Explain Garner v. Murray rule applicable in the case of partnership firms. State, when is this rule not applicable? [CA Inter May 2013, 4 Marks]
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Detailed Solution & Explanation
Garner vs. Murray rule - Applicability When a partner is unable to pay his debt due to the
firm, he is said to be insolvent and the share of loss is to be borne by other solvent partners in
accordance with the decision held in the English case of Garner vs. Murray.
According to this decision, normal loss on realisation of assets is to be brought in cash by all
partners (including insolvent partner) in the profit-sharing ratio but a loss due to insolvency
of a partner has to be borne by the solvent partners in their capital ratio. In order to calculate
the capital ratio, no adjustment will be made in case of fixed capitals.
However, in case of fluctuating capitals, ratio should be calculated on the basis of adjusted
capital before considering profit or loss on realization at the time of dissolution.Non-Applicability of Garner vs Murray rule:
1. When the solvent partner has a debit balance in the capital account. Only solvent
partners will bear the loss of capital deficiency of insolvent partner in their capital
ratio. If incidentally a solvent partner has a debit balance in his capital account, he will
escape the liability to bear the loss due to insolvency of another partner.
2. When the firm has only two partners.
3. When there is an agreement between the partners to share the deficiency in capital
account of insolvent partner.
4. When all the partners of the firm are insolvent.
About This Chapter: Partnership & Companies
Paper
Paper 1: Accounting
Weightage
15-20%
Key Topics
Admission, Retirement, Death, Shares, Debentures
This chapter covers Admission, Retirement, Death, Shares, Debentures and is part of Paper 1: Accounting in the CA Foundation exam.
View Official ICAI SyllabusExam Strategy Tip
This topic carries 15-20% weightage. Focus on understanding core concepts rather than memorizing.
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