Indian Partnership Act
Garner v Murray: A Worked Example
When a firm is wound up and one partner turns out to be insolvent with a debit balance on his capital account he cannot pay, who bears that shortfall? The English rule in Garner v Murray (1904) answers: the solvent partners bear it in the ratio of their capitals, not in their profit-sharing ratio, because a capital deficiency is a loss of capital. Indian courts apply the rule, subject to a contrary agreement in the deed. This note explains the rule, works a numerical example, and separates the two steps that candidates most often merge.
The rule, a worked example with figures, the two steps kept separate, and the Indian position
1. The Rule
📖 Garner v Murray, [1904] 1 Ch 57 On the dissolution of a firm of three partners, one was insolvent and could not make good the debit balance on his capital account. The court held that, in the absence of agreement, the loss arising from that capital deficiency must be borne by the solvent partners in proportion to their capitals (their last agreed capitals), and not in their profit-sharing ratio. The reasoning: the deficiency is a loss of capital, which should be shared in proportion to capital. |
2. The Setting under Section 48
§ Where the rule fits • Section 48(a) provides that losses, including deficiencies of capital, are paid first out of profits, then out of capital, and lastly by the partners individually in their profit-sharing ratio. • Garner v Murray does not contradict this for the general loss on realisation, which is shared in the profit-sharing ratio. • It applies to the residual capital deficiency of the insolvent partner, which the profit-sharing ratio cannot absorb, and which is therefore borne in the capital ratio. • Two different losses, then: the general trading loss (profit ratio) and the insolvent partner's capital deficiency (capital ratio). |
3. A Worked Example
A, B and C share profits equally. On dissolution, after paying outside creditors and partners' advances, their capital accounts stand at: A 60,000, B 40,000, C 20,000. The realisation leaves a general loss, and C is insolvent with a debit balance of 12,000 he cannot pay.
Step | What happens |
|---|---|
1. Share the general loss | The ordinary loss on realisation is shared equally (the profit ratio), and each partner's capital account is adjusted; the solvent partners bring in cash for their own share of that loss |
2. C's deficiency | C's remaining debit balance of 12,000, which he cannot pay, is a capital deficiency borne by A and B in the ratio of their capitals, 60,000 : 40,000, that is 3 : 2 |
§ The arithmetic of step 2 C's unpaid deficiency: 12,000. Divide in the capital ratio 3 : 2. A bears 12,000 x 3/5 = 7,200. B bears 12,000 x 2/5 = 4,800. Total borne by A and B: 12,000. Compare the profit-sharing ratio (1 : 1), which would give 6,000 each. Garner v Murray shifts more of the loss onto the partner with the larger capital, here A. |
4. The Two Steps, Kept Separate
i. Step one: the general loss. Shared in the profit-sharing ratio under Section 48(a). The solvent partners contribute cash equal to their own share of this loss.
ii. Step two: the capital deficiency. The insolvent partner's remaining debit balance is borne by the solvent partners in the capital ratio, under Garner v Murray.
iii. The classic error is to merge the two, and to make the solvent partners bear the insolvent partner's deficiency in the profit-sharing ratio. Keep them separate.
5. The Indian Position
§ How Indian law treats the rule • Applied, but subject to contract. Indian courts apply Garner v Murray, but it yields to a contrary agreement in the partnership deed. • Deeds usually displace it. A well-drafted deed provides that all deficiencies, including a capital deficiency, are shared in the profit-sharing ratio, which is simpler and often fairer. • Fixed capitals assumed. The rule works on the last agreed capitals; where capitals fluctuate, those figures are used. • Check the deed first. The rule fills a gap where the deed is silent; it does not override an express agreement. |
6. Frequently Asked Questions
What is the rule in Garner v Murray?
That on dissolution, an insolvent partner's capital deficiency is borne by the solvent partners in the ratio of their capitals, not their profit-sharing ratio.
Why is the deficiency shared in the capital ratio?
Because a capital deficiency is a loss of capital, which the court held should be shared in proportion to the partners' capitals.
Does Garner v Murray apply in India?
Yes, but subject to a contrary agreement in the deed; most deeds provide that all deficiencies are shared in the profit-sharing ratio, displacing the rule.
What is the common mistake in applying the rule?
Merging the two steps: the general loss is shared in the profit ratio, but the insolvent partner's capital deficiency is shared in the capital ratio.