Sarthaks Test
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How deficiency of creditors is paid off?

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When a firm gets into the situation of dissolution, first of all the amount received from the sale of firm’s assets are utilised to pay the creditors. After that, if the sale receipts of assets fall short, then partners’ private assets are used for settling the dues of the firm’s creditors. Even if some portion of the amount due to creditors is left unpaid, then there arises deficiency of creditors. 

This deficiency is handled in the following two ways 

(i) In first case, deficiency is transferred to the Deficiency Account. 

(ii) In second case, the deficiency is transferred to the partner’s capital account. In first case, a separate account is prepared for the firm’s creditors. Then in ‘ order to ascertain the firm’s cash balance accruing from the sale of the firm’s assets and partners’ private assets, cash account is prepared. After ascertaining the cash availability with the firm, the creditors and the external liabilities are paid proportionately (partially). The remaining unpaid creditors or the deficiency is transferred to the Deficiency Account. 

In the second case, the creditors are paid by the cash available with the firm including the partners’ individual contribution. The deficiency or unpaid creditors amount .is transferred to the partner’s capital account. Thus, the deficiency of the creditors is borne by all the partners in their profit sharing ratio. If any partner becomes insolvent and is unable to bear the deficiency, then this will be regarded as a capital loss to the firm. ‘ If the partnership deed is silent, about such capital loss in the fact of insolvency of a partner, the deficiency on the insolvent partner’s capital ’ account must be borne by the other solvent partners, in proportion to their capital. In that case, we should apply Garner vs Murray decision in solving problems in partnership.

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