When a partnership firm is being dissolved, the private property of any partner shall be applied first, in payment of __________ and the surplus, if any, may be utilised for payment of __________, in case the firm's liabilities exceed the firm's assets.
When a partnership firm is being dissolved, the private property of any partner shall be applied first, in payment of __________ and the surplus, if any, may be utilised for payment of __________, in case the firm's liabilities exceed the firm's assets.
Solution
When a partnership firm is dissolved and a partner's private property needs to be utilized, the principle of marshalling of assets and liabilities applies.
According to this principle:
A partner's private property has a primary charge in favor of his private creditors. Therefore, the partner's private property must first be used to settle his own private debts.
Only after the private debts are fully paid, if there is any surplus remaining from the partner's private property, can it be applied toward the firm's debts (when firm's liabilities exceed firm's assets).
This protection ensures that a partner's personal creditors are not prejudiced due to the firm's insolvency. The private creditors have the first claim on the private property of the partner.
Correct sequence:
Private Property → First: Private Debts → Surplus (if any): Firm's Debts
Therefore, the blanks are filled as: "his private debt" and "the firm's debts"
Correct Option: 1
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