When a partnership firm is dissolved, its assets are disposed of and the proceeds there from are utilised in paying the creditors.
If the amount realised by sale of assets is not sufficient to discharge the claims of the creditors in full, the deficiency can be recovered proportionately from the personal properties of the partners.
If any partner becomes insolvent, the remaining solvent partners will bear the loss in their capital ratio.
In case the assets of the firm are more than sufficient to meet the liabilities in full, then the surplus may be utilised to pay off the loans and capitals contributed by the partners.
Section 48 of the Partnership Act, 1932 lays down the following procedure for the settlement of accounts between partners after the dissolution of the firm:
1. Losses including deficiencies of capital should be made good
(a) First out of profits,
(b) Then out of capital, and
(c) If needed out of personal contributions of partners in their profit-sharing ratio.
2. The assets of the firm including any sum contributed by partners to make up deficiencies of capital will be applied for settling the debts of the firm, in the following order, subject to any agreement to the contrary:
(a) First, in paying off the debts of the firm due to third parties;
(b) Then in paying to each partner ratably any advances or loans given by him in addition to or apart from his capital contribution;
(c) If any surplus is available after discharging the above liabilities, the capital contributed by the partners may be returned, if possible, in full or otherwise ratably;
(d) The surplus, if any, shall be divided among the partners in their profit-sharing ratios.