Last reviewed: July 2026.
The Garner v Murray rule explains how solvent partners may share an insolvent partner’s unpaid capital deficiency when a traditional partnership is dissolved and the agreement is silent. The calculation comes after realisation losses and all partner balances have been updated.
What the Garner v Murray rule means
The rule addresses a narrow problem that can arise when a partnership is dissolved: one partner has a debit balance on capital after realisation losses and is personally unable to contribute enough cash to clear it. In the absence of an agreement dealing with the deficiency, the solvent partners bear the insolvent partner’s remaining capital deficiency in the ratio of their last agreed capital balances rather than automatically using the ordinary profit-sharing ratio.
It is a historical case-law solution, not a substitute for the partnership agreement or applicable local law. Modern partnerships should state clearly how capital deficiencies, insolvency and dissolution costs are to be shared. The rule is therefore best understood as a default accounting technique used in traditional partnership questions and in jurisdictions where it remains relevant.
When the rule is considered
First prepare the realisation account and transfer the resulting profit or loss to the partners in the agreed profit-sharing ratio. Then close drawings, current accounts and other partner balances into the capital accounts where appropriate. Only after assets have been realised, liabilities settled and partner balances updated can an insolvent partner’s final deficiency be identified.
The rule is considered only if the partner cannot pay the amount due and the partnership agreement does not prescribe another method. If all partners are solvent, each simply brings in the cash required to eliminate a debit capital balance. If the agreement says deficiencies follow the profit-sharing ratio, that contractual term normally governs.
Last agreed capitals
The allocation uses the partners’ last agreed capitals. In many textbook applications these are the fixed capitals immediately before dissolution, adjusted for any permanent capital changes that the partners had agreed before the dissolution process began. Temporary current-account balances, drawings or undistributed profits are dealt with separately before the final deficiency allocation.
Care is needed where capitals fluctuate. The accountant should reconstruct the capital position that was genuinely agreed, not choose a convenient balance after realisation losses. Working papers should show which balances were treated as permanent capital and why.
Worked example
| Item | Partner A | Partner B | Partner C |
|---|---|---|---|
| Last agreed capital | $60,000 | $40,000 | $20,000 |
| Profit-sharing ratio | 3 | 2 | 1 |
| Capital after realisation and other adjustments | $18,000 | $12,000 | ($9,000) |
| Cash C can contribute | — | — | $1,000 |
| Unpaid deficiency to allocate | — | — | $8,000 |
Partner C’s unpaid deficiency is $8,000. The solvent partners’ last agreed capitals are $60,000 and $40,000, a ratio of 3:2. Partner A therefore absorbs $4,800 and Partner B absorbs $3,200. Their remaining capital balances are $13,200 and $8,800, which can then be paid as cash becomes available.
The ordinary profit-sharing ratio happens to be 3:2:1 in this example, but C is excluded from the deficiency allocation because C is the insolvent partner. If A and B had last agreed capitals of equal amount, the $8,000 would be shared equally even if their profit-sharing proportions differed.
Journal and capital-account treatment
- Debit the solvent partners’ capital accounts for their shares of the insolvent partner’s deficiency.
- Credit the insolvent partner’s capital account with the total deficiency allocated.
- Record any cash actually introduced by the insolvent partner before allocating the unpaid balance.
- Pay solvent partners only after outside liabilities and dissolution costs have been settled.
The allocation is a capital adjustment; it is not a new trading loss in the income statement. The realisation loss has already been shared under the partnership agreement. The Garner v Murray adjustment deals with the inability of one partner to meet the resulting debit capital balance.
Order of payments during dissolution
Cash realised from assets is normally applied first to external creditors and dissolution expenses. Partner loans rank separately from partner capital, and capital repayments follow after external claims and partner loans have been dealt with. The exact legal order depends on the governing law and the partnership agreement.
Where assets are realised in stages, accountants may use a safe-payments approach so that no partner receives more than the amount that would be due if the remaining assets produced nothing. This avoids later demands for repayment.
When the rule does not apply
- The partnership agreement specifies how an insolvent partner’s deficiency is shared.
- Applicable law prescribes a different result.
- The debit balance is caused by drawings or another personal amount that must be recovered directly.
- The partner is solvent and can contribute the required cash.
- The entity is an LLP or another legal form governed by different insolvency rules.
Do not apply a historical partnership rule mechanically to a modern corporate or limited-liability structure. Confirm the legal form, jurisdiction and contractual terms first.
Controls and documentation
Maintain a dissolution schedule that reconciles the realisation account, cash account, partner loans and every capital account. Obtain evidence of the insolvent partner’s inability to contribute and document legal advice where the amount is material. The final statement should explain the basis used to allocate the deficiency.
Partners should approve the dissolution calculations in writing. A transparent schedule reduces disputes and provides an audit trail for tax filings, legal settlements and final distributions.
Common mistakes
- Using the profit-sharing ratio instead of last agreed capitals.
- Including the insolvent partner in the ratio used for the deficiency.
- Allocating the full debit balance without deducting cash the partner can pay.
- Treating partner loans as ordinary capital.
- Paying partners before confirming all external liabilities and costs.
Another common error is to apply the rule before realisation is complete. The final deficiency may change as assets are sold, liabilities are discovered or dissolution expenses are incurred.
Practical dissolution checklist
- Read the partnership agreement and identify the governing law.
- Prepare and verify the realisation account.
- Update partner current and capital accounts.
- Confirm each partner’s ability to settle a debit balance.
- Allocate only the unpaid deficiency using the correct basis.
- Reconcile cash and document final payments.
A carefully documented sequence is more important than memorising a single formula. The accounts must explain how every asset, liability, partner loan, capital balance and cash distribution was settled.
Related accounting guides
- Partnership Dissolution: Realisation Account and Entries
- Partnership Capital and Current Accounts: Worked Example
- Partnership Accounts: Format, Appropriation and Examples
Authoritative references
Practical takeaway
Apply the rule only after reading the partnership agreement and confirming the relevant law. Calculate the final unpaid capital deficiency, exclude the insolvent partner, and allocate the balance between solvent partners using their last agreed capitals. Keep the realisation, capital and cash accounts fully reconciled.