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CA Foundation · Business Laws · The Indian Partnership Act, 1932

Nitin and Omar dissolve their firm. The firm's assets are applied in settlement. Which of the following is the correct order of payment under the Act?

Payment is made first to outsiders' debts, then to partners' advances, then to partners' capital, and any residue goes to the partners in their profit-sharing ratio. Advances rank ahead of capital, so paying capital before advances is incorrect.

  1. ADebts to third parties, then each partner's advances (loans) proportionately, then partners' capital, and the residue to the partners in their profit-sharing ratioCorrect
  2. BPartners' capital, then debts to third parties, then partners' advances
  3. CPartners' advances, then debts to third parties, then capital
  4. DDebts to third parties, then partners' capital, then partners' advances, then the residue

Explanation

Assets and contributions are applied first to debts owed to third parties, then to each partner ratably for advances as distinguished from capital, then to each partner ratably for capital, and the residue is divided in the profit-sharing ratio. The last distractor swaps advances and capital, so it is wrong.

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