Garner v/s Murray is a very famous case in partnership law, it is so popular that the situation related to this case named is Garner v/s 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 v/s 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.
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.
The judgment in this case was that:
(a) First, the solvent partners should bring in cash equal to their respective shares of the loss on realisation; and
(b) Second, the loss due to the insolvency of a partner should be divided among the other partners in the ratio of capitals then standing (i.e., after partners have brought in cash equal to their shares of loss on realisation).
The practical effect of this is that the loss due to the insolvency of a partner has to be borne by the solvent partners in the ratio of their capitals standing just prior to dissolution.
Application in India:
Many people believe that the decisions in Garner vs. Murray does not apply in India. But there is nothing in Indian Partnership Act which goes against the rule laid down in the case and it would be safe to follow it till an Indian Court definitely rules against it. According to section 48, partners are required to make up their shares of losses and then assets, remaining after satisfaction of claims of outsiders and after repayment of the advances of partners over and above capitals contributed by them, have to be distributed rateably amongst the partners. A partner is required to make up his share of the realisation loss but not that of other partners.
The effect of this would be that assets remaining after paying off creditors’ claims and partners’ loans, as increased by the share of loss contributed by solvent partners, would be distributed amongst solvent partners in the ratio of their capitals minus their shares of loss plus cash brought in by them for it or, in other words, capitals just before dissolution. This is precisely the decision in Garner vs. Murray.
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