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Settlement of Accounts after partnership Dissolution

Settlement of Accounts
Settlement of Accounts


Settlement of Accounts

The settlement of accounts among partners in a firm is typically governed by the provisions outlined in the partnership deed. However, in the absence of such provisions, Section 48 of the Partnership Act comes into effect, containing the following guidelines:

  1. Priority of Losses: Losses, including those on capital investments, must first be covered by the firm's profits. If profits are insufficient, losses are then deducted from the capital contributions of partners. Any remaining losses are shared among partners according to their profit shares.

  2. Disposition of Assets:

  3. Debts to Outsiders: The firm's assets are initially allocated to paying off external debts.

In the event of a partner's insolvency or inability to contribute, solvent partners must share the burden, contributing proportionally to cover the firm's liabilities. This principle is known as the rule in Garner vs Murray.


Limitation Period

In cases pertaining to the settlement of a firm's accounts upon its dissolution, the limitation period for filing a case in court is three years. If a partner fails to initiate legal action against even a single partner within this three-year timeframe, the entire claim becomes time-barred against all remaining partners of the firm.

Payment of Partnership Debt

According to Section 49, when a partnership firm has both joint debts and separate debts owed by its partners:

  • The assets of the firm must first be used to settle the debts of the firm.

  • Any surplus remaining after settling the firm's debts will be used to pay each partner's separate debts, or it will be paid directly to them.

  • If any partner has separate property, it will be used first to pay off their separate debts.

  • Any surplus from the partner's separate property will then be used to pay the debts of the firm.

Sale of Goodwill after Dissolution

According to Section 55, when settling the final accounts of a dissolved partnership firm:

  • The goodwill of the firm, as per the partnership agreement, is considered an asset and included in the firm's assets.

  • The goodwill can be sold separately or along with other assets of the firm.

After the sale of the goodwill:

  • A former partner may start a competing business and advertise it.

  • However, the former partner must not use the firm's name, represent themselves as the former firm, or solicit customers from the former firm.

  • Partners may agree with the buyer of the goodwill not to start a similar business for a specified time or within certain limits. This agreement must be reasonable to be valid; otherwise, it is void.


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