PARTNERSHIP DISSOLUTION 1. Types of dissolution, or liqui dation, of a partnership may be voluntary or involun tary. In the first case, liquidation is brought about by agreement among the partners, and in the second case by the action of outsiders, who are generally credi torS of the firm. It is important to note that the ac tion taken in liquidation depends very largely upon whether the partnership is solvent or insolvent. When the liquidation is voluntary and the partnership solvent, one of the partners usually acts as agent for the firm in the proceedings. Where the partnership is dissolved because of insolvency, the affairs of the firm are usually wound up by the assignee or by a receiver.
2. Application of assets at dis,s;olution in a solvent firm.—The assets of a solvent firm are applied as follows: ( 1 ) In the payment of firm debts to credi tors, exclusive of loans from partners ; (2) In the re payment of loans made to the firm by the partners themselves; (3) In the repayment of the capital ac count' of the partners ; (4) In the distribution as profits of the residue, if any, to the partners, in the proportion specified in the partnership agreement; or equally, if the agreement does not provide for any definite proportion.
3. Application of partnership assets of an insolvent from operation, as well as losses on realization and liquidation, are charged against the capital account in the proportion in which profits and losses are to be shared. If any of the partners have contributed money to the firm in the form of loans, the loans are to be repaid next, unless the partners who loaned money to the firm are in debt to the firm on account of capital. Finally, partners must con tribute individually to the deficit, according to their respective shares.
4. Status of a partner's loan in loan that a partner has made to his firm cannot be paid until the outside creditors receive what is due them. The reason for this is that it might be neces sary to use a part of the money which a partner con tributed as a loan for the payment of the partner ship debts. Inasmuch as the partners are jointly and severally liable for firm debts, a partner who loans money to the business cannot expect his loan to be repaid until it is definitely known that the assets of the firm will realize a sufficient amount. to pay off all the firm's creditors. In this connection, how ever, it must be noted that if losses on operation, or losses on realization and liquidation, are so great as to wipe out the capital account of a partner who has loaned money to the firm, so much of his loan as would be necessary to cancel the debit balance in his capital account would be deducted from the amount to be paid to him.
5. Expenses of liquidation.—One or more of the partners may be intrusted with the task of liquidating the affairs of the firm. Since this work is not a part of the partnership duties, special compensation is given. When the partnership is insolvent, the liqui dation is usually placed in charge of a trustee ap pointed by a court. The services of the liquidating agent are paid for on such a basis as the statute per mits, or upon such a basis as the court to whom he ac counts, may deem proper.
When one partner liquidates the affairs of a firm as agent for his fellow-partners, the compensation that he receives should not be charged as an expense of the business, because if it is so charged the liquidating partner will be debited with his share of the expense in the final settlement. The commission or payment that he receives is a private matter between himself and his fellow-partners, who will compensate him. But if an outsider liquidates the affairs of a partner ship, the compensation for his services will be charged to an appropriate expense account, and that expense will be borne by all the partners in the proportion in which they share profits and losses.
6. Treatment of partners' loans illustrated.—Sup pose that M and N are partners who share profits and losses equally; M's capital is $8,000 and X's capital is $10,000. The former has loaned the busi ness $10,000, and the latter has loaned $3,000. They dissolve partnership, and the net assets after the creditors have been paid, realize $14,000. To whom shall distribution of this amount be made? 7. Comments on the solution of the problem.— The total aggregate capital and loans of the members of the firm are $31,000, and the assets realized $14,000 in cash. Therefore the loss of $17,000 will be charged against the capital accounts of the respec tive members of the firm in the proportion in which they share profits and losses, i.e., equally, M is debited with $8,500, and N is debited with the same amount. It will be noticed that this settlement creates a debit balance in M's capital account of $500, which is trans ferred to his loan account; the net amount, then, that is still due him out of the assets is $9,500. N's ac count presents no difficulties.