What is Garner vs Murray rule?

According to Garner vs Murray Rule:

• The loss on account of insolvency of a partner is a CAPITAL loss which should be borne by the solvent partners in the ratio of their capitals standing in the balance sheet on the date of dissolution of the firm.

Notes:

• “Capital” in this case relates to the real capital of the partners and not capital as may be standing in the books of partnership firm in the names of different partners. This distinction is especially critical when the partners are maintaining their capital accounts on fluctuation capital system. The true capitals according to this rule will be ascertained after making all adjustments regarding reserves, drawings, unrecorded assets on the date of the balance sheet on the date of dissolution of the partnership firm. When the capitals are FIXED, no such adjustment is required.
• Where a partner is solvent but has a debit balance in his/her capital account, just before the dissolution of the partnership firm, such a partner will not be required to bear the loss on account of insolvency of a partner.

The rules dictates that:-

• The solvent partners should bring in cash equivalent to their respective share of loss on realization and

• The loss due to the insolvency of a partner should be then be divided among the solvent partners in the ratio of capitals standing after the partners have brought in cash equal to their share of loss on realization.

This rule says 1. That the solvent partners should bring in cash equal to their respective shares of the loss on realization2. That the solvent partners should bear the loss arising due to the insolvency of a partner in the ratio of their Last Agreed Capitals3. that the solvent partner having a debit balance will not bear the loss arising due to insolvency of a partnerLast Agreed Capital means 1. In case of Fixed Capitals - Fixed Capital (as given in the Balance Sheet) without any adjustment2. In case of Fluctuating Capitals - Capital after making adjustments for past accumulated reserves, profits or losses, drawings, Interest on capital, Interest on Drawing, remuneration to a partner etc. to the date of dissolution but before making adjustment for profit or loss on realization

The loss on account of insolvency of a partner is a CAPITAL loss which should be borne by the solvent partners in the ratio of their capitals standing in the balance sheet on the date of dissolution of the firm