The business assets of a firm are worth ₹65,000 but the debts remaining unpaid are worth ₹85,000. What course of action can the creditors take if the organization is a partnership firm, with Suraj and Sanjay as partners sharing profits equally? Also explain how the amount will be recovered, if one of the partners becomes insolvent.
Answers
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ANSWER
(a) The organization is a sole proprietorship firm. Sole proprietors have unlimited liability. This implies that the owner is personally responsible for payment of debts in case the assets of the business are not sufficient to meet all the debts.
As such the owner's personal possessions such as his/her personal car and other assets could be sold for repaying the debt. In the given case, the total debts that remain unpaid are Rs. 1,00,000 but the organizational assets amount to Rs.70,000 only. In such a situation, the creditors can demand from the proprietor to pay Rs.30,000 from his/her personal sources even if he/she has to sell his/her personal property to repay the firm's debts.
(b) The organization is a partnership firm with Anthony and Akbar as partners. The partners of a firm have unlimited liability. Personal assets may be used for repaying debts in case the business assets are insufficient.
As the total debts that remain unpaid are Rs. 1,00,000 but the organizational assets amount to Rs. 70,000 only, the creditors can demand from both or any of the partners Anthony and Akbar to pay Rs. 30,000 from their personal sources even if they have to sell their personal property to repay the firm's debts.
In the given situation, creditors can demand the payment of debt from both Anthony and Akbar as the partners are jointly liable for payment of debts and they contribute in proportion to their share in business as they are liable to that extent.
However, if one of them is not available or is unable to pay, the other partner will have to pay the creditors as each partner can be held responsible for repaying the debts of the business. Such a partner can later recover from the other partner an amount of money equivalent to the share in liability defined as per the partnership agreement.
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