Introduction
The rule of Garner vs Murray is one of the most important legal principles in partnership accounting. It applies at the time of the dissolution of a partnership firm when any partner becomes insolvent and is unable to bring his share of loss as shown by the Realisation Account. The rule determines how the deficiency of the insolvent partner is to be borne by the solvent partners.
This decision was delivered in the English case Garner v. Murray (1904), and since then it has formed a major principle in partnership law and accounting practices wherever no agreement exists regarding insolvency.
Meaning of the Rule
The rule states:
If a partner becomes insolvent and cannot bring his share of realisation loss or capital deficiency, such deficiency shall be borne by the solvent partners in the ratio of their last agreed capitals.
Thus, the deficiency is not borne in the profit-sharing ratio, but in the proportion of capitals that were agreed upon by partners before dissolution adjustments.
Why the Rule Was Established?
The logic behind the rule is simple:
- The insolvent partner cannot bring anything more than what is available from his private estate.
- His private estate is first used to pay private debts; only the balance goes to firm’s creditors.
- Since the insolvent partner fails to pay his capital deficiency, the remaining partners must bear it.
- They bear it based on the last agreed capitals, which reflects their long‑term investment strength in the firm.
Conditions for the Application of Garner vs Murray Rule
The rule applies only when:
- There is dissolution of the firm.
- One partner becomes insolvent and cannot pay his deficiency.
- There is no agreement among partners regarding how such deficiency should be shared.
- The capitals of partners are fixed or the firm has agreed upon the capital balances before dissolution began.
What Are “Last Agreed Capitals”?
These are the capital balances of partners:
- After all adjustments relating to reserves, accumulated profits/losses, drawings, interest, etc.
- Before transferring assets and liabilities to Realisation Account.
They represent the true capital investment of partners and thus form the basis for bearing deficiency.
Illustration (Conceptual Explanation)
Suppose A, B, and C are partners. C becomes insolvent and cannot bring his deficiency. A and B must bear C’s capital deficiency according to their last agreed capitals even if their profit-sharing ratio is different.
This ensures fairness because partners with higher long-term capital contribution compensate more.
Difference Between Application and Non-Application of the Rule
| Basis | When Rule Applies | When Rule Does Not Apply |
|---|---|---|
| Distribution of insolvent partner’s deficiency | Shared in the ratio of last agreed capitals of solvent partners. | Shared in the profit-sharing ratio. |
| Requirement of agreement | No specific agreement regarding insolvency. | Partners have an agreement for distribution of deficiency. |
| Type of capital | Fixed or adjusted capitals before dissolution. | Fluctuating capitals without agreed balances. |
Conclusion
The rule of Garner vs Murray plays a vital role in maintaining fairness during dissolution. It ensures that the loss caused by an insolvent partner is borne by solvent partners in proportion to their long-term capital strength, not according to profit-sharing ratio. The rule simplifies the distribution of losses and avoids disputes arising in the final settlement of accounts.