Examkin

Question

Difficulty: HardPartnership: Types, Deed, Rights, and Dissolution

Four trading partners dissolved their partnership firm after five years of business operations without drawing up a formal Partnership Deed. After liquidating all firm assets, the liquidator holds the total realized proceeds. Under the provisions of the Partnership Act applicable in commercial law, which of the following outlines the correct legal order of priority for applying these funds?

  1. Settle external debts first, pay partner advances next, refund partner capital contributions third, and distribute any remaining surplus according to the profit-sharing ratio.Answer
  2. B
    Refund partner capital contributions first, pay partner advances next, settle external debts third, and distribute any remaining surplus equally among all partners.
  3. C
    Pay partner advances and loans first, settle external debts next, refund partner capital contributions third, and retain any remaining balance in a reserve account.
  4. D
    Settle external debts first, refund partner capital contributions next, pay partner advances third, and divide any remaining surplus in proportion to capital contributions.

Answer

The correct sequence for applying realized proceeds upon partnership dissolution is: first settle external debts, next repay partner advances/loans, then refund partner capital contributions, and finally distribute any remaining surplus according to the profit-sharing ratio.
The correct answer accurately reflects Section 44 of the Partnership Act 1890 regarding the distribution of assets upon dissolution. External debts owed to outside creditors take absolute priority. Once external liabilities are satisfied, any advances or loans made by partners to the business beyond their capital are repaid rateably. Next, capital accounts are refunded. Any ultimate residual surplus is treated as profit and distributed among the partners in their profit-sharing ratio (or equally if no ratio was agreed upon).

Step-by-Step Solution

1
Identify the governing legal framework when no Partnership Deed exists
The standard provisions of the Partnership Act 1890 apply to govern the dissolution and account settlement process.
In the absence of a written agreement specifying otherwise, statutory rules dictate the distribution order of partnership assets.
2
Apply the statutory order of asset distribution upon dissolution
1st: Debts to outside (non-partner) creditors; 2nd: Advances/loans made by partners; 3rd: Capital contributed by partners; 4th: Residual surplus.
Outside creditors have primary legal claim over firm assets to satisfy liabilities before any distribution to equity owners or partners.
3
Select the option reflecting this exact legal hierarchy
The option prioritizing external debts, followed by partner advances, partner capital, and residual profit sharing.
This directly aligns with the mandatory priorities established in statutory commercial law.

Key Concept

Partnership Dissolution and Settlement Hierarchy of Accounts
Rate this question

Topics

Partnership: Types, Deed, Rights, and Dissolution

More questions from this topic