1,50,000 in cash. There are no realisation expenses. C is insolvent and nothing is recovered from his estate. Show the final settlement under Garner v Murray.

Show the solution

Realisation loss = ₹2,70,000 − ₹1,50,000 = ₹1,20,000.
Share of loss in the ratio 3:2:1: A = ₹60,000, B = ₹40,000, C = ₹20,000.
C's capital account: ₹10,000 − ₹20,000 = debit ₹10,000. This is his deficiency. Nothing is recovered, so the whole ₹10,000 is unrecovered.
Capital ratio of the solvent partners A and B = 80,000 : 1,20,000 = 2:3.
A bears ₹10,000 × 2/5 = ₹4,000. B bears ₹10,000 × 3/5 = ₹6,000.
A's closing balance = ₹80,000 − ₹60,000 − ₹4,000 = ₹16,000. B's closing balance = ₹1,20,000 − ₹40,000 − ₹6,000 = ₹74,000.
Cash check: ₹1,50,000 − ₹60,000 (creditors) = ₹90,000. ₹16,000 + ₹74,000 = ₹90,000. This agrees.

Answer: Deficiency of C = ₹10,000, borne by A ₹4,000 and B ₹6,000. Cash paid: A ₹16,000 and B ₹74,000. (Under the profit ratio 3:2, A would bear ₹6,000 and B ₹4,000, so the rule changes the answer.)

Example 2

X, Y and Z share profits equally. Their capitals before dissolution are X ₹90,000, Y ₹60,000 and Z ₹30,000. Creditors are ₹40,000. The assets, which stand at ₹2,20,000 in the books, realise ₹1,00,000. Z is declared insolvent and his estate pays ₹4,000 in full settlement. Prepare the capital accounts' closing balances for X and Y under Garner v Murray. Ignore realisation expenses.

Show the solution

Realisation loss = ₹2,20,000 − ₹1,00,000 = ₹1,20,000. Each partner's share = ₹1,20,000 ÷ 3 = ₹40,000.
Z's capital account: ₹30,000 − ₹40,000 = debit ₹10,000.
Estate pays ₹4,000, so the unrecovered deficiency = ₹10,000 − ₹4,000 = ₹6,000.
Capital ratio of X and Y = 90,000 : 60,000 = 3:2.
X bears ₹6,000 × 3/5 = ₹3,600. Y bears ₹6,000 × 2/5 = ₹2,400.
X's closing balance = ₹90,000 − ₹40,000 − ₹3,600 = ₹46,400. Y's closing balance = ₹60,000 − ₹40,000 − ₹2,400 = ₹17,600.
Cash check: ₹1,00,000 + ₹4,000 − ₹40,000 = ₹64,000. ₹46,400 + ₹17,600 = ₹64,000. This agrees.

Answer: Unrecovered deficiency of Z = ₹6,000, borne by X ₹3,600 and Y ₹2,400. Final payments: X ₹46,400 and Y ₹17,600.

Exam tips

Start every answer by writing the capital ratio of the solvent partners. Markers look for it as a working note.
Show the realisation loss sharing and the deficiency calculation as separate lines. Step marks are given for each.
Read the question for phrases like "as per Garner v Murray" or "in the profit-sharing ratio". If the question states a rule, follow it over your own memory.
In MCQs, check whether the question asks for the deficiency amount or the share of one partner. Compute the whole table and then pick the option.
Finish with the cash check. It catches most arithmetic errors in a few seconds.

Practice questions from Dissolution of Partnership Firms including Piecemeal Distribution

Insolvency of Partners and Garner v Murray Rule: frequently asked questions

What is the Garner v Murray rule in simple words?

When a partner is insolvent, the part of his negative capital that cannot be recovered is shared by the solvent partners in the ratio of their capitals before dissolution. It is not shared in the profit-sharing ratio.

How is the Garner v Murray rule different from section 48(a) of the Partnership Act?

Section 48(a) says that, subject to agreement, deficiencies of capital are borne by the partners individually in the proportions in which they shared profits. Garner v Murray applies the capital ratio of the solvent partners to the insolvent partner's unrecovered deficiency. Exam questions in this chapter expect the Garner v Murray treatment unless told otherwise.

Which capital should I use to find the capital ratio?

Use the capitals just before dissolution, after adjusting reserves, accumulated profits or losses and drawings, but before any realisation loss. Only the solvent partners' capitals are used.

What is the difference between Garner v Murray and Wilkins v Hughes?

Garner v Murray applies where the insolvent partner's deficiency arises from his share of the realisation loss, and it is shared in the capital ratio. Wilkins v Hughes is usually stated for the case where his capital account was already in debit before dissolution, and the loss is then shared in the profit-sharing ratio. Follow the wording of the question and your study material.

What happens if more than one partner is insolvent?

Find each insolvent partner's unrecovered deficiency. Share them among the remaining solvent partners in their capital ratio, working carefully with their capitals before dissolution. Do the sharing in one table so no step is missed.