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Wednesday, September 15, 2010

The Rule in Garner versus Murray

This is the situation where, on dissolution, a partner, capital account is in debt and he is unable to discharge his indebtedness.

Prior to the decision in Garner versus Murray it was generally supposed that any loss occasioned by one of the partners of a firm being unable to make good a debit balance on his account should be borne by the remaining partners in the proportions in which they shared profits and losses.

In this case, however, it was held that a deficiency of assets occasioned through the default of one of the partners must be distinguished from an ordinary trading loss, and should be regarded as a debt due to the remaining partners individually and not to the firm.

The decision of the case gave rise to considerable controversy. The circumstances were as follows: Garner, Murray and Wilkins were in partnership under a parole agreement by the terms of which capital was to be contributed by them in unequal shares, but profits and losses were to be divided equally. On the dissolution of the partnership, after payment of the creditors and of advances made by two of the partners, there was a deficiency of assets of 635 $, in addition to which Wilkins’ capital account was overdrawn by 263$, which he was unable to pay. There was thus a total deficiency of 898$, and the plaintiff claimed that this should be borne by the solvent partners, Garner and Murray, in their agreed profit and loss ration, via equally. Mr. Justice Joyce held, however, that each of the three partners was liable to make good his share of the 635$ deficiency of assets, after which the available assets should be applied in repaying to each partner what was due to him on account of capital. Since, however, one of the assets was the debt balance on Wilkins’ account, which was valueless, the remaining assets were to be applied in paying to Garner and Murray ratable what was due to them in respect of capital, with the result that Wilkins’ deficiency was borne by them in respect of capital, with the result that Wilkins’ deficiency was borne by them in proportion to their capitals.

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