It should be noted that partners' loans in liquida tion stand on an equal status and rank equally in payment.
8. Repayment of partners' capital.—After the out side creditors have been paid, and the balance due to partners on their loans has been liquidated, the as sets should be applied in repayment of the partners' capital accounts. The distribution of assets in liqui dation is always made with the capital accounts as a basis at the time the dividend is distributed. It is often necessary for the liquidating agent to require considerable time for the realization of the assets, and in the meantime the partners may desire to receive a portion of the amount that he has collected. If the capital ratio is the same as the profit-and-loss-sharing ratio, the liquidator may do this without any further trouble.
Difficulty is liable to arise, however, if the capital ratio is different from the profit-and-loss-sharing ratio. It is evident that if there is a great difference between the capital accounts of the partners, and if the partner who has made the smallest capital contribution should be the one who either is entitled to receive the largest share of the profits or is to be charged with the greatest part of the losses, a situation may arise in which the liquidator must be especially careful in paying off the capital accounts of the partners.
9. Adjustment of capital ratio to profit-and-loss sharing ratio in liquidation.—For the sake of illus trating the danger that the liquidator will encounter if he does not bring the capital ratio into agreement with the profit-and-loss-sharing ratio when he pays liquidation dividends, let it be assumed that X, Y and Z are partners, each with a capital account of $30, 000. After the payment of creditors and partners' loans, the loss which is to be charged against the re spective partners, who share in the ratio of five, three and two, amounts to $24,000. The liquidator has for distribution $33,000 in cash, and he proceeds to dis tribute it among the partners on the basis of the capital ratios, after the loss of $24,000 has been charged against them. But additional losses develop, amount ing to $24,000, which are charged against the capital accounts of the partners in the ratio in which they share losses. The following tabulation will show
the results that will be brought about by the neglect to reduce the capital ratio to the profit-and-loss-shar ing ratio.
It will be noticed that in the payment of the divi dends, one partner X, has been overpaid by the amount of $3,000. The liquidator is personally liable to Y and Z for the amount of this overpayment.
If, however, the liquidator had reduced the capital ratio to the profit-and-loss-sharing ratio, this diffi culty would have been avoided, as the following state ment will show: On the distribution of the first dividend, amount ing to $33,000, the liquidator has applied the cash used in the payment of partners in such a manner as to reduce the capital ratios of the partners to the profit-and-loss-sharing ratio. Instead of $9,000, X will receive only $1,500; Y will receive $12,900, in stead of $11,400; while partner Z will be paid $18,600, instead of $12,600. The adjusted capital, after the dividend of $33,000 has been paid, will be $16,500 for X, $9,900 for Y and $6,600 for Z. After this ad justment has been made, all future losses, payments and charges for expense of liquidation, will be dis tributed on the same ratio—that is, five, three and two.
Altho the distribution is made on the profit-and loss-sharing ratio, this method has been adopted not because it is proper to distribute liquidating divi dends on the profit-and-loss-sharing ratio, but be cause the capital ratio has been reduced to the profit and-loss-sharing ratio.
10. 3lethod by which the liquidator can easily de termine the amount to be distributed.—In the total column the capital remaining after the first dividend is paid amounts to $33,000. To find how much of the dividend of $33,000 is to be paid to X, Y and Z respectively, the liquidator should divide the capital remaining after the payment of the dividend, on the basis of five, three and two. If this were done it would be seen that X's capital would be $16,500; Y's S9,900; and Z's, $6,600.