Question

According to Indian Partnership Act, 1932, when the firm is dissolved, cash received on sale of assets are applied in following order :
(A) Paying to each partner proportionately what is due to him/her on account of capital
(B) In paying the secured debts of the firm to the third parties
(C) In paying each partner proportionately what is due to him/her from the firm for advances as distinguished from capital
(D) The residue, if any shall be divided among the partner’s in their profit sharing ratio
(E) In paying unsecured debt of firm to third parties
Choose the correct answer from the options given below :

• A. (C), (B), (D), (A), (E)
• B. (B), (E), (C), (A), (D)
• C. (A), (B), (C), (D), (E)
• D. (D), (C), (B), (A), (E)

Hint:

Think of the payment of asset at the time of dissolution as how governments spend their revenue, first giving it to the people of needs and following the law before distributing the income.

Answer 1

The Correct Option is B

Order of Priority for Asset Realisation Distribution in Partnership Dissolution (Indian Partnership Act, 1932):
Understanding the Legal Framework: The Indian Partnership Act, 1932 lays down specific rules for the settlement of accounts after the dissolution of a firm, aiming to ensure fairness and protection of third-party interests.
The Order of Distribution
Step 1: Payment of Third-Party Debts First, the firm uses available funds to pay off the secured debts to third parties (B).
Step 2: Payment of Unsecured Debts Next, the firm settles its unsecured debts to third parties (E). These creditors have no specific security against any of the firm’s assets.
Step 3: Partner's Advances After settling third-party debts, any loans or advances made by partners to the firm (beyond their capital contributions) are repaid (C). Partners, in this context, are treated as creditors for their advances.
Step 4: Partner’s Capital Once advances are repaid, the remaining funds are used to return partners’ capital contributions proportionately according to what each partner is due (A).
Step 5: Distribution of Residue/Profit or Loss Finally, if there’s any surplus left after all the above payments, it's divided among the partners in their agreed profit-sharing ratio (D). This also covers any losses, which would be borne by partners in the same ratio.