At the time of dissolution of the firm, following payments are due :
(i) ₹ 10,000 partners loan
(ii) Creditors for goods ₹ 12,000
(iii) ₹ 1,000 for payment of expenses incurred in selling of assets
(iv) Capital of A ₹ 5,000, B ₹ 3,000.
What will be the order of payment as per section 48 u/s Partnership Act?

Question

At the time of dissolution of the firm, following payments are due :
(i) ₹ 10,000 partners loan 
(ii) Creditors for goods ₹ 12,000 
(iii) ₹ 1,000 for payment of expenses incurred in selling of assets 
(iv) Capital of A ₹ 5,000, B ₹ 3,000. 
What will be the order of payment as per section 48 u/s Partnership Act?

Accepted Answer

The correct option is 1:
The correct order of payment during the dissolution of a partnership firm is strictly governed by Section 48 of the Indian Partnership Act, 1932. The process is a statutory hierarchy designed to ensure fairness and adherence to legal priorities. The initial step, even before the categories listed in Section 48(b), is the payment of all costs and expenses related to the winding up of the firm's affairs, which includes the realization expenses. Therefore, **(iii) Payment of expenses incurred in selling of assets** comes first. Next are the debts of the firm to **(ii) Third parties/External Creditors** (Creditors for goods). This is followed by **(i) Partner's loan or advances** (which is a debt to the partner, treated as an external liability but subordinate to third-party claims). Finally, any remaining funds are used to repay **(iv) Partners' Capital**. Hence, the order is (iii), (ii), (i), (iv).

The incorrect option is 2:
The order (i), (ii), (iii), (iv) is incorrect because it violates the fundamental rule of dissolution priority by placing the partner’s loan (i) as the first payment. The partner’s loan is explicitly ranked lower than external trade creditors (ii) in the statutory payment hierarchy. Furthermore, placing dissolution expenses (iii) third is wrong, as these expenses, incurred to realize assets, must be paid before any liabilities to ensure the winding-up process is completed.

The incorrect option is 3:
The order (ii), (i), (iii), (iv) is incorrect as it places the external creditors (ii) before the expenses of selling the assets (iii). In practice, expenses incurred in the process of asset realization and dissolution are always the first charge on the assets, as these expenses enable the generation of funds required to pay all subsequent liabilities. Therefore, realisation expenses must precede all other listed payments, including trade creditors and partner's loans.

The incorrect option is 4:
The order (ii), (i), (iv), (iii) is severely incorrect on multiple grounds. Similar to the other incorrect options, it places external creditors (ii) before realisation expenses (iii). More critically, this option incorrectly suggests that the partners' capital (iv) is paid before the dissolution expenses (iii). Capital repayment is the final priority before the distribution of any surplus profit, coming after all external debts, including partner's loans and realization expenses, have been fully settled.