Question

All the partners want to dissolve the firm. Y, a partner, demands that his loan of Rs. 2,00,000 be paid before payment of capitals of the partners. But X, another partner demands that capitals be paid before payment of Y's loans. Who is correct?

Answer 1

Y is correct. According to Section 48 of the Indian Partnership Act, 1932:

The amount collected from the sale of assets and contribution of the partners will be used in the following order:

1. Paying the debts of any third party;

2. Paying any loans or advances of the partner's;

3. Paying the partner's the amount of capital advanced by them;

4. The residue being transferred to the partner's in their profit sharing ratio.

According to the above rules, Y's loan of Rs. 200000 needs to be discharged off before the payment of any capital to the partner's.