Garner v Murray

Garner v Murray

Garner v Murray is a landmark legal case from 1904 that set a precedent for handling financial matters during the dissolution of a partnership, particularly when one of the partners becomes insolvent. According to the rule established by this case, if a partner has a debit balance in their capital account at the time of dissolution, they are required to contribute enough to cover the deficit. However, if the partner is insolvent and unable to make this contribution, the other partners must share the loss proportionally based on their last agreed-upon capital balances.

Key Points

1. Capital Contribution: All partners must cover any debit balances in their capital accounts at the end of the partnership.
2. Insolvency: If one partner is insolvent, the remaining partners share the loss.
3. Loss Sharing Ratio: Losses are shared according to the last agreed capital balances, not the profit-sharing ratio.

Examples

1. Partner with Debit Balance:

   • Scenario: A partnership dissolves, and Partner A has a debit balance of $10,000. Partner A is expected to pay this amount to the partnership.
   • Outcome: Partner A arranges for the payment, and all obligations are settled.

2. Insolvent Partner:

   • Scenario: The same partnership dissolves, but this time Partner A is insolvent and cannot pay the $10,000 debit balance.
   • Outcome: The $10,000 deficit will be divided among the remaining partners according to their last agreed capital balances:
     • Partner B’s capital balance: $50,000
     • Partner C’s capital balance: $30,000
     • The loss would be split in the ratio of 5:3.

Frequently Asked Questions (FAQs)

Q1: What happens if the partnership agreement explicitly excludes the Garner v Murray rule?

• A1: If the partnership agreement excludes the Garner v Murray rule, partners will instead follow the terms stipulated in the partnership agreement. This often involves sharing losses according to the profit-sharing ratio rather than the last agreed capital balances.

Q2: How is the last agreed capital balance determined?

• A2: The last agreed capital balance refers to the capital accounts of the partners as per the most recent financial statement or agreement before the partnership began experiencing financial trouble or dissolution.

Q3: Does the Garner v Murray rule apply to all partnerships?

• A3: While it sets a legal precedent, many modern partnership agreements explicitly state their own rules for loss-sharing upon dissolution, which may vary from the Garner v Murray rule.

Related Terms

• Partnership Agreements: Contracts outlining the mutual rights and responsibilities of partners.
• Capital Accounts: Accounts showing the net value of each partner’s equity in the partnership.
• Insolvency: The inability of a partner or business to meet their financial obligations as they become due.
• Profit-sharing Ratio: The agreed proportion in which profits and losses are shared among the partners.

Online References

1. UK Legislation on Partnership Act 1890
2. Legal Dictionary: Garner v Murray
3. Partnership Law Insights

Suggested Books for Further Studies

1. “Advanced Accounting” by Floyd A. Beams, Joseph H. Anthony, Bruce Bettinghaus, and Kenneth Smith

   • Coverage includes accounting for partnerships and the associated legal principles.

2. “Partnership Law” by Mark Blackett-Ord and Sarah Haren

   • A comprehensive guide addressing the laws and regulations governing partnerships.

3. “Partnerships and LLPs: Law, Practice and Precedents” by Geoffrey Morse

   • Provides practical insights and precedent cases relevant to partnerships and LLPs.

Accounting Basics: “Garner v Murray” Fundamentals Quiz

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